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Title: Distributive Justice - The Right and Wrong of Our Present Distribution of Wealth
Author: Ryan, John A. (John Augustine)
Language: English
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DISTRIBUTIVE JUSTICE

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THE MACMILLAN COMPANY

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DISTRIBUTIVE JUSTICE

The Right and Wrong of Our Present Distribution of Wealth

by

JOHN A. RYAN, D.D.

Associate Professor of Political Science at
the Catholic University of America; Professor
of Economics at Trinity College; Author of
"A Living Wage," "Alleged Socialism of the
Church Fathers," Joint Author with Morris
Hillquit of "Socialism: Promise or Menace?"



New York
The Macmillan Company
1916

All rights reserved



     Nihil Obstat.
           _REMIGIUS LAFORT, S. T. D.,
                                Censor_.

     Imprimatur.
           _JOHN CARDINAL FARLEY,
                Archbishop of New York_.


              COPYRIGHT, 1916,
          BY THE MACMILLAN COMPANY

Set up and electrotyped. Published November, 1916.



                     TO

             ARCHBISHOP IRELAND

                     IN

          ADMIRATION AND GRATITUDE



PREFACE


Five of the nine members of the late Federal Commission on Industrial
Relations united in the declaration that the first cause of industrial
unrest is, "unjust distribution of wealth and income." In all
probability this judgment is shared by the majority of the American
people. Regarding the precise nature and extent of the injustice,
however, there is no such preponderance of opinion. Even the makers of
ethical and economic treatises fail to give us anything like uniform
or definite pronouncements concerning the moral defects of the present
distribution. While the Socialists and the Single Taxers are
sufficiently positive in their statements, they form only a small
portion of the total population, and include only an insignificant
fraction of the recognised authorities on either ethics or economics.

The volume in hand represents an attempt to discuss systematically and
comprehensively the justice of the processes by which the product of
industry is distributed. Inasmuch as the product is actually
apportioned among landowners, capitalists, business men, and
labourers, the moral aspects of the distribution are studied with
reference to these four classes. While their rights and obligations
form the main subject of the book, the effort is also made to propose
reforms that would remove the principal defects of the present system
and bring about a larger measure of justice.

Many treatises have been written concerning the morality of one or
other element or section of the distributive process; for example,
wages, interest, monopoly, the land question; but, so far as the
author knows, no attempt has hitherto been made to discuss the moral
aspects of the entire process in all its parts. At least, no such task
has been undertaken by any one who believes that the existing economic
system is not inherently unjust. That the present essay in this field
falls far short of adequate achievement the author fully realises, but
he is sustained by the hope that it will provoke discussion, and move
some more competent person to till the same field in a more thorough
and fruitful way.

                                               JOHN A. RYAN.

    The Catholic University of America,
    Washington, D. C., June 14, 1916.



CONTENTS


  PREFACE                                                        vii

  INTRODUCTORY CHAPTER: THE ELEMENTS AND SCOPE OF THE PROBLEM   xiii
                        General References                      xvii


  SECTION I

  THE MORALITY OF PRIVATE LANDOWNERSHIP AND RENT

  CHAPTER                                                       PAGE

      I THE LANDOWNER'S SHARE OF THE NATIONAL PRODUCT              3
          Economic Rent Always Goes to the Landowner               4
          Economic Rent and Commercial Rent                        5
          The Cause of Economic Rent                               6

     II LANDOWNERSHIP IN HISTORY                                   8
          No Private Ownership in Pre-Agricultural Conditions     10
          How the Change Probably Took Place                      12
          Limited Character of Primitive Common Ownership         14
          Private Ownership General in Historical Times           15
          Conclusions from History                                17

    III THE ARGUMENTS AGAINST PRIVATE LANDOWNERSHIP               19
          Arguments by Socialists                                 19
          Henry George's Attack on the Title of First Occupancy   21
          His Defence of the Title of Labour                      24
          The Right of all Men to the Bounty of the Earth         30
          The Alleged Right of the Community to Land Values       39

     IV PRIVATE OWNERSHIP THE BEST SYSTEM OF LAND TENURE          48
          The Socialist Proposals Impracticable                   48
          Inferiority of the Single Tax System                    51

      V PRIVATE LANDOWNERSHIP A NATURAL RIGHT                     56
          Three Principal Kinds of Natural Rights                 57
          Private Landownership Indirectly Necessary for
              Individual Welfare                                  59
          Excessive Interpretations of the Right of Private
              Landownership                                       61
          The Doctrine of the Fathers and the Theologians         62
          The Teaching of Pope Leo XIII                           64

     VI LIMITATIONS OF THE LANDOWNER'S RIGHT TO RENT              67
          The Tenant's Right to a Decent Livelihood               69
          The Labourer's Claim Upon the Rent                      71

    VII DEFECTS OF THE EXISTING LAND SYSTEM                       74
          Landownership and Monopoly                              75
          Excessive Gains from Private Landownership              80
          Exclusion from the Land                                 90

   VIII METHODS OF REFORMING OUR LAND SYSTEM                      94
          The Leasing System                                      95
          Public Agricultural Lands                               97
          Public Ownership of Urban Land                          98
          Appropriating Future Increases of Land Value           100
          Some Objections to the Increment Tax                   102
          The Morality of the Proposal                           108
          The German and British Increment Taxes                 114
          Transferring Other Taxes to Land                       117
          The Morality of the Plan                               120
          Amount of Taxes Practically Transferable               122
          The Social Benefits of the Plan                        127
          A Supertax on Large Holdings                           130
          References on Section I                                133


  SECTION II

  THE MORALITY OF PRIVATE CAPITAL AND INTEREST

     IX THE NATURE AND THE RATE OF INTEREST                      137
          Meaning of Capital and Capitalist                      137
          Meaning of Interest                                    138
          The Rate of Interest                                   141

      X THE ALLEGED RIGHT OF LABOUR TO THE ENTIRE PRODUCT
        OF INDUSTRY                                              145
          The Labour Theory of Value                             146
          The Right of Productivity                              149

     XI THE SOCIALIST SCHEME OF INDUSTRY                         152
          Socialist Inconsistency                                152
          Expropriating the Capitalists                          154
          Inefficient Industrial Leadership                      158
          Inefficient Labour                                     162
          Attempted Replies to Objections                        162
          Restricting Individual Liberty                         168

    XII ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST             171
          Attitude of the Church Toward Interest on Loans        172
          Interest on Productive Capital                         175
          The Claims of Productivity                             177
          The Claims of Service                                  181
          The Claims of Abstinence                               182

   XIII SOCIAL AND PRESUMPTIVE JUSTIFICATIONS OF INTEREST        187
          Limitations of the Sacrifice Principle                 187
          The Value of Capital in a No-Interest Régime           188
          Whether the Present Rate of Interest is Necessary      191
          Whether at Least two Per Cent. is Necessary            193
          Whether any Interest is Necessary                      196
          The State is Justified in Permitting Interest          199
          Civil Authorisation not Sufficient for Individual
              Justification                                      201
          How the Interest-Taker is Justified                    204

    XIV CO-OPERATION A PARTIAL SOLVENT OF CAPITALISM             210
          Reducing the Rate of Interest                          211
          Need for a Wider Distribution of Capital               213
          The Essence of Co-operative Enterprise                 214
          Co-operative Credit Societies                          216
          Co-operative Agricultural Societies                    217
          Co-operative Mercantile Societies                      220
          Co-operation in Production                             222
          Advantages and Prospects of Co-operation               228
          References on Section II                               233


  SECTION III

  THE MORAL ASPECT OF PROFITS

     XV THE NATURE OF PROFITS                                    237
          The Functions and Rewards of the Business Man          237
          The Amount of Profits                                  239
          Profits in a Joint-Stock Company                       241

    XVI THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE             243
          The Canon of Equality                                  243
          The Canon of Needs                                     244
          The Canon of Efforts and Sacrifice                     246
          The Canon of Productivity                              247
          The Canon of Scarcity                                  250
          The Canon of Human Welfare                             252

   XVII JUST PROFITS IN CONDITIONS OF COMPETITION                254
          The Question of Indefinitely Large Profits             255
          The Question of Minimum Profits                        258
          The Question of Superfluous Business Men               260

  XVIII THE MORAL ASPECT OF MONOPOLY                             262
          Surplus and Excessive Profits                          263
          The Question of Monopolistic Efficiency                265
          Discriminative Underselling                            267
          Exclusive-Sales Contracts                              270
          Discriminative Transportation Arrangements             272
          Natural Monopolies                                     273
          Methods of Preventing Monopolistic Injustice           275
          Legalised Price Agreements                             277

    XIX THE MORAL ASPECTS OF STOCKWATERING                       279
          Injurious Effects of Stockwatering                     281
          The Moral Wrong                                        284
          The "Innocent" Investor                                286
          Magnitude of Overcapitalisation                        288

     XX THE LEGAL LIMITATION OF FORTUNES                         291
          The Method of Direct Limitation                        292
          Limitation Through Progressive Taxation                296
          The Proper Rate of Income and Inheritance Taxes        299
          Effectiveness of Such Taxation                         300

    XXI THE DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH              303
          The Question of Distributing Some                      303
          The Question of Distributing All                       308
          Some Objections                                        311
          A False Conception of Welfare and Superfluous Goods    314
          The True Conception of Welfare                         316
          References on Section III                              318


  SECTION IV

  THE MORAL ASPECTS OF WAGES

   XXII SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE               323
           I The Prevailing-Rate Theory                          323
               Not in Harmony with Justice                       325
          II Exchange-Equivalence Theories                       326
               The Rule of Equal Gains                           326
               The Rule of Free Contract                         328
               The Rule of Market Value                          330
               The Mediæval Theory                               332
               A Modern Variation of the Mediæval Theory         337
         III Productivity Theories                               340
               Labour's Right to the Whole Product               341
               Clark's Theory of Specific Productivity           347
               Carver's Modified Version of Productivity         351

  XXIII THE MINIMUM OF JUSTICE; A LIVING WAGE                    356
          The Principle of Needs                                 356
          Three Fundamental Principles                           358
          The Right to a Decent Livelihood                       360
          The Claim to a Decent Livelihood from a Present
              Occupation                                         362
          The Labourer's Right to a Living Wage                  363
          When the Employer is Unable to Pay a Living Wage       366
          An Objection and Some Difficulties                     370
          The Family Living Wage                                 373
          Other Arguments in Favour of a Living Wage             376
          The Money Measure of a Living Wage                     378

   XXIV THE PROBLEM OF COMPLETE WAGE JUSTICE                     381
          Comparative Claims of Different Labour Groups          381
          Wages Versus Profits                                   388
          Wages Versus Interest                                  390
          Wages Versus Prices                                    393
          Concluding Remarks                                     398

    XXV METHODS OF INCREASING WAGES                              400
          The Minimum Wage in Operation                          400
          The Question of Constitutionality                      405
          The Ethical and Political Aspects                      407
          The Economic Aspect                                    408
          Opinions of Economists                                 412
          Other Legislative Proposals                            416
          Labour Unions                                          417
          Organisation Versus Legislation                        420
          Participation in Capital Ownership                     423
          References on Section IV                               425

   XXVI SUMMARY AND CONCLUSION                                   426
          The Landowner and Rent                                 426
          The Capitalist and Interest                            427
          The Business Man and Profits                           428
          The Labourer and Wages                                 430
          Concluding Observations                                431

          INDEX                                                  453



INTRODUCTORY CHAPTER

THE ELEMENTS AND SCOPE OF THE PROBLEM


Distributive justice is primarily a problem of incomes rather than of
possessions. It is not immediately concerned with John Brown's railway
stock, John White's house, or John Smith's automobile. It deals with
the morality of such possessions only indirectly and under one aspect;
that is, in so far as they have been acquired through income.
Moreover, it deals only with those incomes that are derived from
participation in the process of production. For example; it considers
the labourer's wages, but not the subsidies that he may receive
through charity or friendship. Its province is not the distribution of
all the goods of the country among all the people of the country, but
only the distribution of the products of industry among the classes
that have taken part in the making of these products.

These classes are four, designated as landowners, capitalists,
undertakers or business men, and labourers or wage earners. The
individual member of each class is an _agent_ of production, while the
instrument or energy that he owns and contributes is a _factor_ of
production. Thus, the landowner is an agent of production because he
contributes to the productive process the factor known as land, and
the capitalist is an agent of production because he contributes the
factor known as capital; while the business man and the labourer are
agents not only in the sense that they contribute factors to the
process, but in the very special sense that their contributions
involve the continuous expenditure of human energy. Now the product of
industry is distributed among these four classes precisely because
they are agents of production; that is because they own and put at the
disposal of industry the indispensable factors of production. We say
that the agents of production "put the factors of production at the
disposal of industry," rather than "exercise or operate the factors,"
because neither the landowner nor the capitalist, as such, expend
continuous energy in the productive process. All that is necessary to
enforce a claim upon the product is to contribute an instrument or
factor without which production cannot be carried on.

The product distributed in any country during a single year is
variously described by economists as the national product, the
national income, the national dividend. It consists not merely of
material goods, such as houses, food, clothing, and automobiles, but
also of those non-material goods known as services. Such are the tasks
performed by the domestic servant, the barber, the chauffeur, the
public official, the physician, the teacher; or any other personal
service "that is valued, as material commodities are valued, according
to their selling prices." Even the services of the clergyman are
included in the national income or product, since they are paid for
and form a part of the annual supply of good things produced and
distributed within the country. In the language of the economist,
anything that satisfies a human want is a utility, and forms part of
the national wealth; hence there can be no sufficient reason for
excluding from the national income goods which minister to spiritual
or intellectual wants. The services of the clergyman, the actor, the
author, the painter, and the physician are quite as much a part of the
utilities of life as the services of the cook, the chambermaid, or the
barber; and all are as clearly utilities as bread, hats, houses, or
any other material thing. In a general way, therefore, we say that the
national product which is available for distribution among the
different productive classes comprises all the utilities, material
and non-material, that are produced through human agents and satisfy
human desires.

In the great majority of instances the product is not distributed in
kind. The wheat produced on a given farm is not directly apportioned
among the farmers, labourers, and landowners that have co-operated in
its production; nor are the shoes turned out by a given factory
divided among the co-operating labourers and capitalists; and it is
obvious that personal services cannot be returned to the persons that
have rendered them. Cases of partial direct distribution do, indeed,
occur; as when the tenant takes two-thirds and the landowner one-third
of the crop raised by the former on land belonging to the latter; or
when the miller receives his compensation in a part of the flour that
he grinds. To-day, however, such instances are relatively
insignificant. By far the greater part of the material product is sold
by the undertaker or business man, and the price is then divided
between himself and the other agents of production. All personal
services are sold, and the price is obtained by the performers
thereof. The farmer sells his wheat, the miller his flour, and the
barber his services. With the money received for his part in
production each productive agent obtains possession of such kinds and
amounts of the national product as his desires dictate and his income
will procure. Hence the distribution of the product is effected
through the conversion of producers' claims into money, and the
exchange of the latter for specific quantities and qualities of the
product.

While the national product as a whole is divided among the four
productive classes, not every portion of it is distributed among
actually distinct representatives of these classes. When more than one
factor of production is owned by the same person, the product will
obviously not go to four different classes of persons. For example;
the crop raised by a man on his own unmortgaged land, with his own
instruments, and without any hired assistance; and the products of the
small shopkeeper, tailor, and barber who are similarly self sufficient
and independent,--are in each case obtained by one person, and do not
undergo any actual distribution. Even in these instances, however,
there occurs what may be called _virtual_ distribution, inasmuch as
the single agent owns more than one factor, and performs more than one
productive function. And the problem of distributive justice in such
cases is to determine whether all these productive functions are
properly rewarded through the total amount which the individual has
received. Where the factors are owned by distinct persons, or groups
of persons, the problem is to determine whether each group is properly
remunerated for the single function that it has performed.

The problem of the morality of industrial incomes is obviously
complex. For example; the income of the farmer is sometimes derived
from a product which he must divide with a landowner and with
labourers; sometimes from a product which he shares with labourers
only; and sometimes from a product which he can retain wholly for
himself. The labourer's income arises sometimes out of a product which
he divides with other agents of production; sometimes out of a product
which he divides with other labourers as well as other agents; and
sometimes out of a product of which he receives the full money
equivalent. The complexity of the forces determining distribution and
income indicate a complexity in the forces affecting the morality of
income. Moreover, there is the more fundamental ethical question
concerning the titles of distribution: whether mere ownership of a
factor of production gives a just claim upon the product, as in the
case of the landowner and the capitalist; whether such a claim,
assuming it to be valid, is as good as that of the labourer and the
business man, who expend human energy in the productive process;
whether different kinds of productive activity should be rewarded at
different rates; and if so in what proportion. Why should the
capitalist receive six per cent., rather than two per cent., or
sixteen per cent.? Why should the locomotive engineer receive more
than the trackman? Why should not all persons be compensated equally?
Should all or any of the benefits of industrial improvements go to the
consumer? Such are typical questions in the study of distributive
justice. They are sufficient to give some idea of the magnitude and
difficulty of the problem.

Scarcely less formidable is the task of suggesting means to correct
the injustices of the present distribution. The difficulties in this
part of the field are indicated by the multiplicity of social remedies
that have been proposed, and by the fact that none of them has
succeeded in winning the adhesion of more than a minority of the
population. We shall be obliged not only to pass moral judgment upon
the most important of these proposals, but to indicate and advocate a
more or less complete and systematic group of such reforms as seem to
be at once feasible and righteous.


GENERAL REFERENCES

     TAUSSIG: Principles of Economics. Macmillan; 1911.

     DEVAS: Political Economy. Longmans; 1901.

     HOBSON: The Industrial System. Longmans; 1909.

     CLARK: The Distribution of Wealth. Macmillan; 1899.

     SMART: The Distribution of Income. London; 1899.

     WILLOUGHBY: Social Justice. Macmillan; 1900.

     CARVER: Essays in Social Justice. Harvard University Press;
     1915.

     ELY: Property and Contract in Their Relations to the
     Distribution of Wealth. Macmillan; 1914.

     NEARING: Income. Macmillan; 1915.

     STREIGHTOFF: The Distribution of Incomes in the United
     States. Longmans; 1912.

     WAGNER: Grundlegung der Nationaloekonomie. Leipzig;
     1892-1894.

     PESCH: Lehrbuch der Nationaloekonomie. Freiburg; 1905-1913.

     ANTOINE: Cours d'Économie Sociale. Paris; 1899.

     HITZE: Capital et Travail. Louvain; 1898.

     HOLLANDER: The Abolition of Poverty. Houghton Mifflin
     Company; 1914.

     ELLWOOD: The Social Problem. Macmillan; 1915.

     GARRIGUET: The Social Value of the Gospel. Herder; 1911.

     PARKINSON: A Primer of Social Science. Devin-Adair Co.; 1913.

     VERMEERSCH: Quaestiones de Justitia. Bruges; 1901.

     KING: The Wealth and Income of the People of the United
     States. Macmillan; 1915.

     COMMISSION ON INDUSTRIAL RELATIONS. Final Report; 1915.



SECTION I

THE MORALITY OF PRIVATE LANDOWNERSHIP AND RENT DISTRIBUTIVE JUSTICE



CHAPTER I

THE LANDOWNER'S SHARE OF THE NATIONAL PRODUCT


That part of the national product which represents land, and is
attributed specifically to land, goes to the landowner. It is called
economic rent, or simply rent. We say that rent "is attributed
specifically to land," rather than "is produced specifically by land,"
because we do not know what proportion of the joint product of the
different factors of production exactly reflects the productive
contribution of any factor. Economic rent represents the productivity
of land in so far as it indicates what men are willing to pay for
land-use in the productive process. In any particular case rent comes
into existence because the land makes a commercially valuable
contribution to the product; and it goes to the landowner because this
is one of the powers or rights included in the institution of private
ownership. And the landowner's share is received by him precisely in
his capacity as landowner, and not because he may happen to be
labourer, farmer, or proprietor of agricultural capital.

It is perhaps superfluous to observe that not all land produces rent.
While almost all land is useful and productive, at least potentially,
there is in almost every locality some land which in present
conditions does not warrant men in paying a price for its use. If the
crop raised on very sandy soil is so small as to cover merely the
outlay for labour and capital, men will not pay rent for the use of
that soil. Yet the land has contributed something to the product.
Herein we have another indication that rent is not an adequate measure
of land productivity. It merely represents land value,--at a given
time, in given circumstances.


_Economic Rent Always Goes to the Landowner_

All land that is in use, and for the use of which men are willing to
pay a price yields rent, whether it is used by a tenant or by the
owner. In the latter case the owner may not call the rent that he
receives by that name; he may not distinguish between it and the other
portions of the product that he gets from the land; he may call the
entire product profits, or wages. Nevertheless the rent exists as a
surplus over that part of the product that he can regard as the proper
return for his labour, and for the use of his capital-instruments,
such as, horses, buildings, and machinery. If a farmer employs the
same amount and kind of labour and capital in the cultivation of two
pieces of land, one of which he owns, the other being hired from some
one else; if his net product is the same in both cases, say, 1,000
dollars; and if he must pay 200 dollars to the owner of the hired
land,--then, 200 of the 1,000 dollars that he receives from his own
land, is likewise to be attributed specifically to his land rather
than to his capital or labour. It is rent. While the whole product is
due in some degree to the productive power of land, 200 dollars of it
represents land value in the process of production, and goes to him
solely in his capacity as landowner. The rent that arises on land used
for building sites is of the same general character, and goes likewise
to the owner of the land. The owner of the site upon which a factory
is located may hire it to another for a certain sum annually, or he
may operate the factory himself. In either case he receives rent, the
amount that the land itself is worth for use, independently of the
return that he obtains for his expenditure of capital and labour. Even
when a person uses his land as a site for a dwelling which he himself
occupies, the land still brings him economic rent, since it affords
him something for which he would be obliged to pay if his house were
located on land of the same kind owned by some one else.


_Economic Rent and Commercial Rent_

It will be observed that the landowner's share of the product, or
economic rent, is not identical with commercial rent. The latter is a
payment for land and capital, or land and improvements, combined. When
a man pays nine hundred dollars for the use of a house and lot for a
year, this sum contains two elements, economic rent for the lot, and
interest on the money invested in the house. Assuming that the house
is worth ten thousand dollars, and that the usual return on such
investments is eight per cent., we see that eight hundred dollars goes
to the owner as interest on his capital, and only one hundred dollars
as rent for his land. Similarly the price paid by a tenant for the use
of an improved farm is partly interest on the value of the
improvements, and partly economic rent. In both cases the owner may
reckon the land as so much capital value, and the economic rent as
interest thereon, just as the commercial rent for the buildings and
other improvements is interest on their capital value; but the
economist distinguishes between them because he knows that they are
determined by different forces, and that the distinction is of
importance. He knows, for example, that the supply of land is fixed,
while the supply of capital is capable of indefinite increase. In many
situations, therefore, rent increases, but interest remains stationary
or declines. Sometimes, though more rarely, the reverse occurs. As we
shall see later, this and some other specific characteristics of land
and rent have important moral aspects; consequently the moralist
cannot afford to confuse rent with interest.


_The Cause of Economic Rent_

The cause of economic rent is the fact that land is limited relatively
to the demand for it. If land were as plentiful as air mere ownership
of some portion of it would not enable the owner to collect rent. As
landowner he would receive no income. If he cultivated his land
himself the return therefrom would not exceed normal compensation for
his labour, and normal interest on his capital. Since no one would be
compelled to pay for the use of land, competition among the different
cultivators would keep the price of their product so low that it would
merely reimburse them for their expenditures of capital and labour. In
similar conditions no rent would arise on building sites. The cause of
the _amount_ of rent may also be stated in terms of scarcity. At any
given time and place, the rent of a piece of land will be determined
by the supply of that kind of land relatively to the demand for it.
However, the demand itself will be regulated by the fertility or by
the location of the land in question. Two pieces of agricultural land
equally distant from a city, but of varying fertility, will yield
different rents because of this difference in natural productiveness.
Two pieces of ground of equal natural adaptability for building sites,
but at unequal distances from the centre of a city, will produce
different rents on account of their difference of location. The
absolute scarcity of land is, of course, fixed by nature; its relative
scarcity is the result of human activities and desires.

The definition of rent adopted in these pages, "what men are willing
to pay for the use of land," or, "what land is worth for use," is
simpler and more concrete, though possibly less scientific, than those
ordinarily found in manuals of economics, namely: "that portion of
the product that remains after all the usual expenditures for labour,
capital, and directive ability have been deducted;" or, "the surplus
which any piece of land yields over the poorest land devoted to the
same use, when the return from the latter is only sufficient to cover
the usual expenses of production."

The statement that all rent goes to the landowner supposes that, in
the case of hired land, the tenant pays the full amount that would
result from competitive bidding. Evidently this was not the case under
the feudal system, when rents were fixed by custom and remained
stationary for centuries. Even to-day, competition is not perfect, and
men often obtain the use of land for less than they or others might
have been willing to give. But the statement in question does describe
what tends to happen in a system of competitive rents.

Before discussing the morality of the landowner's income, and of rent
receiving, we may with profit glance at the history of land tenure.
Thus we shall get some idea, first, of the antiquity of the present
system, and, second, of its effects upon individual and social
welfare. Both these considerations have an important bearing upon the
moral problem; for length of existence creates a presumption in favour
of the social, and therefore the moral, value of any institution; and
past experience is our chief means of determining whether an
institution is likely to be socially beneficial, and therefore morally
right, in the future.



CHAPTER II

LANDOWNERSHIP IN HISTORY


Thirty or thirty-five years ago, the majority of economic historians
seemed to accept the theory that land was originally owned in
common.[1] They held that in the beginning the community, usually a
village community, was the landowner; that the community either
cultivated the land as a corporation, and distributed the product
among the individual members, or periodically divided the land among
the social units, and permitted the latter to cultivate their
allotments separately. The second of these forms of tenure was the
more general. The primitive time to which the theory referred was not
the period when men got their living by hunting and fishing, or by
rearing herds, but the agricultural stage of economic development,
when life had become settled. Of the arguments upon which the theory
was based, some consisted of ambiguous statements by ancient writers,
such as Plato, Cæsar, and Tacitus, and others were merely inferences
drawn from the existence of certain agrarian institutions: family
ownership of land; common pasture lands and woodlands; periodical
distribution of land among the cultivators, as in the German Mark, the
Russian Mir, the Slavonic Zadruga, and the Javanese Dessa. All these
practices have been interpreted as "survivals" of primitive common
ownership. Only on this hypothesis, it is argued, can they be
satisfactorily explained.

More recent writers have subjected the various arguments for this
theory to a searching criticism.[2] To-day the great majority of
scholars would undoubtedly accept the conclusion of Fustel de
Coulanges, that the arguments and evidence are not sufficient to prove
that in the earliest stages of agricultural life land was held in
common; and a majority would probably take the more positive ground
that common ownership in the sense of communal cultivation and
distribution, never existed for any considerable length of time among
any agricultural people. The present authoritative opinion on the
subject is thus summarized by Professor Ashley:

"From the earliest historical times, in Gaul and Germany, very much
land was owned individually, and wealth on one side and slavery on the
other were always very important factors in the situation.

"Even in Germany, communal ownership of land was never a fundamental
or generally pervasive social institution; there was something very
much like large private estates, worked by dependents and slaves, from
the very earliest days of Teutonic Settlement.

"As to England, it is highly probable that we shall not find anything
that can fairly be called a general communal system of landowning,
combined with a substantial equality among the majority of the people,
under conditions of settled agriculture. To find it in any sense we
shall have to go back to an earlier and 'tribal' condition, if,
indeed, we shall find it there!"[3]


_No Private Ownership in Pre-Agricultural Conditions_

Whenever and wherever men got their living by hunting and fishing,
there was no inducement to own land privately, except possibly those
portions upon which they built their huts or houses. "Until they
become more or less an agricultural people they are usually hunters or
fishermen or both, and possibly also to a limited extent keepers of
sheep and cattle. Population is then sparse and unoccupied territory
is plentiful, and questions of the ownership of particular tracts of
land do not concern them."[4] In any region occupied by a group or
tribe, all portions of the land and the water were about equally
productive of game and fish; the amount obtainable by any individual
had no relation to labour on any particular piece of soil; and it was
much easier for each to range over the whole region in common with his
fellows than to mark off a definite section upon which he would not
permit others to come, but beyond which he himself would not be
permitted to go. In such conditions private ownership of land would
have been folly. Tribal or group ownership was, however, in vogue,
especially among those groups that were in control of the better
grounds or streams. Even this form of proprietorship was comparatively
unstable, since the people were to a considerable degree nomadic, and
were willing to abandon present possessions whenever there was a
prospect of obtaining better ones elsewhere. Among men who got their
living by rearing herds, the inducement to hold land in exclusive
private control would be somewhat stronger. The better grazing tracts
would be coveted by many different persons, especially in the more
populous communities. And there would always be the possibility of
confusion among the different herds, and contention among their
owners. In such circumstances the advantages of exclusive control
would sometimes outweigh the benefits of common use and ownership. In
the thirteenth chapter of Genesis we are told that, owing to strife
between the herdsmen of Abram and Lot, the brothers separated, and
agreed to become the exclusive possessors of different territories.
Nevertheless, it is probable that tribal ownership was the prevailing
form of land tenure so long as people remained mainly in pastoral
conditions.

It is likewise probable that the same system continued in many cases
for some time after men began to cultivate the soil. At least, this
would seem to have been the natural arrangement while land was
plentiful, and the methods of cultivation crude and soil-exhausting.
It would be more profitable to take up new lands than to continue upon
the old. Within historical times this system prevailed among the
ancient Germans, some of the tribes of New Zealand, and some of the
tribes of Western Africa. Where land was not so plentiful it was
sometimes redistributed among individuals or heads of families, as
often as a death occurred or a new member arrived in the community.
Some of the tribes and peoples who observed this practice were the
ancient Irish, the aborigines of Peru, Mexico, and parts of what is
now the United States, and Australia, and some of the tribes of
Africa, India, and Malaysia.[5] Whether the most primitive
agricultural systems of every people were of this nature we have, of
course, no means of knowing, but the supposition is antecedently
probable; for agriculture must have begun very gradually, and been for
some time practised in connection with the more primitive methods of
obtaining a livelihood. As the land had been held for the most part in
common during the hunting and fishing stage and during the pastoral
stage, the same arrangement would probably continue until the people
found it necessary to cultivate the same tracts of land year after
year, and conceived the desire to retain their holdings in stable
possession and to transmit them to their children. Moreover, so long
as the members of the clan remained strongly conscious of their
kinship, and realised the necessity of acting as a unit against their
enemies, there would be a strong incentive to clan ownership of the
land, and clan allotment of it among the individual members. In other
words, the clan would, in these circumstances, have the same motives
for common ownership that exist to-day in the family.

The oldest historical peoples, the Israelites, Egyptians, Assyrians,
Babylonians, and Chinese, had private ownership of land at the
beginning of their recorded history. Most of them, however, had been
cultivating land for a considerable length of time, and had acquired a
considerable degree of civilisation, before the earliest period of
their existence of which we have any knowledge. It is quite possible
that those among them that had passed through the hunting and fishing
or the pastoral stage of existence, had practised tribal or common
ownership during the earlier portion of their agricultural life.


_How the Change Probably Took Place_

The change from tribal to private landownership could have occurred in
a great variety of ways. For example, the chief, patriarch, or king
might have gradually obtained greater authority in making the
allotments of land among the members of the tribe or group, and thus
acquired a degree of control over the land which in time became
practical ownership; he might have seized the holdings of deceased
persons, or of those who were unable to pay him the tax or tribute
that he demanded, or of those who were for any reason obnoxious to
him. Again, the taxes paid to the chief man in a community for his
services as ruler might have come in time to be regarded as a payment
for the use of the land, and therefore as an acknowledgment that the
chief was also the landlord. Even in the Middle Ages the rents
received by the feudal lords were in great measure a return for social
and political services, just as are the taxes received to-day from
private landowners by the State. In primitive times, as well as later
on, the chief would naturally do his best to convert this institution
of tax paying or tribute paying into rent paying, and to add the
position of landowner to his other prerogatives. After all, the
transition from tribal ownership, with private cultivation and private
receipt of the produce of individual allotments, to overlordship and
landlordism, would not have been greater than that which actually took
place in England between the fifteenth and the nineteenth centuries,
when the lords became absolute owners of land that they had previously
held with their tenants in a sort of divided or dual ownership. In a
word, tribal ownership could have been displaced by landlordism
through the same methods that have been used everywhere by the
powerful, the ambitious, and the greedy against the weak, the
indifferent, and the upright. Nor must we forget the influence of
conquest. Most of the countries that appear in historical times with a
system of private ownership had at some previous period been
subjugated by an alien people. In many of these the conquerors
undoubtedly introduced a considerable degree of individual ownership,
the more powerful among them becoming landlords, while their weaker
companions and the mass of the conquered population were established
in a condition of tenancy.

Where a somewhat widely diffused private ownership succeeded the
primitive system, it was probably due to the free action of the
cultivators, as soon as they came to realise the inconveniences of
ownership in common. "Any enclosed land round their permanent
dwellings, and any land outside the settlement which was cleared,
reclaimed, and cultivated, or occupied with cattle by individuals or
families, was recognised as their personal property. Only those who
were industrious, enterprising, and courageous enough would clear,
occupy, retain, cultivate, and defend waste land. They would become
personal owners of cattle, and would gradually acquire wealth which
would enable them to employ others and still further improve their
position. As their power increased, and as population grew, the
bravest, wealthiest, and most capable fighting men amongst them would
become chiefs or a species of nobles, and the force of circumstances,
often no doubt aided by force and fraud, would eventually make them
the landowners of the greater part of the district, with the more or
less willing acquiescence and consent of the community amongst whom
they lived, and to whom they extended their protection."[6]


_Limited Character of Primitive Common Ownership_

A great deal of the opposition to the theory of primitive common
ownership of agricultural land, seems to be based upon an exaggerated
conception of the scope of that institution. The average man who
thinks or speaks of ownership to-day has in mind the Roman concept and
practice of private property. This includes the unrestricted right of
disposal; that is, the power to hold permanently, to transfer or
transmit, to use or to abuse or not to use at all, to retain the
product of the owner's use, to rent the property to any person and for
any period that the owner chooses, and to obtain a price in return
called rent. Any man who takes the theory of primitive common
ownership to imply that the community or tribe exercised all these
powers over its land, will have no difficulty in proving that the
evidence is overwhelmingly against any such theory. Even among those
people that are certainly known to have practised so-called common
ownership of land, there are very few instances of communal
cultivation, or communal distribution of the product. Yet these are
included in the Roman concept of ownership. The usual method seems to
have been periodical allotment by the community of the land among
individuals, individual cultivation of the allotted tracts, and
individual ownership of the product. Moreover, there was always a
chief or patriarch who exercised considerable authority in the
distribution of the land, frequently collected a rent or tax from the
cultivators, and almost invariably exercised something like private
ownership of a portion of the land for his direct and special benefit.
Sometimes other men of importance in the community possessed land
which was not subject to the communal allotment. Primitive ownership
of land in common was, therefore, very far from vesting in the
community all the powers that inhere in the private proprietor of land
according to the Roman law and usage.


_Private Ownership General in Historical Times_

So much for land tenure in prehistoric times. During the historical
period of the existence of the race, almost all civilised peoples have
practised some form of private ownership in the matter of their arable
lands. While differing considerably at various times and places, it
has always excluded communal allotment of land and communal
distribution of the product, and has always included private receipt
of the product by the owner-user, or private receipt of rent when the
owner transferred the use to some one else. But it did not always
include the right to determine who should be the user. In the later
centuries of the feudal system, for example, the lord could not always
expel the tenants from the land, nor prevent them from transmitting
the use of it to their children. Moreover, the rent that he received
was customary and fixed, not competitive and arbitrary, and it was
looked upon in great measure as a return to the lord for social,
military, and political services, as well as a payment for the use of
land. This system was private ownership, indeed, but if we apply the
Roman notion of ownership we shall find it difficult to decide whether
the tenant or the lord should more properly be called the owner. At
any rate, the right of ownership possessed by the lord was greatly
limited by restrictions which favoured the masses of the cultivators.
In every community there were common wood lands and pasture lands for
the free use of all the inhabitants. Among other restrictions of
private ownership and control in favour of the principle of equal
access to the land by all persons, we may mention the division of the
English villein's holding into several portions, intermingled with
those of his neighbours, so that each would have about the same amount
of good land; and the ancient Hebrew law whereby alienated land was
returned to the descendants of its original owners every fifty
years.[7]

Reckoning the feudal lord, and all other overlords who had the same
control over land, as private proprietors, we may say that in
historical times the arable land of every country has been owned by a
minority of the population. Since the downfall of feudalism, the
tendency in most regions of the Western world has been toward an
increase in the number of owners, and a decrease in the number of
great estates. This tendency has been especially marked during the
last one hundred years. It will, however, need to continue for a very
long time, or else to increase its pace very rapidly, before land
ownership will be diffused in anything like the measure that is
necessary if its benefits are to be shared by all the people. Even in
the United States, where the distribution is perhaps more general than
in any other country, only 38.4 per cent. of the families in towns and
cities owned, in 1910, the homes in which they lived, and therefore
the land upon which their homes were located. In the rural districts
the per cent. of home-owning families was only 62.8.


_Conclusions from History_

What conclusions does history warrant concerning the social and moral
value of private landownership? Here we are on very uncertain ground;
for different inferences may be drawn from the same group of facts if
a different section of them be selected for emphasis. Sir Henry Maine
and Henry George both accepted the theory of primitive agrarian
communism, but the former saw in this assumed fact a proof that common
ownership was suited only to the needs of rude and undeveloped
peoples, while the latter regarded it as a sure indication that common
ownership was fundamentally natural and in accordance with permanent
social welfare. The fact that practically all peoples whose history we
know discarded communal for private ownership as soon as they had
acquired a moderate degree of proficiency in methods of cultivation
and in the arts of civilised life does, indeed, create a presumption
that the latter system is the better for civilised men. To this extent
Sir Henry Maine is right. Against this presumption Henry George
maintained that common ownership was abandoned solely because of the
usurpation, fraud, and force employed by the powerful and privileged
classes. Undoubtedly this factor played a great part in bringing about
the private ownership that has existed and still exists, but it does
not account for the institution as a whole and everywhere. If chiefs,
kings, and other powerful personages had never usurped control of the
land, if no people had ever conquered the territory of another, it is
probable that private ownership would have taken place to the same
extent, although it would have been much more widely diffused. For the
system of periodical repartition of land, to say nothing of communal
cultivation and communal distribution of the product, does hinder that
attachment to a particular portion of the soil and that intensive
cultivation which are so necessary to the best interests of the
cultivator, the most productive use of the land, and therefore the
welfare of society.

On the other hand, the limitations on the right of private ownership
which have been established in so many places and times in favour of
those who were not owners, show that men have very generally looked
upon land as in some measure the inheritance of all the people. Hence
arises the presumption that this conviction is but the reflection of
fundamental and permanent human needs.

Summing up the matter, we may say that the history of land tenure
points on the whole to the conclusion that private ownership is
socially and individually preferable to agrarian communism, but that
it should be somewhat strictly limited in the interest of the
non-owners, and of the community as a whole.

FOOTNOTES:

[1] The most notable exponents of this view were: Von Maurer,
"Einleitung zur Geschichte der Mark," 1854; Viollet, "Bibliotheque de
l'école des chartres," 1872; Maine, "Village Communities in the East
and the West," 1872; and De Laveleye, "De la propriété et ses formes
primitives," 1874, of which an English translation appeared in 1878
under the title, "Primitive Property."

[2] Chief among these writers are: Fustel de Coulanges in an article
in "Revue des Questions Historiques," April, 1889; translated by
Margaret Ashley, and published with an introductory chapter by W. J.
Ashley under the title, "The Origin of Property in Land," 1891; G. Von
Below, "Beilage zur Allgemeine Zeitung: Das kurze Leben einer
vielgenannten Theorie," 1903; F. Seebohm, "The Village Community,"
1883. Cf. Whittaker, "Ownership, Tenure, and Taxation of Land," 1914,
ch. ii; Cathrein, "Das Privatgrundeigenthum und seine Gegner," 1909;
and Pesch, "Lehrbuch der Nationaloekonomie," I, 183-188.

[3] Quoted in Whittaker, op. cit., pp. 27, 28.

[4] Idem, p. 29.

[5] Cf. P. W. Joyce, "A Social History of Ancient Ireland," 1903; and
Letourneau, "Property: Its Origin and Development," 1896.

[6] Whittaker, op. cit., pp. 30, 31.

[7] Leviticus xxv, 23-28.



CHAPTER III

THE ARGUMENTS AGAINST PRIVATE LANDOWNERSHIP


If land were not privately owned there would be no receiving of rent
by individuals. Therefore, the morality of the landlord's share of the
national product is intimately related to, and is usually treated in
connection with, the morality of private ownership.

Substantially all the opponents of private property in land to-day are
either Socialists or disciples of Henry George. In the view of the
former, land as well as the other means of production should be owned
and managed by the State. Although they are more numerous than the
Georgeites, their attack upon private landownership is less
conspicuous and less formidable than the propaganda carried on by the
Henry George men. The Socialists give most of their attention to the
artificial instruments of production, dealing with land only
incidentally, implicitly, or occasionally. The followers of Henry
George, commonly known as Single Taxers or Single Tax men, defend the
private ownership of artificial capital, or capital in the strict
economic sense, but desire that the control of the community over the
natural means of production should be so far extended as to
appropriate for public uses all economic rent. Their criticism of
private ownership is not only more prominent than that made by the
Socialists, but is based to a much greater extent upon ethical
considerations.


_Arguments by Socialists_

Indeed, the orthodox or Marxian Socialists are logically debarred by
their social philosophy from passing a strictly moral judgment upon
property in land. For their theory of economic determinism, or
historical materialism, involves the belief that private
landownership, like all other social institutions, is a _necessary
product_ of economic forces and processes. Hence it is neither morally
good nor morally bad. Since neither its existence nor its continuance
depends upon the human will, it is entirely devoid of moral quality.
It is as unmoral as the succession of the seasons, or the movement of
the tides. And it will disappear through the inevitable processes of
economic evolution. As expressed by Engels: "The growing perception
that existing social institutions are unreasonable and unjust, that
reason has become unreason, and right wrong, is only proof that in the
modes of production and exchange changes have taken place, with which
the social order, adapted to earlier economic conditions, is no longer
in keeping."[8]

Frequently, however, the individual Socialist forgets this
materialistic theory, and falls back upon his common sense, and
his innate conceptions of right and wrong, of free will and
responsibility. Instead of regarding the existing land system as a
mere product of blind economic forces, he often denounces it as
morally wrong and unjust. His contentions may be reduced to two
propositions: The proprietor who takes rent from a cultivator robs the
producer of a part of his product; and no one has a right to take for
his exclusive use that which is the natural heritage and means of
support for all the people. Referring to the receipt of 35,000,000
pounds a year in rent by 8,000 British landlords, Hyndman and Morris
exclaim: "Yet in the face of all this a certain school still contend
that there is no class robbery."[9] Since the claim that the labourer
has a right to the full product of his labour applies to capital as
well as to land, it can be more conveniently considered when we come
to treat of the income of the capitalist. With regard to the second
contention, the following statement by Robert Blatchford may be taken
as fairly representative of Socialist thought: "The earth belongs to
the people.... So that he who possesses land possesses that to which
he has no right, and he who invests his savings in land becomes the
purchaser of stolen property."[10] Inasmuch as this argument is
substantially the same as one of the fundamental contentions in the
system of Henry George, it will be discussed in connection with the
latter, in the pages immediately following.


_Henry George's Attack on the Title of First Occupancy_

Every concrete right, whether to land or to artificial goods, is based
upon some contingent fact or ground, called a title. By reason of some
title a man is justified in appropriating a particular farm, house, or
hat. When he becomes the proprietor of a thing that has hitherto been
ownerless, his title is said to be original; when he acquires an
article from some previous owner, his title is said to be derived. As
an endless series of proprietors is impossible, every derived title
must be traceable ultimately to some original title. Among the derived
titles the most important are contract, inheritance, and prescription.
The original title is either first occupancy or labour. The prevailing
view among the defenders of private landownership has always been that
the original title is not labour but first occupancy. If this title be
not valid every derived title is worthless, and no man has a true
right to the land that he calls his own. Henry George's attack upon
the title of first occupancy is an important link in his argument
against private property in land.

"Priority of occupation give exclusive and perpetual title to the
surface of a globe in which, in the order of nature, countless
generations succeed each other!... Has the first comer at a banquet
the right to turn back all the chairs, and claim that none of the
other guests shall partake of the food provided, except as they make
terms with him? Does the first man who presents a ticket at the door
of a theatre, and passes in, acquire by his priority the right to shut
the doors and have the performance go on for him alone?... And to this
manifest absurdity does the recognition of the individual right to
land come when carried to its ultimate that any human being, could he
concentrate in himself the individual rights to the land of any
country, could expel therefrom all the rest of the inhabitants; and
could he concentrate the individual rights to the whole surface of the
globe, he alone of all the teeming population of the earth would have
the right to live."[11]

In passing, it may be observed that Henry George was not the first
distinguished writer to use the illustration drawn from the theatre.
Cicero, St. Basil, and St. Thomas Aquinas all employed it to refute
extravagant conceptions of private ownership. In reply to the
foregoing argument of Henry George, we point out: first, that the
right of ownership created by first occupancy is not unlimited, either
extensively or intensively; and, second, that the historical
injustices connected with private ownership have been in only a
comparatively slight degree due to the first occupation of very large
tracts of land. The right of first occupancy does not involve the
right to take a whole region or continent, compelling all subsequent
arrivals to become tenants of the first. There seems to be no good
reason to think that the first occupant is justified in claiming as
his own more land than he can cultivate by his own labour, or with the
assistance of those who prefer to be his employés or his tenants
rather than independent proprietors. "He has not the right to reserve
for himself alone the whole territory, but only that part of it which
is really useful to him, which he can make fruitful."[12] Nor is the
right of private landownership, on whatever title it may rest,
unlimited intensively, that is, in its powers or comprehension. Though
a man should have become the rightful owner of all the land in a
neighbourhood, he would have no moral right to exclude therefrom those
persons who could not without extreme inconvenience find a living
elsewhere. He would be morally bound to let them cultivate it at a
fair rental. The Christian conception of the intensive limitations of
private ownership is well exemplified in the action of Pope Clement
IV, who permitted strangers to occupy the third part of any estate
which the proprietor refused to cultivate himself.[13] Ownership
understood as the right to do what one pleases with one's possessions,
is due partly to the Roman law, partly to the Code Napoléon, but
chiefly to modern theories of individualism.

In the second place, the abuses which have accompanied private
property in land are very rarely traceable to abuses of the right of
first occupancy. The men who have possessed too much land, and the men
who have used their land as an instrument of social oppression, have
scarcely ever been first occupants or the successors thereof through
derived titles. This is especially true of modern abuses, and modern
legal titles. In the words of Herbert Spencer: "Violence, fraud, the
prerogative of force, the claims of superior cunning,--these are the
sources to which these titles may be traced. The original deeds were
written with the sword, rather than with the pen: not lawyers but
soldiers were the conveyancers: blows were the current coin given in
payment; and for seals blood was used in preference to wax."[14] Not
the appropriation of land which nobody owned, but the forcible and
fraudulent seizure of land which had already been occupied, has been
one of the main causes of the evils attending upon private
landownership. Moreover, in England and all other countries that have
adopted her legal system, the title of first occupancy could never be
utilised by individuals: all unoccupied land was claimed by the Crown
or by the State, and transferred thence to private persons or
corporations. If some individuals have got possession of too much land
through this process, the State, not the title of first occupancy,
must bear the blame. This is quite clear in the history of land tenure
in the United States and Australasia.

Henry George's attack upon private landownership through the title of
first occupancy is therefore ineffective; for he attributes to this
qualities that it does not possess, and consequences for which it is
not responsible.


_His Defence of the Title of Labour_

Thinking that he has shattered the title of first occupancy, Henry
George undertakes to set up in its place the title of labour. "There
can be to the ownership of anything no rightful title which is not
derived from the title of the producer, and does not rest on the
natural right of the man to himself."[15] The only original title is
man's right to the exercise of his own faculties; from this right
follows his right to what he produces; now man does not produce land;
therefore he cannot have rightful property in land. Of these four
propositions the first is a pure assumption, the second is untrue, the
third is a truism, and the fourth is as unfounded as the first.
Dependently upon God, man has, indeed, a right to himself and to the
exercise of his own faculties; but this is a right of action, not of
property. By the exercise of this right alone man can never produce
anything, never become the owner of anything. He can produce only by
exerting his powers upon something outside of himself; that is, upon
the goods of external nature. To become the producer and the owner of
a product, he must first become the owner of materials. By what title
is he to acquire these? In one passage[16] Henry George seems to think
that no title is necessary, and refers to the raw material as an
"accident," while the finished product is the "essence," declaring
that "the right of private ownership attaches the accident to the
essence, and gives the right of ownership to the natural material in
which the labour of production is embodied." Now this solution of the
difficulty is too simple and arbitrary. Its author would have shrunk
from applying it universally; for example, to the case of the
shoemaker who produces a pair of shoes out of stolen materials, or the
burglar who makes an overcoat more useful (and therefore performs a
task of production) by transferring it from a warehouse to his
shivering back! Evidently Henry George has in mind only raw material
in the strict sense, that which has not yet been separated from the
storehouse of nature; for he declares in another place that "the right
to the produce of labour cannot be enjoyed without the free use of the
opportunities offered by nature."[17] In other words, man's title to
the materials upon which he is to exercise his faculties, and of which
he is to become the owner by right of production, is the title of gift
conferred by nature, or nature's God.

Nevertheless this title is applicable only to those goods that exist
in unlimited abundance, not to those parts of the natural bounty that
are scarce and possess economic value. A general assumption by
producers that they were entitled to take possession of the gifts of
nature indiscriminately would mean industrial anarchy and civil war.
Hence Henry George tells us that the individual should pay rent to
"the community to satisfy the equal rights of all other members of
the community."[18] Inasmuch as the individual must pay this price
before he begins to produce, his right to the use of natural
opportunities is not "free," nor does his labour alone constitute a
title to that part of them that he utilises in production.
Consequently labour does not create a right to the concrete product.
It merely gives the producer a right to the value that he adds to the
raw material. His right to the raw material itself, to the elements
that he withdraws from the common store, and fashions into a product,
say, wheat, lumber, or steel, does not originate in the title of
labour but in the title of contract. This is the contract by which in
exchange for rent paid to the community he is authorised to utilise
these materials. Until he has made this contract he has manifestly no
full right to the product into which natural forces as well as his own
labour have entered. According to Henry George's own statements,
therefore, the right to the product does not spring from labour alone,
but from labour plus compensation to the community. Since the contract
by which the prospective user agrees to pay this compensation or rent
must precede his application of labour, it instead of labour is the
original title. Since the contract is made with a particular community
for the use of a particular piece of land, the title that it conveys
must derive ultimately from the occupation of that land by that
community,--or some previous community of which the present one is the
legal heir. So far as economically valuable materials are concerned,
therefore, the logic of Henry George's principles leads inevitably to
the conclusion that the original title of ownership is first
occupancy.

Even in the case of economically free goods, the original title of
ownership is occupancy. Henry George declares that the traveller who
has filled his vessels at a free-for-all spring owns the water when he
has carried it into a desert, by the title of labour.[19]
Nevertheless, in its original place this water belonged either to the
community or to nobody. In the former supposition it can become the
property of the traveller only through an explicit or implicit gift
from the community; and it is this contract, not labour, that
constitutes his title to the water. If we assume that the spring was
ownerless, we see that the labour of carrying a portion of it into the
desert still lacks the qualifications of a title; for the abstracted
water must have belonged to him before he began the journey. It must
have been his from the moment that he separated it from the spring.
Otherwise he had no right to take it away. His labour of transporting
it gave him a right to the utility thus added to the water, but not a
right to the water when it first found a local habitation in his
vessels. Nor was the labour of transferring it from the spring into
his vessels the true title; for labour alone cannot create a right to
the material upon which it is exerted, as we see in the case of stolen
objects. If it be contended that labour together with the natural
right to use the ownerless goods of nature have all the elements of a
valid title, the assertion must be rejected as unprecise and
inadequate. The right to use ownerless goods is a general and abstract
right that requires to become specific and concrete through some
title. In the case of water it is a right to water in general, to some
water, but not a right to a definite portion of the water in this
particular spring. The required and sufficient title here is that of
apprehension, occupation, the act of separating a portion from the
natural reservoir. Therefore, it is first occupancy as exemplified in
mere seizure of an ownerless good, not labour in the sense of
productive activity, nor labour in the sense of painful exertion, that
constitutes the precise title whereby the man acquires a right to the
water that he has put into his cup or barrel. Mere seizure is a
sufficient title in all such cases as that which we are now
considering, simply because it is a reasonable method of determining
and specifying ownership. There is no need whatever of having recourse
to the concept of labour to justify this kind of property right. In
the present case, indeed, the acts of apprehension and of productive
labour (the labour of dipping the water into a vessel _is_ productive
inasmuch as the water is more useful there than in the spring) are the
same physically, but they are distinct logically and ethically. One is
mere occupation, while the other is production; and ownership of a
thing must precede, in morals if not in time, the expenditure upon it
of productive labour.

"The theory which bases the right of property on labour really depends
in the ultimate resort on the right of possession and the fact that it
is socially expedient, and is therefore upheld by the laws of society.
Grotius, discussing this in the old Roman days, pointed out that since
nothing can be made except out of pre-existing matter, acquisition by
means of labour depends, ultimately, on possession by means of
occupation."[20]

Since man's right to his faculties does not of itself give him a right
to exercise them upon material objects, productive labour cannot of
itself give him a right to the product therefrom created, nor
constitute the original title of ownership. Since labour is not the
original title to property, it is not the only possible title to
property in land. Hence the fact that labour does not produce land,
has no bearing on the question of private landownership.

In passing it may be observed that Henry George implicitly admitted
that the argument from the labour title was not of itself sufficient
to disprove the right of private property in land. Considering the
objection, "if private property in land be not just, then private
property in the products of land is not just, as the material of these
products is taken from the land," he replied that the latter form of
ownership "is in reality a mere right of temporary possession," since
the raw material in the products sooner or later returns to the
"reservoirs provided for all ... and thus the ownership of them by one
works no injury to others."[21] But private ownership of land, he
continued, shuts out others from the very reservoirs. Here we have a
complete abandonment of the principle which underlies the labour
argument. Instead of trying to show from the nature of the situation
that there is a logical difference between the two kinds of ownership,
he shifts his ground to a consideration of consequences. He makes the
title of social utility instead of the title of labour the
distinguishing and decisive consideration. As we shall see later, he
is wrong even on this ground; for the fundamental justification of
private landownership is precisely the fact that it is the system of
land tenure most conducive to human welfare. At present we merely call
attention to the breakdown in his own hands of the labour argument.

To sum up the entire discussion on the original title of ownership:
Henry George's attack upon first occupancy is futile because based
upon an exaggerated conception of the scope of private landownership,
and upon a false assumption concerning the responsibility of that
title for the historical evils of the system. His attempt to
substitute labour as the original title is likewise unsuccessful,
since labour can give a right only to the utility added to natural
materials, not to the materials themselves. Ownership of the latter
reaches back finally to occupation. Whence it follows that the title
to an artificial thing, such as a hat or coat, water taken from a
spring, a fish drawn from the sea, is a joint or two-fold title;
namely, occupation and labour. Where the product embodies scarce and
economically valuable raw material, occupation is usually prior to
labour in time; in _all_ cases it is prior to labour logically and
ethically. Since labour is not the original title, its absence in the
case of land does not leave that form of property unjustified. The
title of first occupancy remains. In a word, the one original title of
all property, natural and artificial, is first occupancy.

The other arguments of Henry George against private landownership are
based upon the assumed right of all mankind to land and land values,
and on the contention that this right is violated by the present
system of tenure.


_The Right of All Men to the Bounty of the Earth_

"The equal right of all men to the use of land is as clear as their
equal right to breathe the air--it is a right proclaimed by the fact
of their existence. For we cannot suppose that some men have a right
to be in the world, and others no right.

"If we are here by the equal permission of the Creator, we are all
here with an equal title to the enjoyment of his bounty--with an equal
right to the use of all that nature so impartially offers.... There is
in nature no such thing as a fee simple in land. There is on earth no
power which can rightfully make a grant of exclusive ownership of
land. If all existing men were to grant away their equal rights, they
could not grant away the rights of those who follow them. For what are
we but tenants for a day? Have we made the earth that we should
determine the rights of those who after us shall tenant it in their
turn?"[22]

The right to use the goods of nature for the support of life is
certainly a fundamental natural right; and it is substantially equal
in all persons. It arises, on the one hand, from man's intrinsic
worth, his essential needs, and his final destiny; and, on the other
hand, from the fact that nature's bounty has been placed by God at the
disposal of all His children indiscriminately. But this is a general
and abstract right. What does it imply specifically and in the
concrete? In the first place, it includes the actual and continuous
use of some land; for a man cannot support life unless he is permitted
to occupy some portion of the earth for the purposes of working, and
eating, and sleeping. Secondly, it means that in time of extreme need,
and when more orderly methods are not available, a man has the right
to seize sufficient goods, natural or produced, public or private, to
support life. So much is admitted and taught by all Catholic
authorities, and probably by all other authorities. Furthermore, the
abstract right in question seems very clearly to include the concrete
right to obtain on reasonable conditions at least the requisites of a
decent livelihood; for example, by direct access to a piece of land,
or in return for a reasonable amount of useful labour. All of these
particular rights are equally valid in all persons.

Does the equal right to use the bounty of nature include the right to
equal _shares_ of land, or land values, or land advantages? Since the
resources of nature have been given to all men in general, and since
human nature is specifically and juridically equal in all, have not
all persons the right to share equally in these resources? Suppose
that some philanthropist hands over to one hundred persons an
uninhabited island, on condition that they shall divide it among
themselves with absolute justice. Are they not obliged to divide it
equally? On what ground can any person claim or be awarded a larger
share than his fellows? None is of greater intrinsic worth than
another, nor has any one made efforts, or sacrifices, or products
which will entitle him to exceptional treatment. The correct principle
of distribution would seem to be absolute equality, except in so far
as it may be modified on account of varying needs, and varying
capacities for social service. In any just distribution account must
be taken of differences in needs and capacities; for it is not just to
treat men as equal in those respects in which they are unequal, nor is
it fair to deprive the community of those social benefits which can be
obtained only by giving exceptional rewards for exceptional services.
The same amount of food allotted to two persons might leave one hungry
and the other sated; the same amount of land assigned to two persons
might tempt the one to wastefulness and discourage the other. To be
sure, the factor of exceptional capacity should not figure in the
distribution until all persons had received that measure of natural
goods which was in each case sufficient for a decent livelihood. For
the fundamental justification of any distribution is to be sought in
human needs; and among human needs the most deserving and the most
urgent are those which must be satisfied as a prerequisite to right
and reasonable life.

Now it is true that private ownership of land has nowhere realised
this principle of proportional equality and proportional justice. No
such result is possible in a system that, in addition to other
difficulties, would be required to make a new distribution at every
birth and at every death. Private ownership of land can never bring
about ideal justice in distribution. Nevertheless it is not
necessarily out of harmony with the demands of _practical_ justice. A
community that lacks either the knowledge or the power to establish
the ideal system is not guilty of actual injustice because of this
failure. In such a situation the proportionally equal rights of all
men to the bounty of nature are not actual rights. They are
conditional, or hypothetical, or suspended. At best they have no more
moral validity than the right of a creditor to a loan that, owing to
the untimely death of the debtor, he can never recover. In both cases
it is misleading to talk of injustice; for this term always implies
that some person or community is guilty of some action which could
have been avoided. The system of private landownership is not, indeed,
perfect; but this is not exceptional in a world where the ideal is
never attained, and all things are imperfect. Henry George declares
that "there is on earth no power which can rightfully make a grant of
exclusive ownership in land"; but what would he have a community do
which has never heard of his system? Introduce some crude form of
communism, or refrain from using the land at all, and permit the
people to starve to death in the interests of ideal justice? Evidently
such a community must make grants of exclusive ownership, and these
will be as valid in reason and in morals as any other act that is
subject to human limitations which are at the time irremovable.

Perhaps the Single Taxer would admit the force of the foregoing
argument. He might insist that the titles given by the State in such
conditions were not exclusive grants in the strict sense, but were
valid only until a better system could be set up, and the people put
in possession of their natural heritage. Let us suppose, then, that a
nation were shown "a more excellent way." Suppose that the people of
the United States set about to establish Henry George's system in the
way that he himself advocated. They would forthwith impose upon all
land an annual tax equivalent to the annual rent. What would be the
effect upon private land-incomes, and private land-wealth? Since the
first would be handed over to the State in the form of a tax, the
second would utterly disappear. For the value of land, like the value
of any other economic good, depends upon the utilities that it
embodies or produces. Whoever controls these will control the market
value of the land itself. No man will pay anything for a
revenue-producing property if some one else, for example, the State,
is forever to take the revenue. The owner of a piece of land which
brings him an annual revenue or rent of one hundred dollars, will not
find a purchaser for it if the State appropriates the one hundred
dollars in the form of a tax that is to be levied year after year for
all time. On the assumption that the revenue represents a selling
value of two thousand dollars, the private owner will be worth that
much less after the introduction of the new system.

Henry George defends this proceeding as emphatically just, and denies
the justice of compensating the private owners. In the chapter of
"Progress and Poverty" headed, "Claim of Land Owners to Compensation,"
he declares that "private property in land is a bold, bare, enormous
wrong, like that of chattel slavery"; and against Mill's statement
that land owners have a right to rent and to the selling value of
their holdings, he exclaims: "If the land of any country belong to the
people of that country, what right, in morality and justice, have the
individuals called land owners to the rent? If the land belong to the
people, why in the name of morality and justice should the people pay
its salable value for their own?"[23]

Here, then, we have the full implication of the Georgean principle
that private property in land is essentially unjust. It is not merely
imperfect,--tolerable while unavoidable. When it can be supplanted by
the right system, its inequalities must not continue under another
form. If inequalities are continued through the compensation of
private owners, individuals are still hindered from enjoying their
equal rights to land, and the State becomes guilty of formal and
culpable injustice. The titles which the State formerly guaranteed to
the private owners did not have in morals the perpetual validity which
they professed to have. Since the State is not the owner of the land,
it was morally powerless to create or sanction titles of this
character. Even if all the citizens at any given time had deliberately
transferred the necessary authorisation to the State, "they could
not," in the words of Henry George, "grant away the right of those who
follow them." The individual's right to land is innate and natural,
not civil or social. The author of "Progress and Poverty" attributes
to the individual's _common_ right to land precisely the same absolute
character that Father Liberatore predicates of the right to become a
_private_ land owner.[24] In the view of Henry George, the State is
merely the trustee of the land, having the duty of distributing its
benefits and values so as to make effective the equal rights of all
individuals. Consequently, the legal titles of private ownership which
it creates or sanctions are valid only so long as nothing better is
available. At best such titles have no greater moral force than the
title by which an innocent purchaser holds a stolen watch; and the
persons who are thereby deprived of their proper shares of land
benefits, have the same right to recover them from the existing
private owners that the watch-owner has to recover his property from
the innocent purchaser. Hence the demand for compensation has no more
merit in the one case than in the other.

To the objection that the civil laws of many civilised countries would
permit the innocent purchaser of the watch to retain it, provided that
sufficient time had elapsed to create a title of prescription, the
Single Taxer would reply that the two kinds of goods are not on the
same moral basis in all respects. He would contend that the natural
heritage of the race is too valuable, and too important for human
welfare to fall under the title of prescription.

To put the matter briefly, then, Henry George contends that the
individual's equal right to land is so much superior to the claim of
the private owner that the latter must give way, even when it
represents an expenditure of money or other valuable goods. The
average opponent does not seem to realise the full force of the
impression which this theory makes upon the man who overemphasises the
innate rights of men to a share in the gifts of nature. Let us see
whether this right has the absolute and overpowering value which is
attributed to it by Henry George.

In considering this question, the supremely important fact to be kept
in mind is that the natural right to land is not an end in itself. It
is not a prerogative that inheres in men, regardless of its purposes
or effects. It has validity only in so far as it promotes individual
and social welfare. As regards individual welfare, we must bear in
mind that this phrase includes the well being of all persons, of those
who do as well as of those who do not at present enjoy the benefits of
private landownership. Consequently the proposal to restore to the
"disinherited" the use of their land rights must be judged by its
effects upon the welfare of all persons. If existing landowners are
not compensated they are deprived, in varying amounts, of the
conditions of material well being to which they have become
accustomed, and are thereby subjected to varying degrees of positive
inconvenience and hardship. The assertion that this loss would be
offset by the moral gain in altruistic feelings and consciousness, may
be passed over as applying to a different race of beings from those
who would be despoiled. The hardship is aggravated considerably by the
fact that very many of the dispossessed private owners have paid the
full value of their land out of the earnings of labour or capital, and
that all of them have been encouraged by society and the State to
regard landed property in precisely the same way as any other kind of
property. In the latter respect they are not in the same position as
the innocent purchaser of the stolen watch; for they have never been
warned by society that the land might have been virtually stolen, or
that the supposedly rightful claimants might some day be empowered by
the law to recover possession. On the other hand, the persons who own
no land under the present system, the persons who are deprived of
their "birthright," suffer no such degree of hardship when they are
continued in that condition. They are kept out of something which they
have never possessed, which they have never hoped to get by any such
easy method, and from which they have not been accustomed to derive
any benefit. To prolong this condition is not to inflict upon them any
new or positive inconvenience. Evidently their welfare and claims in
the circumstances are not of the same moral importance as the welfare
and claims of persons who would be called upon to suffer the loss of
goods already possessed and enjoyed, and acquired with the full
sanction of society.

Henry George is fond of comparing the private owner of land with the
slave owner, and the landless man with the man enslaved; but there is
a world of difference between their respective positions and moral
claims. Liberty is immeasurably more important than land, and the
hardship suffered by the master when he is compelled to free the slave
is immeasurably less than that endured by the slave who is forcibly
detained in bondage. Moreover, the moral sense of mankind recognises
that it is in accordance with equity to compensate slave owners when
the slaves are legally emancipated. Infinitely stronger is the claim
of the landowner to compensation.

If the Georgeite replies that the landless man is at present kept out
of something to which he has a right, while confiscation would take
from the private owner something which does not really belong to him,
the rejoinder must be that this assertion begs the question. The
question is likewise begged when the unreasonable defender of private
property declares that the right of the landless is vague and
undetermined, and therefore morally inferior to the determinate and
specific right of the individual landowner. This is precisely the
question to be solved. Does the abstract right of the landless man
become a concrete right which is so strong as to justify confiscation?
Is his natural right valid against the acquired right of the private
proprietor? These questions can be answered intelligently only by
applying the test of human welfare, individual and social. To say that
land of its very nature is not morally susceptible of private
ownership, is to make an easy assertion that may be as easily denied.
To interpret man's natural right to land by any other standard than
human welfare, is to make of it a fetish, not a thing of reason. Henry
George himself seemed to recognise this when he wrote that
wonderfully eloquent but overdrawn and one-sided description of the
effects of private ownership which occurs in the chapter entitled,
"Claim of Landowners to Compensation."[25]

When we say that human welfare is the final determinant of the right
to land, we understand this phrase in the widest possible sense. To
divide the goods of the idle rich among the deserving poor, might be
temporarily beneficial to both these classes, but the more remote and
enduring consequences would be individually and socially disastrous.
To restore a legacy to persons who had been defrauded of it when very
young, would probably cause more hardship to the swindler than the
heirs would have suffered had there been no restitution; nevertheless
the larger view of human welfare requires that the legacy should be
restored. When, however, two or three generations have been kept out
of their inheritance, the civil law permits the children of the
swindler to retain the property by the title of prescription; and for
precisely the same reason, human welfare.

The social consequences of the confiscation of rent and land values,
would be even more injurious than those falling upon the individuals
despoiled. Social peace and order would be gravely disturbed by the
protests and opposition of the landowners, while the popular
conception of property rights, and of the inviolability of property,
would be greatly weakened, if not entirely destroyed. The average man
would not grasp or seriously consider the Georgean distinction between
land and other kinds of property in this connection. He would infer
that purchase, or inheritance, or bequest, or any other title having
the immemorial sanction of the State, does not create a moral right to
movable goods any more than to land. This would be especially likely
in the matter of capital. Why should the capitalist, who is no more a
worker than the landowner, be permitted to extract revenue from his
possessions? In both cases the most significant and practical feature
is that one class of men contributes to another class an annual
payment for the use of socially necessary productive goods. If
rent-confiscation would benefit a large number of people, why not
increase the number by confiscating interest? Indeed, the proposal to
confiscate rent is so abhorrent to the moral sense of the average man
that it could never take place except in conditions of revolution and
anarchy. If that day should ever arrive the policy of confiscation
would not stop with land.


_The Alleged Right of the Community to Land Values_

In the foregoing pages we have confined our attention to the Georgean
principle which bases men's common right to land and rent upon their
common nature, and their common claims to the material gifts of the
Creator. Another argument against private ownership takes this form:
"Consider what rent is. It does not arise spontaneously from the soil;
it is due to nothing that the landowners have done. It represents a
value created by the whole community.... But rent, the creation of the
whole community, necessarily belongs to the whole community."[26]

Before taking up the main contention in this passage, let us notice
two incidental points. If all rent be due to the community by the
title of social production, why does Henry George defend at such
length the title of birthright? If the latter title does not extend to
rent it is restricted to land which is so plentiful as to yield no
rent. Since the owners or holders of such land rarely take the trouble
to exclude any one from it, the right in question, the inborn right,
has not much practical value. Probably, however, the words quoted
above ought not to be interpreted as excluding the title of
birthright. In that case, the meaning would be that rent belongs to
the community by the title of production, as well as by the congenital
title.

The second preliminary consideration is that the community does not
create _all_ land values nor _all_ rent. These things are as certainly
due to nature as to social action. In no case can they be attributed
exclusively to one factor. Land that has no natural qualities or
capacities suitable for the satisfaction of human wants will never
have value or yield rent, no matter what society does in connection
with it: the richest land in the world will likewise remain valueless,
until it is brought into relation with society, with at least two
human beings. If Henry George merely means to say that, without the
presence of the community, land will not produce rent, he is stating
something that is perfectly obvious, but it is not peculiar to land.
Manufactured products would have no value outside of society, yet no
one maintains that their value is all created by social action.
Although the value of land is always due to both nature and society,
for practical purposes we may correctly attribute the value of a
particular piece of land predominantly to nature, or predominantly to
society. When three tracts, equally distant from a city, and equally
affected by society and its activities, have different values because
one is fit only for grazing, while the second produces large crops of
wheat, and the third contains a rich coal mine, their relative values
are evidently due to nature rather than to society. On the other hand,
the varying values of two equally fertile pieces of land unequally
distant from a city, must be ascribed primarily to social action. In
general, it is probably safe to say that almost all the value of land
in cities, and the greater part of the value of land in thickly
settled districts, is specifically due to social action rather than to
differences in fertility. Nevertheless, it remains true that the value
of every piece of land arises partly from nature, and partly from
society; but it is impossible to say in what proportion.

Our present concern is with those values and rents which are to be
attributed to social action. These cannot be claimed by any person,
nor by any community, in virtue of the individual's natural right to
the bounty of nature. Since they are not included among the ready made
gifts of God, they are no part of man's birthright. If they belong to
all the people the title to them must be sought in some historical
fact, some fact of experience, some social fact. According to Henry
George, the required title is found in the fact of production.
Socially created land values and rents belong to the community because
the community, not the private proprietor, has produced them. Let us
see in what sense the community produces the social value of land.

In the first place, this value is produced by the community in two
different senses of the word community, namely, as a civil, corporate
entity, and as a group of individuals who do not form a moral unit.
Under the first head must be placed a great deal of the value of land
in cities; for example, that which arises from municipal institutions
and improvements, such as, fire and police protection, water works,
sewers, paved streets, and parks. On the other hand, a considerable
part of land values both within and without cities is due, not to the
community as a civil body, but to the community as a collection of
individuals and groups of individuals. Thus, the erection and
maintenance of buildings, the various economic exchanges of goods and
labour, the superior opportunities for social intercourse and
amusement which characterise a city, make the land of the city and its
environs more valuable than land at a distance. While the activities
involved in these economic and "social" facts and relations are,
indeed, a social not an individual product, they are the product of
small, temporary, and shifting groups within the community. They are
not the activities of the community as a moral whole. For example, the
maintenance of a grocery business implies a series of social
relations and agreements between the grocer and his customers; but
none of these transactions is participated in by the community acting
as a community. Consequently such actions and relations, and the land
values to which they give rise are not due to, are not the products of
the community as a unit, as a moral body, as an organic entity. What
is true of the land values created by the grocery business applies to
the values which are due to other economic institutions and relations,
as well as to those values which arise out of the purely "social"
activities and advantages. If these values are to go to their
producers they must be taken, in various proportions, by the different
small groups and the various individuals whose actions and
transactions have been directly responsible.

To distribute these values among the producers thereof in proportion
to the productive contribution of each person is obviously impossible.
How can it be known, for example, what portion of the increase in the
value of a city's real estate during a given year is due to the
merchants, the manufacturers, the railroads, the labourers, the
professional classes, or the city as a corporation? The only practical
method is for the city or other political unit to act as the
representative of all its members, appropriate the increase in value,
and distribute it among the citizens in the form of public services,
institutions, and improvements. Assuming that the socially produced
value of land ought to go to its social producer rather than to the
individual proprietor, this method of public appropriation and
disbursement would seem to be the nearest approximation to practical
justice that is available.

Is the assumption correct? Do the socially produced land values
necessarily belong to the producer, society? Does not the assumption
rest upon a misconception of the moral validity of production as a
canon of distribution? Let us examine some of the ways in which
values are produced.

The man who converts leather and other suitable raw materials into a
pair of shoes, increases the utility of these materials, and in normal
market conditions increases their value. In a certain sense he has
created value, and he is universally acknowledged to have a right to
this product. Similarly the man who increases the utility and value of
land by fertilising, irrigating, or draining it, is conceded the
benefit of these improvements by the title of production.

But value may be increased by mere restriction of supply, and by mere
increase in demand. If a group of men get control of the existing
supply of wheat or cotton, they can artificially raise the price,
thereby producing value as effectively as the shoemaker or the farmer.
If a syndicate of speculators gets possession of all the land of a
certain quality in a community, they can likewise increase its value,
produce new value. If a few powerful leaders of fashion decide to
adopt a certain style of millinery, their action and example will
effect an increase in the demand for and the value of that kind of
goods. Yet none of these producers of value are regarded as having a
moral right to their product.

When we turn to what is called the social creation of land values, we
find that it takes two forms. It always implies increase of social
demand; but the latter may be either purely subjective, reflecting
merely the desires and power of the demanders themselves, or it may
have an objective basis connected with the land. In the first case it
may be due solely to an increase of population. Within the last few
years, agricultural land which is no more fertile nor any better
situated with regard to markets or other social advantages than it was
thirty years ago, has risen in value because its products have risen
in value. Its products have become dearer because population, and
therefore demand, have grown faster than agricultural production.
Merely by increasing its wants the population has produced land
values; but it has obviously no more right to them than have the
leaders of fashion to the enhanced value which they have given to
feminine headgear. On the other hand, the increased demand for land,
and the consequent increase in its value, are frequently attributable
specifically to changes connected with the land itself. They are
changes which affect its utility rather than its scarcity. The farmer
who irrigates desert land increases its utility, as it were,
_intrinsically_. The community that establishes a city increases the
utility of the land therein and thereabout _extrinsically_. New
_relations_ are introduced between that land and certain desirable
social institutions. Land that was formerly useful only for
agriculture becomes profitable for a factory or a store. Through its
new external relations, the land acquires new utility; or better, its
latent and potential uses have become actual. Now these new relations,
these utility-creating and value-creating relations, have been
established by society, in its corporate capacity through civil
institutions and activities, and in its non-corporate capacity through
the economic and "social" (in the narrower "society" sense) activities
of groups and individuals. In this sense, then, the community has
created the increased land values. Has it a strict right to them? a
right so rigorous and exact that private appropriation of them is
unjust?

As we have just seen, men do not admit that mere production of value
constitutes a title of ownership. Neither the monopolist who increases
value by restricting supply, nor the pace-makers of fashion, who
increase value by merely increasing demand, are regarded as possessing
a moral right to the value that they have "created." It is increase of
utility, and not either actual or virtual increase of scarcity to
which men attribute a moral claim. Why do men assign these different
ethical qualities to the production of value? Why has the shoemaker a
right to the value that he adds to the raw material in making a pair
of shoes? What is the precise basis of his right? It cannot be labour
merely; for the cotton monopolist has laboured in getting his corner
on cotton. It cannot be the fact that the shoemaker's labour is
socially useful; for a chemist might spend laborious days and nights
producing water from its component elements, and find his product a
drug on the market. Yet he would have no reasonable ground of
complaint. Why, then, is it reasonable for the shoemaker to require,
why has he a right to require payment for the utilities that he
produces? Because men want to use his products, and because they have
no right to require him to serve them without compensation. He is
morally and juridically their equal, and has the same right as they to
have access on reasonable terms to the earth and the earth's
possibilities of a livelihood. Being thus equal to his fellows, he is
under no obligation to subordinate himself to them by becoming a mere
instrument for their welfare. To assume that he is obliged to produce
socially useful things without remuneration, is to assume that all
these propositions are false; it is to assume that his life and
personality and personal development are of no intrinsic importance,
and that his pursuit of the essential ends of life has no meaning
except in so far as may be conducive to his function as an instrument
of production. In a word, the ultimate basis of the producer's right
to his product, or its value, is the fact that this is the only way in
which he can get his just share of the earth's goods, and of the means
of life and personal development. His right to compensation does not
rest on the mere fact of value-production.

As a producer of land values, the community is not on the same moral
ground with the shoemaker. Its productive action is indirect and
extrinsic, instead of direct and intrinsic, and is merely incidental
to its principal activities and purposes. Land values are a
by-product which do not require the community to devote thereto a
single moment of time or a single ounce of effort. The activities of
which land values are a by-product, have already been remunerated in
the price paid to the wage-earner for his labour, the physician for
his services, the manufacturer and the merchant for their wares, and
the municipal corporation in the form of taxes. On what ground can the
community, or any part of it, set up a claim in strict justice to the
increased land values? The right of the members of the community to
the means of living and self development is not dependent upon the
taking of these values by the community. Nor are they treated as
instruments to the welfare of the private owners who do get the
socially created land values; for they expend neither time nor labour
in the interest of the latter directly. Their labour is precisely what
it would have been had there been no increase in the value of the
land.

Since social production does not constitute a right to land values nor
to rent, it affords not a shadow of justification for the confiscation
of these things by the community. If social appropriation of socially
created land values had been introduced with the first occupation of a
piece of land, it might possibly have proved more generally beneficial
than the present system. In that case, however, the moral claim of the
community to these values would have rested on the fact that they did
not belong to anybody by a title of strict justice. They would have
been a "res nullius" ("nobody's property") which might fairly have
been taken by the community according as they made their appearance.
The community could have appropriated them by the title of first
occupancy. But there could have been no moral title of social
production. When, however, the community or the State failed to take
advantage of its opportunity to be the first occupant of these values,
when it permitted the individual proprietor to appropriate them, it
forfeited its own claim. Ever since it has had no more right to
already existing land values than it has to seize the labourer's wages
or the capitalist's interest,--no more right than one person has to
recover a gift or donation that he has unconditionally bestowed upon
another.

To sum up the conclusions of this chapter: The argument against first
occupancy is valid only with regard to the abuses of private
ownership, not with regard to the institution; the argument based upon
the title of labour is the outcome of a faulty analysis, and is
inconsistent with other statements of its author; the argument derived
from men's equal rights to land merely proves that private ownership
does not secure perfect justice, and the proposal to correct this
defect by confiscating rent is unjust because it would produce greater
evils; and the so called production of the social values of land
confers upon the community no property right whatever.

FOOTNOTES:

[8] "Socialism: Utopian and Scientific," p. 45; Chicago, 1900.

[9] "A summary of the Principles of Socialism," p. 23; London, 1899.

[10] "Socialism: A Reply to the Pope's Encyclical," p. 4; London,
1899.

[11] "Progress and Poverty," book vii, ch. i.

[12] "La Propriété Privée," par L. Garriguet, I, 62; Paris, 1903.

[13] Cf. Ardant, "Papes et Paysans," pp. 41, sq.

[14] "Social Statics," chap, ix; 1850. Spencer's retractation, in a
later edition of this work, of his earlier views on the right of
property in land does not affect the truth of the description quoted
in the passage above.

[15] "Progress and Poverty," loc. cit.

[16] "Open Letter to Pope Leo XIII," page 25 of Vierth's edition.

[17] "Progress and Poverty," loc. cit.

[18] "Progress and Poverty," loc. cit.

[19] "Open Letter to Pope Leo XIII," loc. cit.

[20] Whittaker, op. cit., p. 32.

[21] "Open Letter," loc. cit.

[22] "Progress and Poverty," book vii, ch. i.

[23] Cf. chapter entitled "Compensation" in "A Perplexed Philosopher."

[24] Cf. "Principles of Political Economy," 1891, p. 130.

[25] "Progress and Poverty."

[26] "Progress and Poverty," book vii, ch. iii.



CHAPTER IV

PRIVATE OWNERSHIP THE BEST SYSTEM OF LAND TENURE


The defence of private landownership set forth in the last chapter has
been conditional. It has tended to show that the institution is
morally lawful so long as no better system is available. As soon as a
better system has been discovered, the State and the citizens are
undoubtedly under some degree of moral obligation to put it into
practice. Hence the important present question is whether this
condition or contingency has become a reality. The only proposed and
the only possible alternative systems are Socialism and the Single
Tax. All other forms of tenure are properly classed as modifications
of private ownership, rather than as distinct systems. Consequently
the worth, and efficiency, and morality of private ownership can be
adequately determined by comparison with the two just mentioned.


_The Socialist Proposals Impracticable_

As now existing and as commonly understood, private landownership
comprises four elements which are not found together in either
Socialism or the Single Tax. They are: security of possession combined
with the power to transfer and transmit; the use of land combined with
the power to let the use to others; the receipt of revenue from
improvements in or upon the land; and the receipt of economic rent,
the revenue due to the land itself, apart from improvements. In its
extreme form, and as formerly understood by the majority of its
authoritative exponents, Socialism would take from the individual all
of these elements or powers. The State, or the Collectivity, would own
and manage all productive land and land-capital, and would receive and
distribute the product. Consequently the cultivators of the land would
be deprived of even that limited degree of control which is now
possessed by the tenant on a rented farm; for the latter, though not a
landowner, is the owner of a farming business, and of agricultural
instruments of production. Under Socialism the users of the land would
not receive the revenue either from improvements or from the land
itself. They would be substantially employés of the community,
receiving a share of the product according to some plan of
distribution established by public authority. Land occupied by
dwellings would likewise be owned and managed by the State, although
its product, the benefit of its use, would necessarily go in the first
instance to the occupier. In return for this benefit he would
undoubtedly be required to pay some kind of rent to the State.

Now the majority of persons believe that this system of land tenure
would be inferior to private ownership, both as regards individual
welfare and social welfare. The reasons for this belief will be given
in detail in the chapter on "The Socialist Scheme of Industry." For
the present it will be sufficient to point out in a summary way that
Socialism would be unable to organise and carry on efficiently all
agricultural and extractive industries, either under one central
direction or under many provincial authorities; that it could not
adjust wages and salaries satisfactorily, nor give the individual
worker an incentive as effective as the self interest that goes with
private ownership; that it would deprive the worker of a great part of
the freedom that he now enjoys in the matters of occupation and
residence; that it would leave to the consumer less choice in the
demand for the products of land; that it would place all the people in
a position of dependence upon a single agency for all these products;
and that it would make all land users, whether as workers or as
residents, tenants-at-will on the property of the State.

From the nature of the case, none of the foregoing propositions can be
demonstrated mathematically. Nevertheless they are as nearly evident
as any other practical conclusions which are based upon our general
experience of human nature, its tendencies, and its limitations. At
any rate, the burden of proof is upon the advocates of the new system.
Until they have assumed and satisfactorily disposed of this burden, we
are justified in rejecting their prophecies, and in maintaining the
superiority of private ownership.[27]

To-day, however, many Socialists, possibly the majority of them in
some countries, would reject the extreme form of land socialisation
discussed in the preceding paragraphs. "The nearest approach which
Socialists have made to a _volte face_ since Marx, has been in
relation to Agrarianism.... Marx thought that the advantage of
concentrating capital would be felt in agriculture as in other
industries; but, in spite of a temporary confirmation of this view by
the mammoth farms which sprang up in North America, it now appears
very doubtful.... Recognition of this has led reformists to substitute
a policy of actively assisting the peasants for the orthodox policy of
leaving them to succumb to capitalism. Their formula is: 'Collectivise
credit, transport, exchange, and all subsidiary manufacture, but
individualise culture.'"[28] The Belgian Socialist leader,
Vandervelde, seems to prefer State ownership and management of the
great agricultural industries which require large masses of capital
for their efficient operation, such as dairying, distilling, and sugar
making, together with State ownership of the land thus used. Other
lands he would have owned by the State, but cultivated by individuals
according to a system of leasing and rent-paying.[29] By a referendum
vote the members of the Socialist party in the United States recently
amended their platform on land, to read as follows: "The Socialist
party strives to prevent land from being used for the purpose of
exploitation and speculation. It demands the collective possession,
control or management of land to whatever extent may be necessary to
attain that end. It is not opposed to the occupation and possession of
land by those using it in a useful and bona fide manner without
exploitation."[30] As to land occupied by dwellings, perhaps the
majority of Socialists would now agree with Spargo in the statement
that, "so far as the central principle of Socialism is concerned,
there is no more reason for denying the right of a man to own his own
home than there is to deny him the right to own his hat."[31]

In so far as the foregoing modifications of Socialist proposals would
allow the individual to own the land that he cultivates or occupies,
they do not call for further discussion here. In so far as they
combine State ownership of land with individual management of
cultivation, they are subject to at least all the limitations of the
Single Tax. To the latter system we now turn our attention.


_Inferiority of the Single Tax System_

Of the four leading elements of private ownership enumerated above,
the Single Tax scheme would comprise all but one. In the words of
Henry George himself: "Let the individuals who now hold it still
retain, if they want to, possession of what they are pleased to call
_their_ land. Let them continue to call it _their_ land. Let them buy
and sell, and bequeath and devise it. We may safely leave them the
shell, if we take the kernel. _It is not necessary to confiscate
land; it is only necessary to confiscate rent...._ In this way the
State may become the universal landlord without calling herself so,
and without assuming a single new function. In form, the ownership of
land would remain just as now. No owner of land need be dispossessed,
and no restriction need be placed upon the amount of land that any one
could hold."[32]

Individuals would, therefore, still enjoy security of possession, the
managerial use of land, and the revenue due to improvements. The
income arising from the land itself, the economic rent, they would be
obliged to hand over as a free gift to the State. As we have seen in a
preceding chapter, this confiscation of rent by the State would be
pure and simple robbery of the private owner. Suppose, however, that
the State were willing to compensate individual proprietors with a sum
equal to the present value, or the capitalised rent, of their land. In
that case the only difference made to the individual would be that he
could no longer invest his money in land nor profit by the increases
in land values. While this would deprive some persons of advantages
that they now enjoy, it would be beneficial to the majority, and to
the community. Since no man would find it profitable to retain control
of more land than he could use himself, the number of actual land
users would be increased. The land speculator would disappear,
together with the opportunity of making and losing fortunes by
gambling on the changes in land values. Owing to the removal of
taxation from the necessaries of life and from industry, consumers
would get goods cheaper, and some stimulus would be given to
production and employment. Those monopolies which derive their
strength from land would become weaker and tend to disappear. Sooner
or later there would probably be a considerable increase in the amount
of money available for public improvements and socially beneficial
institutions.

On the other hand, there would be certain and serious disadvantages. A
considerable number of land users might permit their holdings to
deteriorate through careless cultivation. To be sure, they would not
find this a profitable course if they intended to remain on the land
permanently; but they might prefer to exhaust the best qualities of a
farm in a few years, and then retire, or go into some other business,
or repeat the wearing-out process on other lands. Thus the community
would suffer through the lowered productiveness of its land, and
because of the lower rent that it would receive from all subsequent
users of the deteriorated tracts. In the second place, the
administrative machinery required to levy and collect the rent, and to
apportion the different holdings among competitive bidders, would
inevitably involve a vast amount of error, inequality, favouritism,
and corruption. For the land tax to be levied and collected would not
be, as now, a fraction of the rental value, but the full amount of the
annual rent. In the third place, cultivators would not have the
inducement to make improvements which arises from the hope of selling
both the improvements and the land at a profit, owing to the increased
demand for the land. Perhaps the greatest disadvantage of the system
would be the instability of tenure, with regard to both productive and
residential lands. Owing to misfortunes of various kinds, for example,
one or two bad crops, many cultivators would be temporarily unable to
pay the full amount of the land tax or rent. It is scarcely
conceivable that the State would remit the deficiency, or refuse to
turn the land over to other persons on terms more advantageous to
itself. Inasmuch as the value and rent of land would be continuously
adjusted by competition, the more efficient and more wealthy would
frequently supplant the less efficient and the less wealthy, even
though the latter had occupied their holdings or their dwellings for a
great number of years. Legal security of tenure, though theoretically
the same as that enjoyed by the private owner to-day, would be much
less effective practically. In this respect land users would be in
almost as bad a case as renters are at present.[33]

Our conclusion, then, is that private landownership is certainly
better than extreme Socialism, or any form of Socialism which does not
concede to the land user all the control that he would have under the
Single Tax system, and that it is very probably superior to the
latter. In making this comparison and drawing this conclusion, we have
in mind private ownership, not at its worst nor as it exists or has
existed in any particular country, but private ownership in its
essential elements, and with its capacity for modification and
improvement. If we were to examine carefully the results of private
ownership as it obtained in Ireland for several centuries before the
enactment of the recent Land Purchase Act, we should probably be
tempted to declare that the most extreme form of agrarian Socialism
could scarcely have been productive of more individual and social
injury. Certain other countries present almost equally unfavourable
conditions of comparison. Failure to note this distinction between the
historical and the potential aspects of private landownership has
vitiated many otherwise excellent defences of the institution. It has
provoked the retort that almost any plausible change would be an
improvement upon private ownership as it has existed in this or that
country. But these are not the real alternatives. The practical choice
is between private ownership as shown by experience and reason to be
capable of improvement, and some untried system which is subject to
grave defects, and which at its best would be probably inferior to
modified private ownership. An attempt to describe some of these
modifications and improvements will be made in a subsequent chapter.
In the meantime we content ourselves with the statement that private
land ownership is capable of becoming better than Socialism
certainly, and probably better than the Single Tax system.
Consequently it is justified not merely so long as neither of these
schemes is introduced, but as an institution which the State would do
well to maintain, protect, and improve.

FOOTNOTES:

[27] Cf. Chapter xi.

[28] Ensor, "Modern Socialism," p. xxxi, N. Y., 1904.

[29] Idem, pp. 213-216.

[30] Cited by Spargo, "The Substance of Socialism," p. 88, N. Y.,
1909.

[31] Idem, p. 90.

[32] "Progress and Poverty," book viii, ch. ii.

[33] Cf. Walker, "Land and Its Rent"; and Seligman, "Essays in
Taxation."



CHAPTER V

PRIVATE LANDOWNERSHIP A NATURAL RIGHT


The conclusions of the preceding chapter include the statement that
individuals are morally justified in becoming and remaining
landowners. May we take a further step, and assert that private
landownership is a natural right of the individual? If it is, the
abolition of it by the State, even with compensation to the owners,
would be an act of injustice. The doctrine of natural rights is so
prominent in the arguments of both the advocates and the opponents of
private landownership that it deserves specific treatment. Moreover,
the claim that private landownership is a natural right rests upon
precisely the same basis as the similar claim with regard to the
individual ownership of capital; and the conclusions pertinent to the
former will be equally applicable to the latter.

A natural right is a right derived from the nature of the individual,
and existing for his welfare. Hence it differs from a civil right,
which is derived from society or the State, and is intended for a
social or civil purpose. Such, for example, is the right to vote, or
the right to hold a public office. Since a natural right neither
proceeds from nor is primarily designed for a civil end, it cannot be
annulled, and it may not be ignored, by the State. For example: the
right to life and the right to liberty are so sacred to the
individual, so necessary to his welfare, that the State cannot
rightfully kill an innocent man, nor punish him by a term in prison.


_Three Principal Kinds of Natural Rights_

Although natural rights are all equally valid, they differ in regard
to their basis, and their urgency or importance. From this point of
view, we may profitably distinguish three principal types.

The first is exemplified in the right to live. The object of this
right, life itself, is intrinsically good, good for its own sake, an
end in itself. It is the end to which even civil society is a means.
Since life is good intrinsically, the right to life is also valid
intrinsically, and not because of consequences. Since there is no
conceivable equivalent for life in the case of any individual in any
contingency, the right to life is immediate and direct in all possible
circumstances.

Among the natural rights of the second class, the most prominent are
the right to marry, to enjoy personal freedom, and to own
consumption-goods, such as food and clothing. The objects of these
rights are not ends in themselves, but means to human welfare.
Confining our attention to marriage, we see that membership in the
conjugal union is an indispensable means to reasonable life and self
development in the majority of persons. The only conceivable
substitutes are free love and celibacy. Of these the first is
inadequate for any person, and the second is adequate only for a
minority. Marriage is, therefore, _directly_ and _per se_ necessary
for the majority of individuals; for the majority it is an
_individual_ necessity. If the State were to abolish marriage it would
deprive the majority of an indispensable means of right and reasonable
life. Consequently the majority have a _direct_ natural right to the
legal power of marrying.

In the case of the minority who do not need to marry, who can live as
well or better as celibates, the legal opportunity of marriage is
evidently not directly necessary. But it is necessary indirectly,
inasmuch as the _power of choice_ between marriage and celibacy is an
individual necessity. No argument is required to show that the State
could not decide this matter consistently with individual welfare or
social peace. Whence it follows that even the minority who do not wish
or do not need to marry, have a natural right to embrace or reject the
conjugal condition. In their case the right to marry is indirect, but
none the less inviolable.[34]

Private ownership of land belongs in a third class of natural rights.
Inasmuch as it is not an intrinsic good, but merely a means to human
welfare, it differs from life and resembles marriage. On the other
hand, it is unlike marriage in that it is not _directly_ necessary for
any individual whatever.[35] The alternative to marriage, namely,
celibacy, would not even under the best social administration enable
the majority to lead right and reasonable lives. The alternative to
private landownership (and to private ownership of capital as well),
namely, some form of employment as wage receiver, salary receiver, or
fee receiver enables the individual to attain all the vital ends of
private ownership: food, clothing, shelter, security of livelihood and
residence, and the means of mental, moral, and spiritual development.
None of these vital ends or needs is essentially dependent upon
private ownership of land; for millions of persons satisfy them every
day without becoming landowners. Nor are they exceptions, as those who
can get along without marriage are exceptions. The persons who live
reasonable lives without owning land are average persons. What they do
any other person could do if placed in the same circumstances.
Therefore, private landownership is not directly necessary for the
welfare of any individual.


_Private Landownership Indirectly Necessary for Individual Welfare_

In our present industrial civilisation, however, private landownership
is _indirectly_ necessary for the welfare of the individual. It is
said to be indirectly necessary because it is necessary as a _social
institution_, rather than as something immediately connected with
individual needs as such. It is not, indeed, so necessary that society
would promptly go to pieces under any other form of land tenure. As we
have seen in the last chapter, it is necessary in the sense that it is
capable of promoting the welfare of the average person, of the
majority of persons, to a much greater degree than State ownership. It
is necessary for the same reason and in the same way as a civil police
force. As the State is obliged to maintain a police force, so it is
obliged to maintain a system of private landownership. As the citizen
has a right to police protection, so he has a right to the social and
economic advantages which are connected with the system of private
ownership of land. These rights are natural, derived from the needs of
the individual in society, not dependent upon the good pleasure of the
city or the State. They are individual rights to the presence and
benefits of these social institutions.

But man's rights in the matter of land tenure are more extensive than
his rights with regard to a police force. They are not restricted to
the presence and functioning of a social institution. Every citizen
has a natural right to police protection, but no citizen has a natural
right to become a policeman. The welfare of the citizen is
sufficiently looked after when the members of the police are selected
by the authorities of the city. On the contrary, his welfare would not
be adequately safeguarded if the State were to decide who might and
who might not become landowners. In the first place, the ideal
condition is that in which _all_ persons can easily become actual
owners. In the second place, the mere legal opportunity of becoming
owners is a considerable stimulus to the energy and ambition of all
persons, even of those who are never able to convert it into an
economic opportunity. Therefore, only a very powerful reason of social
utility would justify the State in excluding any person or any class
from the legal power to own land. No such reason exists; and there are
many reasons why the State should not attempt anything of the sort. As
a consequence of these facts, every person, whether an actual owner or
not, has a natural right to acquire property in land. This right is
evidently a necessary condition of a fair and efficient system of
private ownership, which is in turn a necessary condition of
individual welfare. The right of private landownership is, therefore,
an indirect right; but it is quite as valid and quite as certain as
any other natural right.

Now this right is certainly valid as against complete Socialism, which
includes State management and use, as well as State ownership. Is it
valid against the Single Tax system, or against such modified forms of
Socialism as would allow the individual to rent and use the land as an
independent cultivator with security of tenure? Would the introduction
of some such scheme in a country in which only a small minority of the
population were actual owners, constitute a violation of individual
rights? While we cannot with any feeling of certainty return an
affirmative answer to these questions, we can confidently affirm that
reform within the lines of private ownership would in the long run be
more effective, and, therefore, that the right of private ownership is
_probably_ valid even against these modified forms of common
ownership.[36]


_Excessive Interpretations of the Right of Private Landownership_

The indirect character of the right of private landownership, its
relativity to and dependence upon social conditions, is not always
sufficiently grasped by either its advocates or its opponents. In the
writings of the former we sometimes find language which suggests that
this right is as independent of social conditions as the right to
marriage or the right to life. "The State has no right to abolish
private property [in land] because private property is not a social
right, but an individual right derived from nature, not derived from
the State." It exists for _human_ welfare, not merely for _civil_
welfare.[37] The only defect in this reasoning is that the premises do
not justify the conclusion. Undoubtedly the State may not abolish
private ownership, _so long as it is necessary for human or individual
welfare_; but, when this necessity ceases, the moral justification of
the institution likewise disappears. The institution may then be
abolished, somehow, by some agency, without any violation of
individual rights. Why may not the task of abolition be performed by
the State? No other agency is available. The assertion that the State
is incompetent to decide whether the institution of private ownership
has outlived its usefulness, is entirely gratuitous; besides, it
implies that a small minority of selfishly interested persons may
justly require the continuation of a system of land tenure which has
become harmful to the overwhelming majority of the community. Extreme
defences of the right of private landownership are largely
responsible for the misconceptions of many of its opponents.
Occasionally the latter represent this right as an _a priori_
monstrosity which is serenely independent of the facts of life and
industry. While such persons are at liberty to reject the
interpretations of facts contained in the preceding paragraphs, they
cannot reasonably deny the logic of the process which has led to the
conclusion that the individual has a natural right to own land.

So much for the natural right of landownership as seen in the light of
reason. Let us now consider it briefly from the side of doctrinal
authority, namely, the writings of the Fathers and Theologians of the
Church, and the formal pronouncements of the Popes.


_The Doctrine of the Fathers and Theologians_

Some of the Church Fathers, particularly Augustine, Ambrose, Basil,
Chrysostom, and Jerome, denounced riches and the rich so severely that
they have been accused of denying the right of private ownership. The
facts, however, are that none of the passages upon which this
accusation is based proves it to be true, and that in numerous other
passages all of these writers explicitly affirm that private ownership
is lawful.[38] Speaking generally, we may say that they taught the
moral goodness of private ownership without insisting upon its
necessity. Hence they cannot be cited as authorities for the doctrine
that the individual has a natural right to own land.

Some of the great theologians of mediæval and post-mediæval times
denied this right, inasmuch as they denied that the institution of
private ownership was imposed or commanded by the natural law. Among
them are Scotus,[39] Molina,[40] Lessius,[41] Suarez,[42]
Vasquez,[43] and Billuart.[44] Since private ownership is not
absolutely necessary to human welfare in all forms of society, it
cannot, in their view, be regarded as strictly prescribed by the
natural law, nor be instituted without the positive action of civil
authority, or the consent of the community. Nevertheless they all
admit that it is much better than common ownership in contemporary
societies. The difference between their position and that of de Lugo,
for example, seems to be two-fold: First, they put stronger emphasis
upon the doctrines that the earth belongs to all men in common, that
in the absence of original sin ownership would likewise have been
common, and that this arrangement is therefore in a fundamental sense
normal, agreeing with nature and the natural law; and, second, they
put a lower estimate upon the superiority of private ownership even in
contemporary conditions. In a word, they denied that private ownership
was so much better than any alternative system as to confer upon the
individual a natural right in the strict sense; that is, a right which
laid upon the State the correlative obligation of maintaining the
institution of private landownership.

On the other hand, many of the ablest theologians of the same period
declared that private ownership was enjoined by the natural law and
right reason, and consequently that it was among the individual's
natural rights. According to St. Thomas Aquinas, private property is
"necessary for human life," and is one of those social institutions
which are prescribed by the _jus gentium_; and the content of the _jus
gentium_ is not determined by positive law, but by the dictates of
"natural reason," by "natural reason itself."[45] These statements
seem to convey the doctrine of natural right as clearly as could be
expected in the absence of an explicit declaration. Cardinal de Lugo
sets forth the same teaching somewhat more compactly, but in
substantially the same terms: "Speaking generally, a division of goods
and of ownership-titles proceeds from the law of nature, for natural
reason dictates such division as necessary in the present
circumstances of fallen nature and dense populations."[46] This view
is to-day universally accepted among Catholic writers.


_The Teaching of Pope Leo XIII_

The official teaching of the Church on the subject is found in the
Encyclical, "On the Condition of Labour," by Pope Leo XIII. In this
document we are told that the proposals of the Socialists are
"manifestly against justice"; that the right of private property in
land is "granted to man by nature"; that it is derived "from nature
not from man, and the State has the right to control its use in the
interest of the public good alone, but by no means to abolish it
altogether." These statements the Pope deduces from a consideration of
man's needs. Private property in land is necessary to satisfy the
wants, present and future, of the individual and his family. Were the
State to attempt the task of making this provision, it would exceed
its proper sphere, and produce manifold domestic and social confusion.

While Pope Leo defines the natural right of private ownership as
incompatible with complete Socialism, that is, collective use as well
as collective ownership, his statements cannot fairly or certainly be
interpreted as condemning the Single Tax system, or any other
arrangement which would leave to the individual managerial use and
secure possession of his holding, together with the power to transmit
and transfer it, and full ownership of improvements. These are the
only elements of ownership which the Holy Father defends, and which he
insists upon as necessary. The one element of private ownership which
the Single Tax system would exclude; namely, the power to take rent
from and profit by the changes in land values, finds no place among
the advantages of private ownership enumerated in the Encyclical.

There is, indeed, one passage of the Encyclical in which Pope Leo
seems to allude to the Single Tax, or to some similar proposal. He
expresses his amazement at those persons who "assert that it is right
for private persons to have the use of the soil and its various
fruits, but that it is unjust for any one to possess outright either
the land on which he has built, or the estate which he has brought
under cultivation. But those who deny these rights do not perceive
that they are defrauding man of what his own labour has produced. For
the soil which is tilled and cultivated with toil and skill utterly
changes its conditions: it was wild before, now it is fruitful; was
barren, but now brings forth in abundance. That which has thus altered
and improved the land becomes so truly a part of itself as to be in
great measure indistinguishable and inseparable from it. Is it just
that the fruit of a man's own labour should be possessed and enjoyed
by any one else? As effects follow their cause, so is it just and
right that the results of labour should belong to those who have
bestowed their labour."

In this passage we find two principal statements: first, that those
persons are in error who declare full private ownership of land to be
unjust; and, second, that it is wrong to deprive a man of the
improvements which he makes in the soil. Now the first of these
propositions does not touch the Single Tax system as such; it only
condemns the assertion of Henry George that private ownership is
essentially unjust. It is directed against one of the arguments for
the system, not against the system itself. More specifically, it is a
refutation of an argument against private land ownership, rather than
a positive attack upon any other system. It could be accepted by any
Single Taxer who does not agree with Henry George that the present
system is essentially unjust. The second proposition does not apply to
the Single Tax system at all; for the latter would concede to the
individual holder the full ownership and benefit of improvements; and
it could easily be so administered as to protect him against injury in
any case in which improvement values were not exactly and clearly
distinguishable from land values.

While Henry George opposed the doctrines of the Encyclical in his
"Open Letter to Pope Leo XIII," all his arguments are directed against
the proposition that private ownership is right and just. The "Letter"
is an attack upon private ownership rather than a defence of the
Single Tax. Apparently its author did not find that Pope Leo condemned
any positive or essential element of the Single Tax as a proposed
system of land tenure.

If the rejoinder be made that Pope Leo could have had no other group
of persons in mind than the Single Taxers, when he wrote the paragraph
quoted above, our answer must be that he did not definitely identify
them, either by naming them, as he named the Socialists, or by any
other sufficiently explicit designation. Applying to this paragraph
the customary and recognised rules of interpretation, we are obliged
to conclude that it does not contain an explicit condemnation of the
Single Tax system.

To put the substance of this chapter in two sentences: Private
landownership is a natural right because in present conditions the
institution is necessary for individual and social welfare. The right
is certainly valid as against complete Socialism, and probably valid
as against any such radical modification of the present system as that
contemplated by the thoroughgoing Single Taxers.

FOOTNOTES:

[34] The marriage rights of criminals, degenerates, and other socially
dangerous persons, are passed over here as not pertinent to the
present discussion. For the same reason nothing is said of the
perfectly valid _social_ argument in favour of the individual right of
marriage.

[35] Cf. Vermeersch, "Quaestiones de Justitia," no. 204.

[36] The argument in the text is obviously empirical, drawn from
consequences. There is, however, a putatively intrinsic or
metaphysical argument which is sometimes urged against the justice of
the Single Tax system. It runs thus: since the fruits of a thing
belong to the owner of the thing, "res fructificat domino," rent,
which is the economically imputed fruit of land, necessarily and as a
matter of natural right should go to the owner of the land. As will be
shown later, the formula at the basis of this contention is not a
metaphysical principle at all, but a conclusion from experience. Like
every other formula or principle of property rights, it must find its
ultimate basis in human welfare.

[37] Liberatore, "Principles of Political Economy," pp. 130, 134.

[38] Cf. Vermeersch, op. cit., no. 210; Ryan, "Alleged Socialism of
the Church Fathers."

[39] "In IV Sent.," d. 15, q. 2, n. 5; and "Reportata parisiensia," d.
15, q. 4, n. 7-12.

[40] "De Justitia et Jure," tr. 2, d. 18 and 20.

[41] "De Justitia et Jure," c. 5, n. 3.

[42] "De Legibus," l. 2, c. 14, n. 13 and 16.

[43] "In Summa," 1ma 2ae, d. 157, n. 17.

[44] "De Justitia et Jure," d. 4, a. 1.

[45] "Summa Theologica," 2a 2ae, q. 57, a. 2 and 3.

[46] "De Justitia et Jure," d. 6, s. 1, n. 6.



CHAPTER VI

LIMITATIONS ON THE LANDOWNER'S RIGHT TO RENT


The chapters immediately preceding have led to the conclusion that
private ownership is the best system of land tenure, and that the
individual has a natural right to participate in its advantages.
Although this system confers upon the individual owner the power to
take the rent of the land, we are not logically debarred from raising
the question whether this power is a necessary part of the moral
rights of landownership. Does the right to own a piece of land
necessarily include the right to take its rent? By what ethical
principle of distribution is the landowner justified in appropriating
a revenue in return for which he has performed no labour, nor made any
sacrifice? This is unquestionably what happens when a man hires out
his land to another. And in conditions of perfect competition, those
owners who operate their own land are fully remunerated for their
labour in the form of profits. Over and above this sum they receive
rent, the payment that they could get from the land if they were to
let its use to tenants. In the normal situation, therefore, rent is a
workless income. On what moral ground may it be taken by the
landowner?[47]

The fact that we have rejected the Single Tax and the confiscation of
rent by the community, does not of itself commit us to the conclusion
that the private owner has a moral right to receive rent. We have
condemned the State appropriation of rent on the assumption that it
would take place without a similar confiscation of interest. Such
discrimination would be grossly unfair; for it would cause land values
to sink to zero, while leaving the value of capital substantially
undisturbed. To carry out such a programme would be to treat property
owners unequally, to penalise one set of beneficiaries of "workless"
incomes, while leaving another set untouched. Consequently, the State
is not justified in confiscating rent unless it is justified in
confiscating or prohibiting interest; and the landowner is as fully
justified in taking rent as the capital owner is in taking interest.
The contention of the Single Taxer that ownership of the former kind
is morally wrong, while ownership of capital is morally legitimate,
has already received sufficient discussion. The specific question
remains, therefore,--whether the landowner and the capitalist are
justified in receiving and retaining their "workless" incomes.

Inasmuch as the principles and pertinent facts involved in this
question can be more effectively and more conveniently discussed in
relation to interest than in relation to rent, the solution will be
deferred to the chapters on interest. Assuming provisionally that the
outcome of the discussion will be favourable to the claims of the
landowner, let us inquire whether he always has a moral right to _all_
the rent. The parallel question regarding the capitalist will be
considered in connection with the right of the labourer to a living
wage.


_The Tenant's Right to a Decent Livelihood_

The actual payments made by tenants to landowners sometimes leave the
former without the means of decent living. Such had been the condition
of a large part of the Irish tenant farmers before 1881, when the Land
Courts were established. In the course of twenty-five years these
courts reduced the rents by twenty per cent. on the average in upwards
of half a million cases. While a part of the reductions was intended
to free the tenants from the unjust burden of paying rent on their own
improvements, another part was undoubtedly ordered on the theory that
the tenants were entitled to retain a larger share of the product for
their own support. Yet the latter portion of the reduction apparently
represented true economic rent; for it was included in the difference
between the product and the current cost of production; it was
included in the amount that men in Ireland were willing to pay for the
use of land. It was a part of the surplus that they had left after
defraying their expenditures for capital and labour. To be sure, the
tenants in some other countries, say, the United States, would not
have been satisfied with such a small remuneration, and would not have
handed over so much to the landlord; but if the concept of economic
rent is to have any serviceable meaning it must be determined by the
actual returns to capital and labour in each locality, and not by the
standards of some other place which are assumed to be normal. In any
case, the Irish Land Courts did reduce the rents below the level fixed
by competition, by the unregulated forces of supply and demand.

Was this treating the landlords justly? May a tenant ever retain a
part of the rent which the free course of competition would yield to
the landowner? Here we must distinguish between the tenant who is and
the tenant who is not in possession of a holding sufficiently large to
require all the time and labour of a cultivator possessing average
efficiency. The tenant who controls and cultivates less than this
amount of land ought not to expect to get all his livelihood
therefrom. Failure to do so would not necessarily mean that he was
paying exorbitant rent. Holdings of this sort are rightly called
"uneconomic"; that is, they are too small to permit a profitable and
reasonable application of labour and capital. On such holdings the
fair rent would be that amount per acre which would be regarded as
fair for the use of the same land held in farms of "economic" size.
The proper recourse for the occupiers of uneconomic holdings is to get
control of more land, which is exactly what has been happening in
Ireland through the action of the Congested Districts Board.

This brings us to the case of the man who cannot pay the competitive
rent on a holding of normal size, and have sufficient left to provide
himself and family with a decent livelihood. The fundamental reason why
the rent is so high is to be found in the economic weakness of the
great mass of the tenants, who can neither emigrate to another country
nor get a better living as wage earners in their own. Their predicament
is exactly the same as that of the helpless and unskilled labourers who
are compelled by the force of competition to accept less than living
wages. In these circumstances it seems clear that a government
commission would be justified in reducing the rents to such a level as
would leave the tenants of average efficiency on normal holdings the
means of maintaining a decent standard of living. In such cases, then,
the landowner has not a right to the full economic or competitive rent.
His right thereto is morally inferior to the tenant's right to a decent
livelihood, just as the capitalist-employer's right to the prevailing
rate of interest is morally inferior to the labourer's right to a
living wage. Neither in the one case nor in the other is mere
competition the final determinant and measure of justice. It has no
moral validity when it comes into conflict with man's natural right to
get a reasonable livelihood on reasonable conditions from the bounty of
the earth. These fundamental questions will be discussed at length in
the chapters on wages.

To the possible objection that the concept of a "normal" holding is
vague, the sufficient reply is that in practice it can be estimated
with as much definiteness as the concept of the "average" labourer. As
we see from the history of the Irish Land Courts and their "Judicial
Rents," it can be defined with sufficient accuracy to serve the ends
of practical justice. More than this is not attained in any department
of human relations, particularly, economic relations.


_The Labourer's Claim Upon the Rent_

Should any part of the rent go to the labourer? Let us take first the
case of the labourer who is employed by a tenant, and who is not
occupied in personal service but in some productive task connected
with the land. Like all other wage earners he has a right to a
sufficient share of the product to afford him a decent livelihood.
Since the tenant is the employer, the director of the business, and
the owner of the product, he rather than the landowner is the person
who is primarily charged with the obligation of providing the labourer
with a living wage. As noted above, his own claim to a decent
livelihood is morally superior to the landlord's claim to rent; but
if, having taken this amount from the product, he finds himself unable
to pay living wages to all his employees unless he deducts something
either from the normal interest-return on his own capital or from the
rent that would ordinarily go to the landowner, he is morally bound to
choose the former course. He, not the landowner, is the wage payer.
That he is obliged to provide living wages to his labour force even
at the cost of interest on his own investment in the business, is a
proposition that will receive ample discussion and defence in a later
chapter.[48]

Suppose, however, that the tenant has not the means of paying full
living wages after turning into the wage fund all the money that he
had hoped to retain as interest on his capital. May he withhold from
the landowner a sufficient portion of the rent to cover the deficit in
wages? Were this action practicable it would be undoubtedly
justifiable; for the landowner's claim to rent is no stronger than the
tenant-capitalist's claim to interest. As claims upon the product,
both are morally weaker than the labourer's right to a living wage.
Nevertheless, the tenant who should attempt to carry out this course
would probably be prosecuted for non-fulfilment of his contract with
the landowner, or would be evicted from the holding. Nor is the
landowner obliged in such cases to give up the rent in order that a
living wage may be paid to the tenant's labour force. He cannot be
certain that the failure of the latter to receive full living wages
has not been due to inefficiency or fraudulent conduct on the part of
the tenant. Moreover, the landowner would be justified in seeking to
protect himself against the recurrence of such situations by putting
his land in charge of a more capable tenant, or by selling it and
investing or lending the money elsewhere. However clear may be the
abstract proposition that the claim to a living wage possessed by the
employee of the tenant is superior to the claim to rent possessed by
the landowner, the difficulty of realising this right in practice is
sufficient to relieve even conscientious proprietors from the
obligation of giving up the rent for this purpose.

When the landowner is operating or cultivating his land himself, he is
evidently obliged to pay a living wage to all his employees at the
expense of rent, just as he is obliged to do so at the cost of
interest on his artificial capital. To be sure, the first charge upon
the product should be a decent livelihood for himself; but, when he
has obtained this, the right of his employees to a living wage is
morally superior to his right to either rent or interest.

At present the State takes a part of the rent through taxation. May it
take a larger share without violating justice? This question will be
considered in the second chapter following. In the meantime, we shall
examine the principal defects of the existing system of land tenure
with a view to the suggestion of appropriate remedies, whether through
taxation or otherwise.

FOOTNOTES:

[47] The assumption that perfect competition is even roughly
approximated in relation to men who operate their own land, and that
they generally obtain an adequate return for their labour in addition
to the sum that they might have obtained through hiring out their
land, may appear rather violent in view of the estimate that the
average farmer in the United States gets only $402 annually in payment
for the labour of himself and family. See article on "The Farmer's
Income" in the _American Economic Review_, March, 1916. However, this
income is mostly in the form of food, fuel, and shelter, which would
cost very much more in the city; consequently it is probably
equivalent to an urban income of $600. Its value is still further
enhanced by the farmer's independent position, and by his expectation
of profiting by the future increase of land values. Hence it would
seem that the rent and interest allowance of $322 might fairly be
regarded as a surplus in excess of the necessary payment for labour.

[48] Chapter xxii.



CHAPTER VII

DEFECTS OF THE EXISTING LAND SYSTEM


Starting from the principle that the rightness or wrongness of any
system of land tenure is determined not by metaphysical and intrinsic
considerations, but by the effects of the institution upon human
welfare, we arrived at the conclusion that private landownership is
not unjust, so long as no better system is available. By the same test
of human welfare we found that it would be wrong to substitute a
better system through the process of confiscating rent, while leaving
interest undisturbed. A further step brought us to the conclusion that
complete Socialism would certainly, and the complete Single Tax
probably, be inferior to the present system. As a sort of corollary,
the social and moral superiority of private landownership was stated
in terms of natural rights. Finally, the question was raised whether
the landowner has a right to take rent, and to take all the rent.

In stating the superiority of the present system, we explicitly noted
that we had in mind the system as capable of improvement. This implied
that there are defects in the present form of land tenure, and that
these can be eliminated in such a way as to make the system more
beneficial and more in harmony with the principles of justice. In the
present chapter we shall give a summary review of the principal
defects, and in the following chapter we shall suggest some methods of
reform. All the defects and abuses may conveniently be grouped under
three heads: Monopoly; Excessive Gains; and Exclusion from the Land.


_Landownership and Monopoly_

In the literature of the Single Tax movement the phrase, "land
monopoly," is constantly recurring. The expression is inaccurate; for
the system of individual landownership does not conform to the
requirements of a monopoly. There is, indeed, a certain resemblance
between the control exercised by the owner of land and that possessed
by the monopolist. As the proprietor of every superior soil or site
has an economic advantage over the owner of the poorest soil or site,
so the proprietor of a monopolistic business obtains larger gains than
the man who must operate in conditions of competition. In both cases
the advantage is based upon the scarcity of the thing controlled, and
the extent of the advantage is measured by the degree of scarcity.

Nevertheless, there is an important difference between landownership
and monopoly. The latter is usually defined as that degree of unified
control which enables the persons in control arbitrarily to limit
supply and raise price. As a rule, no such power is exercised by
individuals, or by combinations of individuals with regard to land.
The pecuniary advantage possessed by the landowner, that is, the power
to take rent, is conferred and determined by influences outside of
himself, by the natural superiority of his land, or by its proximity
to a city. He can neither diminish the amount of land in existence nor
raise the price of his own. The former result is inhibited by nature;
the latter by the competition of other persons who own the same kind
of land. To be sure, there are certain kinds of land which are so
scarce and so concentrated that they do fall under true monopolistic
control. Such are the anthracite coal mines of Pennsylvania, and some
peculiarly situated plots in a few great cities, for example, land
that is desired for a railway terminal. But these instances are
exceptional. The general fact is that the owners of any kind of land
are in competition with similar owners. While the element of scarcity
is common to landownership and to monopoly, it differs in its
operation. In the case of monopoly it is subject, within limits, to
the human will. This difference is sufficiently important, both
theoretically and practically, to forbid the identification or
confusion of landownership with monopoly.

A notable illustration of such confusion is the volume by Dr. F. C.
Howe, entitled, "Privilege and Democracy in America." He maintains
that bituminous coal, copper ore, and natural gas are true monopolies,
but gives no adequate proof to support this assertion. Moreover, he
exaggerates considerably the part played by landownership in the
formation of industrial monopolies. Thus, his contention that the
petroleum monopoly is due to ownership of oil-producing lands is
certainly incorrect; for the Standard Oil Company (or companies) has
never controlled as much as half the supply of raw material. "The
power of the Standard does not rest upon a direct monopoly of the
production of crude oil through ownership of the wells."[49] Perhaps
the most remarkable misstatement in the volume is this: "The railway
is a monopoly because of its identity with land."[50] Now there are a
few important railway lines traversing routes or possessing terminal
sites which are so much better than any alternative routes or sites as
to give all the advantages of a true monopoly. But they are in a small
minority. In the great majority of cases, a second parallel strip or
parallel site could be found which would be equally or almost equally
suitable. Neither the amount nor the kind of land owned by a railroad,
nor its legal privilege of holding land in a long, continuous strip,
is the efficient cause of a railway monopoly. To attribute the
monopoly to land is to confound a condition with a cause. One might as
well say that the land underlying the "wheat king's" office is the
cause of his corner in wheat. It is true that in a few of the great
cities the existing railroads may, through their ownership of all the
suitable terminal sites, prevent the entrance of a competing line. In
the first place, such instances are rare; in the second place, the
fact that there are several roads already in existence shows that
competition was possible without the entrance of another one. The
influence impelling them to form a monopoly for the regulation of
charges is not their ownership of terminal sites. No sort of uniform
action with regard to terminals would produce any such effect. The
true source of the monopoly element in railways is inherent in the
industry itself. It is the fact of "increasing returns," which means
that each additional increment of business is more profitable than the
preceding one, and that in most cases this process can be kept up
indefinitely. As a consequence, each of two or more railroads between
two points strives to get all the traffic; then follows unprofitable
rate cutting, and finally combination.[51] The same forces would
produce identical results if railroad tracks and terminals were
suspended in the air.

Dr. Howe asserts that the monopolistic character of such public
utility corporations as street railways and telephone companies is due
to their occupation of "favoured sites."[52] How can this be true,
when it is possible to build a competing line on an adjoining and
parallel street? If the city forbids this, and gives an exclusive
franchise to one company, this legal ordinance, and not any
exceptional advantage in the nature of the land occupied, is the
specific cause of the monopoly. If the city permits a competing line,
and if the two lines sooner or later enter into a combination, the
true source and explanation are to be found in the fact of increasing
returns. Combination is immeasurably more profitable than cut-throat
competition. Moreover, the evils of public service monopolies can be
remedied through public control of charges and through taxation.
Neither in railroads nor in public utilities is land an impelling
cause of monopoly, or a serious hindrance to proper regulation.

Most of Dr. Howe's exaggerations of the influence of land upon
monopoly take the form of suggestion rather than of specific and
direct statement. When he attempts in precise language to enumerate
the leading sources of monopoly, he mentions four; namely, land,
railways, the tariff, and public service franchises.[53] Nor is he
able to prove his assertion that of these the most important is land.

Nevertheless, land is one of the foremost causes. The most prominent
examples of land monopoly in this country are the anthracite coal
mines and the iron ore beds. Fully ninety per cent. of our anthracite
coal supply (exclusive of Alaska) is under the control of eight
railway systems which in this matter act as a unit.[54] According to
Dr. Howe, the excessive profits reaped from this monopolistic control
amount to between one hundred and two hundred million dollars
annually.[55] In other words, the consumers of anthracite coal must
pay every year that much more than they would have expended if the
supply had not been monopolised. On the other hand, the formation of
monopoly would have been much more difficult if the railroads had been
legally forbidden to own coal mines. As things stand, railway monopoly
is an important cause of the anthracite coal monopoly. Some
authorities are of the opinion that a similar condition of monopoly
will ultimately prevail in the bituminous coal mines. Iron ore has
been brought under the control of the United States Steel Corporation
to such an extent that the Commissioner of Corporations writes:
"Indeed, so far as the Steel Corporation's position in the entire iron
and steel industry is of a monopolistic character, it is chiefly
through its control of ore holdings and the transportation of
ore."[56] From this statement, however, it is evident that the
monopoly depends upon control of transportation as well as upon
ownership of the ore beds. If the former were properly regulated by
law, the latter would not be so effective in promoting monopoly.

Speaking generally, we may say that when a great corporation controls
a large proportion of the raw material entering into its manufactured
products, such control will supplement and reinforce very materially
those other special advantages which make for monopoly.[57] Prominent
examples are to be found in steel, natural gas, petroleum, and water
powers. In his "Report on Water Power Development in the United
States," the Commissioner of Corporations (March 14, 1912) declared
that the rapidly increasing concentration of control might easily
become the nucleus of a monopoly of both steam and water power. Ten
great groups of interests, he said, already dominated about sixty per
cent. of the developed water power, and were pursuing a policy
characterised by a large measure of agreement.[58] As a rough
generalisation, it would be fair to say that in one or two instances,
at least, landownership is the chief basis, and in several other cases
an important contributory cause of monopoly.

Even an approximately accurate estimate of the amount of money which
consumers are compelled to pay annually for the products of such
concerns over and above what they would pay if the raw material were
not wholly or partially monopolised, is obviously impossible. It may
possibly run into hundreds of millions of dollars.


_Excessive Gains from Private Landownership_

The second evil of private landownership to be considered here, is the
general fact that it enables some men to take a larger share of the
national product than is consistent with the welfare of their
neighbours and of society as a whole. As in the matter of monopoly,
however, so here, Single Tax advocates are chargeable with a certain
amount of overstatement. They contend that the landowner's share of
the national product is constantly increasing, that rent advances
faster than interest or wages, nay, that all of the annual increase in
the national product tends to be gathered in by the landowner, while
wages and interest remain stationary, if they do not actually
decline.[59]

The share of the product received by any of the four agents of
production depends upon the relative scarcity of the corresponding
factor. When undertaking ability becomes scarce in proportion to the
supply of land, labour, and capital, there is a rise in the
remuneration of the business man; when labour decreases relatively to
undertaking ability, land, and capital, there is an increase in wages.
Similar statements are true of the other two agents and factors. All
these propositions are merely particular illustrations of the general
rule that the price of any commodity is immediately governed by the
movement of supply and demand. In view of this fact, it is not
impossible that rent might increase to the extent described in the
preceding paragraph. All that is necessary is that land should become
sufficiently scarce, and the other factors sufficiently plentiful.

As a fact, the supply of land is strictly limited by nature, while
the other factors can and do increase. There are, however, several
forces which neutralise or retard the tendency of land to become
scarce, and of rent to rise. Modern methods of transportation, of
drainage, and of irrigation have greatly increased the supply of
available land, and of commercially profitable land. During the
nineteenth century, the transcontinental railroads of the United
States made so much of our Western territory accessible that the value
and rent of New England lands actually declined; and there are still
many millions of acres throughout the country which can be made
productive through drainage and irrigation. In the second place, every
increase of what is called the "intensive use" of land gives
employment to labour and capital which otherwise would have to go upon
new land. In America this practice is only in its infancy. With its
inevitable growth, both in agriculture and mining, the demand for
additional land will be checked, and the rise in land values and rents
be correspondingly diminished. Finally, the proportion of capital and
labour that is absorbed in the manufacturing, finishing, and
distributive operations of modern industry is constantly increasing.
These processes call for very little land in comparison with that
required for the extractive operations of agriculture and mining. An
increase of one-fifth in the amount of capital and labour occupied in
growing wheat or in taking out coal, implies a much greater demand for
land than the same quantity employed in factories, stores, and
railroads.[60]

As a consequence of these counteracting influences, it appears that
the share of the landowners has not increased disproportionately. The
most comprehensive endeavour yet made to determine the growth and
relative size of the different shares of the national product is
embodied in Professor W. I. King's volume, "The Wealth and Income of
the People of the United States," published in 1915. It estimates
that the total annual income of the nation increased from a little
less than two and one-fourth billions of dollars in 1850 to a little
more than thirty and one-half billions in 1910, or slightly more than
fifteen times. During the same period rent, the share of the
landowners, advanced from $170,600,000 to $2,673,900,000, or about
fifteen and three quarter times. In the year 1910, therefore, the
landowners were receiving but a very small fraction more of the
national product than their predecessors obtained sixty years
earlier.[61] As to the relative size of the shares going to the
different factors in 1910, the figures are even more remarkable. Wages
and salaries absorbed 46.9 per cent.; profits, 27.5 per cent.;
interest, 16.8 per cent.; and rent, only 8.8 per cent.[62] This was
exactly the same per cent. that the landowners received in 1860. To be
sure, these figures are only approximations, but they are probably the
most reliable that can be obtained from our notoriously incomplete
statistics, and they will deserve respectful consideration until they
have been refuted by specific criticism and argument. In the opinion
of their compiler: "The figures for wages and salaries are believed to
be fairly accurate; those for rent are thought to have an error of not
more than twenty per cent. The separation of the share of capital from
that of the entrepreneur is very crudely done and no stress should be
laid on the results. The total for all shares is thought to be more
accurate than the mode of distribution, and for the last three census
years should come within ten per cent. of the correct statement of the
national income. For earlier years the error should not be over twenty
per cent. at the outside."[63] If we make the maximum allowance for
error in reference to the share of the landowner, and assume that the
rent estimate is twenty per cent. too low, we find that it was still
only ten and one-half per cent. of the total product in 1910, which
represents an increase of less than three per cent. since 1850. It is
significant that Dr. Howe, who has no bias toward belittling the share
of the landowner, suggested as his minimum and maximum estimates of
the land values of the country in 1910 figures which are respectively
fifty per cent. below and only five per cent. above the amount taken
by Professor King as the basis for his estimate of rent.[64] There is,
consequently, a strong presumption that Professor King is right when
he stigmatises as "absurd" the contention of the Single Taxer, "that
all the improvements of industry result only in the enrichment of the
landlord.... The value of our products has increased since 1850 to the
extent of some twenty-eight billions of dollars, while rent has gained
less than three billions. Evidently it has captured but a meagre part
of the new production."[65]

There are strong indications, however, that the per cent. of the
product going to the owners of land has increased considerably in the
last twenty years, and that this movement will continue indefinitely.
According to Professor King's calculations, the per cent. of the total
product assignable as rent advanced from 7.8 in 1900 to 8.8 in 1910,
which meant that during that period the national income increased only
70 per cent., while the share of the landowner increased 91 per
cent.[66] It is true that a disproportionate advance in rent has
occurred between other census years, only to be neutralised by
subsequent decreases; but the present instance seems to include
certain features which did not characterise any of the former gains in
the relative share of the landowner. Since 1896 the prices of food
products "rose most rapidly in the case of meat, dairy products, and
cereals, which were derived directly from the land. The prices of raw
materials show a like relation. Timber, grain, and other raw materials
obtained directly from the land have risen rapidly in price, while
semi-manufactured articles have increased less rapidly, or have
decreased in price.... There is no parallel in any other field to the
advance in those land values upon which civilisation most directly
depends--timber lands, fertile agricultural land, and land in large
commercial and industrial centres. The recent rise in land values has
been little short of revolutionary."[67]

Between 1900 and 1910 the value of farm lands _per acre_ in the United
States advanced 108.1 per cent.[68] During the eight years beginning
with July 1, 1906, the value of land in Greater New York increased
something more than one-third; in the principal cities of New Jersey,
and in Worcester, Washington, Boston, and Buffalo, somewhat less; in
Springfield and Holyoke, considerably more. In the most recent ten
years for which figures are available (since 1900 in every case) the
land values of Milwaukee, St. Louis and San Francisco averaged only a
slight degree of expansion, while those of Kansas City doubled, and
those of Houston, Dallas, Los Angeles, and Seattle trebled. To quote
Professor Nearing, from whose compilations these estimates have been
summarised: "The total extent of the increase in American city land
values may be hinted at rather than stated with any certainty. The
scattering instances in which land and improvements are separately
assessed led to the conclusion that in a large, well-established city,
growing at approximately the same rate as the other portions of the
United States, the land value is doubling in from ten to twenty-five
years. In the new, rapidly growing city of the middle and far West and
in some of the smaller cities of the East, the ratio of increase in
land values is far greater, amounting to two-fold or even three-fold
in a decade. In a few instances the rate of increase is much smaller,
and in one case, Jersey City, land values over a period of seven years
have actually decreased.... Nevertheless, the few available long range
figures indicate a widespread and considerable increase in American
city land values."[69]

The rise in the value of timber lands during the last thirty years has
been, in the words of the federal investigators, "enormous." For the
ten-year period ending in 1908, "the value of a given piece of
southern pine taken at random is likely to have increased in any ratio
from three-fold to ten-fold." About the same ratio of increase
obtained in the Pacific Northwest, and a somewhat smaller increase in
the region of the Great Lakes.[70] While a considerable decline has
taken place since 1908, it is only temporary; for the demand for
timber is notoriously increasing several times as fast as the supply.

That this upward movement in the value of all three kinds of land will
continue without serious interruption, seems to be as nearly certain
as any economic proposition that is dependent upon the future.
Although millions of acres of arable lands are still unoccupied in the
United States and Canada, the far greater part of them require a
comparatively large initial outlay for draining, clearing, irrigation,
etc., in order to become productive. Hence there is no likelihood that
they can be brought under cultivation fast enough to halt or greatly
retard the advancing values which follow upon the growth of population
and the increased demand for agricultural products. In all probability
the greater part of them will not come into use until the prices of
farm products have risen above the present level. Obviously this
supposes an increase in the value of all farm land, old and new. Nor
is the adoption of better methods of farming likely to check seriously
the upward movement. Between 1900 and 1910 the urban population of
America increased 34.8 per cent., as against a gain of only 21 per
cent. in the total population. This disproportionate growth in the
number of the city dwellers will if continued make certain what is in
any case extremely probable, a steady and considerable advance in
urban land values and rents.

The circumstance that these remarkable increases in land values are a
comparatively recent phenomenon has prevented them from receiving the
attention that they deserve, either from the general public or from
the students of economic and social problems. The total value of the
land of the country has increased steadily from decade to decade, but
so has the total value of capital, and even between 1900 and 1910 the
increase in the share of the capitalist was exactly equal to the
increase in the share of the landowner, that is, 91 per cent.[71]
Those persons who complacently make such comparisons overlook the new
and significant feature of the more recent advances in land value;
namely, that they are due in only a slight degree to an expansion of
the _area_ of land under consideration. The increases of value quoted
in the foregoing paragraphs are increases _per acre_ and _per urban
lot_, not increases derived from bringing new land under cultivation
or new tracts within municipal limits. On the other hand, the
increases in the value of capital, now as always, represent for the
most part concrete additions to the existing stock of productive
instruments. Except where monopoly holds sway, particular capital
instruments, unlike particular pieces of land, do not increase in
value. Hence the owner of a given amount of capital does not profit by
the advance in the total value of capital as the owner of the average
parcel of land profits by the general increase in the value of land.
This means that all those consumers of products who are not
landowners must pay an increasing tribute to those who are landed
proprietors.

So much for the _proportion_ of the national product which goes to the
landowning class. Let us next inquire how the landowner's share, or
rent, is distributed throughout the population. If it were equally
divided among all persons, its increase relatively to the shares of
the other factors would, from the social viewpoint, be a matter of
considerable indifference. On the other hand, if it is secured by a
minority of the population, and if that minority tends to become
smaller as the share itself becomes larger, we have a socially
undesirable condition.

In the twenty years between 1890 and 1910, the proportion of farm
families in the United States owning farm land, mortgaged or
unmortgaged, declined from 65.9 per cent. to 62.8 per cent.; the
proportion of urban families owning their homes, encumbered or
unencumbered, increased from 36.9 to 38.4 per cent., and the
proportion of all families owning homes, encumbered or unencumbered,
fell from 47.8 to 45.8 per cent. Of the homes owned by their
occupiers, 28 per cent. were mortgaged in 1890, and 32.8 per cent. in
1910.[72] While a decline of two per cent. in the home owning and
landowning families in twenty years, and an increase of almost five
per cent. in the number of those families who hold their property
subject to encumbrance, may not seem very serious in themselves, they
indicate a definitely unhealthy trend. Not only are the landowning
families in a minority, but the minority is becoming smaller.

Nevertheless, when we consider the amount of gains accruing to the
average member of the landowning class, we do not find that it is
unreasonably large. The great majority of landed proprietors have not
received, nor are they likely to receive, from their holdings incomes
sufficiently large to be called excessive shares of the national
product. Their gross returns from land have not exceeded the
equivalent of fair interest on their actual investment, and fair wages
for their labour. The landowners who have been enabled through their
holdings to rise above the level of moderate living constitute a
comparatively small minority. And these statements are true of both
agricultural and urban proprietors.

It is true that a considerable number of persons, absolutely speaking,
have amassed great wealth out of land. It is a well known fact that
land was the principal source of the great mediæval and post-mediæval
fortunes, down to the end of the eighteenth century. "The historical
foundation of capitalism is rent."[73] Capitalism had its beginning in
the revenue from agricultural lands, city sites, and mines. A
conspicuous example is that of the great Fugger family of the
sixteenth century, whose wealth was mostly derived from the ownership
and exploitation of rich mineral lands.[74] In the United States very
few large fortunes have been obtained from agricultural land, but the
same is not true of mineral lands, timber lands, or urban sites. "The
growth of cities has, through real estate speculation and incremental
income, made many of our millionaires."[75] "As with the unearned
income of city land, our mineral resources have been conspicuously
prolific producers of millionaires."[76] The most striking instance of
great wealth derived from urban land is the fortune of the Astor
family. While gains from trading ventures formed the beginning of the
riches of the original Astor, John Jacob, these were "a comparatively
insignificant portion of the great fortune which he transmitted to
his descendants."[77] At his death, in 1848, John Jacob Astor's real
estate holdings in New York City were valued at eighteen or twenty
million dollars. To-day the Astor estate in that city is estimated at
between 450 and 500 millions, and within a quarter of a century will
not improbably be worth one billion dollars.[78] According to an
investigation made in 1892 by the _New York Tribune_, 26.4 per cent.
of the millionaire fortunes of the United States at that time were
traceable to landownership, while 41.5 per cent. were derived from
competitive industries which were largely assisted by land
possessions.[79] The proportion of such fortunes that is due, directly
or indirectly, in whole or in part, to landownership has undoubtedly
increased considerably since 1892.

With regard to great individual or corporate land holdings, there
exist no adequate statistics. A few conspicuous instances may be
cited. The United States Steel Corporation owns lands yielding iron
ore, coal, coke, and timber which are valued by the Commissioner of
Corporations at nearly 250 million dollars, and by the Steel
Corporation itself at more than 800 million dollars.[80] Three
companies own nearly eleven per cent., and 195 individuals or
corporations own 48 per cent. of all the privately owned timber in the
United States.[81] The United States Census of 1910 shows that the
number of farms containing 500 acres or over was about 175,000, and
comprised ten per cent. of the total farm acreage. One hundred and
fifty persons and corporations are said to own 220,000,000 acres of
various kinds of land. None of these holders has less than ten
thousand acres, and two of the syndicates possess fifty million acres
each.[82]


_Exclusion from the Land_

One of the most frequent charges brought against the present system of
land tenure is that it keeps a large proportion of our natural
resources out of use. It is contended that this evil appears in three
principal forms: owners of large estates refuse to break up their
holdings by sale; many proprietors are unwilling to let the use of
their land on reasonable terms; and a great deal of land is held at
speculative prices, instead of at economic prices. So far as the
United States are concerned, the first of these charges does not seem
to represent a condition that is at all general. Although many holders
of large mineral and timber tracts seem to be in no hurry to sell
portions of their holdings, they are probably moved by a desire to
obtain higher prices rather than to continue as large landowners. As a
rule, the great landholders of America are without those sentiments of
tradition, local attachment, and social ascendency which are so
powerful in maintaining intact the immense estates of Great Britain.
On the contrary, one of the common facts of to-day is the persistent
effort carried on by railroads and other holders of large tracts to
dispose of their land to settlers. While the price asked by these
proprietors is frequently higher than that which corresponds to the
present productiveness of the land, it is generally as low as that
which is demanded by the owners of smaller parcels. To be sure, this
is one way of unreasonably hindering access to the land, but it falls
properly under the head of the third charge enumerated above. There is
no sufficient evidence that the _large_ landholders are exceptional
offenders in refusing to sell their holdings to actual settlers.

The assertion that unused land cannot be rented on reasonable terms is
in the main unfounded, so far as it refers to land which is desired
for agriculture. As a rule, any man who wishes to cultivate a portion
of such land can fulfil his desire if he is willing to pay a rent that
corresponds to its productiveness. After all, landowners are neither
fools nor fanatics: while awaiting a higher price than is now
obtainable for their land, they would prefer to get from it some
revenue rather than none at all. As a matter of fact, almost all the
agricultural land that is immediately available for renting, is
constantly under cultivation. This refers to land that is already
under the plough, and is provided with buildings and other necessary
improvements. Practically none of this is out of use. New land which
is without buildings is not wanted by tenants, unless it is convenient
to their residences, because they do not desire to expend money for
permanent improvements upon land that they do not own. True, the
present owners of such land might erect buildings, and then let it to
tenants. In so far as new land might profitably be improved and
cultivated, and in so far as the owners are unwilling or unable to
provide the improvements, the present system does keep out of use
agricultural land that could be cultivated by tenants. Mineral and
timber lands are sometimes withheld from tenants because the owners
wish to limit the supply of the product, or because they fear that a
long-term lease would prevent them from selling the land to the best
advantage. As to urban sites, the contention that we are now examining
is generally true. The practice of leasing land to persons who wish to
build thereon does not, with the exception of a very few cities,
obtain in the United States for other than very large business
structures. As a rule, it does not apply to sites for residences. The
man who wants a piece of urban land for a dwelling or for a moderately
sized business building cannot obtain it except by purchase.

Cannot the land be bought at a reasonable price? This brings us to the
third and most serious of the charges concerning exclusion from the
land. Since the value of land in most cities is rising, and apparently
will continue to rise more or less steadily, the price at which it is
held and purchasable is not the economic price but a speculative
price. It is higher than the capitalised value of the present revenue
or rent. For example: if five per cent. be the prevailing rate of
interest, a piece of land which returns that rate on a capital of one
thousand dollars cannot be bought for one thousand dollars. The
purchaser is willing to pay more because he hopes to sell it for a
still higher price within a reasonable time. He knows that he cannot
immediately obtain five per cent. on the amount (say, 1,200 dollars)
that he is ready to pay for the land, but his valuation of it is not
determined merely by its present income-producing power, but by its
anticipated revenue value and selling value.[83] The buyer will pay
more for such land than for a house which yields the same return; for
he knows that the latter will not, and hopes that the former will,
bring a higher return and a higher price in the future. Wherever this
discounting of the future obtains, the price of land is unreasonably
high, and access to vacant land is unreasonably difficult.

This condition undoubtedly exists most of the time in the great
majority of our larger cities. Men will not sell vacant land at a
price which will enable the buyer to obtain immediately a reasonable
return on his investment. They demand in addition a part of the
anticipated increase in value. In the rural regions this evil appears
to be smaller and less general. The owners of unused or uneconomically
used arable land are more eager to sell their holdings than the
average proprietor of a vacant lot. So far as this sort of land is
concerned, it is probable that most of the denunciation of "land
speculators" and "land monopolists" overshoots the mark. Not the high
price at which unused arable lands are held, but the great initial
cost of draining, clearing, or irrigating them, is the main reason why
they are not purchased by cultivators.

While no general and precise estimate can be given of the extent to
which the speculative exceeds the actual rent-producing value of land
in growing cities, twenty-five per cent. would not improbably be a
fair conjecture. Even when a reaction occurs after a period of
excessive "land-booming," the lower prices do not bring the manless
land any nearer to the landless men. Only the few who possess ready
money or excellent credit can take advantage of such a situation. On
the whole the evil that we are now considering is probably greater
than any other connected with the private ownership of land.

All the tendencies and forces that have been described in the present
chapter under the heads of Monopoly, Excessive Gains, and Exclusion
from the Land, are in some degree real defects and abuses of the
existing system of land tenure. Most of them do not seem to be
sufficiently understood or appreciated by the more ardent defenders of
private ownership. To recognise them, and to seek adequate correctives
of them would seem to be the task of both righteousness and
expediency. In the next and final chapter of this Section, we shall
consider certain remedies that seem to be at once effective and just.

FOOTNOTES:

[49] "Report of the Commissioner of Corporations on the Petroleum
Industry," Part I, p. 8.

[50] P. 138.

[51] Cf. Ely, "Monopolies and Trusts," pp. 59, sq.

[52] P. 133.

[53] Pp. 68, 69.

[54] "Final Report of the U. S. Industrial Commission," p. 463; Bliss,
"New Encyclopedia of Social Reform," pp. 245, 770; Van Hise,
"Concentration and Control," pp. 32, 33.

[55] Idem, pp. 46, 47; cf. "Final Report of Industrial Commission,"
pp. 463-465.

[56] "Report of the Commissioner of Corporations on the Steel
Industry," Part I, p. 60.

[57] Cf. Hobson, "The Industrial System," pp. 192-197.

[58] Pp. 15, 16, 29-31.

[59] Cf. "Progress and Poverty," books III and IV.

[60] Cf. Walker, "Land and Its Rent," pp. 168-182, Boston, 1883.

[61] Page 158.

[62] Page 160.

[63] Page 158; footnote.

[64] "Privilege and Democracy," p. 307.

[65] Page 160.

[66] Op. cit., pages 160, 158.

[67] Professor Nearing in "The Annals of the American Academy of
Political and Social Science," March, 1915.

[68] Thirteenth Census, Bulletin on "Farms and Farm Property," page 1.

[69] _The Public_, Nov. 26, 1915. For an account of increases in the
principal European cities, see Camille-Husymans, "La plus-value
immobilière dans les communes belges"; Gand, 1909.

[70] "Report of the Commissioner of Corporations on the Lumber
Industry," Part I, pp. 214-216.

[71] King, op. cit., p. 158.

[72] Thirteenth Census, Vol. I, p. 1295.

[73] Hobson, "The Evolution of Modern Capitalism," p. 4; London, 1907.

[74] _Harper's Monthly Magazine_, Jan., 1910.

[75] Watkins, "The Growth of Large Fortunes," p. 75; N. Y., 1907.

[76] Idem, p. 93.

[77] Youngman, "The Economic Causes of Great Fortunes," p. 45; N. Y.,
1909.

[78] Howe, op. cit., pp. 125, 126.

[79] Cf. Commons, "The Distribution of Wealth," pp. 252, 257; N. Y.,
1893.

[80] "Report of the Commissioner of Corporations on the Steel
Industry," Part I, p. 314.

[81] "Summary of Report of the Commissioner of Corporations on the
Lumber Industry," pp. 3-8.

[82] From articles in "The Single Tax Review," vol. 9, nos. 5, 6.

[83] "In a growing city, an advantageous site will command a price
more than in proportion to its present rent, because it is expected
that the rent will increase still further as the years go on."
Taussig, "Principles of Economics," II, 98; N. Y., 1911.



CHAPTER VIII

METHODS OF REFORMING OUR LAND SYSTEM


In economic and social discussion the word reform is commonly opposed
to the word revolution. It implies modification rather than abolition,
gradual rather than violent change. Hence reforms of the system of
land tenure do not include such radical proposals as those of land
nationalisation or the Single Tax. On the other hand, some extension
of State ownership of land, and some increase in the proportion of
taxes imposed upon land, may quite properly be placed under the head
of reform, inasmuch as they are changes in rather than a destruction
of the existing system.

In general, the reform measures needed are such as will meet the
defects described in the last chapter; namely, monopoly, excessive
gains, and exclusion from the land. Obviously they can be provided
only by legislation; and they may all be included under two heads,
ownership and taxation.

By far the greater part of the more valuable lands of the country are
no longer under the ownership of the State. Urban land is practically
all in the hands of private proprietors. While many millions of acres
of land suitable for agriculture are still under public ownership,
almost all of this area requires a considerable outlay for irrigation,
clearing, and draining before it can become productive. Forty years
ago, three-fourths of the timber now standing was public property; at
present about four-fifths of it is owned by private persons or
corporations.[84] The bulk of our mineral deposits, coal, copper,
gold, silver, etc., have likewise fallen under private ownership, with
the exception of those of Alaska. The undeveloped water power
remaining under government ownership has been roughly estimated at
fourteen million horse power in the national forests, and considerably
less than that amount in other parts of the public domain.[85] This is
a gratifying proportion of the whole supply, developed and
undeveloped, of this national resource, which is said to be somewhere
between 27 and 60 millions horse power.[86] Only about seven million
horse power has yet been developed, almost all of which is privately
owned.


_The Leasing System_

In many countries of Europe it has long been the policy of governments
to retain ownership of all lands containing timber, minerals, oil,
natural gas, phosphate, and water power. The products of these lands
are extracted and put upon the market through a leasing system. That
is; the user of the land pays to the State a rental according to the
amount and quality of raw material which he takes from the storehouse
of nature. Theoretically, the State could sell such lands at prices
that would bring in as much revenue as does the leasing system;
practically, this result has never been attained. The principal
advantages of the leasing arrangement are: to prevent the premature
destruction of forests, the private monopolisation of limited natural
resources (which has happened in the case of the anthracite coal
fields of Pennsylvania) and the private acquisition of exceptionally
valuable land at ridiculously low prices; and to enable the State to
secure just treatment for the consumer and the labourer by
stipulating that the former shall obtain the product at fair prices,
and that the latter shall receive fair wages.

This example should be followed by the United States. All timber,
mineral, gas, oil, and water power lands which have not been alienated
to private persons should remain under government ownership, and be
brought into use through a leasing arrangement which would enable the
private operators to obtain the rates of profit and interest which are
ordinarily yielded by enterprises subject to the same degree of risk.
Happily this policy now seems likely to be adopted. In 1913 a law was
passed by the United States providing for the operation of the coal
mines of Alaska on leases. The amount that can be leased by any person
or corporation is limited to 2560 acres, and the penalty for
attempting to monopolise the product is forfeiture of tenure. The
Secretary of the Interior has urged a similar arrangement for the
development and extraction of water power, coal, oil, gas, phosphate,
sodium, and potassium on the public domain of Continental United
States, and his recommendation will probably be adopted by Congress.
Thus the rent of these lands will go to the whole people instead of to
a comparatively small number of individuals, monopoly of the products
will be made impossible, and our remaining public resources will be
protected from rapid and ruinous exploitation.

To the objection that capitalists will not invest their money in nor
carry on extractive enterprises on a leasing basis, the sufficient
answer is that they are doing it now. In 1909, 24.5 per cent. of all
the lands producing minerals, precious metals, and stone; 94.6 per
cent. of the lands producing petroleum and gas; and 61.2 per cent. of
the two groups of lands combined, were operated under leases from
private owners or from the government.[87] If the rental or royalty
demanded is not unreasonably high capitalists will be quite as
willing to produce raw materials of these kinds from leased land as
they are to manufacture or sell goods in a rented building. Not the
leasing system, but the terms of the particular lease are the
important consideration.

Public grazing lands should remain government property until such time
as they become available for agriculture. Cattle owners could lease
the land from the State on equitable terms, and receive ample
protection for money invested in improvements.


_Public Agricultural Lands_

The leasing system cannot well be applied to agricultural lands. In
order that they may be continuously improved and protected against
deterioration, they must be owned by the cultivators. The temptation
to wear out a piece of land quickly, and then move to another piece,
and all the other obstacles that stand in the way of the Single Tax as
applied to agricultural land, show that the government cannot with
advantage assume the function of landlord in this domain. In the great
majority of cases the State would do better to sell the land in small
parcels to genuine settlers. There are, indeed, many situations,
especially in connection with government projects of irrigation,
clearing, and drainage, in which the leasing arrangement could be
adopted temporarily. It should not be continued longer than is
necessary to enable the tenants to become owners. With this end in
view the State should make loans to cultivators at moderate rates of
interest, as is done in New Zealand and Australia.

Whether the State ought to purchase undeveloped land from private
owners in order to sell it to settlers, may well be doubted. The only
lands to which such a scheme would be at all applicable are large
estates which are held out of use by their proprietors. Even here the
transfer of the land to cultivators could be accomplished indirectly,
through an extra heavy tax. This method has been adopted with success
by Australia and New Zealand. The only other action by the State that
seems necessary or wise in order to place settlers upon privately
owned agricultural land, is the establishment of a comprehensive
system of rural credits. The need of cheaper food products, and the
desirability of checking the abnormal growth of our urban populations,
are powerful additional reasons for the adoption of this policy. The
Hollis Rural Credits Bill recently enacted into law by Congress goes a
considerable way toward meeting these needs.


_Public Ownership of Urban Land_

No city should part with the ownership of any land that it now
possesses. Since capitalists are willing to erect costly buildings on
sites leased from private owners, there is no good reason why any one
should refuse to put up or purchase any sort of structure on land
owned by the municipality. The situation differs from that presented
by agricultural land; for the value of the land can easily be
distinguished from that of improvements, the owner of the latter can
sell them even if he is not the owner of the land, and he cannot be
deprived of them without full compensation. While the lessee paid his
annual rent, his control of the land would be as complete and certain
as that of the landowner who continues to pay his taxes. On the other
hand, the leaseholder could not permit or cause the land to
deteriorate if he would; for the nature of the land renders this
impossible. Finally, the official activities involved in the
collection of the rent and the periodical revaluation of the land,
would not differ essentially from those now required to make
assessments and gather taxes.

The benefits of this system would be great and manifest. Persons who
were unable to own a home because of their inability to purchase land,
could get secure possession of the necessary land through a lease from
the city. Instead of spending all their lives in rented houses,
thousands upon thousands of families could become the owners and
occupiers of homes. The greater the amount of land thus owned and
leased by the city, the less would be the power of private owners to
hold land for exorbitant prices. Competition with the city would
compel them to sell the land at its revenue-producing value instead of
at its speculative value. Finally, the city would obtain the benefit
of every increase in the value of its land by means of periodical
revaluation, and periodical readjustment of rent.

Unfortunately the amount of municipal land available for such an
arrangement in our American cities is negligible. If they are to
establish the system they must first purchase the land from private
owners. Undoubtedly this ought to be done by all large cities in which
the housing problem has become acute, and the value of land is
constantly rising. This policy has been adopted with happy results by
many of the municipalities of France and Germany.[88] At the state
election of 1915 the voters of Massachusetts adopted by an
overwhelming majority a constitutional amendment authorising the
cities of the commonwealth to acquire land for prospective home
builders. In Savannah, Georgia, no extension of the municipal limits
is made until the land to be embraced has passed into the ownership of
the city. Another method is to refrain from opening a new street in a
suburban district until the city has become the proprietor of the
abutting land. Whatever be the particular means adopted, the objects
of municipal purchase and ownership of land are definite and obvious:
to check the congestion of population in the great urban centres, to
provide homes for the homeless, and to secure for the whole community
the socially occasioned increases in land values. Indeed, it is
probable that no comprehensive scheme of housing reform can be
realised without a considerable amount of land purchase by the
municipalities. Cities must be in a position to provide sites for
those home builders who cannot obtain land on fair conditions from
private proprietors.[89]

Turning now from the direct method of public ownership to the indirect
method of reform through taxation, we reject the thoroughgoing
proposals of the Single Taxers. To appropriate all economic rent for
the public treasury would be to transfer all the value of land without
compensation from the private owner to the State. For example: a piece
of land that brought to the owner an annual revenue of one hundred
dollars would be taxed exactly that amount; if the prevailing rate of
interest were five per cent. the proprietor would be deprived of
wealth to the amount of two thousand dollars; for the value of all
productive goods is determined by the revenue that they yield, and
benefits the person who receives the revenue. Thus the State would
become the beneficiary and the virtual owner of the land. Inasmuch as
we do not admit that the so-called social creation of land values
gives the State a moral right to these values, we must regard the
complete appropriation of economic rent through taxation as an act of
pure and simple confiscation.[90]


_Appropriating Future Increases of Land Value_

Let us examine, then, the milder suggestion of John Stuart Mill, that
the State should impose a tax upon land sufficient to absorb all
future increases in its value.[91] This scheme is commonly known as
the appropriation of future unearned increment. Either in whole or in
part it is at least plausible, and is to-day within the range of
practical discussion. It is expected to obtain for the whole
community all future increases in land values, and to wipe out the
speculative, as distinguished from the revenue-producing value of
land. Consequently it would make land cheaper and more accessible than
would be the case if the present system of land taxation were
continued. Before discussing its moral character, let us see briefly
whether the ends that it seeks may properly be sought by the method of
taxation. For these ends are mainly social rather than fiscal.

To use the taxing power for a social purpose is neither unusual nor
unreasonable. "All governments," says Professor Seligman, "have
allowed social considerations in the wider sense to influence their
revenue policy. The whole system of productive duties has been framed
not merely with reference to revenue considerations, but in order to
produce results which should directly affect social and national
prosperity. Taxes on luxuries have often been mere sumptuary laws
designed as much to check consumption as to yield revenue. Excise
taxes have as frequently been levied from a wide social, as from a
narrow fiscal, standpoint. From the very beginning of all tax systems
these social reasons have often been present."[92] Our Federal taxes
on imports, on intoxicating liquors, on oleo-margarine, and on white
phosphorus matches, and many of the license taxes in our
municipalities, as on pedlars, saloon keepers, and dog owners, are in
large part intended to meet social as well as fiscal ends. They are in
the interest of domestic production, public health, and public safety.
The reasonableness of effecting social reforms through taxation cannot
be seriously questioned. While the maintenance of government is the
primary object of taxation, its ultimate end, the ultimate end of
government itself, is the welfare of the people. Now if the public
welfare can be promoted by certain social changes, and if these in
turn can be effected through taxation, this use of the taxing power
will be quite as normal and legitimate as though it were employed for
the upkeep of government. Hence the morality of taxing land for
purposes of social reform will depend entirely upon the nature of the
particular tax that is imposed.


_Some Objections to the Increment Tax_

The tax that we are now considering can be condemned as unjust on only
two possible grounds: first, that it would be injurious to society;
and, second, that it would wrong the private landowner. If it were
fairly adjusted and efficiently administered it could not prove
harmful to the community. In the first place, landowners could not
shift the tax to the consumer. All the authorities on the subject
admit that taxes on land stay where they are put, and are paid by
those upon whom they are levied in the first instance.[93] The only
way in which the owners of a commodity can shift a tax to the users or
consumers of it, is by limiting the supply until the price rises
sufficiently to cover the tax. By the simple device of refusing to
erect more buildings until those in existence have become scarce
enough to command an increase in rent equivalent to the new tax, the
actual and prospective owners of buildings can pass the tax on to the
tenants thereof. By refusing to put their money into, say, shoe
factories, investors can limit the supply of shoes until any new tax
on this commodity is shifted upon the wearers of shoes in the form of
higher prices. Until these rises take place in the rent of buildings
and the price of shoes, investors will put their money into
enterprises which are not burdened with equivalent taxes. But nothing
of this sort can follow the imposition of a new tax upon land. The
supply of land is fixed, and cannot be affected by any action of
landowners or would-be landowners. The users of land and the consumers
of its products are at present paying all that competition can compel
them to pay. They would not pay more merely because they were
requested to do so by landowners who were labouring under the burden
of a new tax. If all landowners were to carry out an agreement to
refrain from producing, and to withhold their land from others until
rents and prices had gone up sufficiently to offset the tax, they
could, indeed, shift the latter to the renters of land and the
consumers of its products. Such a monopoly, however, is not within the
range of practical achievement. In its absence, individual landowners
are not likely to withhold land nor to discontinue production in
sufficient numbers to raise rents or prices. Indeed, the tendency will
be all the other way; for all landowners, including the proprietors of
land now vacant, will be anxious to put their land to the best use in
order to have the means of paying the tax. Owing to this increased
production, and the increased willingness to sell and let land, rents
and prices must fall. It is axiomatic that new taxes upon land always
make it cheaper than it would have been otherwise, and are beneficial
to the community as against the present owners.

In the second place, the tax in question could not injure the
community on account of discouraging investment in land. Once men
could no longer hope to sell land at an advance in price, they would
not seek it to the extent that they now do as a field of investment.
For the same reason many of the present owners would sell their
holdings sooner than they would have sold them if the tax had not been
levied. From the viewpoint of the public the outcome of this situation
would be wholly good. Land would be cheaper and more easy of access to
all who desired to buy or use it for the sake of production, rather
than for the sake of speculation. Investments in land which have as
their main object a rise in value are an injury rather than a benefit
to the community; for they do not increase the products of land, while
they do advance its price, thereby keeping it out of use. Hence the
State should discourage instead of encouraging mere speculators in
land. Whether it is or is not bought and sold, the supply of land
remains the same. The supreme interest of the community is that it
should be put to use, and made to supply the wants of the people.
Consequently the only land investments that help the community are
those that tend to make the land productive. Under a tax on future
increases in value, such investments would increase for the simple
reason that land would be cheaper than it would have been without the
tax. Men who desired land for the sake of its rent or its product
would continue as now to pay such prices for it as would enable them
to obtain the prevailing rate of interest on their investment after
all charges, including taxes, had been paid. Men who wanted to rent
land would continue as now to get it at a rental that would give them
the usual return for their capital and labour.

So much for the effect of the tax upon the community. Would it not,
however, be unjust to the landowners? Does not private ownership of
its very nature demand that increases in the value of the property
should go to the owners thereof? "Res fructificat domino:" a thing
fructifies to its owner; and value-increases may be classed as a kind
of fruit.

In the first place, this formula was originally a dictum of the civil
law merely, the law of the Roman Empire. It was a legal rather than an
ethical maxim. Whatever validity it has in morals must be established
on moral grounds, by moral arguments. It cannot forthwith be assumed
to be morally sound on the mere authority of legal usage. In the
second place, it was for a long time applied only to natural products,
to the grain grown in a field, to the offspring of domestic animals.
It simply enunciated the policy of the law to defend the owner of the
land in his claim to such fruits, as against any outsider who should
attempt to set up an adverse title through mere appropriation or
possession. Thus far, the formula was evidently in conformity with
reason and justice. Later on it was extended, both by lawyers and
moralists, to cover commercial "fruits," such as, rent from lands and
houses, and interest from loans and investments. Its validity in this
field will be examined in connection with the justification of
interest. More recently the maxim has received the still wider
application which we are now considering. Obviously increases in value
are quite a different thing from the concrete fruit of the land, its
natural product. A right to the latter does not necessarily and
forthwith imply a right to the former. In the third place, the formula
in question is not a self evident, fundamental principle. It is merely
a summary conclusion drawn from the consideration of the facts and
principles of social and industrial life. Consequently its validity as
applied to any particular situation will depend on the correctness of
these premises, and on the soundness of the process by which it has
been deduced.

The increment tax is sometimes opposed on the ground that it is new,
in fact, revolutionary. In some degree the charge is true, but the
conditions which the proposal is intended to meet are likewise of
recent origin. The case for this legislation rests mainly on the fact
that, for the first time in the world's history, land values
everywhere show an unmistakable tendency to advance indefinitely. This
means that the landowning minority will be in a position to reap
unbought and continuous benefits at the expense of the landless
majority. This new fact, with its very important significance for
human welfare, may well require a new limitation on the right of
property in land.

It is also objected that to deprive men of the opportunity of
profiting by changes in the value of their land would be an unfair
discrimination against one class of proprietors. But there are good
reasons for making the distinction. Except in the case of monopoly,
increases in the value of goods other than land are almost always due
to expenditures of labour or money upon the goods themselves. The
value increases that can be specifically traced to external and social
influences are intermittent, uncertain, and temporary. Houses,
furniture, machinery, and every other important category of artificial
goods are perishable, and decline steadily in value. Land, however, is
substantially imperishable, becomes steadily scarcer relatively to the
demand, and its value-increases are on the whole constant, certain,
and permanent. Moreover, it is the settled policy of most enlightened
governments to appropriate or to prevent all notable increases in the
value of monopolistic goods, either through special taxation or
through regulation of prices and charges. Taking the increment values
of land is, therefore, not so discriminative as it appears at first
glance.[94]

Another objection is that the proposal would violate the canons of
just taxation, since it would impose a specially heavy burden upon one
form of property. The general doctrine of justice in taxation which is
held by substantially all economists to-day, and which has been taught
by Catholic moralists for centuries, is that known as the "faculty"
theory.[95] Men should be taxed in proportion to their ability to pay,
not in accordance with the benefits that they may be assumed to
receive from the State. And it is universally recognised that the
proper measure of "ability" is not a man's total possessions,
productive and unproductive, but his income, his annual revenue. Now,
the increment tax does seem to violate the rule of taxation according
to ability, inasmuch as it would take all of one species of revenue,
while all other incomes and properties pay only a certain percentage.

All the adherents of the faculty theory maintain, however, that it is
subject to certain modifications. Incomes from interest, rent, and
socially occasioned increases in the value of property should be taxed
at a higher rate than incomes that represent expenditures of labour;
for to give up a certain per cent. of the former involves less
sacrifice than to give up the same per cent. of the latter. Therefore,
increments of land-value may be fairly taxed at a higher rate than
salaries, personal property, or even rent and interest. When, however,
the law absorbs the whole of the value increments, it seems to be
something more than a tax. The essential nature of a tax is to take
only a portion of the particular class of income or property upon
which it is imposed. The nearest approach to the plan of taking all
future increases in land value is to be found in the special
assessments that are levied in many American cities. Thus, the owners
of urban lots are frequently compelled to defray the entire cost of
street improvements on the theory that their land is thereby and to
that extent increased in value. In such cases the contribution is
levied not on the basis of the faculty theory, but on that of the
benefit theory; that is, the owners are required to pay in proportion
to benefits received. All adherents of the faculty theory admit that
the benefit theory is justifiably applied in situations of this kind.
It might be argued that the latter theory can also be fairly applied
to increments of land value that are to arise in the future. In both
cases the owner returns to the State the equivalent of benefits which
have cost him nothing. There is, however, a difference. In the former
case the value increases are specifically due to expenditures made by
the State, while in the latter they are indirectly brought about by
the general activities of the community. We do not admit with the
Single Taxers that this "social production" of value increments
creates a right thereto on the part of either the community or the
civil body; but even if we did we should be compelled to admit that
the two situations are not exactly parallel; for the social production
of increases in the value of land involves no special expenditure of
labour or money. Hence it is very questionable whether the
appropriation of the whole of the future value increments can be
harmonised with the received conceptions and applications of the
canons of taxation.


_The Morality of the Proposal_

However, it is neither necessary nor desirable to justify the proposal
on the mere ground of taxation. Only in form and administration is it
a tax; primarily and in essence it is a method of distribution. It
resembles the action by which the State takes possession of a newly
discovered territory by the title of first occupancy. The future
increases of land value may be regarded as a sort of no man's property
which the State appropriates for the benefit of the community. And the
morality of this proceeding must be determined by the same criterion
that is applied to every other method or rule of distribution; namely,
social and individual consequences. No principle, title, or practice
of ownership, nor any canon of taxation, has intrinsic or metaphysical
value. All are to be evaluated with reference to human welfare. Since
the right of property is not an end in itself, but only a means of
human welfare, its just prerogatives and limitations are determined by
their conduciveness to the welfare of human beings. By human welfare
is meant not merely the good of society as a whole, but the good of
all individuals and classes of individuals. For society is made up of
individuals, all of whom are of equal worth and importance, and have
equal claims to consideration in the matter of livelihood, material
goods, and property. In general, then, any method of distribution, any
modification of property rights, any form of taxation, is morally
lawful which promotes the interests of the whole community, without
causing undue inconvenience to any individual. Whether a given rule of
ownership or method of distribution which is evidently conducive to
the public good is, nevertheless, unduly severe on a certain class of
individuals, is a question that is not always easily answered. Some of
the methods and practices appearing in history were clearly fair and
just, others clearly unfair and unjust, and still others of doubtful
morality. Frequently the State has compelled private persons to give
up their land at a lower price than they paid for it; in more than one
country freebooters and kingly favourites robbed the people of the
land, yet their heirs and successors are recognised by both moralists
and statesmen as the legitimate owners of that land; in Ireland
stubborn landlords are to-day compelled by the British government to
sell their holdings to the tenants at an appraised valuation; in many
countries men may become owners of their neighbours' lands by the
title of prescription, without the payment of a cent of compensation.
All these practices and titles inflict considerable hardship upon
individuals, but most of them are held to be justified on grounds of
social welfare.

Now the public appropriation of all future increments of land value
would evidently be beneficial to the community as a whole. It would
enable all the people to profit by gains that now go to a minority,
and it would enable the landless majority to acquire land more easily
and more cheaply. We have in mind, of course, only those value
increases that are not due to improvements in or on the land, and we
assume that these could be distinguished in practice from the
increments of value that represent improvements. Would the measure in
question inflict undue hardship upon individuals? Here we must make a
distinction between those persons who own land at the time that, and
those who buy land after, the law is enacted.

The only inconvenience falling upon the latter class would be
deprivation of the power to obtain future increases in value. The law
would not cause the value of the land to decline below their purchase
price. Other forces might, indeed, bring about such a result; but, as
a rule, such depreciation would be relatively insignificant, for the
simple reason that it would already have been "discounted" in the
reduction of value which followed the law at the outset. The very
knowledge that they could not hope to profit by future increases in
the value of the land would impel purchasers to lower their price
accordingly. While taking away the possibility of gaining, the law
enables the buyers to take the ordinary precautions against losing.
Therefore, it does not, as sometimes objected, lessen the so called
"gambler's chances." On the other hand, the tax does not deprive the
owners of any value that they may add to the land through the
expenditure of labour or money, nor in any way discourage productive
effort. Now it is, as a rule, better for individuals as well as for
society that men's incomes should represent labour, expenditure, and
saving instead of being the result of "windfalls," or other fortuitous
and conjunctural circumstances. And the power to take future value
increments is not an intrinsically essential element of private
property in land. Like every other condition of ownership, its
morality is determined by its effects upon human welfare. But we have
seen in the last paragraph that human welfare in the sense of the
social good is better promoted by a system of landownership which does
not include this element; and we have just shown that such a system
causes no undue hardship to the individual who buys land after its
establishment. Such is the answer to the contention, noticed a few
pages back, that the landowner has a right to future increments of
value because they are a kind of fruit of his property. It is more
reasonable that he should not enjoy this particular and peculiar
"fruit." Were the increment tax introduced into a new community before
any one had purchased land, it would clearly be a fair and valid
limitation on the right of ownership. Those who should become owners
after the regulation went into effect in an old community would be in
exactly the same moral and economic position. Finally, there exists
some kind of legal precedent for the proposal in the present policy of
efficient governments with regard to the only important increases that
occur in the value of goods other than land; namely, increases due to
the possession of monopoly power. By various devices these are either
prevented or appropriated by the State.

Those persons who are landowners when the increment tax goes into
effect are in a very different situation from those that we have just
been considering. Many of them would undoubtedly suffer injury through
the operation of the measure, inasmuch as their land would reach and
maintain a level of value below the price that they had paid for it.
The immediate effect of the increment tax would be a decline in the
value of all land, caused by men's increased desire to sell and
decreased desire to buy. In all growing communities a part of the
present value of land is speculative; that is, it is due to demand for
the land by persons who want it mainly to sell at an expected rise,
and also to the disinclination of present owners to sell until this
expectation is realised. The practical result of the attitude of these
two classes of persons is that the demand for, and therefore the value
of land is considerably enhanced. Let a law be enacted depriving them
of all hope of securing the anticipated increases in value, and the
one group will cease to buy, while the other will hasten to sell, thus
causing a decline in demand relatively to supply, and therefore a
decline in value and price.

All persons who had paid more for their land than the value which it
came to have as a result of the increment tax law, would lose the
difference. For, no matter how much the land might rise in value
subsequently, the increase would all be taken by the State. And all
owners of vacant land the value of which after the law was passed did
not remain sufficiently high to provide accumulated interest on the
purchase price, would also lose accordingly. To be sure, both these
kinds of losses would exist even if the law should cause no decline in
the value of land, but they would not be so great either in number or
in volume.

Landowners who should suffer either of these sorts of losses would
have a valid moral claim against the State for compensation. Through
its silence on the subject of increment-tax legislation, the State
virtually promised them at the time of their purchases that it would
not thus interfere with the ordinary course of values. Had it given
any intimation that it would enact such a law at a future time, these
persons would not have paid as much for their land as they actually
did pay. When the State passes the law, it violates its implicit
promise, and consequently is under obligation to make good the
resulting losses.

Is it not obliged to go further, and pay for the positive gains that
many of the owners would have reaped in the absence of the law? For
example: a piece of land is worth one thousand dollars the day after
the tax goes into effect, and that was exactly the price paid for it
by the present owner; another piece has the same value, but was bought
by the present owner for eight hundred dollars. While neither of these
men suffer any loss on their investments, they are deprived of
possible gains; for had the law not been enacted their holdings would
be worth, say, eleven hundred dollars. Nevertheless, they are no worse
off in this respect than those persons who buy land after the
increment tax goes into effect, and have no greater claim to
compensation for abolished opportunities of positive gain. As we have
seen above, the certain advantages of the measure to the community,
the doubtful advantages to individuals of profiting by changes in
price which do not represent labour, expense, or saving, show that the
owners have no strict right to compensation. And it is still clearer
that no landowner has a valid claim on account of value increases that
would have taken place subsequent to the time that the measure was
enacted. There is no way by which owners who would have held their
land long enough to profit by these increments can be distinguished
from owners who would not have availed themselves of this conjectural
opportunity, nor any method by which the amount of such gains can be
determined.

On the other hand, it might be objected that, in reimbursing all
owners who suffer the positive losses above described, the State is
unduly generous; for if the law had not been enacted many of the
reimbursed persons would have sold their holdings at a price
insufficient to cover their losses. But these cannot be distinguished
from those who would have sold at a remunerative price. Hence the
State must compensate all or none. The former alternative is not only
the more just all round, but in the long run the more expedient.

In view of the social benefits of the increment tax, especially the
removal of many of the inequities of the present taxing system, the
State might sometimes be justified in making good only a part of the
losses that we have been discussing. But this could probably occur
only for administrative reasons, such as the difficulty of determining
the persons entitled to and the amounts of compensation. It would not
be justified merely to enable the State to profit at the expense of
individuals. And, in any case, there seems to be no good reason why
the unpaid losses should amount to more than a small fraction of the
whole.

In the foregoing pages we have been considering a law which would from
the beginning of its operation take _all_ the future increments of
land value. There is, however, no likelihood that any such measure
will soon be enacted in any country, least of all, in the United
States. What we shall probably see is the spread of legislation
designed to take a part, and a gradual growing part, of value
increases, after the example of Germany and Great Britain. Let us
glance at the laws in force in these two countries.


_The German and British Increment Taxes_

The first increment tax (Werthzuwachssteuer) was established in the
year 1898 in the German colony of Kiautschou, China. In 1904 the
principle of the tax was adopted by Frankfort-am-Main, and in 1905 by
Cologne. By April, 1910, it had already been enacted in 457 cities and
towns of Germany, some twenty of which had a population of more than
100,000 each, in 652 communes, several districts, one principality,
and one grand duchy. In 1911 it was inserted in the imperial fiscal
system, and thus extended over the whole German Empire. While these
laws are all alike in certain essentials, they vary greatly in
details. They agree in taking only a per cent. of the value increases,
and in imposing a higher rate on the more rapid increases. The rates
of the imperial law vary from ten per cent. on increases of ten per
cent. or less to thirty per cent. on increases of 290 per cent. or
over. In Dortmund the scale progresses from one to 12-1/2 per cent.
Inasmuch as the highest rate in the imperial law is 30 per cent., and
in any municipal law (Cologne and Frankfort) 25 per cent.; inasmuch as
all the laws allow deductions from the tax to cover the interest that
was not obtained while the land was unproductive; and inasmuch as only
those increases are taxed which are measured from the value that the
land had when it came into the possession of the present owner,--it is
clear that landowners are not obliged to undergo any positive loss,
and that they are permitted to retain the lion's share of the
"unearned increment."[96]

It is to be noted that most of the German laws are retroactive, since
they apply not merely to future value increases, but to some of those
that occurred before the law was enacted. Thus, the Hamburg ordinance
measures the increases from the last sale, no matter how long ago that
transaction took place. The imperial law uses the same starting point,
except in cases where the last sale occurred before 1885. Accordingly,
a man who had in 1880 paid 2500 marks for a piece of land which in
1885 was worth only 2000 marks, and who sold it for 3000 marks after
the law went into effect, would pay the increment tax on 1000
marks,--unless he could prove that his purchase price was 2500 marks.
In all such cases the burden of proof is on the owner to show that the
value of the land in 1885 was lower than when he had bought it at the
earlier date. Obviously this retroactive feature of the German
legislation inflicts no wrong on the owner, since it does not touch
value increases that he has paid for. Indeed, the value of the land
when it came into the present owner's possession seems to be a fairer
and more easily ascertained basis from which to reckon increases than
any date subsequent to the enactment of the law. On the one hand,
persons whose lands had fallen in value during their ownership would
be automatically excluded from the operation of the law until such
time as the acquisition value was again reached; on the other hand,
those owners whose lands had increased in value before the law went
into effect would be taxed as well as those whose gains began after
that event; thus the law would reach a greater proportion of the
existing beneficiaries of "unearned increment." Moreover, it would
bring in a larger amount of revenue.

The British law formed a part of the famous Lloyd-George budget of
1909. It taxes only those increments that occur after its enactment.
These are subject to a tax of twenty per cent. on the occasion of the
next transfer of the land, by sale, bequest, or otherwise.[97] In some
cases this arrangement will undoubtedly cause hardship. For example:
if land which was bought for 1,000 pounds in 1900 had fallen to 800
pounds in 1909, and were sold for 1,000 pounds in 1915, the owner
would have to pay a tax of twenty per cent. on 200 pounds. This would
mean a net loss of forty pounds, to say nothing of the loss of
interest in case the land was unproductive. It would seem that some
compensation ought to be given here; yet the rarity of such
instances, the administrative difficulties, and the general advantages
of this sort of legislation quite conceivably might forbid the
conclusion that the owner was made to suffer certain injustice. The
compensating social advantages of the increment tax as well as of
other special taxes on land, will receive adequate discussion
presently.


_Transferring Other Taxes to Land_

Another taxation plan for reducing the evils of our land system
consists in the imposition of special taxes on the _present_ value of
land. As a rule, these imply, not an addition to the total tax levy,
but a transfer of taxes from other forms of property. The usual
practice is to begin by exempting either partly or wholly buildings
and other kinds of improvements from taxation, and then to apply the
same measure to certain kinds of personal property. In most cases the
transfer of such taxes to land is gradual, extending over a period of
five, ten, or fifteen years. The plan is in operation in Canada and
Australasia, and to a slight extent in the United States.

It has received its greatest development in the western provinces of
Canada; namely, British Columbia, Alberta, Saskatchewan, and Manitoba.
The cities of Edmonton, Medicine Hat, and Red Deer; Vancouver,
Victoria, and thirteen others of the thirty-three cities of British
Columbia; all the towns of Alberta except two; all but one of the
villages of Alberta, and one-fourth of those in Saskatchewan; all the
rural municipalities and local improvements districts in Alberta,
Manitoba, and Saskatchewan, and 24 of the 28 in British
Columbia,--exempt improvements entirely from taxation. The three
cities in Alberta which retain some taxes on improvements; all the
cities and towns and three-fourths of the villages in Saskatchewan;
the four largest cities in Manitoba; and a considerable number of the
municipalities in Ontario (by the device of illegal under-assessment
in this instance),--tax improvements at less than full value, in some
cases as low as fifteen per cent. Land is invariably assessed at its
full value. It is to be observed that these special land taxes provide
only local revenues; they do not contribute anything to the
maintenance of either the provincial or the dominion governments. The
reason why the local jurisdictions have adopted these taxes so much
more extensively in Alberta than in the other provinces is to be found
in a provincial law enacted in 1912, which requires all towns,
villages, and rural areas to establish within seven years the practice
of exempting from taxation personal property and buildings.
Saskatchewan permits cities and towns to tax improvements up to sixty
per cent. of their value, while British Columbia and Manitoba leave
the matter entirely in the hands of the local authorities. The
provincial revenues are derived from many sources, chiefly real
estate, personal property, and incomes; but British Columbia,
Saskatchewan, and Alberta levy a special tax on unimproved and only
slightly improved rural land. The rate of this "wild lands tax" is in
British Columbia four per cent., and in the other two provinces one
per cent. Some of the municipalities of British Columbia and
Saskatchewan also impose a "wild lands tax." By a law passed in 1913
Alberta levies a provincial tax of five per cent. on the value
increases of non-agricultural lands. A movement for the reduction of
the tax on buildings has developed considerable strength in the
eastern provinces of Ontario, Nova Scotia, and New Brunswick.[98]

New Zealand and most of the states of Australia have for several years
levied special taxes on land, consisting mainly of general rates on
estates of moderate size, and a progressive super tax on large
estates. The Commonwealth of Australia also imposes a tax of one penny
in the pound on the value of land. A considerable proportion of the
cities and towns in both New Zealand and Australia derive practically
all their revenues from land, exempting improvements entirely. In both
countries, however, the bulk of the total revenue is obtained from
other sources than land taxes. In New Zealand they yield less than
thirteen per cent. of the national receipts.[99]

Pittsburgh and Scranton were required by a law enacted in 1913 to
reduce the local tax rate on buildings at such a pace that in 1925 and
thereafter it would be only one-half the highest rate on other forms
of property. Everett, Wash., and Pueblo, Col., within recent years
adopted by popular vote more sweeping measures of the same character,
but the Everett law has never gone into effect, and the Pueblo statute
was repealed two years after it had been passed. In many cities of the
United States, buildings are undervalued relatively to land by the
informal and illegal action of assessors. The most pronounced and best
known instance of this kind is Houston, Texas, where in 1914 land was
assessed at seventy per cent. of its value and buildings at only
twenty-five per cent. In 1915, however, the practice was forbidden by
the courts as contrary to the Texas constitution. At more than one
recent session of the New York legislature, bills have been introduced
providing for the gradual reduction of the tax on buildings in New
York City to a basis of fifty per cent. of their value. While none of
them has been passed, the sentiment in favour of some such measure is
probably increasing. A similar movement of opinion is apparent in many
other sections of the country.

On the whole, the special land taxes of Canada and Australasia are not
remarkably high. They seem to be as low or lower than the average
rates imposed on land, as well as on other forms of general property,
in the United States. In the provinces, the special land taxes provide
only a small portion of the total revenues; in the cities and towns,
there are, as a rule, other sources of revenue as well as land, and
the expenses of municipal government are probably not as high as in
this country. Hence the land taxes of Canada have not reached an
abnormally high level, and are probably lower than most persons who
have heard of them would be inclined to expect. The chief exceptions
to the foregoing statements are to be found in the "wild lands tax" of
British Columbia, and in the land taxes of some of the towns (not the
cities) of Alberta. A rate of four per cent. on unimproved and
slightly improved rural land is extraordinary in fiscal annals, and is
scarcely warranted by any received principle of taxation, although it
may possibly be justified by peculiar social and administrative
conditions in the province of British Columbia. Some of the smaller
towns of Alberta which adopted the land tax during the recent period
of depression have been compelled to impose even higher rates, the
maximum being reached by Castor in 1912, with a rate of 8-1/2 per
cent. As a natural consequence, a large proportion of the land in this
town was surrendered by its owners to the municipality. While this
amazing tax rate is probably temporary, and is likely to be lowered
after the return of the average conditions of prosperity, it inflicts
unfair hardship upon those owners whose circumstances are such that
they must give up their land, instead of awaiting the hoped for
decline in the rate of taxation.


_The Morality of the Plan_

The losses of various kinds that would result from the transfer of
other taxes to land may be thus summarised. Land would depreciate in
value by an amount equal to the capitalised tax. For example; if the
rate of interest were five per cent., an additional tax of one per
cent. would reduce land worth one hundred dollars an acre to eighty
dollars. This decline might, indeed, be partly, wholly, or more than
offset by a simultaneous rise due to economic forces. In any case,
however, the land would be worth twenty dollars less than it would
have been worth had the tax not been imposed. For some owners this
would mean a positive loss; for others it would signify mere failure
to gain. The latter would happen in the case of all those owners who
at any time after the imposition of the tax sold their land at as high
a price as they had paid for it. Not all of the owners whose land was
forced by the tax to a figure below their purchase price would suffer
positive loss; for the land might subsequently rise in value
sufficiently to wipe out the unfavourable difference. In this respect
a special tax on the present value of land has a different effect from
a tax that appropriates all the future value increases. Only those
owners who actually sold their land below their purchase price could
charge the former tax with inflicting upon them positive losses. In
the case of the land exemplified above, the owner who sold at ninety
dollars per acre could properly attribute to the tax a loss of ten
dollars; the owner who sold at eighty dollars would have a grievance
amounting to twenty dollars; and a loss would be suffered by any owner
who sold for less than eighty dollars. In the second place, all owners
of vacant land who sold at a price insufficient to provide for
accumulated interest on the purchase price, could justly hold the tax
responsible, so long as the deficiency did not exceed the
value-depreciation caused by the tax. Thirdly, all persons whose land
had an unusually high value relatively to the value of their exempted
property, would suffer losses as taxpayers. They would lose more
through the heavier land taxes than they would gain through the
lighter taxes, or the absence of taxes, on their other property.

To compensate all owners who underwent these three kinds of losses
would be practically impossible. The number of persons would be too
large, the difficulty of proving many of the claims would be too
expensive, and the compensation process would be too long drawn out,
since it would have to continue until the death of all persons who had
owned land when the last instalment of the increased land taxes went
into effect. Therefore, the losses in question must be counterbalanced
by other and indirect methods. These will be found mainly in the
following considerations: the amount of the new taxes; the gradual
method of imposing them; and their socially beneficial results.


_Amount of Taxes Practically Transferable_

According to Professor King's computations, the total rent of land in
the United States in 1910 was $2,673,900,000, while the total
expenditures of national, state, county and city governments were
$2,591,800,000.[100] In his opinion (p. 162) "the rent would have been
barely sufficient to pay off the various governmental budgets as at
present constituted, and with the growing concentration of activities
in the hands of the government, it appears that rent will soon be a
quantity far too small to meet the required changes. With increasing
pressure on our natural resources, however, it is probable that the
percentage of the total income paid for rent will gradually increase
and, since this is true, the lag behind the growing governmental
expenses will be considerably less than would otherwise be the case."

A change in our fiscal system providing for the immediate derivation
of all revenues from land taxes would, therefore, involve the
confiscation of all rent, and the destruction of all private land
values. Land would be worth nothing to the owners when its entire
annual return was taken by the State in the guise of taxes. Even if
the process of imposing the new taxes on land were extended over a
long term of years the same result would be reached in the end; for
whatever increase had taken place in the economic value of land during
the process would in all probability have been neutralised by the
increase in governmental expenditures. It is evident, therefore, that
the proposal to put _all_ taxes on land must be rejected on grounds of
both morals and expediency.

Let us suppose that all national revenues continued, as now, to be
raised from other sources than land, and that all state, county, and
city revenues remained as they are, except those derived from the
general property tax. This would mean that all the following taxes
would be unchanged: all federal taxes, the taxes on licenses of all
kinds, all taxes on business, incomes, and inheritances, and all
special property taxes. If, then, the whole of the general property
tax were concentrated on land; that is, if all the taxes on
improvements and on all forms of personal property were legally
shifted to land,--the entire revenue to be raised from land would in
1912 have amounted to $1,349,841,038.[101] This is slightly more than
one-half of Professor King's estimate of the total rent for 1910,
which was $2,673,900,000. But this figure equals four per cent. of the
land values of the country; hence the concentration of the general
property tax on land would mean a tax rate of two per cent. on the
full value of the land.

How much would this change increase the present rate of land taxes,
and decrease existing land values? While no accurate and definite
answer can be given to either of these questions, certain
approximations can be attempted which should be of considerable
service.

In 1912 the average tax rate on the assessed valuation of all goods
subject to the general property tax was .0194, or $19.40 per thousand
dollars.[102] The assessed valuation of taxed real property and
improvements (land, buildings, and other improvements) was nearly
fifty-two billion dollars, while the true value of the same property
was nearly ninety-eight and one-half billions.[103] Consequently, the
actual tax rate of .0194 on the assessed valuation was exactly one per
cent. on the true value of real estate. On the assumption that both
land and improvements were undervalued to the same extent, the land
tax was one per cent. of the full value of the land. If now we take
Thomas G. Shearman's estimate, that land values form sixty per cent.
of the total value of real estate, we find that the taxes derived from
land constituted only forty-four per cent. of the total revenues
raised by the general property tax. To concentrate the whole of the
general property tax on land, by transferring thereto the taxes on
improvements and on personal property, would, accordingly, cause the
land tax to be somewhat more than doubled. It would be slightly above
two per cent. on the full value of the land. This is the same estimate
that we obtained above by a different process; that is, by comparing
Professor King's estimate of land value and rent with the total
revenues derived from the general property tax.

However, it is not improbable that sixty per cent. is too low an
estimate of the ratio of land values to entire real estate values. In
1900, farm land and improvements, exclusive of buildings, formed 78.6
per cent. of the value of real estate, i.e., land, improvements, and
buildings. In 1910, the per cent. was a little less than 82. Now it is
quite unlikely that the value of non-building improvements on farms
amounted to the difference between sixty per cent. and seventy-eight
per cent. in 1900, or between sixty per cent. and eighty-two per cent.
in 1910. Hence the value of farm land is something more than sixty per
cent. of farm real estate. On the other hand, the value of factory
land in 1900 formed only 41.5 per cent. of the total value of factory
land and buildings, while the value of city and town lots in five
rural states varied from 34 to 62 per cent. of this species of real
estate.[104] In Greater New York land constitutes 61 per cent. of real
estate values.[105] Owing to the lack of data, the average ratio for
all kinds of real estate for the whole country is impossible of
determination. If the estimate of seventy per cent. be adopted, which
is probably the upper limit of the average proportion between land
values and real estate values throughout the country, the portion of
the general property tax now paid by land amounts to about fifty-two
per cent. Consequently the imposition of the whole general property
tax on land would not quite double the present rate on land. To the
first of the two questions raised above the answer can be given with a
fair amount of confidence that the transfer of improvement and
personal property taxes to land would cause land taxes to be about
twice what they are at present.

To the second question, concerning the extent to which land values
would fall in consequence of the heavier taxes, the answer must be
somewhat less definite. The added land taxes would be about one-half
the present general property taxes, or $675,000,000. This is about one
per cent. the total land values of the country. One per cent. of land
values capitalised at five per cent. represents a depreciation of
twenty per cent. in the value of land; capitalised at four per cent.,
it represents a depreciation of twenty-five per cent. For example; if
land worth one hundred dollars an acre returns to its owner a net
income of five dollars annually, the appropriation of one dollar by a
new tax will leave a net revenue of only four dollars; capitalised at
the current rate of five per cent., this represents only eighty
dollars of land value, or a depreciation of twenty per cent. If the
land has the same value of one hundred dollars, and still yields only
four dollars revenue, a deduction of one dollar in new taxes will
leave only three dollars net; capitalised at the current rate of four
per cent., this represents only seventy-five dollars of land value, or
a depreciation of twenty-five per cent. Using the other method of
calculation, which estimated the present tax rate on the full value of
land at one per cent., we get exactly the same results; namely, the
new tax is one per cent., which is equivalent to a depreciation of
twenty per cent. or of twenty-five per cent., according as we assume
an interest rate of five per cent. or of four per cent. Suppose,
however, that the assessors do not undervalue land to the extent that
we have been assuming; suppose that the present rate of .0194 on
assessed valuation is equivalent to, not merely one per cent., but one
and one-half per cent. of the full value of land. In that hypothesis
the additional tax would likewise be one and one-half per cent., which
capitalised at five per cent, would represent a depreciation of thirty
per cent., and at four per cent. a depreciation of thirty-seven and
one-half per cent. Combining in one generalisation the various
suppositions made in this paragraph, we estimate the depreciation of
land values resulting from the proposed tax transfer as somewhere
between twenty and forty per cent.

We have considered two hypothetical transfers of taxes to land. The
first we found to be out of the question because it would appropriate
the whole of the rent and destroy all private land values. The second
would apparently amount to two per cent. of the value of land, and
cause land values to depreciate from twenty to forty per cent. It is
unnecessary to consider the probable effects of any plan that would
involve heavier land taxes than the second; that is, the scheme of
imposing all the general property tax on land; for it represents the
extreme feasible and fair limit of the movement within, at any rate,
the next fifteen or twenty years.

Even this degree of tax transference would be unjust to the landowners
if it were brought about at once. No social or other considerations
exist that would justify a depreciation in land values of from twenty
to forty per cent. If, however, the process were extended over a
period of, say, twenty years, the decline would be only one or two per
cent. annually, which is considerably less than the rate at which farm
lands and the land in large cities have risen in value during recent
years. Under such an arrangement the great majority of owners would
probably find that the depreciation caused by the heavier land taxes,
had been more than offset by the upward tendency resulting from the
increased demand for land.

Nevertheless, there would still be positive losses of the three kinds
described a few pages back; namely, to owners who sold land below the
price that they had paid for it; to owners who sold vacant land at a
price insufficient to cover accumulated interest on the investment;
and to owners whose aggregate tax burdens were increased. Some degree
of each of these sorts of losses would be due specifically to the new
land taxes. As noted above, public compensation in all such cases
would be impracticable. Consequently the justification of a law that
inflicts such losses must be found, if it exists, in social
considerations.


_The Social Benefits of the Plan_

These may be summed up under three heads: making land easier to
acquire; cheapening the products and rent of land; and reducing the
burdens of taxation borne by the poorer and middle classes. An
increase in the tax on land would reduce its value and price, or at
least cause the price to be lower than it would have been in the
absence of the tax. This does not mean that land would be more
profitable to the purchaser, since he is enabled to buy it at a lower
price only because it yields him less net revenue, or because it is
less likely to increase in value. The value of land is always
determined by its revenue-producing power, and by its probabilities of
price-appreciation. Consequently, what the purchasers would gain by
the lower price resulting from the new tax, they would lose when they
came to pay the tax itself, and when they found the chances of value
increases diminished. If a piece of land which brings a return of five
dollars a year costs one hundred dollars before the new tax of one per
cent. is imposed, and can be bought for eighty dollars afterward, the
net interest on the purchase price has not changed. It is still five
per cent. Hence the only advantage to the prospective purchaser of
land in getting it cheaper consists in the fact that he can obtain it
with a smaller outlay of capital. For persons in moderate
circumstances this is a very important consideration.

In the second place, higher taxes would cause many existing owners
either to improve their land, in order to have the means of meeting
the added fiscal charges, or to sell it to persons who would be
willing to make improvements. And the desire to erect buildings and
other forms of improvements would be reinforced by the reduction or
abolition of taxes on those kinds of personal property which consist
of building materials. An increase in the rapidity of improvements on
land would mean an increase in the rate at which land was brought into
use, and therefore an unusual increase in the volume of products. This
virtual increase in the supply of land, and actual increase in the
supply of products, would cause a fall in three kinds of prices: the
price of products, the rent of land, and the price of land. The last
named reduction would be distinct from the reduction of land value
caused in the first instance by the imposition of the tax.

In the third place, the reduction, and finally the abolition, of taxes
on improvements and personal property would be especially beneficial
to the poorer and middle classes because they now pay a
disproportionate share of these charges. Lower taxes on dwellings
would mean lower rents for all persons who did not own their homes,
and lower taxes for all owners whose residence values were unusually
large relatively to their land values. And the tendency to lower rents
on dwellings would be reinforced by the lower cost of building
materials resulting, as noted above, from the increased supply and the
lower tax on this form of personal property. Lower taxes on that
species of personal property which consists of consumers' goods, such
as household furniture and wearing apparel, would lessen the present
inequity of taxation because this class of goods is reached to a much
greater extent in the case of the poor than in the case of the rich.
It is not easy to conceal or to undervalue a relatively small number
of simple and standard articles; but diamonds, costly furniture, and
luxurious wardrobes can be either hidden, or certified to the assessor
at a low valuation. As for those forms of personal property which are
of the nature of capital and other profit producing goods, such as
machinery and tools of all kinds, productive animals, money,
mortgages, securities, the stocks of goods held by manufacturers and
merchants, and likewise buildings which are used for productive
purposes,--the taxes on all these kinds of property are for the most
part shifted to the consumer. The latter ultimately pays the tax in
the form of higher prices for food, clothing, shelter, and the other
necessaries and comforts of life.[106] Now a tax on consumption is
notoriously unfair to the poorer and middle classes because it affects
a greater portion of their total expenditures, and takes a larger per
cent. of their income than in the case of the rich. Hence the removal
of the taxes specified in this paragraph would be at once the
abolition of a fiscal injustice, and a considerable assistance to the
less fortunate classes.

All those landowners who occupied rented dwellings would benefit by
the reduction in house rent, and all landowners without exception
would reap some advantage from the reduction or abolition of the taxes
on consumers' goods and on the various forms of producers' goods. It
is not improbable that a considerable proportion of them would gain as
much in these respects as they would lose in the capacity of
landowners.

Would the social benefits summarily described in the foregoing
paragraphs be sufficient to justify the increased land taxes in the
face of the losses that would be undergone by some landowners in the
three ways already specified? In view of our ignorance concerning the
probable amount of benefits on the one hand and losses on the other,
it is impossible to give a dogmatic answer. However, when we reflect
on the manifold social evils that are threatened by a rapid and
continuous increase in land values, and the resulting decrease in the
proportion of the population that can hope to participate in the
ownership of land, we are forced to conclude that some means of
checking both tendencies is urgently necessary for the sake of social
justice and social peace. The project that we have been considering;
namely, the transfer of taxes on improvements and on personal property
to land by a process extending over twenty years, seems to involve a
sufficiently large amount of advantage and a sufficiently small amount
of disadvantage to justify systematic and careful experiment.


_A Supertax on Large Holdings_

Every estate containing more than a maximum number of acres, say, ten
thousand, whether composed of a single tract or of several tracts,
could be compelled to pay a special tax in addition to the ordinary
tax levied on land of the same value. The rate of this supertax
should increase with the size of the estate above the fixed maximum.
Through this device large holdings could be broken up, and divided
among many owners and occupiers. For several years it has been
successfully applied for this purpose in New Zealand and
Australia.[107] Inasmuch as this tax exemplifies the principle of
progression, it is in accord with the principles of justice; for
relative ability to pay is closely connected with relative sacrifice.
Other things being equal, the less the sacrifice involved, the greater
is the ability of the individual to pay the tax. Thus, the man with an
income of ten thousand dollars a year makes a smaller sacrifice in
giving up two per cent. of it than the man whose income is only one
thousand dollars; for the latter case the twenty dollars surrendered
represent a privation of the necessaries or the elementary comforts of
life, while the two hundred dollars taken from the rich man would have
been expended for luxuries or converted into capital. While the
incomes of both are reduced in the same proportion, their
satisfactions are not diminished to the same degree. The wants that
are deprived of satisfaction are much less important in the case of
the richer than in that of the poorer man. Hence the only way to bring
about anything like equality of sacrifice between them is to increase
the proportion of income taken from the former. This means that the
rate of taxation would be progressive.[108]

It is in order to object that the principle of progression should not
be applied to the taxation of great landed estates, since a
considerable part of them is unproductive, and consequently does not
directly affect sacrifice. But the same objection can be urged against
any taxation of unoccupied land. The obvious reply is that the equal
taxation of unproductive with productive land is justified by social
reasons, chiefly, the unwisdom of permitting land to be held out of
use. The same social reasons apply to the question of levying an
exceptionally high tax on large estates, even though they may at
present produce no revenue.

While the tax is sound in principle, it is probably not much needed in
America in connection with agricultural or urban land. Its main sphere
of usefulness would seem to be certain great holdings of mineral,
timber, and water power lands. "There are many great combinations in
other industries whose formation is complete. In the lumber industry,
on the other hand, the Bureau now finds in the making a combination
caused, fundamentally, by a long standing public policy. The
concentration already existing is sufficiently impressive. Still more
impressive are the possibilities for the future. In the last forty
years concentration has so proceeded that 195 holders, many
interrelated, now have practically one-half of the privately owned
timber in the investigation area (which contains eighty per cent. of
the whole). This formidable process of concentration, in timber and in
land, clearly involves grave future possibilities of impregnable
monopolistic conditions, whose far reaching consequences to society it
is now difficult to anticipate fully or to overestimate."[109] In
January, 1916, the Secretary of Agriculture called the attention of
Congress to the fact that a small number of corporations closely
associated in a policy of community of interest were threatening to
secure and exercise a monopoly over the developed water power of the
country. Ninety per cent. of the anthracite coal lands of Pennsylvania
are owned or controlled by some nine railroads acting as a unit in all
important matters. For situations of this kind a supertax on large
estates would seem to hold the promise of a large measure of relief.

To sum up the main conclusions of this very long chapter:
Exceptionally valuable lands, as those containing timber, minerals,
oil, gas, phosphate, and water power, which are still under public
ownership should remain there. Through a judicious system of loans,
deserving and efficient persons should be assisted to get possession
of some land. Municipalities should lease rather than sell their
lands, and should strive to increase their holdings. To take all the
future increases in the value of land would be morally lawful,
provided that compensation were given to owners who thereby suffered
positive losses of interest or principal. To take a small part of the
increase, and to transfer very gradually the taxes on improvements and
on personal property to land, would probably be just, owing to the
beneficial effects upon public welfare. A supertax on large holdings
of exceptionally valuable and scarce land would likewise be beneficial
and legitimate.[110]


REFERENCES ON SECTION I

     ASHLEY: The Origin of Property in Land. London; 1892.

     LAVELEYE: Primitive Property. London; 1878.

     WHITTAKER: The Taxation, Tenure, and Ownership of Land.
     London; 1914.

     PREUSS: The Fundamental Fallacy of Socialism. St. Louis;
     1908.

     GEORGE: Progress and Poverty; and A Perplexed Philosopher.

     MARSH: Land Value Taxation in American Cities. N. Y.; 1911.

     FILLEBROWN: A Single Tax Handbook for 1913. Boston; 1912.

     YOUNG: The Single Tax Movement in the United States.
     Princeton; 1916.

     SHEARMAN: Natural Taxation. N. Y.; 1898.

     MATHEWS: Taxation and the Distribution of Wealth. N. Y.;
     1914.

     CATHREIN: Das Privatgrundeigenthum und seine Gegner.
     Freiburg; 1909.

     FALLON: Les Plus-Values et l'Impot. Paris; 1914.

     NEARING: Anthracite. Philadelphia; 1916.

     HAIG: Final Report of the Committee on Taxation of the City
     of New York; 1916.

     The exemption of Improvements from Taxation in Canada and U.
     S.; 1915.

     Some Probable Effects of Exemption in City of New York; 1915.

     KELLEHER: Private Ownership. Dublin; 1911.

     Proceedings of the 1913 Meeting of the American Economic
     Association.

     U. S. COMMISSIONER OF CORPORATIONS: Reports on the Lumber,
     Petroleum, Steel, and Water Power of the United States.

     SELIGMAN: Essays in Taxation; Shifting and Incidence of
     Taxation; and Progressive Taxation in Theory and Practice.

     Also the works of Taussig, Devas, Carver, Pesch, King,
     Vermeersch, Willoughby, and the Commission on Industrial
     Relations, all of which are cited at the end of the
     introductory chapter.

FOOTNOTES:

[84] "Summary of Report of the Commissioner of Corporations on the
Timber Industry in the United States," p. 3.

[85] "Report of the Commissioner of Corporations on Water Power
Development in the United States," pp. 193-195.

[86] Idem, pp. 4, 5.

[87] "Abstract of the Thirteenth Census," p. 552.

[88] Cf. Marsh, "Land Value Taxation in American Cities," p. 95.

[89] Municipal purchase and ownership of land have been advocated by
such a conservative authority as the Rev. Heinrich Pesch, S.J.
"Lehrbuch der Nationaloekonomie," I, 203.

[90] As we shall see in a later chapter, the confiscation and
injustice would be smaller if the State should simultaneously abolish
interest. In any case, the decline in land value resulting from
complete confiscation of rent should be made up to the private owner
by public compensation.

[91] "Principles of Political Economy," book V, ch. 2, sect. v.

[92] "Progressive Taxation in Theory and Practice," 1908, p. 130.

[93] Cf. Taussig, "Principles of Economics," II, 516: Seligman, "The
Shifting and Incidence of Taxation," p. 223.

[94] The "discrimination" objection is put in a somewhat different
form by the Rev. Sydney F. Smith, S.J., in an article in _The Month_,
Sept., 1909, entitled "The Theory of Unearned Increment." His argument
is in substance that if the people of a city can claim the increases
in land values which their presence and activity have occasioned, the
purchasers of food, clothes, books, or concert tickets are equally
justified in claiming that, "having added to the value of the shops
and music halls, they had acquired a co-proprietary right in the
increased value of the owners' stock, and the owners' premises." While
this argument is specifically directed against those who maintain that
the "social production" of values confers a right thereto, it affects
to some extent our thesis that there is a vast difference between
value-increases in land and in other goods. Father Smith seems to
confuse the origination of value with the increase of value. The
presence of consumers is an obvious prerequisite to the existence of
any value at all in any kind of goods, but labour and financial outlay
on the part of the producers of the goods are an equally indispensable
prerequisite. The reason why the value is appropriated by the latter
rather than the former is that this is clearly the only rational
method of distribution. What we are concerned with here, however, is
not this initial or cost-of-production-value of artificial goods, but
the _increases_ in value above this level which are brought about by
external and social influences. Theoretically, the State could as
reasonably take these as the increases in the value of land;
practically, such a performance is out of the question, for the simple
reason that such increases are spasmodic and exceptional. If Father
Smith thinks that "food or clothes, or books, or concert tickets"
regularly advance above the cost-of-production-value, he is simply
mistaken. Since these and other artificial goods bring to their owners
as a rule no socially occasioned increments of value, they and their
owners are in quite a different situation from land and the owners of
land.

[95] Cf. Seligman, "Progressive Taxation in Theory and Practice," part
II, chs. ii and iii; also the classic refutation of the "benefit"
theory by John Stuart Mill in "Principles of Political Economy," book
V, ch. ii, sec. 2. The traditional Catholic teaching on the subject is
compactly stated by Cardinal de Lugo in "De Justitia et Jure," disp.
36; cf. Devas, "Political Economy," p. 594, 2d ed.

[96] Cf. Fallon, "Les Plus-Values et l'Impot," pp. 455, sq.; Paris,
1914; Fillebrown, "A Single Tax Handbook for 1913"; Boston, 1912;
Marsh, "Taxation of Land Values in American Cities," pp. 90-92; New
York, 1911; "The Quarterly Journal of Economics," vols. 22, 24, 25;
"The Single Tax Review," March-April, 1912; "Stimmen aus Maria-Laach,"
Oct., 1907.

[97] See the references in the second last paragraph.

[98] The most comprehensive and reliable account of the special land
taxes in Canada is contained in the report prepared for the Committee
on Taxation of the City of New York, by Robert Murray Haig, Ph.D.,
entitled, "The Exemption of Improvements from Taxation in Canada and
the United States"; New York, 1915. See also Fallon, op. cit., pp.
452-455.

[99] Cf. Fallon, op. cit., pp. 443-452.

[100] "The Wealth and Income of the People of the United States," pp.
158, 143.

[101] "Abstract of Bulletins on Wealth, Debt, and Taxation," p. 16; U.
S. Census, 1913.

[102] Idem, p. 15.

[103] Idem, p. 16; and Bulletin of the Census on "Estimated Valuation
of National Wealth," p. 15.

[104] "Special Report of the Twelfth Census on Wealth, Debt, and
Taxation," pp. 12, 13.

[105] Haig, "Probable Effects of Exemption of Improvements....", p.
23.

[106] Cf. Seligman, "The Shifting and Incidence of Taxation," pp. 187,
245, 272, and all of part II; N. Y., 1899; Taussig, "Principles of
Economics," II, 518-549, and chs. 67-69.

[107] Cf. Fallon, op. cit., pp. 442, sq.

[108] Cf. Vermeersch, "Quaestiones de Justitia," pp. 94-126; Seligman,
"Progressive Taxation in Theory and Practice," pp. 210, 211; Mill,
"Principles of Political Economy," book V, ch. ii, sec. 3.

[109] "Summary of Report of the Commissioner of Corporations on the
Lumber Industry in the United States," p. 8.

[110] Probably the most concrete and satisfactory discussion of the
increment tax and the project to transfer improvement taxes to land,
is that presented in the "Final Report of the Committee on Taxation of
the City of New York"; 1916. It contains brief, though complete,
statements of all phases of the subject, together with concise
arguments on both sides, majority and minority recommendations, a
great variety of dissenting individual opinions, and considerable
testimony by experts, authorities, and other interested persons.



SECTION II

THE MORALITY OF PRIVATE CAPITAL AND INTEREST



CHAPTER IX

THE NATURE AND THE RATE OF INTEREST


Interest denotes that part of the product of industry which goes to
the capitalist. As the ownership of land commands rent, so the
ownership of capital commands interest; as rent is a price paid for
the use of land, so interest is a price paid for the use of capital.

However, the term capital is less definite and unambiguous, both in
popular and in economic usage, than the word land. The farmer, the
merchant, and the manufacturer often speak of their land, buildings,
and chattels as their capital, and reckon the returns from all these
sources as equivalent to a certain per cent. of interest or profit.
This is not technically correct; when we use the terms capital and
interest we should exclude the notions of land and rent.


_Meaning of Capital and Capitalist_

Capital is ordinarily defined as, wealth employed directly for the
production of new wealth. According as it is considered in the
abstract or the concrete, it is capital-value or capital-instruments.
For example, the owner of a wagon factory may describe his capital as
having a value of 100,000 dollars, or as consisting of certain
buildings, machines, tools, office furniture, etc. In the former case
he thinks of his capital as so much abstract value which, through a
sale, he could take out of the factory, and put into other concrete
capital forms, such as a railroad or a jobbing house. In the latter
case he has in mind the particular instruments in which his capital is
at present embodied. The capital-value concept is the more convenient,
and is usually intended when the word capital is used without
qualification. It is also the basis upon which interest is reckoned;
for the capitalist does not measure his share of the product as so
many dollars of rent on his capital-instruments, but as so many per
cent. on his capital-value.

Capitalists are of two principal kinds: those who employ their own
money in their own enterprises; and those who lend their money to
others for use in industry. The former may be called active
capitalists, the latter loan-capitalists. Perhaps a majority of active
capitalists use some borrowed money in their business. To the lenders
of this borrowed money or capital they turn over a part of the product
in the form of interest. When, therefore, interest is defined as the
share of the product that goes to the capitalist, it is the owner of
capital-value rather than of capital-instruments that is meant. For
the man who has loaned 50,000 dollars at five per cent. to the wagon
manufacturer is not, except hypothetically, the owner of the buildings
which have been erected with that money. These are owned (subject
possibly to a mortgage) by the borrower, the active capitalist. But
the abstract value which has gone into them continues to be the
property of the lender. As owner thereof, he, instead of the active
capitalist, receives the interest that is assigned to this portion of
the total capital. Hence interest is the share of the product that is
taken by the owner of capital, whether he employs it himself or lends
it to some one else. While the fundamental reason of interest is the
fact that certain concrete instruments are necessary to the making of
the product, interest is always _reckoned_ on capital-value, and goes
to the owner of the capital-value. It goes to the man whose money has
been put into the instruments, whether or not he is the owner of the
instruments.


_Meaning of Interest_

Interest is the share of the capitalist as capitalist. The man who
employs his own capital in his own business receives therefrom in
addition to interest other returns. Let us suppose that some one has
invested 100,000 dollars of borrowed money and 100,000 dollars of his
own money in a wholesale grocery business. At the end of the year,
after defraying the cost of labour, materials, rent, repairs, and
replacement, his gross returns are 15,000 dollars. Out of this sum he
must pay five thousand dollars as interest on the money that he has
borrowed. This leaves him a total amount of ten thousand dollars, as
his share of the product of the industry. Since he could command a
salary of three thousand dollars if he worked for some one else, he
regards his labour of directing his own business as worth at least
this sum. Deducting it from ten thousand dollars, he has left seven
thousand dollars, which must in some sense be accredited as payment
for the use of his own capital. However, it is not all pure interest;
for he runs the risk of losing his capital, and also of failing to get
the normal rate of interest on it during future unprosperous years.
Hence he will require a part of the seven thousand dollars as
insurance against these two contingencies. Two per cent. of his
capital, or two thousand dollars, is not an excessive allowance. If
the business did not provide him with this amount of insurance he
would probably regard it as unsafe, and would sell it and invest his
money elsewhere. Subtracting two thousand dollars from seven thousand,
we have five thousand left as pure interest on the director's own
capital. This is equivalent to five per cent., which is the rate that
he is paying on the capital that he has borrowed. If he could not get
this rate on his own money he would probably prefer to become a lender
himself, a loan capitalist instead of an active capitalist. This part
of his total share, then, and only this part, is pure interest. The
other two sums that he receives, the three thousand dollars and the
two thousand dollars, are respectively wages for his labour and
insurance against his risks. Sometimes they are classified together
under the general name of profits.

Let us suppose, however, that the gross returns are not 15,000
dollars, but 17,000. How is the additional sum to be denominated? In
strict economic language it would probably be called net profits, as
distinguished from normal or necessary profits, which comprise wages
of direction and insurance against loss. Sometimes it is called
interest. In that case the owner of the store would receive seven
instead of five per cent, on his own capital. Whether the extra two
per cent. (2,000 dollars) be called net profits or surplus interest,
is mainly a matter of terminology. The important thing is to indicate
clearly that these terms designate the surplus which goes to the
active capitalist in addition to necessary profits and necessary
interest.

At the risk of wearisome repetition, one more example will be given to
illustrate the distinction between interest and the other returns that
are received in connection with capital. The annual income from a
railway bond is interest on lender's capital, and consequently pure
interest. Ordinarily the bondholder is adequately protected against
the loss of his capital by a mortgage on the railroad. On the other
hand, the holder of a share of railway stock is a part owner of the
railroad, and consequently incurs the risk of losing his property.
Hence the dividend that he receives on his stock comprises interest on
capital plus insurance against loss. It is usually one or two per
cent. higher than the rate on the bonds. Since the officers and
directors are the only shareholders who perform any labour in the
management of the railroad, only they receive wages of management.
Consequently the gross profits are divided into interest and dividends
at fixed rates, and fixed salaries. When a surplus exists above these
requirements it is not, as a rule, distributed among the stockholders
annually. In railroads, therefore, and many other corporations,
interest is easily distinguished from those other returns with which
it is frequently confused in partnerships and enterprises carried on
by individuals.


_The Rate of Interest_

Is there a single rate of interest throughout industry? At first sight
this question would seem to demand a negative answer. United States
bonds pay about two per cent.; banks about three per cent.; municipal
bonds about four per cent.; railway bonds about five per cent.; the
stocks of stable industrial corporations about six per cent. net; real
estate mortgages from five to seven per cent.; promissory notes
somewhat higher rates; and pawnbrokers' loans from twelve per cent.
upwards. Moreover, the same kind of loans brings different rates in
different places. For example, money lent on the security of farm
mortgages yields only about five per cent. in the states of the East,
but seven or eight per cent. on the Pacific coast.

These and similar variations are differences not so much of interest
as of security, cost of negotiation, and mental attitude. The farm
mortgage pays a higher rate than the government bond partly because it
is less secure, partly because it involves greater trouble of
investment, and partly because it does not run for so long a time. For
the same reasons a higher rate of interest is charged on a promissory
note than on a bank deposit certificate. Again, the lower rates on
government bonds and bank deposits are due in some degree to the
peculiar attitude of that class of investors whose savings are small
in amount, who are not well aware of the range of investment
opportunities, and to whom security and convenience are exceptionally
important considerations. If such persons did not exist the rates on
government bonds and savings deposits would be higher than they
actually are. The higher rates in a new country on, say, farm
mortgages are likewise due in part to psychical peculiarities. Where
men are more speculative and more eager to borrow money for industrial
purposes, the demand for loans is greater relatively to the supply
than in older and more conservative communities. Therefore, the price
of the loans, the rate of interest, is higher.

In one sense it would seem that the lowest of the rates cited above,
namely, that on United States bonds, represents pure interest, and
that all the other rates are interest plus something else.
Nevertheless, the sums invested in these bonds form but a very small
part of the whole amount of money and capital drawing interest, and
they come from persons who do not display the average degree either of
business ability or of willingness to take risks. Hence it is more
convenient and more correct to regard as the standard rate of interest
in any community that which is obtained on first class industrial
security, such as the bonds of railroads and other stable
corporations, and mortgages on real estate. Loans to these enterprises
are subject to what may properly be called the average or prevailing
industrial risks, are negotiated in average psychical conditions, and
embrace by far the greater part of all money drawing interest;
consequently the rate that they command may be looked upon as in a
very real and practical sense normal. While this conception of the
normal rate is in a measure conventional, it accords with popular
usage. It is what most men have in mind when they speak of the
prevailing rate of interest.

The prevailing or standard rate in any community can usually be stated
with a sufficient approach to precision to be satisfactory for all
practical purposes. In all the Eastern States it is now about five per
cent.; in the Middle West it is somewhere between five and six per
cent.; on the Pacific coast it is between six and seven per cent. The
supreme court of Minnesota decided in 1896 that, in view of the actual
rates of interest then obtaining, five per cent. on the reproduction
cost of railroads was a fairly liberal return, and could be adopted by
the state authorities in fixing charges for carrying freight and
passengers.[111] A few years later the Michigan tax commission allowed
the railroads four per cent. on the reproduction cost of their
property, on the ground that investments which yielded that rate in
addition to the usual tax of one per cent. (or five per cent. before
the deduction of the tax) stood at par on the stock market.[112] In
other words, the prevailing rate was five per cent. At the beginning
of the year 1907, the railroad commission of Wisconsin fixed six per
cent. as the return to which the stockholders of railroads were
entitled, because this was about the return which investors generally
were able to get on that kind of security. In the view of the
Commission, the current rate of interest on railroad _bonds_, and
similar investments, was about five per cent.[113] The significance of
these decisions by the public authorities of three states is found not
so much in the particular rates which they sanctioned as in the fact
that they were able to determine a standard or prevailing rate.
Therefore a standard rate exists. At the same time it is interesting
to note that in all three states the rate of industrial interest was
declared to be about the same, that is, five per cent. Perhaps it is
safe to say that, throughout the greater part of the industrial field
of America, five or six per cent. is the prevailing rate of interest.

What causes the rate to be five per cent., or six per cent., or any
other per cent.? Briefly stated, it is the interplay of supply and
demand. Since interest is a price paid for the use of a thing, i.e.,
capital, its rate or level is determined by the same general forces
that govern the price of wheat, or shoes, or hats, or any other
commodity that is bought and sold in the market. The rate is five or
six per cent. because at that rate the amount of money offered by
lenders equals the amount demanded by borrowers. Should the amount
offered at that rate increase without a corresponding increase in the
amount demanded, the rate would fall, just as it would rise under
opposite conditions.

Supply and demand, however, are merely the immediate forces. They are
themselves the outcome or resultant of factors more remote. On the
side of supply, the principal remote forces which regulate the rate of
interest are: the industrial resources of the community, and the
relative strength of its habits of saving and spending. On the side of
demand, the chief ultimate factors are: the productivity of
capital-instruments, the comparative intensity of the social desires
of investing and lending, and the supplies of land, business ability
and labour. Each of these factors exercises upon the rate of interest
an influence of its own, and each of them may be assisted or
counteracted by one or more of the others. Precisely what rate will
result from any given condition of the factors, cannot be stated
beforehand, for the factors cannot be measured in such a way as to
provide a basis for this kind of forecast. All that can be said is
that, when changes occur on the side of either demand or supply, there
will be a corresponding change in the rate of interest, provided that
no neutralising change takes place on the other side.

FOOTNOTES:

[111] "Final Report of the Industrial Commission," pp. 410, 411.

[112] "Report of the Industrial Commission," vol. IX, p. 380.

[113] "Publication No. 32 of the Railroad Commission of Wisconsin,"
pp. 165, 166.



CHAPTER X

THE ALLEGED RIGHT OF LABOUR TO THE ENTIRE PRODUCT OF INDUSTRY


In a preceding chapter we saw that Marxian Socialism is logically
debarred from passing _moral_ judgment upon any social institution or
practice.[114] If social institutions are produced necessarily by
socio-economic forces they are neither morally good nor morally bad.
They are quite as unmoral as rain and snow, verdure and decay,
tadpoles and elephants. Consistent Socialists cannot, therefore,
censure on purely ethical grounds the system of private capital and
interest.

This logical requirement of the theory of economic determinism is
exemplified in much of the rigidly scientific discussions of
Socialists. Marx maintained that the value of commodities is all
determined and created by labour, and that interest is the surplus
which the labourer produces above the cost of his keep; nevertheless
Marx did not formally assert that the labourer has a moral right to
the whole product, nor that interest is theft. He set forth his
theories of value and surplus value as positive explanations of
economic facts, not as an ethical evaluation of human actions. His
object was to show the causes and nature of value, wages, and
interest, not to estimate the moral claims of the agents of
production, or the morality of the distributive process. In his formal
discussion of the theory of value and of surplus value, Marx said
nothing that implied a belief in genuine moral responsibility, or
that contradicted the principles of philosophical materialism and
economic determinism. It is, therefore, quite erroneous to infer that,
since the Marxian theory attributes all value and products to the
action of labour, Marxian Socialists must condemn the interest-taker
as a robber.

Neither Marx nor any other Socialist authority, however, has always
held consistently to this purely positive method of economic
exposition. When they declare that the labourer is "exploited," that
surplus value is "filched" from him, that the capitalist is a
"parasite," etc., they are expressing and conveying distinct moral
judgments. In their more popular writings Socialist authors do not
seriously attempt to observe the logical requirements of their
necessitarian philosophy. They assume the same ethical postulates, and
give expression to the same ethical intuitions as the man who believes
in the human soul and free will.[115] And the great majority of their
followers likewise regard the question of distribution as a moral
question, as a question of justice. In their view the labourer not
only creates all value, but has a just claim to the whole product.


_The Labour Theory of Value_

This doctrine is sometimes formally based upon the Marxian theory of
value, and is sometimes defended independently of that theory. In the
former case its groundwork is about as follows: By eliminating the
factors of utility and scarcity, Marx found that the only element
common to all commodities is labour, and then concluded that labour is
the only possible explanation, creator, and determinant of value.[116]
Since capital, that is, concrete capital, is a commodity, its value is
likewise determined and created by labour. Since it cannot create
value, for only labour has that power, it can contribute to the
product of the productive process in which it is engaged only as much
value as it originally received. Since it is only a reservoir of
value, it cannot transfer more value than it holds and possesses. In
the words of Marx, "the means of production transfer value to the new
product, so far only as during the labour-process they lose value in
the shape of the old use-value. The maximum loss of value that they
can suffer in the process is plainly limited by the amount of the
original value with which they came into the process, or, in other
words, by the labour time necessary for their production. Therefore,
the means of production can ever add more value to the product than
they themselves possess independently of the process in which they
assist. However useful a given kind of raw material, or a machine, or
other means of production may be, though it may cost 150 pounds, or
say 500 days' labour, yet it cannot, under any circumstances, add to
the value of the product more than 150 pounds."[117]

To view the matter from another angle: capital contributes to the
product only sufficient value to pay for its own reproduction. When,
as is the normal usage, the undertaker has deducted from the product
sufficient value or money to replace the deteriorated or worn out
machine, or other concrete capital, all the remaining value in the
product is due specifically to labour.

When, therefore, the capitalist goes further, and appropriates from
the product interest and profits, he takes a part of the value that
labour has created. He seizes the surplus value which labour has
produced in excess of the wages that it receives. In ethical terms, he
robs the labourers of a part of their product.

It is not necessary to introduce any extended refutation of this
arbitrary, unreal, and fantastic argument. "The theory that labour is
the sole source of value has few defenders to-day. In the face of the
overwhelming criticism which has been directed against it, even good
Marxists are forced to abandon it, or to explain it away."[118] It
may, however, be useful to recount very briefly the facts which
disprove the theory. Labour creates some things which have no value,
as wooden shoes in a community that does not desire wooden shoes; some
things have value, exchange value, although no labour has been
expended upon them, as land and minerals; the value of things is
sometimes greater, sometimes less, proportionately, than the labour
embodied in them; for example, paintings by the old masters, and last
year's styles of millinery; and, finally, the true determinants of
value are utility and scarcity. If it be objected that Marx was aware
of these two factors, the reply is that he either restricted them to
the function of conditions rather than efficient causes of value, or
attributed to them an influence that is inconsistent with his main
theory that labour is the sole determinant of value. Indeed, the
contradictions into which Marx was led by the theory are its
sufficient refutation.[119]

With the destruction of the labour theory of value, the Marxian
contention that capital contributes only its own original value to the
product is likewise overthrown. The same conclusion is reached more
directly by recalling the obvious facts of experience that, since the
joint action of both capital and labour is required to bring into
being every atom of the product, each is in its own order the cause of
the whole product, and the proportion of the whole that is
specifically due to the casual influence of either is as incapable of
determination as the procreative contribution of either parent to
their common offspring. The productive process carried on by labour
and capital is virtually an organic process, in which the precise
amount contributed by either factor is unknown and unknowable.

In so far, therefore, as the alleged right of labour to the whole
product is based upon the Marxian theory of value, it has not a shadow
of validity.


_The Right of Productivity_

But the claim is not necessarily dependent upon this foundation. Those
Socialists who have abandoned the labour theory of value can argue
that the labourer (including the active director of industry) is the
only _human_ producer, that the capitalist as such produces nothing,
and consequently has no moral claim to any part of the product.
Whatever theory of value we may adopt, or whether we adopt any, we
cannot annul the fact that interest does not represent labour expended
upon the product by the capitalist.

Nevertheless, this fact does not compel the conclusion that the share
of the product now taken by the capitalist belongs of right to the
labourer. Productivity does not of itself create a right to the
product. It is not an intrinsic title. That is to say, a right to the
product is not inherent in the relation between product and producer.
It is determined by certain extrinsic relations. When Brown makes a
pair of shoes out of materials that he has stolen, he has not a right
to the whole product; when Jones turns out a similar product from
materials that he has bought, he becomes the exclusive owner of the
shoes. The intrinsic relation of productivity is the same in both
cases. It is the difference of extrinsic relation, namely, the
relation between the producer and the material, that begets the
difference between the moral claims of the two producers upon the
product.

The right of the producer is conditioned by certain other and more
fundamental relations. Why has Jones a right to the shoes that he has
made out of materials that he has bought? Not because he needs them;
he is not alone in this condition. The ultimate reason and basis of
his ownership is to be sought in the practical requirements of an
equitable social distribution. Unless men receive an adequate return
for their labour, they will not be able to satisfy their wants in a
regular and sufficient manner. If they are forced to labour for others
without compensation, they are deprived of the opportunity to develop
their personality. They are treated as mere instruments to the welfare
of beings who are not their superiors, but their moral and juridical
equals. Their intrinsic worth and sacredness of personality is
outraged, their essential equality with their fellows is disregarded,
and their indestructible rights are violated. On the other hand, when
a producer, such as Jones, gets possession of his product, he
subordinates no human being to himself, deprives no man of the
opportunity to perform remunerative labour, nor appropriates an
unreasonable share of the common bounty of the earth. He has a right
to his product because this is one of the reasonable methods of
distribution.

In fact, it is the exigencies of reasonable distribution that
constitute the fundamental justification of every title of ownership.
The title of purchase by which a man claims the hat that he wears; the
title of inheritance by which a son claims the house that once
belonged to his father; the title of contract through which a labourer
gets wages, a merchant prices, and a landlord rent,--are all valid
simply because they are reasonable devices for enabling men to obtain
the goods of the earth for the satisfaction of their wants. All titles
of property, productivity included, are conventional institutions
which reason and experience have shown to be conducive to human
welfare. None of them possesses intrinsic or metaphysical
validity.[120]

Therefore, the Socialist cannot establish the right of labour to the
full product of industry until he proves that this so-called right
could be reduced to practice consistently with individual and social
welfare. In other words, he must show that to give the entire product
to the labourer would be a reasonable method of distribution. Now the
arrangement by which the Socialist proposes to award the whole product
of labour is the collective ownership and operation of the means of
production, and the social distribution of the product. If this system
would not enable the labourer and the members of society generally to
satisfy their wants to better advantage than is possible under the
present system, the contention that the labourer has a right to the
entire product of industry falls to the ground. The question will be
considered in the following chapter.

FOOTNOTES:

[114] Cf. Engels, "Socialism: Utopian and Scientific," pp. 45, 46; and
Hillquit-Ryan, "Socialism: Promise or Menace," 103, 104, 143-145.

[115] Cf. Hillquit-Ryan, op. cit., pp. 75, 76.

[116] "Capital," pp. 1-9.

[117] Op. cit., p. 117; Humboldt Edition.

[118] Skelton, "Socialism: A Critical Analysis," pp. 121, 122.

[119] Cf. Skelton, loc. cit.

[120] The exaggerated claims made on behalf of social productivity in
the matter of land values have been examined in a previous chapter.
Similar exaggerations with regard to capital will be considered in
chapter xii.



CHAPTER XI

THE SOCIALIST SCHEME OF INDUSTRY


"Never has our party told the workingman about a 'State of the
future,' never in any way than as a mere utopia. If anybody says: 'I
picture to myself society after our programme has been realised, after
wage labour has been abolished, and the exploitation of men has
ceased, in such and such a manner,--' well and good; ideas are free,
and everybody may conceive the Socialist State as he pleases. Whoever
believes in it may do so; whoever does not, need not. These pictures
are but dreams, and Social Democracy has never understood them
otherwise."[121]

Such is the official attitude of Socialism toward descriptions of its
contemplated industrial organisation. The party has never drawn up nor
approved any of the various outlines of this sort which have been
defended by individual Socialists. It maintains that it cannot
anticipate even the essential factors in the operation of a social and
industrial system which will differ so widely from the one that we
have to-day, and which will be so profoundly determined by events that
are in the nature of the case impossible to prognosticate.


_Socialist Inconsistency_

From the viewpoint of all but convinced Socialists, this position is
indefensible. We are asked to believe that the collective ownership
and operation of the means of production would be more just and
beneficial than the present plan of private ownership and operation.
Yet the Socialist party refuses to tell us how the scheme would bring
about these results; refuses to give us, even in outline, a picture of
the machine at work. As reasonably might we be expected to turn the
direction of industry over to a Rockefeller or a Morgan, making an act
of faith in their efficiency and fairness. We are in the position of a
man who should be advised to demolish an unsatisfactory house, without
receiving any solid assurance that the proposed new one would be as
good. To our requests for specific information about the working of
the new industrial order the Socialists, as a rule, answer in terms of
prophesied results. They leave us in the dark concerning the causes by
which these wonderful results are to be produced.

From the viewpoint of the confirmed Socialist, however, this failure
to be specific is not at all unreasonable. He can have faith in the
Socialist system without knowing beforehand how it will work. He
believes in its efficacy because he believes that it is inevitable. In
the words of Kautsky, "what is proved to be inevitable is proved not
only to be possible, but to be the only possible outcome."[122] The
Socialist believes that his scheme is inevitable because he thinks
that it is necessarily included in the outcome of economic and social
evolution.

Neither the premises nor the conclusion of this reasoning is valid.
The doctrines of economic determinism, the class struggle, the
concentration of capital, the disappearance of the middle classes, the
progressive pauperisation of the working classes, and all the other
tenets of the Socialist philosophy, have been thoroughly discredited
by the facts of psychology, the experience of the last half century,
and the present trend of industrial and social forces.[123] Even if
the Socialist outcome were inevitable, it would not necessarily be an
improvement on the present system. It might illustrate the principle
of retrogression.

Since we cannot make an act of faith in either the inevitableness or
the efficacy of the Socialist industrial scheme, we are compelled to
submit it to the ordinary tests of examination and criticism. We must
try to see what would be the essential structure, elements, and
operation of a system in which the means of production were owned and
managed collectively, and the product socially distributed. In
attempting to describe the system, we shall be guided by what seems to
be inherently necessary to it, and by the prevalent conception of it
among present day Socialists. In this connection we have to observe
that some of the criticisms of the Socialist order attribute to it
elements that are not essential, nor any longer demanded by the
authoritative spokesmen of the movement; for example, complete
confiscation of capital, compulsory assignment of men to the different
industrial tasks, equality of remuneration, the use of labour checks
instead of money, the socialisation of all capital down to the
smallest tool, and collective ownership of homes.


_Expropriating the Capitalists_

The first problem confronting a Socialist administration would be the
method of getting possession of the instruments of production. In the
early years of the Socialist movement, most of its adherents seemed to
favour a policy of outright confiscation. Professor Nearing estimates
the total property income now paid in the United States as, "well
above the six-billion-dollar mark."[124] Were the Socialist State to
seize all land and capital without compensation, it could conceivably
transfer more than six billion dollars annually from landowners and
capitalists to the community. Not all of it, however, would be
available for diversion to the labourers. According to the
computations of Professor King, about two billion dollars were in 1910
saved and converted into capital.[125] A progressive Socialist régime
would want to appropriate at least that sum for the renewal and
increase of the instruments of production. Consequently, it would have
only four billion dollars to add to the present total income of
labour. This would be equivalent to $43.50 for every person in the
United States.

Desirable as would be such an addition to the remuneration of labour,
it could never be realised through the process of confiscation. The
owners of land and capital would be sufficiently powerful to defeat
any such simple scheme of setting up the collectivist commonwealth.
They constitute probably a majority of the adults of our population,
and their economic advantages would make them much stronger relatively
than their numbers.[126] Ethically the policy of confiscation would
be, on the whole, sheer robbery. To be sure, not all owners of land
and capital have a valid claim to all their possessions, but
practically all of them hold the greater part of their wealth by some
kind of just title. Much land and capital that was originally acquired
by unjust means has become morally legitimatised by the title of
prescription.

The majority of present day Socialists seem to advocate at least
partial compensation.[127] But this plan does not seem to offer any
considerable advantage over complete confiscation. As regards
morality, it would differ only in the degree of its injustice; as
regards expediency, it would be at best of doubtful efficacy. If the
capitalists were given only a small fraction of the value of their
holdings they would oppose the change with quite as much
determination as though they were offered nothing; if they were paid
almost the full value of their possessions there would be no
substantial gain to the community from the transfer; if they were
compensated at a figure somewhere between these two extremes their
resistance would still be more costly to the State than the extra
amount required to make full compensation.

Finally, if full compensation were offered it would have to take the
form of government obligations, securities, or bonds. If these did not
bear interest the great majority of capital owners would regard the
scheme as partial and considerable confiscation, and would fight it
with determination and effectiveness. If the State bound itself to pay
interest on the bonds it would probably find itself giving the
dispossessed capitalists as high a rate of return on their capital, as
large a share of the national product, as they receive under the
present system. Consequently, the expropriation of the capitalists
would bring no direct and pecuniary gain to the labouring classes.
Indeed, the latter would suffer positive loss by the change, owing to
the fact that the State would be required to withdraw from the
national product a considerable amount for the maintenance, renewal,
and expansion of the instruments of production. At present the
capitalist class performs the greater part of this function through
the reinvestment of the incomes that it receives in the form of
interest and rent. The average Socialist entirely ignores this
capitalistic service, when he draws his pessimistic picture of the
vast share of the national product which now goes to "idle
capitalists." So far as the larger capitalist incomes are concerned;
that is, those in excess of twenty-five thousand dollars annually, it
is probable that the greater part is not consumed by the receivers,
but is converted into socially necessary capital instruments. Since
this would not be permitted in a Socialist order, the capitalists
would strive to consume the whole of the incomes received from the
public securities, and the State would be compelled to provide the
required new capital out of the current national product. In a word,
society would have to give the capitalists as much as it does at
present, and to withhold from the labourers for new capital an immense
sum which is now furnished by the capitalists.

It is undoubtedly true that the richest capitalists would be unable to
expend the whole of their incomes upon themselves and their families.
If they turned a considerable part of it over to the State, the
surrendered sum would be available as capital, thereby reducing the
amount that the State would need to take out of the national product
for this purpose. Were all those possessing incomes in excess of fifty
thousand dollars per family to give up all above that amount, the
total thus accruing to the State would be a little more than one
billion dollars.[128] But this would be only one-half the required new
capital. A part of the additional one billion is now provided out of
wages and salaries, but the greater part probably comes out of rent
and interest. Under Socialism this latter portion would have to be
deducted from that part of the national product which at present goes
to the workers and is consumed by them. Hence they would undergo a
loss of several hundred million dollars.

One reply to this difficulty is that the total product of industry
would be much increased under Socialism. Undoubtedly an _efficient_
organisation of industry on collectivist lines would be able to effect
economies by combining manufacturing plants, distributive concerns,
and transportation systems, and by reducing unemployment to a minimum;
but it could not possibly make the enormous economies that are
promised by the Socialists. The assertion that under Socialism men
would be able to provide abundantly for all their wants on a basis of
a working day of four, or even two, hours is seductive and
interesting, but it has no support in the ascertainable facts of
industrial resources. Even if the Socialist organisation were
operating with a fair degree of efficiency, the gains that it could
effect over the present system would probably not more than offset the
social losses resulting from increased consumption by the compensated
capitalists.

But the proposed industrial organisation would not operate with a fair
degree of efficiency. According to present Socialist thought,
industries that are national in scope, such as the manufacture of
petroleum, steel, and tobacco, would be carried on under national
direction, while those that supplied only a local market, such as
laundries, bakeries, and retail stores, would be managed by the
municipalities. This division of control would be undoubtedly wise and
necessary. Moreover, the majority of Socialists no longer demand that
_all_ tools and all industries should be brought under collective or
governmental direction. Very small concerns which employed no hired
labour, or at most one or two persons, could remain under private
ownership and operation, while even larger enterprises might be
carried on by co-operative associations.[129] Nevertheless the attempt
to organise and operate collectively the industries of the country,
even with these limitations, would encounter certain insuperable
obstacles. These will be considered under the general heads of
inefficient industrial leadership, inefficient labour, and
interference with individual liberty.


_Inefficient Industrial Leadership_

Under Socialism the boards of directors or commissions which exercised
supreme control in the various industries, would have to be chosen
either by the general popular vote, by the government, or by the
workers in each particular industry. The first method may be at once
excluded from consideration. Even now the number of officials chosen
directly by the people is far too large; hence the widespread
agitation for the "short ballot." Public opinion is coming to realise
that the voters should be required to select only a few important
officials, whose qualifications should be general rather than
technical, and therefore easily recognised by the masses. These
supreme functionaries should have the power of filling all
administrative offices, and all positions demanding expert or
technical ability. If the task of choosing administrative experts
cannot be safely left to the mass of the voters at present, it
certainly ought not to be assigned to them under Socialism, when the
number and qualifications of these functionaries would be indefinitely
increased.

If the boards of industrial directors were selected by the government,
that is, by the national and municipal authorities, the result would
be industrial inefficiency and an intolerable bureaucracy. No body of
officials, whether legislative or executive, would possess the varied,
extensive, and specific knowledge required to pick out efficient
administrative commissions for all the industries of the country or
the city. And no group of political persons could safely be entrusted
with such tremendous power. It would enable them to dominate the
industrial as well as the political life of the nation or the
municipality, to establish a bureaucracy that would be impregnable for
a long period of years, and to revive all the conceivable evils of
governmental absolutism.

The third method is apparently the one now favoured by most
Socialists. "The workers in each industry may periodically select the
managing authority," says Morris Hillquit.[130] Even if the workers
were as able as the stockholders of a corporation to select an
efficient governing board, they would be much less likely to choose
men who would insist on hard and efficient work from all subordinates.
The members of a private corporation have a strong pecuniary interest
in selecting directors who will secure the maximum of product at the
minimum of cost, while the employés in a Socialist industry would want
managing authorities who were willing to make working conditions as
easy as possible.

The dependence of the boards of directors upon the mass of the
workers, and the lack of adequate pecuniary motives, would render
their management much less efficient and progressive than that of
private enterprises. In the rules that they would make for the
administration of the industry and the government of the labour force,
in their selection of subordinate officers, such as superintendents,
general managers, and foremen, and in all the other details of
management, they would have always before them the abiding fact that
their authority was derived from and dependent upon the votes of the
majority of the employés. Their supreme consideration would be to
conduct the industry in such a way as to satisfy the men who elected
them. Hence they would strive to maintain an administration which
would permit the mass of the labour force to work leisurely, to be
provided with the most expensive conditions of employment, and to be
immune from discharge except in rare and flagrant cases. Even if the
members of the directing boards were sufficiently courageous or
sufficiently conscientious to exact reasonable and efficient service
from all their subordinates and all the workers, they would not have
the necessary pecuniary motives. Their salaries would be fixed by the
government, and in the nature of things could not be promptly adjusted
to reward efficient and to punish inefficient management. So long as
their administration of industry maintained a certain routine level of
mediocrity, they would have no fear of being removed; since they would
be supervised and paid by public officials who would have neither the
extraordinary capacity nor the necessary incentive to recognise and
reward promptly efficient management, they would lack the powerful
stimulus which is provided by the hope of gain. In the large private
corporations, the tenure of the boards of directors depends not upon
the workers but upon the stockholders, whose main interest is to
obtain a maximum of product at a minimum of cost, and who will employ
and discharge, reward and punish, according as this end is attained.
Moreover, the members of the boards, and the executive officers
generally, are themselves financially interested in the business and
in the maintenance of the policy demanded by the other stockholders.

All the subordinate officers, such as department managers,
superintendents, foremen, etc., would exemplify the same absence of
efficiency. Knowing that they must carry out the prudent policy of the
board of directors, they would be slow to punish shirking or to
discharge incompetents. Realising that the board of directors lacked
the incentive to make promotions promptly for efficient service, or to
discharge promptly for inefficient service, they would devote their
main energies to the task of holding their positions through a policy
of indifferent and routine administration.

Invention and progress would likewise suffer. Men who were capable of
devising new machines, new processes, new methods of combining capital
and labour, would be slow to convert their potencies into action. They
would be painfully aware that the spirit of inertia and routine
prevailing throughout the industrial and political organisation would
prevent their efforts from receiving quick recognition and adequate
rewards. Inventors of mechanical devices particularly would be
deprived of the stimulus which they now find in the hope of
indefinitely large gains. Boards of directors, general managers, and
other persons exercising industrial authority would be very slow to
introduce new and more efficient financial or technical methods when
they had no certainty that they would receive adequate reward in the
form of either promotion or money compensation. They would see no
sufficient reason for abandoning the established and pleasant policy
of routine methods and unprogressive management.


_Inefficient Labour_

The same spirit of inefficiency and mediocrity would permeate the rank
and file of the workers. Indeed, it would operate even more strongly
among them than among the officers and superiors; for their
intellectual limitations and the nature of their tasks would make them
less responsive to other than material and pecuniary motives. They
would desire to follow the line of least resistance, to labour in the
most pleasant conditions, to reduce irksome toil to a minimum. Since
the great bulk of their tasks would necessarily be mechanical and
monotonous, they would demand the shortest possible working day, and
the most leisurely rate of working speed. And because of their
numerical strength they would have the power to enforce this policy
throughout the field of industry. They would have the necessary and
sufficient votes. In a general way they might, indeed, realise that
the practice of universal shirking and laziness must sooner or later
result in such a diminution of the national product as to cause them
great hardship, but the workers in each industry would hope that those
in all the others would be more efficient; or doubt that a better
example set by themselves would be imitated by the workers in other
industries. They would not be keen to give up the certainty of easy
working conditions for the remote possibility of a larger national
product.


_Attempted Replies to Objections_

All the attempts made by Socialists to answer or explain away the
foregoing difficulties may be reduced to two: the achievements of
government enterprises in our present system; and the assumed efficacy
of altruism and public honour in a régime of Socialism.

Under the first head appeal is made to such publicly owned and managed
concerns as the post office, railroads, telegraphs, telephones, street
railways, water works, and lighting plants. It is probably true that
all these enterprises are on the whole carried on with better results
to the public than if they were in private hands. It is likewise
probable that these and all other public utility monopolies will
sooner or later be taken over by the State in all advanced countries.
Even if this should prove in all cases to be a better arrangement from
the viewpoint of the general public welfare than private ownership and
management, the fact would constitute no argument for a Socialist
organisation of all industry. In the first place, the efficiency of
labour, management, and technical organisation is generally lower in
public than in private enterprises, and the cost of operation higher.
Despite these defects, government ownership of public utilities, such
as street railways and lighting concerns, may be socially preferable
because these industries are monopolies. Inasmuch as their charges and
services cannot be regulated by the automatic action of competition,
the only alternative to public ownership is public supervision.
Inasmuch as the latter is often incapable of securing satisfactory
service at fair prices, public ownership and management becomes on the
whole more conducive to social welfare. In other words, the losses
through inefficient operation are more than offset by the gains from
better service and lower charges. Three cent fares and adequate
service on an inefficiently managed municipal street railway are
preferable to five cent fares on a privately owned street railway
whose management is superior. On the other hand, all those industries
which are not natural monopolies can be prevented from practising
extortion upon the public through regulated competition. In them,
therefore, the advantages of private operation, of which competition
itself is not the least, should be retained.

In the second place, practically all the public service monopolies are
simpler in structure, more routine in operation, and more mature in
organisation and efficiency than the other industries. The degree of
managerial ability required, the necessity of experimenting with new
methods and processes, and the opportunity of introducing further
improvements in organisation are relatively less. Now, it is precisely
in these respects that private has shown itself superior to public
operation. Initiative, inventiveness, and eagerness to effect
economies and increase profits are the qualities in which private
management excels. When the nature and maturity of the concern have
rendered these qualities relatively unimportant, public management can
exemplify a fair degree of efficiency.

In the third place, the ability of the State to operate a few
enterprises, does not prove that it could repeat the performance with
an equal degree of success in all industries. I can drive two horses,
but I could not drive twenty-two. No matter how scientific the
organisation and departmentalisation of industries under Socialism,
the final control of and responsibility for all of them would rest
with one organ, one authority, namely, the city in municipal
industries, and the nation in industries having national scope. This
would prove too great a task, too heavy a burden, for any body of
officials, for any group of human beings.

Finally, it must be kept in mind that the publicly operated utilities
are subject continuously to the indirect competition of private
management. By far the greater part of industry is now under private
control, which sets the pace for efficient operation in a hundred
particulars. As a consequence, comparisons are steadily provoked
between public and private management, and the former is subject to
constant criticism. The managers of the State concerns are stimulated
and practically compelled to emulate the success of private
management. This factor is probably more effective in securing
efficiency in public industries than all other causes put together. In
the words of Professor Skelton: "A limited degree of public ownership
succeeds simply because it is a limited degree, succeeds because
private industry, in individual forms or in the socialised joint stock
form, dominates the field as a whole. It is private industry that
provides the capital, private industry that trains the men and tries
out the methods, private industry that sets the pace, and--not the
least of its services--private industry that provides the
ever-possible outlet of escape."[131]

The Socialist expectation that altruistic sentiments and public honour
would induce all industrial leaders and all ordinary workers to exert
themselves as effectively as they now do for the sake of money, is
based upon the very shallow fallacy that what is true of a few men may
very readily become true of all men. There are, indeed, persons in
every walk of life who work faithfully under the influence of the
higher motives, but they are and always have been the exceptions in
their respective classes. The great majority have been affected only
feebly, intermittently, and on the whole ineffectively by either love
of their kind or the hope of public approval.

A Socialist order could generate no forces which would be as
productive of unselfish conduct as the motives that are drawn from
religion. History shows nothing comparable either in extent or
intensity to the record of self surrender and service to the neighbour
which are due to the latter influence. Yet religion has never been
able, even in the periods and places most thoroughly dominated by
Christianity, to induce more than a small minority of the population
to adopt that life of altruism which would be required of the great
majority under Socialism.

Moreover, the efficacy of the higher motives is much greater among men
devoted to scientific, intellectual, and religious pursuits than in
either the leaders or the rank and file engaged in industrial
occupations. The cause of this difference is to be sought in the
varying nature of the two classes of activity: the first necessarily
develops an appreciation of the higher goods, the things of the mind
and the soul; the second compels the attention of men to rest upon
matter, upon the things that appeal to the senses, upon the things
that are measurable in terms of money.

There is a special fallacy underlying the emphasis placed by
Socialists on the power of public honour. It consists in the failure
to perceive that this good declines in efficacy according as the
number of its recipients increases. Even if all the industrial
population were willing to work as hard for public approval as they
now do for money, the results expected by Socialists would not be
forthcoming. Public recognition of unselfish service is now available
in relatively great measure because the persons qualifying for it are
relatively few. They easily stand out conspicuous among their fellows.
Let their numbers vastly increase, and unselfishness would become
commonplace. It would no longer command popular recognition, save in
those who displayed it in exceptional or heroic measure. The public
would not have the time nor take the trouble to notice and honour
adequately every floor walker, retail clerk, factory operative, street
cleaner, agricultural labourer, ditch digger, etc., who might become a
candidate for such recognition.

When the Socialists point to such examples of disinterested public
service as that of Colonel Goethals in building the Panama Canal, they
confound the exceptional with the average. They assume that, since an
exceptional man performs an exceptional task from high motives, all
men can be got to act likewise in all kinds of operations. They
forget that the Panama Canal presented opportunities of self
satisfying achievement and fame which do not occur once in a thousand
years; that the traditions and training of the army have during many
centuries deliberately and consistently aimed and tended to produce an
exceptionally high standard of honour and disinterestedness; that,
even so, the majority of army officers have not in their civil
assignments shown the same degree of faithfulness to the public
welfare as Colonel Goethals; that the Canal was built under a régime
of "benevolent despotism," which placed no reliance upon the "social
mindedness" of the subordinate workers; and that the latter, far from
showing any desire to qualify as altruists or public benefactors,
demanded and received material recognition in the form of wages,
perquisites, and gratuities which greatly surpassed the remuneration
received by any other labour force in history.[132] In a word,
wherever in the construction of the Canal notable disinterestedness or
appreciation of public honour was shown, the circumstances were
exceptional; where the situation was ordinary, the Canal builders were
unable to rise above the ordinary motives of selfish advantage.

Beneath all the Socialist argument on this subject lies the assumption
that the attitude of the _average man_ toward the higher motives can
by some mysterious process be completely _revolutionised_. This is
contrary to all experience, and to all reasonable probability. Only a
small minority of men have ever, in any society or environment, been
dominated mainly by altruism or the desire of public honour. What
reason is there to expect that men will act differently in the future?
Neither legislation nor education can make men love their neighbours
more than themselves, or love the applause of their neighbours more
than their own material welfare.


_Restricting Individual Liberty_

Even though human nature should undergo the degree of miraculous
transformation necessary to maintain an efficient industrial system on
Socialist lines, such a social organisation must soon collapse because
of its injurious effect upon individual liberty. Freedom of choice
would be abolished in the most vital economic transactions; for there
would be but one buyer of labour, and one seller of commodities. And
these two would be identical, namely, the State. With the exception of
the small minority that might be engaged in purely individual
avocations, and in co-operative enterprises, men would be compelled to
sell their labour to either the municipality or the national
government. As competition between these two political agencies in the
matter of wages and other conditions of labour could not be permitted,
there would be virtually only one employer. Practically all material
goods would have to be purchased from either the municipal or the
national shops and stores. Since the city and the nation would produce
different kinds of goods, the purchaser of any given article would be
compelled to deal with one seller. His freedom of choice would be
further restricted by the fact that he would have to be content with
those kinds and grades of commodities which the seller saw fit to
produce. He could not create an effective demand for new forms and
varieties of goods, as he now does, by stimulating the ingenuity and
acquisitiveness of competing producers and dealers.

Prices and wages would, of course, be fixed beforehand by the
government. The supposition that this function might be left to the
workers in each industry is utterly impracticable. Such an arrangement
would involve a grand scramble among the different industries to see
which could pay its own members the highest wages, and charge its
neighbours' members the highest prices. The final result would be a
level of prices so high that only an alert and vigorous section of the
workers in each industry could find employment. Not only wages and
prices but hours, safety requirements, and all the other general
conditions of employment, would be regulated by the government. The
individuals in each industry could not be permitted to determine these
matters any more than they could be permitted to determine wages.
Moreover, all these regulations would from the nature of the case
continue unchanged for a considerable period of time.

The restriction of choice enforced upon the sellers of labour and the
buyers of goods, the utter dependence of the population upon one
agency in all the affairs of their economic as well as their political
life, the tremendous social power concentrated in the State, would
produce a diminution of individual liberty and a perfection of
political despotism surpassing anything that the world has ever seen.
It would not long be tolerated by any self respecting people.

To reply that the Socialist order would be a democracy, and that the
people could vote out of existence any distasteful regulation, is to
play with words. No matter how responsive the governing and managing
authorities might be to the popular will, the dependence of the
individual would prove intolerable. Not the manner in which this
tremendous social power is constituted, nor the personnel of those
exercising it, but the fact that so much power is lodged in one
agency, and so little immediate control of his affairs left to the
individual,--is the heart of the evil situation. In a word, it is a
question of the liberty of the individual versus the all pervading
control of his actions by an agency other than himself. Moreover, the
people in a democracy means a majority, or a compact minority. Under
Socialism the controlling section of the voting population would
possess so much power, political and economic, that it could impose
whatever conditions it pleased upon the non-controlling section for
an almost indefinite period of time. The members of the latter part of
the population would not only be deprived of that immediate liberty
which consists in the power to determine the details of their economic
life, but of that remote liberty which consists in the power to affect
general conditions by their votes.

In the last chapter we saw that the claim to the full product of
industry, made on behalf of labour by the Socialists, cannot be
established on intrinsic grounds. Like all other claims to material
goods, it is valid only if it can be realised consistently with human
welfare. Its validity depends upon its feasibility, upon the
possibility of constructing some social system that will enable it to
work. The present chapter has shown that the requirements of such a
system are not met by Socialism. A Socialist organisation of industry
would make all sections of the population, including the wage earning
class, worse off than they are in the existing industrial order.
Consequently, neither the private ownership of capital nor the
individual receipt of interest can be proved to be immoral by the
Socialist argument.

Since private ownership and management of capital are superior to
Socialism, the State is obliged to maintain, protect, and improve the
existing industrial system. This is precisely the conclusion that we
reached in chapter iv with reference to private ownership of land. In
chapter v we found, moreover, that individual ownership of land is a
natural right. The fundamental considerations there examined lead to
the parallel conclusion that the individual has a natural right to own
capital. But we could not immediately deduce from the right to own
land the right to take rent. Neither can we immediately deduce from
the right to own capital the right to take interest. The positive
establishment of the latter right will occupy us in the two following
chapters.

FOOTNOTES:

[121] Wilhelm Liebknecht, cited in Hillquit's "Socialism in Theory and
Practice," p. 107.

[122] "Das Erfurter Program," cited by Skelton, op. cit., p. 178.

[123] Cf. Skelton, op. cit., ch. vii; Bernstein, "Evolutionary
Socialism," pp. 1-94; Simkhovitch, "Marxism vs. Socialism," _passim_;
Walling, "Progressivism and After," _passim_; Hillquit-Ryan, op. cit.,
ch. iv.

[124] "Income," p. 152.

[125] "The Wealth and Income of the People of the United States," p.
132.

[126] Cf. Hillquit-Ryan, op. cit., pp. 107, 136.

[127] Cf. Hillquit-Ryan, op. cit., pp. 73-77; Skelton, op. cit, p.
183; Walling, "Socialism as It Is," p. 429.

[128] Cf. King, op. cit., pp. 224-226.

[129] Cf. Kautsky, "The Social Revolution," pp. 166, 167;
Hillquit-Ryan, op. cit., p. 72.

[130] Hillquit-Ryan, op. cit., p. 80; cf. Spargo, "Socialism," pp.
225-227.

[131] "Socialism: A Critical Analysis," p. 219.

[132] Cf. "The Panama Gateway," by Joseph Bucklin Bishop, p. 263.



CHAPTER XII

ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST


In his address as President of the American Sociological Society at
the annual meeting, Dec. 27, 1913, Professor Albion W. Small denounced
"the fallacy of treating capital as though it were an active agent in
human processes, and crediting income to the personal representatives
of capital, irrespective of their actual share in human service."
According to his explicit declaration, his criticism of the modern
interest-system was based primarily upon grounds of social utility
rather than upon formally ethical considerations.

A German priest has attacked interest from the purely moral
viewpoint.[133] In his view the owner of any sort of capital who
exacts the return of anything beyond the principal, violates strict
justice.[134] The Church, he maintains, has never formally authorised
or permitted interest, either on loans or on producing capital. She
has merely tolerated it as an irremovable evil.

Is there a satisfactory justification of interest? If there is, does
it rest on individual or on social grounds? That is to say: is
interest justified immediately and intrinsically by the relations
existing between the owner and the user of capital? Or, is rendered
morally good owing to its effects upon social welfare? Let us see what
light is thrown on these questions by the anti-usury legislation of
the Catholic Church.


_Attitude of the Church Toward Interest on Loans_

During the Middle Ages all interest on _loans_ was forbidden under
severe penalties by repeated ordinances of Popes and Councils.[135]
Since the end of the seventeenth century the Church has quite
generally permitted interest on one or more extrinsic grounds, or
"titles." The first of these titles was known as "lucrum cessans," or
relinquished gain. It came into existence whenever a person who could
have invested his money in a productive object, for example, a house,
a farm, or a mercantile enterprise, decided instead to lend the money.
In such cases the interest on the loan was regarded as proper
compensation for the gain which the owner might have obtained from an
investment on his own account. The title created by this situation was
called "extrinsic" because it arose out of circumstances external to
the essential relations of borrower and lender. Not because of the
loan itself, but because the loan prevented the lender from investing
his money in a productive enterprise, was interest on the former held
to be justified. In other words, interest on the loan was looked upon
as merely the fair equivalent of the interest that might have been
obtained on the investment.

During the seventeenth, eighteenth, and nineteenth centuries, another
title or justification of loan-interest found some favour among
Catholic moralists. This was the "praemium legale," or legal rate of
interest allowed by civil governments. Wherever the State authorised a
definite rate of interest, the lender might, according to these
writers, take advantage of it with a clear conscience.

To-day the majority of Catholic authorities on the subject prefer the
title of virtual productivity as a justification. Money, they contend,
has become virtually productive. It can readily be exchanged for
income-bearing or productive property, such as, land, houses,
railroads, machinery, and distributive establishments. Hence it has
become the economic equivalent of productive capital, and the interest
which is received on it through a loan is quite as reasonable as the
annual return to the owner of productive capital. Between this theory
and the theory connected with "lucrum cessans" the only difference is
that the former shifts the justification of interest from the
circumstances and rights of the lender to the present nature of the
money itself. Not merely the fact that the individual will suffer if,
instead of investing his money he loans it without interest, but the
fact that money is generally and virtually productive, is the
important element in the newer theory. In practice, however, the two
explanations or justifications come to substantially the same thing.

Nevertheless, the Church has given no positive approval to any of the
foregoing theories. In the last formal pronouncement by a Pope on the
subject, Benedict XIV[136] condemned anew all interest that had no
other support than the intrinsic conditions of the loan itself. At the
same time, he declared that he had no intention of denying the
lawfulness of interest which was received in virtue of the title of
"lucrum cessans," nor the lawfulness of interest or profits arising
out of investments in productive property. In other words, the
authorisation that he gave to both kinds of interest was merely
negative. He refrained from condemning them.

In the Responses given by the Roman Congregations from 1822 onward to
questions relating to the lawfulness of loan-interest, we may
profitably consider four principal features. First, they declare more
or less specifically that interest may be taken in the absence of the
title of "lucrum cessans"; second, some of them definitely admit the
title of "praemium legale," or civil authorisation, as sufficient to
give the practice moral sanction; third, they express a genuine
permission, not a mere toleration, of interest taking; fourth, none of
them explicitly declares that any of the titles or reasons for
receiving loan-interest will necessarily or always give the lender a
_strict right_ thereto. None of them contains a positive and reasoned
approval of the practice. Most of them merely decide that persons who
engage in it are not to be disturbed in conscience, so long as they
stand ready to submit to a formal decision on the subject by the Holy
See. The insertion of the latter condition clearly intimates that some
day interest taking might be formally and officially condemned.

Should such a condemnation ever appear, it would not contradict any
moral principle contained in the "Roman Responses," nor in the present
attitude of the Church and of Catholic moralists. Undoubtedly it could
come only as the result of a change in the organisation of industry,
just as the existing ecclesiastical attitude has followed the changed
economic conditions since the Middle Ages.

All the theological discussion on the subject, and all the
authoritative ecclesiastical declarations indicate, therefore, that
interest on loans is to-day regarded as lawful because a loan is the
economic equivalent of an investment. Evidently this is good logic and
common sense. If it is right for the stockholder of a railway to
receive dividends, it is equally right for the bondholder to receive
interest. If it is right for a merchant to take from the gross returns
of his business a sum sufficient to cover interest on his capital, it
is equally right for the man from whom he has borrowed money for the
enterprise to exact interest. The money in a loan is economically
equivalent to, convertible into, concrete capital. It deserves,
therefore, the same treatment and the same rewards. The fact that the
investor undergoes a greater risk than the lender, and the fact that
the former often performs labour in connection with the operation of
his capital, have no bearing on the moral problem; for the investor
is repaid for his extra risk and labour by the profits which he
receives, and which the lender does not receive. As a mere recipient
of interest, the investor undergoes no more risk nor exertion than
does the lender. His claim to interest is no better than that of the
latter.


_Interest on Productive Capital_

On what ground does the Church or Catholic theological opinion justify
interest on invested capital? on the shares of the stockholders in
corporations? on the capital of the merchant and the manufacturer?

In the early Middle Ages the only recognised titles to gain from the
ownership of property were labour and risk.[137] Down to the beginning
of the fifteenth century substantially all the incomes of all classes
could be explained and justified by one or other of these two titles;
for the amount of capital in existence was inconsiderable, and the
number of large personal incomes insignificant.

When, however, the traffic in rent charges and the operation of
partnerships, especially the "contractus trinus," or triple contract,
had become fairly common, it was obvious that the profits from these
practices could not be correctly attributed to either labour or risk.
The person who bought, not the land itself, but the right to receive a
portion of the rent thereof, and the person who became the silent
member of a partnership, evidently performed no labour beyond that
involved in making the contract. And their profits clearly exceeded a
fair compensation for their risks, inasmuch as the profits produced a
steady income. How then were they to be justified?

A few authorities maintained that such incomes had no justification.
In the thirteenth century Henry of Ghent condemned the traffic in rent
charges; in the sixteenth Dominicus Soto maintained that the returns
to the silent partner in an enterprise ought not to exceed a fair
equivalent for his risks; about the same time Pope Sixtus V denounced
the triple contract as a form of usury. Nevertheless, the great
majority of writers admitted that all these transactions were morally
lawful, and the gains therefrom just. For a time these writers
employed merely negative and _a pari_ arguments. Gains from rent
charges, they pointed out, were essentially as licit as the net rent
received by the owner of the land; and the interest received by a
silent partner, even in a triple contract, had quite as sound a moral
basis as rent charges. By the beginning of the seventeenth century the
leading authorities were basing their defence of industrial interest
on positive grounds. Lugo, Lessius, and Molina adduced the
productivity of capital goods as a reason for allowing gains to the
investor. Whether they regarded productivity as in itself a sufficient
justification of interest, or merely as a necessary prerequisite to
justification, cannot be determined with certainty.

At present the majority of Catholic writers seem to think that a
formal defence of interest on capital is unnecessary. Apparently they
assume that interest is justified by the mere productivity of capital.
However, this view has never been explicitly approved by the Church.
While she permits and authorises interest, she does not define its
precise moral basis.

So much for the teaching of ecclesiastical and ethical authorities.
What are the objective reasons in favour of the capitalist's claim to
interest? In this chapter we consider only the intrinsic reasons, those
arising wholly out of the relations between the interest-receiver and
the interest-payer. Before taking up the subject it may be well to
point out the source from which interest comes, the class in the
community that pays the interest to the capitalist. From the language
sometimes used by Socialists it might be inferred that interest is
taken from the labourer, and that if it were abolished he would be the
chief if not the only beneficiary. This is incorrect. At any given time
interest on producing capital is paid by the consumer. Those who
purchase the products of industry must give prices sufficiently high to
provide interest in addition to the other expenses of production. Were
interest abolished and the present system of private capital continued,
the gain would be mainly reaped by the consumer in the form of lower
prices; for the various capitalist directors of industry would bring
about this result through their competitive efforts to increase sales.
Only those labourers who were sufficiently organised and sufficiently
alert to make effective demands for higher wages before the movement
toward lower prices had got well under way, would obtain any direct
benefit from the change. The great majority of labourers would gain far
more as consumers than as wage earners. Speaking generally, then, we
may say that the capitalist's gain is the consumer's loss, and the
question of the justice of interest is a question between the
capitalist and the consumer.

The intrinsic or individual grounds upon which the capitalist's claim
to interest has been defended are mainly three: productivity, service,
and abstinence. They will be considered in this order.


_The Claims of Productivity_

It is sometimes asserted that the capitalist has as good a right to
interest as the farmer has to the offspring of his animals. Both are
the products of the owner's property. In two respects, however, the
comparison is inadequate and misleading. Since the owner of a female
animal contributes labour or money or both toward her care during the
period of gestation, his claim to the offspring is based in part upon
these grounds, and only in part upon the title of interest. In the
second place, the offspring is the definite and easily distinguishable
product of its parent. But the sixty dollars derived as interest from
the ownership of ten shares of railway stock, cannot be identified as
the exact product of one thousand dollars of railway property. No man
can tell whether this amount of capital has contributed more or less
than sixty dollars of value to the joint product, i.e., railway
services. The same is true of any other share or piece of concrete
capital. All that we know is that the interest, be it five, six,
seven, or some other per cent., describes the share of the product
which goes to the owner of capital in the present conditions of
industry. It is the conventional not the actual and physical product
of capital.

Another faulty analogy is that drawn between the productivity of
capital and the productivity of labour. Following the terminology of
the economists, most persons think of land, labour, and capital as
productive in the same sense. Hence the productivity of capital is
easily assumed to have the same moral value as the productive action
of human beings; and the right of the capitalist to a part of the
product is put on the same moral basis as the right of the labourer.
Yet the differences between the two kinds of productivity, and between
the two moral claims to the product are more important than their
resemblances.

In the first place, there is an essential physical difference. As an
instrument of production, labour is active, capital is passive. As
regards its worth or dignity, labour is the expenditure of human
energy, the output of a _person_, while capital is a material thing,
standing apart from a personality, and possessing no human quality or
human worth. These significant intrinsic or physical differences
forbid any immediate inference that the moral claims of the owners of
capital and labour are equally valid. We should logically expect to
find that their moral claims are unequal.

This expectation is realised when we examine the bearing of the two
kinds of productivity upon human welfare. In the exercise of
productive effort the average labourer undergoes a sacrifice. He is
engaged in a process that is ordinarily irksome. To require from him
this toilsome expenditure of energy without compensation, would make
him a mere instrument of his fellows. It would subordinate him and his
comfort to the aggrandisement of beings who are not his superiors but
his moral equals. For he is a person; they are no more than persons.
On the other hand, the capitalist as such, as the recipient of
interest, performs no labour, painful or otherwise. Not the
capitalist, but capital participates in the productive process. Even
though the capitalist should receive no interest, the productive
functioning of capital would not subordinate him to his fellows in the
way that wageless labour would subordinate the labourer.

The precise and fundamental reason for according to the labourer his
product is that this is the only rational rule of distribution. When a
man makes a useful thing out of materials that are his, he has a
strict right to the product simply because there is no other
reasonable method of distributing the goods and opportunities of the
earth. If another individual, or society, were permitted to take this
product, industry would be discouraged, idleness fostered, and
reasonable life and self development rendered impossible. Direful
consequences of this magnitude would not follow the abolition of
interest.

Perhaps the most important difference between the moral claims of
capitalist and labourer is the fact that for the latter labour is the
sole means of livelihood. Unless he is compensated for his product he
will perish. But the capitalist has in addition to the interest that
he receives the ability to work. Were interest abolished he would
still be in as good a position as the labourer. The product of the
labourer means to him the necessaries of life; the product of the
capitalist means to him goods in excess of a mere livelihood.
Consequently their claims to the product are greatly unequal in vital
importance and moral value.

The foregoing considerations show that even the claim of the labourer
to his product is not based upon merely intrinsic grounds. It does not
spring entirely from the mere fact that he has produced the product,
from the mere relation between producer and thing produced. If this is
true of labour-productivity we should expect to find it even more
evident with regard to the productivity of capital; for the latter is
passive instead of active, non rational instead of human.

The expectation is well founded. Not a single conclusive argument can
be brought forward to show that the productivity of capital directly
and necessarily confers upon the capitalist a right to the
interest-product. All the attempted arguments are reducible to two
formulas: "res fructificat domino" ("a thing fructifies to its owner")
and "the effect follows its cause." The first of these was originally
a legal rather than an ethical maxim; a rule by which the title was
determined in the civil law, not a principle by which the right was
determined in morals. The second is an irrelevant platitude. As a
juristic principle, neither is self evident. Why should the owner of a
piece of capital, be it a house, a machine, or a share of railway
stock, have a right to its product, when he has expended neither time,
labour, money, nor inconvenience of any kind? To answer, "because the
thing which produced the product belongs to him," is merely to beg the
question. To answer, "because the effect follows the cause," is to
make a statement which has nothing to do with the question. What we
want to know is why the ownership of a productive thing gives a right
to the product; why this particular effect should follow its cause in
this particular way. To answer by repeating under the guise of
sententious formulas the thesis to be proved, is scarcely satisfactory
or convincing. To answer that if the capitalist were not given
interest industry and thrift would decrease and human welfare suffer,
is to abandon the intrinsic argument entirely. It brings in the
extrinsic consideration of social consequences.


_The Claims of Service_

The second intrinsic ground upon which interest is defended, is the
_service_ performed by the capitalist when he permits his capital to
be used in production. Without capital, labourers and consumers would
be unable to command more than a fraction of their present means of
livelihood. From this point of view we see that the service in
question is worth all that is paid in the form of interest.
Nevertheless it does not follow that the capitalist has a claim in
strict justice to any payment for this service. According to St.
Thomas, a seller may not charge a buyer an extra amount merely because
of the extra value attached to the commodity by the latter.[138] In
other words, a man cannot justly be required to pay an unusual price
for a benefit or advantage or service, when the seller undergoes no
unusual deprivation. Father Lehmkuhl carries the principle further,
and declares that the seller has a right to compensation only when and
to the extent that he undergoes a privation or undertakes a
responsibility.[139] According to this rule, the capitalist would have
no right to interest; for as mere interest-receiver he undergoes no
privation. His risk and labour are remunerated in profits, while the
responsibility of not withdrawing from production something that can
continue in existence only by continuing in production, is scarcely
deserving of a reward according to the canons of strict justice.

Whatever we may think of this argument from authority, we find it
impossible to prove objectively that a man who renders a service to
another has an intrinsic right to anything beyond compensation for the
expenditure of money or labour involved in performing the service. The
man who throws a life preserver to a drowning person may justly demand
a payment for his trouble. On any recognised basis of compensation,
this payment will not exceed a few dollars. Yet the man whose life is
in danger would pay a million dollars for this service if he were
extremely rich. He would regard the service as worth this much to him.
Has the man with the life preserver a right to exact such a payment?
Has he a right to demand the full value of the service? No reasonable
person would answer this question otherwise than in the negative. If
the performer of the service may not charge the full value thereof, as
measured by the estimate put upon it by the recipient, it would seem
that he ought not to demand anything in excess of a fair price for his
trouble. In other words, he may not justly exact anything for the
service as such.

It would seem, then, that the capitalist has no moral claim to pure
interest on the mere ground that the use of his capital in production
constitutes a service to labourers and consumers. It would seem that
he has no right to demand a payment for a costless service.


_The Claims of Abstinence_

The third and last of the intrinsic justifications of interest that we
shall consider is _abstinence_. This argument is based upon the
contention that the person who saves his money, and invests it in the
instruments of production undergoes a sacrifice in deferring to the
future satisfactions that he might enjoy to-day. One hundred dollars
now is worth as much as one hundred and five dollars a year hence.
That is, when both are estimated from the viewpoint of the present.
This sacrifice of present to future enjoyment which contributes a
service to the community in the form of capital, creates a just claim
upon the community to compensation in the form of interest. If the
capitalist is not rewarded for this inconvenience he is, like the
unpaid labourer, subordinated to the aggrandisement of his fellows.

Against this argument we may place the extreme refutation attempted by
the Socialist leader, Ferdinand Lassalle:

"But the profit of capital is _the reward of abstinence_. Truly a happy
phrase! European millionaires are ascetics, Indian penitents, modern
St. Simons Stylites, who perched on their columns, with withered
features and arms and bodies thrust forward, hold out a plate to the
passers-by that they may receive the wages of their privations! In the
midst of this sacro-saint group, high above his fellow-mortifiers of
the flesh, stands the Holy House of Rothschild. That is the real truth
about our present society! How could I have hitherto blundered on this
point as I have?"[140]

Obviously this is a malevolently one-sided implication concerning the
sources of capital. But it is scarcely less adequate than the
explanation in opposition to which it has been quoted. Both fail to
distinguish between the different kinds of savers, the different kinds
of capital-owners. For the purposes of our inquiry savings may be
divided into three classes.

First, those which are accumulated and invested automatically. Very
rich persons save a great deal of money that they have no desire to
spend, since they have already satisfied or safeguarded all the wants
of which they are conscious. Evidently this kind of saving involves no
real sacrifice. To it the words of Lassalle are substantially
applicable, and the claim to interest for abstinence decidedly
inapplicable.

Second, savings to provide for old age and other future contingencies
which are estimated as more important than any of the purposes for
which the money might now be expended. Were interest abolished this
kind of saving would be even greater than it is at present; for a
larger total would be required to equal the fund that is now provided
through the addition of interest to the principal. In a no-interest
régime one thousand dollars would have to be set aside every year in
order to total twenty thousand dollars in twenty years; when interest
is accumulated on the savings, a smaller annual amount will suffice to
produce the same fund. Inasmuch as this class of persons would save in
an even greater degree without interest, it is clear that they regard
the sacrifice involved as fully compensated in the resulting provision
for the future. In their case sacrifice is amply rewarded by
accumulation. Their claim to additional compensation in the form of
interest does not seem to have any valid basis. In the words of the
late Professor Devas, "there is ample reward given without any need of
any interest or dividend. For the workers with heads or hands keep the
property intact, ready for the owner to consume whenever convenient,
when he gets infirm or sick, or when his children have grown up, and
can enjoy the property with him."[141]

The third kind of saving is that which is made by persons who could
spend, and have some desire to spend, more on present satisfactions,
and who have already provided for all future wants in accordance with
the standards of necessaries and comforts that they have adopted.
Their fund for the future is already sufficient to meet all those
needs which seem weightier than their present unsatisfied wants. If
the surplus in question is saved it will go to supply future desires
which are no more important than those for which it might be expended
now. In other words, the alternatives before the prospective saver
are to procure a given amount of satisfaction to-day, or to defer the
same degree of satisfaction to a distant day.

In this case the inducement of interest will undoubtedly be necessary
to bring about saving. As between equal amounts of satisfaction at
different times, the average person will certainly prefer those of the
present to those of the future. He will not decide in favour of the
future unless the satisfactions then obtainable are to be greater in
quantity. To this situation the rule that deferred enjoyments are
worth less than present enjoyments, is strictly applicable. The
increased quantity of future satisfaction which is necessary to turn
the choice from the present to the future, and to determine that the
surplus shall be saved rather than spent, can be provided only through
interest. In this way the accumulations of interest and savings will
make the future fund equivalent to a larger amount of enjoyment or
utility than could be obtained if the surplus were exchanged for the
goods of the present. "Interest magnifies the distant object."
Whenever this magnifying power seems sufficiently great to outweigh
the advantage of present over future satisfactions, the surplus will
be saved instead of spent.

Among the well-to-do there is probably a considerable number of
persons who take this attitude toward a considerable part of their
savings. Since they would not make these savings without the
inducement of interest, they regard the latter as a necessary
compensation for the sacrifice of postponed enjoyment. In a general
way we may say that they have a strict right to this interest on the
intrinsic ground of sacrifice. Inasmuch as the community benefits by
the savings, it may quite as fairly be required to pay for the
antecedent sacrifices of the savers as for the inconvenience undergone
by the performer of any useful labour or service.

Summing up the matter regarding the intrinsic justification of
interest, we find that the titles of productivity and service do not
conclusively establish the strict right of the capitalist to interest,
and that the title of abstinence is morally valid for only a portion,
probably a rather small portion, of the total amount of interest now
received by the owners of capital. Consequently interest as a whole is
not conclusively vindicated on individual grounds. If it is to be
proved morally lawful its justification must be sought in extrinsic
and social considerations. This inquiry will form the subject of the
next chapter.

FOOTNOTES:

[133] Hohoff, "Die Bedeutung der Marxschen Kapitalkritik"; Paderborn,
1908.

[134] Pp. 64-67, 88, 89, 96.

[135] Cf. Van Roey, "De Justo Auctario ex Contractu Crediti"; and
Ashley, "English Economic History."

[136] Encyclical, "Vix Pervenit," 1745.

[137] Cf. St. Thomas, "Summa Theologica," 2a 2ae, q. 78, a. 2 et 3.

[138] "Secunda Secondae," q. 77, a. 1, in corp.

[139] "Theologia Moralis," I, no. 1050.

[140] "What is Capital?" p. 27.

[141] "Political Economy," p. 507.



CHAPTER XIII

SOCIAL AND PRESUMPTIVE JUSTIFICATIONS OF INTEREST


As we saw in the last chapter, interest cannot be conclusively
justified on the ground of either productivity or service. It is
impossible to demonstrate that the capitalist has a strict right to
interest because his capital produces interest, or because it renders
a service to the labourer or the consumer. A part, probably a small
part, of the interest now received can be fairly justified by the
title of sacrifice. Some present owners of capital would not have
saved had they not expected to receive interest. In their case
interest may be regarded as a just compensation for the sacrifice that
they underwent when they decided to save instead of consuming.


_Limitations of the Sacrifice Principle_

Nevertheless these men would suffer no injustice if interest were now
to be abolished. Up to the moment of the change, they would have been
in receipt of adequate compensation; thereafter, they would be in
exactly the same position as when they originally chose to save rather
than consume. They would still be able to sell their capital, and
convert the proceeds to their immediate uses and pleasures. In this
case they would obviously have no further claim upon the community for
interest. On the other hand, they could retain the ownership of their
capital, and postpone its consumption to some future time. In making
this choice they would regard future as more important than present
consumption, and the superiority of future enjoyment as sufficiently
great to compensate them for the sacrifice of postponement. Hence
they would have no moral claim to interest on the ground of
abstinence. In general, then, the sacrifice-justification of interest
continues only so long as the interest continues. It extends only to
the interest received by certain capitalists in certain circumstances,
not to all interest in all circumstances. Therefore, it presents no
moral obstacle to the complete abolition of interest.

Since probably the greater part of the interest now received cannot be
justified on intrinsic grounds, and since that part of it which is
thus justified could be abolished consistently with the rights of the
recipients, let us see whether it is capable of justification for
reasons of social welfare. Would its suppression be socially
beneficial or socially detrimental?


_The Value of Capital in a No-Interest Régime_

The interest that we have in mind is pure interest, not undertaker's
profit, nor insurance against risk, nor gross interest. Even if all
pure interest were abolished the capitalist who loaned his money would
still receive something from the borrower in addition to the repayment
of the principal, while the active capitalist would get from the
consumer more than the expenses of production. The former would
require a premium of, say, one or two per cent. to protect him against
the loss of his loan. The latter would demand the same kind of
insurance, and an additional sum to repay him for his labour and
enterprise. None of these payments could be avoided in any system of
privately directed production. The return whose suppression is
considered here is that which the capitalist receives over and above
these payments, and which in this country seems to be about three or
four per cent.

Would capital still have value in a no-interest régime, and if so how
would its value be determined? At present the lower limit of the value
of productive capital, as of all other artificial goods, is fixed in
the long run by the cost of production. Capital instruments that do
not bring this price will not continue to be made. In other words,
cost of production is the governing factor of the value of capital
from the side of supply. It would likewise fix the lower limit of
value in a no-interest régime; only, the cost of producing capital
instruments would then be somewhat lower than to-day, owing to the
absence of an interest charge for the working capital during the
productive process.

But the cost of production is not a constant and accurate measure of
the value of artificial capital. The true measure is found in the
revenue or interest that a given piece of capital yields to its
owners. If the current rate of interest is five per cent., a factory
that brings in ten thousand dollars net return will have a value of
about two hundred thousand dollars. This is the governing factor of
value from the side of demand. In a no-interest economy the demand
factor would be quite different. Capital instruments would be in
demand, not as revenue producers, but as the concrete embodiments, the
indispensable requisites of saving and accumulation. For it is
impossible that saving should in any considerable amount take the form
of cash hoards. In the words of Sir Robert Giffen: "The accumulations
of a single year, even taking it at one hundred and fifty millions
only, ... would absorb more than the entire metallic currency of the
country [Great Britain]. They cannot, therefore, be made in
cash."[142] The instruments of production would be sought and valued
by savers for the same reason that safes and safety deposit boxes are
in demand now. They would be the only means of carrying savings into
the future, and they would necessarily bring a price sufficiently high
to cover the cost of producing them. One man might deposit his savings
in a bank, whence they would be borrowed without interest by some
director of industry. When the owner of the savings desired to recover
them he could obtain from the bank the fund of some other depositor,
or get the proceeds of the sale of the concrete capital in which his
own savings had been embodied. Another man might prefer to invest his
savings directly in a building, a machine, or a mercantile business,
whence he could recover them later from the sale of the property.
Hence the absence of interest would not change essentially the
processes of saving or investment. Capital would still have value, but
its valuation from the demand side would rest on a different basis. It
would be valued not in proportion to its power to yield interest, but
because of its capacity to become a receptacle for savings, and to
carry into the future the consuming power of the present.

The question whether the abolition of interest by the State would be
socially helpful or socially harmful is mainly, though not entirely, a
question of the supply of capital. If the community would not have
sufficient capital to provide for all its needs, actual and
progressive, the suppression of interest would obviously be a bad
policy. Most economists seem inclined to think that this condition
would be realised; that, without the inducement of interest, men would
neither make new savings nor conserve existing capital in sufficient
quantity to supply the wants of society. Very few of them, however,
pretend to be able to prove this proposition. So many complex factors
with regard to the possibilities of saving and the motives of savers,
enter into the situation that no opinion on the subject can have any
stronger basis than probability. As a preliminary to our consideration
of the question of abolition, let us inquire whether there exists any
definite relation between the present supply of capital and the
current rate of interest.


_Whether the Present Rate of Interest Is Necessary_

It is sometimes contended that the interest rate must be kept up to
the present level if the existing supply of capital is to be
maintained. The underlying assumption is that some of the present
savers would discontinue that function at any lower rate, with the
consequence that the supply of capital would fall below the demand.
Owing to this excess of demand over supply, the rate of interest would
rise, or tend to rise, to the former level. Therefore, the rate
existing at any given time is the socially necessary rate. The rate of
interest is said to be analogous to the rate of wages. For example; of
ten thousand men receiving five dollars a day, nine thousand may be
willing to work for four dollars rather than quit their present jobs.
But the other thousand set their minimum price at five dollars. If the
wage is reduced to four dollars these men will get employment
elsewhere, thus causing such an excess of demand over supply as to
force the wage rate back to five dollars. The same thing, it is
contended, will happen when the high-priced section of the savers,
"the marginal savers," discontinue saving on account of the artificial
lowering of the rate of interest.

The analogy, however, is misleading. The "marginal" one thousand wage
earners refuse to work for four dollars a day because they can get
better compensation in some other occupation. This phenomenon has been
proved over and over again by observation and experience. On the other
hand, there is no experience, no positive evidence, which shows or
tends to show that any _necessary_ group of present savers would
discontinue or materially reduce their accumulations if they were no
longer able to secure the present rate of interest. If the rate were
lowered simultaneously in all civilised countries the dissatisfied
savers, unlike the dissatisfied labourers, would not be able to get a
better price for their capital elsewhere. Their only alternative
would be to spend their actual or potential savings for present
enjoyment. Now we have no empirical data to justify the assumption
that any considerable number of savers would choose this alternative
in preference to, say, three or two per cent. interest. The fact that
any group of savers at present gets and insists on getting a higher
rate, merely proves that they can get it, and that they are selfish
enough to take advantage of the possibility. We know that some men who
now obtain six per cent. interest would accept two rather than cease
to save; yet they do not hesitate to demand six per cent. So far as we
know, all present savers might take the same attitude. At any rate, we
can not conclude that they would not take less from the fact that they
now get more. Why then does not the rate of interest fall? If all
present savers are getting a higher rate than is necessary to induce
them to save, why do they not increase their savings to such an extent
that the supply of capital will exceed the present volume of demand,
and thus lead to a decline in the rate of interest? This is what
happens when the price of consumption-goods rises appreciably above
the minimum level that satisfies the most high-priced or "marginal"
producers. There is, however, an important difference between the two
cases. The capacity to produce more goods is practically unlimited,
and the corresponding desire is also unlimited, so long as the price
of the product exceeds the cost of production. The capacity to save is
not unlimited, and the desire to save is neutralised and sharply
restricted by other and more powerful desires. Hence it is quite
possible that the price of capital, i.e., interest, is determined to
only a slight degree by the "cost" of saving, being mainly dominated
and regulated from the side of demand.

Even though many of the present savers and owners of capital should
diminish or discontinue their functions on account of a fall in the
rate of interest, a reduction would not necessarily take place in the
supply of capital. The function of these "marginal savers" would in
all probability be performed by other persons, who would be compelled
to increase their accumulations in order to provide as well for the
future as they had previously been able to provide with a smaller
capital at a higher rate of interest.[143]


_Whether at Least Two Per Cent. Is Necessary_

While admitting that the present rate is unnecessarily high, Professor
Cassel maintains that a certain important class of savers would
diminish very considerably their accumulations if the interest rate
should fall much below two per cent. This class comprises those
persons whose main object in saving is a fund which will some day
support them from its interest. At six per cent. a person can
accumulate in about twelve years a sum sufficient to provide him with
an interest-income equal to the amount annually saved. For example;
two thousand dollars put aside every year, and subjected to compound
interest, will aggregate in twelve years a principal capable of
yielding an annual income of two thousand dollars. At two per cent.
the same amount of yearly saving will not lead to the same income in
less than thirty-five years. If the rate be one and one-half per
cent., forty-seven years will be required to produce the desired
income. Hence, concludes Cassel, if the rate falls below two per cent.
the average man will decide that life is too short to provide for the
future by means of an interest-income, and will expect to draw upon
his principal. This means that he will not need to save as much as
when he sought to accumulate a capital large enough to support him out
of its interest alone.

The argument is plausible but not conclusive. If the rate of interest
is so low that a man must save for forty-seven years in order to
obtain a sufficient interest-income to support him in his declining
years, he will rarely attain that end. In the great majority of
instances men who are unable to save more annually than the amount
that they will need each year in old age, will expect and be compelled
to use up a part or all of their capital in the period following the
cessation of their economic usefulness. Nevertheless, it does not
follow that they will save less at one and one-half per cent. than at
six per cent. The determining factor in the situation is the attitude
of the saver toward the _capital sum accumulated_. He either desires
or does not desire to leave this behind him. In the latter case he
will save only as much as is necessary to provide an annual income
composed partly of interest and partly of the principal. If this
contemplated income is two thousand dollars, and the rate of interest
is six per cent., he will not need to save that much annually for as
long a period as ten years. He can diminish either the yearly amount
saved or the length of time devoted to saving. On the other hand, if
the rate is only one and one-half per cent. he will be compelled to
save a larger total in order to secure an equal accumulation and an
equal provision for the future. In all cases, therefore, in which the
saving is carried on merely for the saver's own lifetime it will be
increased instead of decreased by a low rate of interest.

If the saver does desire to bequeath his capital he will not always be
deterred from this purpose merely because he is compelled to use some
of the capital for the satisfaction of his own wants. Take the man who
can save two thousand dollars a year, and with the rate of interest at
six per cent. assure himself an interest-income of the same amount,
and who intends to leave the principal (some thirty-three thousand
dollars) to his children. Should the rate fall to one and one-half per
cent. he would be unable to accumulate and bequeath nearly such a
large sum. Surely this fact, discouraging as it is, will not determine
him to save nothing. He will not, as Cassel's argument assumes, decide
to leave nothing to his children, and content himself with that amount
of saving which will suffice to provide for his own future. In all
probability he will try to accumulate a sum which, even when
diminished by future deductions for his own wants, will approximate as
closely as possible the amount that he could have bequeathed had the
rate remained at six per cent. This means that he will save more at
the low than at the high rate of interest.

The relative insignificance of the sum which would be saved at a low
rate might sometimes, indeed, deter a person from saving for
testamentary purposes. With the rate at six per cent., a man might be
willing to save six hundred dollars a year for a sufficiently long
period to provide a legacy of twenty thousand dollars to an
educational institution. With the rate at one and one-half per cent.,
the amount that he could hope to accumulate would be so much smaller
that it might seem to him not worth while, and he would decline to
save the six hundred dollars annually. Cases of this kind, however,
always involve the secondary objects of saving, the luxuries rather
than the necessaries of testamentary transmission. They do not include
such primary objects as provision for one's family. When the average
man finds that he cannot leave to his family as much as he would
desire, as much as he would have bequeathed to them at a higher rate
of interest, he will strive to increase rather than decrease his
efforts to save for this purpose.

Speaking generally, then, we conclude that the assumption underlying
Professor Cassel's theory is contradicted by our experience of human
motives and practices. Men who save mainly for a future
interest-income, at the same time wishing to keep the principal intact
until death, and who could have fully realised this desire under a
high interest régime, will not become entirely indifferent to it when
they find that they cannot attain it completely. They will ordinarily
try to leave behind them as large a capital or principal as they can.
Hence they will save more rather than less.


_Whether Any Interest Is Necessary_

Perhaps the best known recent statement of the opinion that interest
is inevitable, appears in Professor Irving Fisher's "The Rate of
Interest."[144] While he does not assert explicitly that sufficient
capital would not be provided without interest, and even admits that
in certain circumstances interest might disappear, the general logic
and implications of his argument are decidedly against the supposition
that society could ever get along without interest. He lays such
stress upon the factor of "impatience," i.e., man's unwillingness to
wait for future goods, as to suggest strongly that other causes of
interest, and the number of savers free from "impatience," are quite
insignificant. Now, if "impatience" were the only cause of interest
the latter must continue as long as "impatience" continues; and if
practically all savers, actual and possible, are completely dominated
by "impatience" the abolition of interest would be socially
disastrous. However, neither of these assumptions is demonstrable. We
have just seen that the present rate of interest has other causes than
"impatience"; that a large proportion of savers insist upon getting
the present rate, not because they require it to offset their
"impatience," but simply because they can obtain it, and because they
prefer it to the lower rate. Therefore, the mere existence of the
present rate does not prove it to be necessary. By the same argument
it is evident that the existence of any interest does not demonstrate
the necessity of some interest. In the second place, the number of
savers, present and prospective, whose "impatience" is so weak as to
permit them to save without interest, is probably greater than the
average reader of Professor Fisher's pages is led to assume. The
question whether interest is necessary cannot be answered by reference
to the general fact of human "impatience"; it demands a preliminary
analysis of the extent to which "impatience" affects the different
classes of savers.

With interest abolished, those persons who were willing to subordinate
present secondary satisfactions to the primary future needs of
themselves and their families, would save at least as much for these
purposes as when they could have obtained interest. Most of them would
probably save more in order to render their future provision as nearly
as possible equal to what it would have been had interest accrued on
their annual savings. Whether a person intended to leave all his
accumulations, or part of them, or none of them to posterity, he would
still desire them to be as large as they might have been in a régime
of interest. In order to realise this desire, he would be compelled to
increase his savings. And it is reasonable to expect that this is
precisely the course that would be followed by men of average thrift
and foresight. Such men regard future necessaries and comforts,
whether for themselves or their children, as more important than
present non-essentials and luxuries. Interest or no interest, prudent
men will subordinate the latter goods to the former, and will save
money accordingly.

When, however, both future and present goods are of the same order and
importance, the future is no longer preferred to the present. In that
case the preference is reversed. The luxuries of to-day are more
keenly prized than the luxuries of to-morrow. If the latter are to be
preferred they must possess some advantage over the luxuries that
might be obtained here and now. Such advantage may arise in various
ways; for example, when a man decides that he will have more leisure
for a foreign journey two years hence than this year, or when he
prefers a large amount of future enjoyment at one time to present
satisfactions taken in small doses. But the most general method of
conferring advantage upon the secondary satisfactions of the future as
compared with those of the present, is to increase the quantity. The
majority of foreseeing persons are willing to pass by one hundred
dollars' worth of enjoyment now for the sake of one hundred and five
dollars' worth one year hence. This advantage of quantity is provided
through the receipt of interest. It affects all those persons whose
saving, as noted in the last chapter, involves a sacrifice for which
the only adequate compensation is interest, and likewise all those
persons who are in a position to choose between present and future
luxuries. Were interest suppressed these classes of persons would
cease to save for this kind of future goods.

According to Professor Taussig, "most saving is done by the well-to-do
and the rich."[145] On this hypothesis it seems probable that the
abolition of interest would diminish the savings and capital of the
community very considerably; for the accumulations of the wealthy are
derived mainly from interest rather than from salaries. On the other
hand, the suppression of interest should bring about a much wider
diffusion of wealth. The sums formerly paid out as interest, would be
distributed among the masses of the population as increased wages and
reduced costs of living. Hence the masses would possess an immensely
increased capacity for saving, which might offset or even exceed the
loss of saving-power among those who now receive interest-incomes.[146]

To sum up the results of our inquiry concerning the necessity of
interest: The fact that men now receive interest does not prove that
they would not save without interest. The fact that many men would
certainly save without interest does not prove that a sufficient
amount would be saved to provide the community with the necessary
supply of capital. Whether the savings of those classes that increased
their accumulations would counteract the decreases in the saving of
the richer classes, is a question that admits of no definite or
confident answer.


_The State Is Justified in Permitting Interest_

If we assume that the suppression of interest would cause a
considerable decline in saving and capital, we must conclude that the
community would be worse off than under the present system. To
diminish greatly the instruments of production, and consequently the
supply of goods for consumption, would create far more hardship than
it would relieve. While "workless" incomes would be suppressed, and
personal incomes more nearly equalised, the total amount available for
distribution would probably be so much smaller as to cause a
deterioration in the condition of every class. In this hypothesis the
State would do wrong to abolish the system of interest.

If, however, we assume that no considerable amount of evil would
follow, or that the balance of results would be favourable, the
question of the proper action of the State becomes somewhat complex.
In the first place, interest could not rightfully be suppressed while
the private taking of rent remained. To adopt such a course would be
to treat the receivers of property incomes inequitably. Landowners
would continue to receive an income from their property, while capital
owners would not; yet the moral claims of the former to income are no
better than those of the latter. In the second place, the State would
be obliged to compensate the owners of existing capital instruments
for the decline in value which, as we have already seen, would occur
when the item of interest was eliminated from the cost of reproducing
such capital instruments. It would likewise be under moral obligation
to compensate landowners for whatever decrease in value befell their
property as a result of the abolition of rent.

Nevertheless, the practical difficulties confronting the legal
abolition of interest are apparently so great as to render the attempt
socially unwise and futile. In order to be effective the prohibition
would have to be international. Were it enforced in only one or in a
few countries, these would suffer far more through the flight of
capital than they would gain through the abolition of interest. The
technical obstacles in any case would be well nigh insuperable. If the
attempt were made to suppress interest on producing capital, as well
as on loans, the civil authorities would be unable to determine with
any degree of precision what part of the gross returns of a business
was pure interest, and what part was a necessary compensation for risk
and the labour of management. Should the State try to solve this
problem by allowing the directors of industry varying salaries to
correspond with their comparative degrees of efficiency, and different
rates of insurance-payments to represent the different risks, it would
inevitably make some allowances so low as to discourage labour and
enterprise, and others so high as to give the recipients a
considerable amount of pure interest in the guise of profits and
salaries. Should it fix a flat rate of salaries and profits, the more
efficient undertakers would refuse to put forth their best efforts,
and the more perilous enterprises would not be undertaken. The
supervision of expenses, receipts, and other details of business that
would be required to prevent evasion of the law, would not improbably
cost more than the total amount now paid in the form of interest. On
the other hand, if the method of suppression were confined to loans it
would probably prove only a little less futile than the effort to
abolish interest on productive capital. The great majority of those
who were prevented from lending at interest would invest their money
in stocks, land, buildings, and other forms of productive property.
Moreover, it is probable that a large volume of loans would be made
despite the prohibition. In the Middle Ages, when the amount of money
available for lending was comparatively small, and when State and
Church and public opinion were unanimous in favour of the policy, the
legal prohibition of loans was only partially effective. Now that the
supply of and the demand for loans have enormously increased, and
interest is not definitely disapproved by the Church or the public, a
similar effort by the State would undoubtedly prove a failure. Even if
it were entirely successful it would only decrease, not abolish,
interest on productive capital.[147]

In view of the manifold and grave uncertainties of the situation, it
is practically certain that modern States are justified in permitting
interest.


_Civil Authorisation not Sufficient for Individual Justification_

This justification of the attitude of the State does not of itself
demonstrate that the capitalist has a right to accept interest. The
civil law tolerates many actions which are morally wrong in the
individual; for example, the payment of starvation wages, the
extortion of unjust prices, and the traffic in immorality. Obviously
legal toleration does not _per se_ nor always exonerate the individual
offender. How, then, shall we justify the individual receiver of
interest?

As already pointed out more than once, those persons who would not
save without interest are justified on the ground of sacrifice. So
long as the community desires their savings, and is willing to pay
interest on them, the savers may take interest as the fair equivalent
of the inconvenience that they undergo in performing this social
service. The precise problem before us, then, is the justification of
those savers and capitalists who do not need the inducement of
interest, and whose functions of saving and conserving capital are
sufficiently compensated without interest.

It is a fact that the civil law can sometimes create moral rights and
obligations. For example; the statute requiring a person to repair
losses that he has unintentionally inflicted upon his neighbour is
held by the moral theologians to be binding _in conscience_, as soon
as the matter has been adjudicated by the court. In other words, this
civil regulation confers on the injured man property rights, and
imposes on the morally inculpable injurer property obligations. The
civil statutes also give moral validity to the title of prescription,
or adverse possession. When the alien possessor has complied with the
legal provisions that apply, he has a moral right to the property,
even though the original owner should assert his claim at a later
time. Some moral theologians maintain that a legal discharge in
bankruptcy liberates the bankrupt from the moral obligation of
satisfying his unpaid debts. Several other situations might be cited
in which the State admittedly creates moral rights of individual
ownership which would have no definite existence in the absence of
such legal action and authorisation.[148]

This principle would seem to have received a particularly pertinent
application for our inquiry in the doctrine of _præmium_ legale as a
title of interest on loans. In the "Opus Morale" of Ballerini-Palmieri
can be found a long list of moral theologians living in the
seventeenth and eighteenth centuries who maintained that the mere
legal sanction of a certain rate of interest was a sufficient moral
justification for the lender.[149] While holding to the traditional
doctrine that interest was not capable of being justified on intrinsic
grounds, these writers contended that by virtue of its power of
eminent domain the State could transfer from the borrower to the
lender the right to the interest paid on a loan. They did not mean
that the State could arbitrarily take one man's property and hand it
over to another, but only that, when it sanctioned interest for the
public welfare, this extrinsic circumstance (like the other "extrinsic
titles" approved by moralists) annulled the claim of the borrower in
favour of the lender. In other words, they maintained that the money
paid in loan-interest did not belong to either borrower or lender with
certainty or definiteness until the matter was determined by economic
conditions and extrinsic circumstances. Hence legal authorisation for
the common good was morally sufficient to award it to the lender. More
than one of them declared that the State had the same right to
determine this indeterminate property, to assign the ownership to the
lender, that it had to transfer property titles by the device of
prescription. And their general position seems to have been confirmed
by the response of the Congregation of the Poenitentiaria, Feb., 1832,
to the Bishop of Verona, the substance of which was that a confessor
might adopt and act upon this position.[150]

And yet, neither this nor any of the other precedents cited above, are
sufficient to give certain moral sanction to the practice of
interest-taking by those persons who would continue to save if
interest were abolished. All the acts of legal authorisation that we
have been considering relate to practices which are beneficial and
necessary to society. Only in such cases has the State the moral
authority to create or annul property rights. In the seventeenth and
eighteenth centuries the legal authorisation of a certain rate of
interest made that rate morally lawful simply because this legal act
gave formal and authoritative testimony to the social utility of
interest-taking. The State merely declared the reasonableness, and
fixed the proper limits of the practice. The beneficent effect of
interest-taking upon society was its underlying justification, was the
ultimate fact which made it reasonable, and which gave to the action
of the State moral value. Had the taking of interest on loans not been
allowed the bulk of possible savings would either not have been saved
at all, or would have been hoarded instead of converted into capital.
And that money was badly needed in the commercial and industrial
operations of the time. Hence the owners of it were in the position of
persons who regarded saving and investing as a sacrifice for which
interest was a necessary and proper compensation. To-day, however,
there are millions of persons who would continue to perform both these
functions without the inducement of interest. Therefore, the public
good does not require that they should receive interest, nor that the
State should have the power to clothe their interest-incomes with
moral lawfulness. Inasmuch as the State is not certain that the
abolition of interest would be socially expedient or practically
possible, it is justified in permitting the institution to continue;
but it has no power to affect the morality of interest-taking as an
individual action.


_How the Interest-Taker Is Justified_

Although the interest received by the non-sacrifice savers is not
clearly justifiable on either intrinsic or social grounds, it is not
utterly lacking in moral sanctions. In the first place, we have not
contended that the intrinsic factors of productivity and service are
_certainly_ invalid morally. We have merely insisted that the moral
worth of these titles has never been satisfactorily demonstrated.
Possibly they have a greater and more definite efficacy than has yet
been shown by their advocates. In more concrete terms, we admit that
the productivity of capital and the service of the capitalist to the
community, are possible and doubtful titles to interest. A doubtful
title to property is, indeed, insufficient by itself. In the case of
the interest receiver, however, the doubtful titles of productivity
and service are reinforced by the fact of possession. Thus
supplemented, they are sufficient to justify the non-sacrifice saver
in giving himself the benefit of the doubt as regards the validity of
his right to take interest. To be sure, this indefinite and uncertain
claim would be overthrown by a more definite and positive title. But
no such antagonistic title exists. Neither the consumer nor the
labourer can show any conclusive reason why interest should go to him
rather than to the capitalist. Hence the latter has at least a
presumptive title. In the circumstances this is morally sufficient.

To this justification by presumption must be added a justification by
analogy. The non-sacrifice savers seem to be in about the same
position as those other agents of production whose rewards are out of
proportion to their sacrifices. For example; the labourer of superior
native ability gets as much compensation for the same quality and
quantity of work as his companion who has only ordinary ability; and
the exceptionally intelligent business man stands in the same relation
to his less efficient competitor; yet the sacrifices undergone by the
former of each pair is less than that suffered by the latter. It would
seem that if the more efficient men may properly take the same rewards
as those who make larger sacrifices, the non-sacrifice capitalist
might lawfully accept the same interest as the man whose saving
involves some sacrifice. On this principle the lenders who would not
have invested their money in a productive enterprise were nevertheless
permitted by the moralists of the post-mediæval period to take
advantage of the title of _lucrum cessans_. Although they had
relinquished no opportunity of gain, nor made any sacrifice, they were
put on the same moral level as sacrificing lenders, and were allowed
to take the same interest.

As a determinant of ownership, possession is the feeblest of all
factors, and yet it is of considerable importance for a large
proportion of incomes and property. In the distribution of the
national product, as well as in the division of the original heritage
of the earth, a large part is played by the title of first occupancy.
Much of the product of industry is assigned to the agents of
production mainly on the basis of inculpable possession. That is; it
goes to its receivers automatically, in exchange for benefits to those
who hand it over, and without excessive exploitation of their needs.
Just as the first arrival on a piece of land may regard it as a
no-man's territory, and make it his own by the mere device of
appropriation, so the capitalist may get morally valid possession of
interest. Sometimes, indeed, this debatable share, this no-man's share
of the product of industry, is secured in some part by the consumer of
the labourer. In such cases their title to it is just as valid as the
title of the capitalist, notwithstanding the doubtful titles of
productivity and service which the latter has in his favour. First
occupancy and possession are the more decisive factors. In the great
majority of instances, however, the capitalist is the first occupant,
and therefore the lawful possessor of the interest-share.

The general justification of interest set forth in the immediately
preceding paragraphs is supplemented in the case of the great majority
of capital owners by the fact that their income from this source is
relatively insignificant. The average income of the farmers of the
United States is only 724 dollars per year, and of this 322 dollars is
interest on the capital invested in the farm.[151] Even when we make
due allowance for the high purchasing power of farm incomes, due to
the lower cost of foodstuffs and house rent, the total amount of 724
dollars provides only a very moderate living. Consequently the great
majority of farmers can regard the interest that they receive as a
necessary part of the remuneration that is fairly due them on account
of their labour, sacrifices, and risks. So far as they are concerned,
the justification of interest, as interest, is not a practical
question. The same observation applies to the majority of urban
business men, such as small merchants and manufacturers. Their
interest can be justified as not more than fair wages and profits.

Again, there is a large number of interest receivers who are entirely
dependent upon this kind of income, and who obtain therefrom only a
moderate livelihood. They are mainly children, aged persons, and
invalids. Unlike the classes just described, they cannot justify their
interest as a fair supplement to wages; however, they may reasonably
claim it as their equitable or charitable share of the common heritage
of the earth. If they did not receive this interest-income they would
have to be supported by their relatives or by the State. For many
reasons this would be a much less desirable arrangement. Consequently
their general claim to interest is supplemented by considerations of
human welfare.

The difference between the ethical character of the interest discussed
in the last two paragraphs and of that received by persons who possess
large incomes, is too often overlooked in technical treatises. Every
man owning any productive goods is reckoned as a capitalist, and
assumed to receive interest. If, however, a man's total
interest-income is so small that when combined with all his other
revenues it merely completes the equivalent of a decent living, it is
surely of very little significance as interest. It stands in no such
need of justification as the interest obtained by men whose incomes
amount to, say, ten thousand dollars a year and upwards.

Still another confirmatory title of interest is suggested by the
following well known declaration of St. Thomas Aquinas: "The
possession of riches is not in itself unlawful if the order of reason
be observed: that a man should possess justly what he owns, and _use_
it in a proper manner for himself and others."[152] Neither just
acquisition nor proper use is alone sufficient to render private
possessions morally good. Both must be present. As we have seen above,
the capitalist can appeal to certain presumptive and analogous titles
which justify practically his acquisition of interest; but there can
be no doubt that his claim and his moral power of disposal are
considerably strengthened when he puts his interest-income to a proper
use. One way of so using it is for a reasonable livelihood, as
exemplified in the case of the farmers, business men, and non-workers
whom we considered above. Those persons who receive incomes in excess
of their reasonable needs could devote the surplus to religion,
charity, education, and a great variety of altruistic purposes. We
shall deal with this matter specifically in the chapter on the "Duty
of Distributing Superfluous Wealth." In the meantime it is sufficient
to note that the rich man who makes a benevolent use of his
interest-income has a special reason for believing that his receipt of
interest is justified.

The decisive value attributed to presumption, analogy, possession, and
doubtful titles in our vindication of the capitalist's claim to
interest, is no doubt disappointing to those persons who desire
clear-cut mathematical rules and principles. Nevertheless, they are
the only factors that seem to be available. While the title that they
confer upon the interest receiver is not as definite nor as noble as
that by which the labourer claims his wages or the business man his
profits, it is morally sufficient. It will remain logically and
ethically unshaken until more cogent arguments have been brought
against it than have yet appeared in the denunciations of the income
of the capitalist. And what is true of him is likewise true of the
rent receiver, and of the person who profits by the "unearned
increment" of land values. In all three cases the presumptive
justification of "workless" incomes will probably remain valid as long
as the present industrial system endures.

FOOTNOTES:

[142] "Growth of Capital," p. 152.

[143] Cf. Gonner, "Interest and Saving," p. 73; Cassel, "The Nature
and Necessity of Interest," ch. iv.

[144] New York, 1907.

[145] "Principles of Economics," II, 42.

[146] Cf. Hobson, "The Economics of Distribution," pp. 259-265.

[147] Cf. Fisher, "Elementary Principles of Economics," pp. 396, 397.
However, he does not discuss in this passage the possibility of
suppressing interest on productive capital by a direct method.

[148] Cf. Lehmkuhl, "Theologia Moralis," I, nos. 917, 965, 1035.

[149] Vol. 3, pp. 617-629; 2d ed.

[150] Ballerini-Palmieri, loc. cit.; cf. Van Roey, op. cit., pp.
73-75.

[151] Cf. _American Economic Review_, March, 1916; p. 46.

[152] "Contra Gentiles," lib. 3, c. 123.



CHAPTER XIV

CO-OPERATION AS A PARTIAL SOLVENT OF CAPITALISM


Interest is not a return for labour. The majority of interest
receivers are, indeed, regularly engaged at some active task, whether
as day labourers, salaried employés, directors of industry, or members
of the professions; but for these services they obtain specific and
distinct compensation. The interest that they get comes to them solely
in their capacity as owners of capital, independently of any personal
activity. From the viewpoint of economic distribution, interest is a
"workless" income. As such, it seems to challenge that ethical
intuition which connects reward with effort and which inclines to
regard income from any other source as not quite normal. Moreover,
interest absorbs a large part of the national income, and perpetuates
grave economic inequalities.[153]

Nevertheless, interest cannot be wholly abolished. As long as capital
remains in private hands, its owners will demand and obtain interest.
The only way of escape is by the road of Socialism, and this would
prove a blind alley. As we have seen in a preceding chapter, Socialism
is ethically and economically impossible.

May not the burdens and disadvantages of interest be mitigated or
minimised? Such a result could conceivably be reached in two ways: the
sum total of interest might be reduced, and the incomes derived from
interest might be more widely distributed.


_Reducing the Rate of Interest_

No considerable diminution of the interest-volume can be expected
through a decline in the interest rate. As far back as the middle of
the eighteenth century, England and Holland were able to borrow money
at three per cent. During the period that has since intervened, the
rate has varied from three to six per cent. on this class of loans.
Between 1870 and 1890, the general rate of interest declined about two
per cent., but it has risen since the latter date about one per cent.
The Great War now (1916) in action is destroying an enormous amount of
capital, and it will, as in the case of all previous military
conflicts of importance, undoubtedly be followed by a marked rise in
the rate of interest.

On the other hand, the only definite grounds upon which a decline in
the rate can be hoped for are either uncertain or unimportant. They
are the rapid increase of capital, and the extension of government
ownership and operation of natural monopolies.

The first is uncertain in its effects upon the rate of interest
because the increased supply of capital is often neutralised by the
process of substitution. That is, a large part of the new capital does
not compete with and bring down the price of the old capital. Instead,
it is absorbed in new inventions, new types of machinery, and new
processes of production, all of which take the place of labour, thus
tending to increase rather than diminish the demand for capital and
the rate of interest. To be sure, the demand for capital thus arising
has not always been sufficient to offset the enlarged supply. Since
the Industrial Revolution capital has at certain periods and in
certain regions increased so rapidly that it could not all find
employment in new forms and in old forms at the old rate. In some
instances a decline in the rate of interest can be clearly traced to
the disproportionately quick growth of capital. But this phenomenon
has been far from uniform, and there is no indication that it will
become so in the future. The possibilities of the process of
substitution have been by no means exhausted.

The effects of government ownership are even more problematical.
States and cities are, indeed, able to obtain capital more cheaply
than private corporations for such public utilities as railways,
telegraphs, tramways, and street lighting; and public ownership of all
such concerns will probably become general in the not remote future.
Nevertheless the social gain is not likely to be proportionate to the
reduction of interest on this section of capital. A part, possibly a
considerable part, of the saving in interest will be neutralised by
the lower efficiency and greater cost of operation; for in this
respect publicly managed are inferior to privately managed
enterprises. Consequently, the charges to the public for the services
rendered by these utilities cannot be reduced to the same degree as
the rate of interest on the capital. On the other hand, the exclusion
of private operating capital from this very large field of public
utilities should increase competition among the various units of
capital, and thus bring down its rewards. To what extent this would
happen cannot be estimated even approximately. The only safe statement
is that the decline in the general rate of interest would probably be
slight.


_Need for a Wider Distribution of Capital_

The main hope of lightening the social burden of interest lies in the
possible reduction in the necessary volume of capital, and especially
in a wider distribution of interest-incomes. In many parts of the
industrial field there is a considerable waste of capital through
unnecessary duplication. This means that a large amount of unnecessary
interest is paid by the consumer in the form of unnecessarily high
prices. Again, the owners of capital and receivers of interest
constitute only a minority of the population of all countries, with
the possible exception of the United States. The great majority of the
wage earners in all lands possess no capital, and obtain no interest.
Not only are their incomes small, often pitiably small, but their lack
of capital deprives them of the security, confidence, and independence
which are required for comfortable existence and efficient
citizenship. They have no income from productive property to protect
them against the cessation of wages. During periods of unemployment
they are frequently compelled to have recourse to charity, and to
forego many of the necessary comforts of life. So long as the bulk of
the means of production remains in the hands of a distinct capitalist
class, this demoralising insecurity of the workers must continue as an
essential part of our industrial system. While it might conceivably be
eliminated through a comprehensive scheme of State insurance, this
arrangement would substitute dependence upon the State for dependence
upon the capitalist, and be much less desirable than ownership of
income-bearing property.

The workers who possess no capital do not enjoy a normal and
reasonable degree of independence, self respect, or self confidence.
They have not sufficient control over the wage contract and the other
conditions of employment, and they have nothing at all to say
concerning the goods that they shall produce, or the persons to whom
their product shall be sold. They lack the incentive to put forth
their best efforts in production. They cannot satisfy adequately the
instinct of property, the desire to control some of the determining
forms of material possession. They are deprived of that consciousness
of power which is generated exclusively by property, and which
contributes so powerfully toward the making of a contended and
efficient life. They do not possess a normal amount of freedom in
politics, nor in those civic and social relations which lie outside
the spheres of industry and politics. In a word, the worker without
capital has not sufficient power over the ordering of his own life.


_The Essence of Co-operative Enterprise_

The most effective means of lessening the volume of interest, and
bringing about a wider distribution of capital, is to be found in
co-operative enterprise. Co-operation in general denotes the unified
action of a group of persons for a common end. A church, a debating
club, a joint stock company, exemplifies co-operation in this sense.
In the strict and technical sense, it has received various
definitions. Professor Taussig declares that it "consists essentially
in getting rid of the managing employer"; but this description is
applicable only to co-operatives of production. "A combination of
individuals to economise by buying in common, or increase their
profits by selling in common" (Encyclopedia Britannica) is likewise
too narrow, since it fits only distributive and agricultural
co-operation. According to C. R. Fay, a co-operative society is "an
association for the purpose of joint trading, originating among the
weak, and conducted always in an unselfish spirit." If the word,
"trading" be stretched to comprehend manufacturing as well as
commercial activities, Fay's definition is fairly satisfactory. The
distinguishing circumstance, "originating among the weak," is also
emphasised by Father Pesch in his statement that the essence, aim, and
meaning of co-operation are to be found in "a combination of the
economically weak in common efforts for the security and betterment of
their condition."[154] In order to give the proper connotation for our
purpose, we shall define co-operation as, that joint economic action
which seeks to obtain for a relatively weak group all or part of the
profits and interest which in the ordinary capitalist enterprise are
taken by a smaller and different group. This formula puts in the
foreground the important fact that in every form of co-operative
effort, some interest or profits, or both, are diverted from those who
would have received them under purely capitalistic arrangements, and
distributed among a larger number of persons. Thus it indicates the
bearing of co-operation upon the problem of lightening the social
burden of interest.

From the viewpoint of economic function, co-operation may be divided
into two general kinds, producers' and consumers'. The best example of
the former is a wage earners' productive society; of the latter, a
co-operative store. Credit co-operatives and agricultural
co-operatives fall mainly under the former head, inasmuch as their
principal object is to assist production, and to benefit men as
producers rather than as consumers. Hence from the viewpoint of type,
co-operation may be classified as credit, agricultural, distributive,
and productive.


_Co-operative Credit Societies_

A co-operative credit society is a bank controlled by the persons who
patronise it, and lending on personal rather than material security.
Such banks are intended almost exclusively for the relatively helpless
borrower, as, the small farmer, artisan, shopkeeper, and the small man
generally. Fundamentally they are associations of neighbours who
combine their resources and their credit in order to obtain loans on
better terms than are accorded by the ordinary commercial banks. The
capital is derived partly from the sale of shares of stock, partly
from deposits, and partly from borrowed money. In Germany, where
credit associations have been more widely extended and more highly
developed than in any other country, they are of two kinds, named
after their respective founders, Schulze-Delitzsch and Raiffeisen. The
former operates chiefly in the cities, serves the middle classes
rather than the very poor, requires all its members to subscribe for
capital stock, commits them to a long course of saving, and thus
develops their interest as lenders. The Raiffeisen societies have, as
a rule, very little share capital, exist chiefly in the country
districts, especially among the poorest of the peasantry, are based
mostly on personal credit, and do not profess to encourage greatly the
saving and lending activities of their members. Both forms of
association loan money to their members at lower rates of interest
than these persons could obtain elsewhere. Hence credit co-operation
directly reduces the burden of interest.

The Schulze-Delitzsch societies have more than half a million members
in the cities and towns of Germany, sixty per cent. of whom take
advantage of the borrowing facilities. The Raiffeisen banks comprise
about one-half of all the independent German agriculturists. Some form
of co-operative banking is well established in every important country
of Europe, except Denmark and Great Britain. In the former country
its place seems to be satisfactorily filled by the ordinary commercial
banks. Its absence from Great Britain is apparently due to the credit
system provided by the large landholders, to the scarcity of peasant
proprietors, and to general lack of initiative. It is especially
strong in Italy, Belgium, and Austria, and it has made a promising
beginning in Ireland. In every country in which it has obtained a
foothold, it gives indication of steady and continuous progress.
Nevertheless it is subject to definite limits. It can never make much
headway among that class of persons whose material resources are
sufficiently large and palpable to command loans on the usual terms
offered by the commercial banks. As a rule, these terms are quite as
favourable as those available through the co-operative credit
associations. It is only because the poorer men cannot obtain loans
from the commercial banks on the prevailing conditions that they are
impelled to have recourse to the co-operative associations.


_Co-operative Agricultural Societies_

The chief operations of agricultural co-operative societies are
manufacturing, marketing, and purchasing. In the first named field the
most important example is the co-operative dairy. The owners of cows
hold the stock or shares of the concern, and in addition to dividends
receive profits in proportion to the amount of milk that they supply.
In Ireland and some other countries, a portion of the profits goes to
the employés of the dairy as a dividend on wages. Other productive
co-operatives of agriculture are found in cheese making, bacon curing,
distilling, and wine making. All are conducted on the same general
principles as the co-operative dairy.

Through the marketing societies and purchasing societies, the farmers
are enabled to sell their products to better advantage, and to obtain
materials needed for carrying on agricultural operations more cheaply
than would be possible by isolated individual action. Some of the
products marketed by the selling societies are eggs, milk, poultry,
fruit, vegetables, live stock, and various kinds of grain. The
purchasing societies supply for the most part manures, seeds, and
machinery. Occasionally they buy the most costly machinery in such a
way that the association becomes the corporate owner of the
implements. In these cases the individual members have only the use of
the machines, but they would be unable to enjoy even that advantage
were it not for the intervention of the co-operative society. Where
such arrangements exist, the society exemplifies not only co-operative
buying but co-operative ownership.

Agricultural co-operation has become most widely extended in Denmark,
and has displayed its most striking possibilities in Ireland.
Relatively to its population, the former country has more farmers in
co-operative societies, and has derived more profit therefrom, than
any other nation. The rapid growth and achievements of agricultural
co-operation in the peculiarly unfavourable circumstances of Ireland
constitute the most convincing proof to be found anywhere of the
essential soundness and efficacy of the movement. Various forms of
rural co-operative societies are solidly established in Germany,
France, Belgium, Italy, and Switzerland. In recent years the movement
has made some progress in the United States, especially in relation to
dairies, grain elevators, the marketing of live stock and fruit, and
various forms of rural insurance. The co-operative insurance companies
effect a saving to the Minnesota farmers of $700,000 annually, and the
co-operative elevators handle about 30 per cent. of the grain marketed
in that state. In 1915 the business transacted by the co-operative
marketing and purchasing organisations of the farmers of the United
States amounted to $1,400,000,000.

The transformation in the rural life of more than one European
community through co-operation has amounted to little less than a
revolution. Higher standards of agricultural products and production
have been set up and maintained, better methods of farming have been
inculcated and enforced, and the whole social, moral, and civic life
of the people has been raised to a higher level. From the viewpoint of
material gain, the chief benefits of agricultural co-operation have
been the elimination of unnecessary middlemen, and the economies of
buying in large quantities, selling in the best markets, and employing
the most efficient implements. As compared with farming conducted on a
large scale, the small farm possesses certain advantages, and is
subject to certain disadvantages. It is less wasteful, permits greater
attention to details, and makes a greater appeal to the self interest
of the cultivator; but the small farmer cannot afford to buy the best
machinery, nor is he in a position to carry on to the best advantage
the commercial features of his occupation, such as borrowing, buying,
and marketing. Co-operation frees him from all these handicaps. "The
co-operative community ... is one in which groups of humble men
combine their efforts, and to some extent their resources, in order to
secure for themselves those advantages in industry which the masters
of capital derive from the organisation of labour, from the use of
costly machinery, and from the economies of business when done on a
large scale. They apply in their industry the methods by which the
fortunes of the magnates in commerce and manufacture are made." These
words, uttered by a prominent member of the Irish co-operative
movement, summarise the aims and achievements of agricultural
co-operation in every country of Europe in which it has obtained a
strong foothold. In every such community the small farm has gained at
the expense of the large farm system. Finally, agricultural
co-operation reduces the burden of interest by eliminating some
unnecessary capital, stimulates saving among the tillers of the soil
by providing a ready and safe means of investment, and in manifold
ways contributes materially toward a better distribution of wealth.


_Co-operative Mercantile Societies_

Co-operative stores are organised by and for consumers. In every
country they follow rather closely the Rochdale system, so called from
the English town in which the first store of this kind was established
in 1844. The members of the co-operative society furnish the capital,
and receive thereon interest at the prevailing rate, usually five per
cent. The stores sell goods at about the same prices as their
privately owned competitors, but return a dividend on the purchases of
all those customers who are members of the society. The dividends are
provided from the surplus which remains after wages, interest on the
capital stock, and all other expenses have been paid. In some
co-operative stores non-members receive a dividend on their purchases
at half the rate accorded to members of the society, but only on
condition that these payments shall be invested in the capital stock
of the enterprise. And the members themselves are strongly urged to
make this disposition of their purchase-dividends. Since the latter
are paid only quarterly, the co-operative store exercises a
considerable influence toward inducing its patrons to save and to
become small capitalists.

In Great Britain the vast majority of the retail stores have been
federated into two great wholesale societies, one in England and the
other in Scotland. The retail stores provide the capital, and
participate in the profits according to the amounts purchased, just as
the individual consumers furnish the capital and share the profits of
the retail establishments. The Scottish Wholesale Society divides a
part of the profits among its employés. Besides their operations as
jobbers, the wholesale societies are bankers for the retail stores,
and own and operate factories, farms, warehouses, and steamships.
Many of the retail co-operatives likewise carry on productive
enterprises, such as milling, tailoring, bread making, and the
manufacture of boots, shoes, and other commodities, and some of them
build, sell, and rent cottages, and lend money to members who desire
to obtain homes.

The co-operative store movement has made greatest progress in its
original home, Great Britain. In 1913 about one person in every three
was to some degree interested in or a beneficiary of these
institutions. The profits of the stores amounted to about $71,302,070,
which was about 35 per cent. on the capital. The employés numbered
about 145,000, and the sales for the year aggregated $650,000,000. The
English Wholesale Society was the largest flour miller and shoe
manufacturer in Great Britain, and its total business amounted to
$150,000,000. Outside of Great Britain, co-operative distribution has
been most successful in Germany, Belgium, and Switzerland. It has had
a fair measure of development in Italy, but has failed to assume any
importance in France. "There is every sign that within the near
future--except in France--the stores will come to include the great
majority of the wage earning class, which is a constantly growing
percentage of the total population."[155] Within recent years a
respectable number of stores have been established on a sound basis in
Canada and the United States. Owing, however, to the marked
individualism and the better economic conditions of these two
countries, the co-operative movement will continue for some time to be
relatively slow.

As in the case of agricultural co-operation, the money benefits
accruing to the members of the co-operative stores consist mainly of
profits rather than interest. In the absence of the store societies,
these profits would have gone for the most part to middlemen as
payments for the risks and labour of conducting privately owned
establishments. Forty-seven of the sixty million dollars profits of
the British co-operative stores in 1910 were divided among more than
two and one-half million members of these institutions, instead of
going to a comparatively small number of private merchants. The other
thirteen million dollars were interest on the capital stock. Had the
members invested an equal amount in other enterprises they could,
indeed, have obtained about the same rate and amount of interest, but
in the absence of the co-operative stores their inducements and
opportunities to save would have been much smaller. For it must be
kept in mind that a very large part of the capital stock in the
co-operative stores is derived from the members' dividends on their
purchases at such stores, and would not have come into existence at
all without these establishments. The gains of the co-operative
stores, whether classified as profits or as interest, are evidently a
not inconsiderable indication of a better distribution of wealth.


_Co-operation in Production_

Co-operative production has occasionally been pronounced a failure.
This judgment is too sweeping and too severe. "As a matter of fact,"
says a prominent London weekly, "the co-operators' success has been
even more remarkable in production than in distribution. The
co-operative movement runs five of the largest of our flour mills; it
has, amongst others, the very largest of our boot factories; it makes
cotton cloth and woollens, and all sorts of clothing; it has even a
corset factory of its own; it turns out huge quantities of soap; it
makes every article of household furniture; it produces cocoa and
confectionery; it grows its own fruit and makes its own jams; it has
one of the largest tobacco factories, and so on." Obviously this
passage refers to that kind of productive co-operation which is
carried on by the stores, not to productive concerns owned and
managed by the workers therein employed. Nevertheless the enterprises
in question are co-operatively managed, and hence exemplify
co-operation rather than private and competitive industry. They ought
not to be left out of any statement of the field occupied by
co-operative production. The limitations and possibilities of
co-operation in production can best be set forth by considering its
three different forms separately.

The "perfect" form occurs when all the workers engaged in a concern
own all the share capital, control the entire management, and receive
the whole of the wages, profits, and interest. In this field the
failures have been much more numerous and conspicuous than the
successes. Godin's stove works at Guise, France, is the only important
enterprise of this kind that is now in existence. Great Britain has
several establishments in which the workers own a large part of the
capital, but apparently none in which they are the sole proprietors
and managers. The "labour societies" of Italy, consisting mostly of
diggers, masons, and bricklayers, co-operatively enter into contracts
for the performance of public works, and share in the profits of the
undertaking in addition to their wages; but the only capital that they
provide consists of comparatively simple and inexpensive tools. The
raw material and other capital is furnished by the public authority
which gives the contract.

A second kind of productive co-operation is found in the arrangement
known as co-partnership. This is "the system under which, in the first
place, a substantial and known share of the profit of a business
belongs to the workers in it, not by right of any shares they may
hold, or any other title, but simply by right of the labour they have
contributed to make the profit; and, in the second place, every worker
is at liberty to invest his profit, or any other savings, in shares of
the society or company, and so become a member entitled to vote on the
affairs of the body which employs him."[156] So far as its first, or
profit sharing, feature is concerned, co-partnership is not genuine
co-operation, for it includes neither ownership of capital nor
management of the business. Co-operative action begins only with the
adoption of the second element. In most of the existing co-partnership
concerns, all the employés are urged, and many of them required to
invest at least a part of their profits in the capital stock. The most
notable and successful of these experiments is that carried on by the
South Metropolitan Gas Company of London. Practically all the
company's 6,000 employés are now among its stockholders. Although
their combined holdings are only about one-twenty-eighth of the total,
they are empowered to select two of the ten members of the board of
directors. Essentially the same co-partnership arrangements have been
adopted by about one-half the privately owned gas companies of Great
Britain. In none of them, however, have the workers obtained as yet
such a large percentage of either ownership or control as in the South
Metropolitan. Co-partnership exists in several other enterprises in
Great Britain, and is found in a considerable number of French
concerns. There are a few instances in the United States, the most
thoroughgoing being that of N. O. Nelson & Co. at Le Claire, Ill.

As already noted, the co-operative stores exemplify a third type of
co-operative production. In some cases the productive concern is under
the management of a local retail establishment, but the great majority
of them are conducted by the English and Scottish Wholesale Societies.
As regards the employés of these enterprises, the arrangement is not
true co-operation, since they have no part in the ownership of the
capital. The Scottish Wholesale Society, as we have seen, permits the
employés of its productive works to share in the profits thereof;
nevertheless it does not admit them as stockholders, nor give them any
voice in the management. In all cases the workers may, indeed, become
owners of stock in their local retail stores. Since the latter are
stockholders in the wholesale societies, which in turn own the
productive enterprises, the workers have a certain indirect and
attenuated proprietorship in the productive concerns. But they derive
therefrom no dividends. All the interest and most of the profits of
the productive establishments are taken by the wholesale and retail
stores. For it is the theory of the wholesale societies that the
employés in the works of production should share in the gains thereof
only as consumers. They are to profit only in the same way and to the
same extent as other consumer-members of the local retail
establishments.

The most effective and beneficial form of co-operative production is
evidently that which has been described as the "perfect" type. Were
all production organised on this plan, the social burden of interest
would be insignificant, industrial despotism would be ended, and
industrial democracy realised. As things are, however, the
establishments exemplifying this type are of small importance. Their
increase and expansion are impeded by lack of directive ability and of
capital, and the risk to the workers' savings. Yet none of these
obstacles is necessarily insuperable. Directive ability can be
developed in the course of time, just as it was in the co-operative
stores. Capital can be obtained fast enough perhaps to keep pace with
the supply of directive ability and the spirit of co-operation. The
risk undertaken by workers who put their savings into productive
concerns owned and managed by themselves need not be greater than that
now borne by investors in private enterprises of the same kind. There
is no essential reason why the former should not provide the same
profits and insurance against business risks as the latter. While the
employés assume none of the risks of capitalistic industry, neither do
they receive any of the profits. If the co-operative factory exhibits
the same degree of business efficiency as the private enterprise it
will necessarily afford the workers adequate protection for their
savings and capital. Indeed, if "perfect" co-operative production is
to be successful at all its profits will be larger than those of the
capitalistic concern, owing to the greater interest taken by the
workers in their tasks, and in the management of the business.

For a long time to come, however, it is probable that "perfect"
co-operative production will be confined to relatively small and local
industries. The difficulty of finding sufficient workers' capital and
ability to carry on, for example, a transcontinental railroad or a
nationwide steel business, is not likely to be overcome for one or two
generations.[157]

The labour co-partnership form of co-operation is susceptible of much
wider and more rapid extension. It can be adapted readily to the very
large as well as to the small and medium sized concerns. Since it
requires the workers to own but a part of the capital, it can be
established in any enterprise in which the capitalists show themselves
willing and sympathetic. In every industrial corporation there are
some employés who possess savings, and these can be considerably
increased through the profit sharing feature of co-partnership. A very
long time must, indeed, elapse before the workers in any of the larger
enterprises could get possession of all, or even of a controlling
share of the capital, and a considerable time would be needed to
educate and fit them for successful management.

Production under the direction of the co-operative stores can be
extended faster than either of the other two forms, and it has before
it a very wide even though definitely limited field. The British
wholesale societies have already shown themselves able to conduct with
great success large manufacturing concerns, have trained and attracted
an adequate number of competent leaders, and have accumulated so much
capital that they have been obliged to invest several million pounds
in other enterprises. The possible scope of the stores and their
co-operative production has been well described by C. R. Fay:
"distribution of goods for personal consumption, first, among the
working class population, secondly, among the salaried classes who
feel a homogeneity of professional interest; production by working
class organisations alone (with rare exceptions in Italy) of all the
goods which they distribute to their members. But this is its limit.
Distribution among the remaining sections of the industrial
population; production for distribution to these members; production
of the instruments of production, and production for international
trade; the services of transport and exchange: all these industrial
departments are, so far as can be seen, permanently outside the domain
of a store movement."[158]

The theory by which the stores attempt to justify the exclusion of the
employés of their productive concerns from a share of the profits
thereof is that all profits come ultimately from the pockets of the
consumer, and should all return to that source. The defect in this
theory is that it ignores the question whether the consumers ought not
to be required to pay a sufficiently high price for their goods to
provide the producers with profits in addition to wages. While the
wholesale stores are the owners and managers of the capital in the
productive enterprises, and on the capitalistic principle should
obtain the profits, the question remains whether this is necessarily a
sound principle, and whether it is in harmony with the theory and
ideals of co-operation. In those concerns which have adopted the
labour co-partnership scheme, the workers, even when they own none of
the capital, are accorded a part of the profits. It is assumed that
this is a fairer and wiser method of distribution than that which
gives the labourer only wages, leaving all the profits to the
manager-capitalist. This feature of co-partnership rests on the theory
that the workers can, if they will, increase their efficiency and
reduce the friction between themselves and their employer to such an
extent as to make the profit sharing arrangement a good thing for both
parties. Consequently the profits obtained by the workers are a
payment for this specific contribution to the prosperity of the
business. Why should not this theory find recognition in productive
enterprises conducted by the co-operative stores?

In the second place, the workers in these concerns ought to be
permitted to participate in the capital ownership and management. They
would thus be strongly encouraged to become better workers, to save
more money, and to increase their capacity for initiative and self
government. Moreover, this arrangement would go farther than any other
system toward reconciling the interests of producer and consumer. As
producer, the worker would obtain, besides his wages, interest and
profits up to the limit set by the competition of private productive
concerns. As consumer, he would share in the profits and interest
which would otherwise have gone to the private distributive
enterprises. In this way the producer and consumer would each get the
gains that were due specifically and respectively to his activity and
efficiency.


_Advantages and Prospects of Co-operation_

At this point it will perhaps be well to sum up the advantages and to
estimate the prospects of the co-operative movement. In all its forms
co-operation eliminates some waste of capital and energy, and
therefore transfers some interest and profits from a special
capitalist and undertaking class to a larger and economically weaker
group of persons. For it must be borne in mind that all co-operative
enterprises are conducted mainly by and for labourers or small
farmers. Hence the system always makes directly for a better
distribution of wealth. To a considerable extent it transfers capital
ownership from those who do not themselves work with or upon capital
to those who are so engaged; namely, the labourers and the farmers;
thus it diminishes the unhealthy separation now existing between the
owners and the users of the instruments of production. Co-operation
has, in the second place, a very great educational value. It enables
and induces the weaker members of economic society to combine and
utilise energies and resources that would otherwise remain unused and
undeveloped; and it greatly stimulates and fosters initiative, self
confidence, self restraint, self government, and the capacity for
democracy. In other words, it vastly increases the development and
efficiency of the individual. It likewise induces him to practise
thrift, and frequently provides better fields for investment than
would be open to him outside the co-operative movement. It diminishes
selfishness and inculcates altruism; for no co-operative enterprise
can succeed in which the individual members are not willing to make
greater sacrifices for the common good than are ordinarily evoked by
private enterprise. Precisely because co-operation makes such heavy
demands upon the capacity for altruism, its progress always has been
and must always continue to be relatively slow. Its fundamental and
perhaps chief merit is that it does provide the mechanism and the
atmosphere for a greater development of the altruistic spirit than is
possible under any other economic system that has ever been tried or
devised.

By putting productive property into the hands of those who now possess
little or nothing, co-operation promotes social stability and social
progress. This statement is true in some degree of all forms of
co-operation, but it applies with particular force to those forms
which are carried on by the working classes. A steadily growing number
of keen-sighted social students are coming to realise that an
industrial system which permits a comparatively small section of
society to own the means of production and the instrumentalities of
distribution, leaving to the great majority of the workers nothing but
their labour power, is fundamentally unstable, and contains within
itself the germs of inevitable dissolution. No mere adequacy of wages
and other working conditions, and no mere security of the workers'
livelihood, can permanently avert this danger, nor compensate the
individual for the lack of power to determine those activities of life
which depend upon the possession of property. Through co-operation
this unnatural divorce of the users from the owners of capital can be
minimised. The worker is converted from a mere wage earner to a wage
earner plus a property owner, thus becoming a safer and more useful
member of society. In a word, co-operation produces all the well
recognised individual and social benefits which have in all ages been
evoked by the "magic of property."

Finally, co-operation is a golden mean between individualism and
Socialism. It includes all the good features and excludes all the evil
features of both. On the one hand, it demands and develops individual
initiative and self reliance, makes the rewards of the individual
depend upon his own efforts and efficiency, and gives him full
ownership of specific pieces of property. On the other hand, it
compels him to submerge much of the selfishness and indifference to
the welfare of his fellows which characterise our individual economy.
It embraces all the good that is claimed for Socialism because it
induces men to consider and to work earnestly for the common good,
eliminates much of the waste of competitive industry, reduces and
redistributes the burdens of profits and interest, and puts the
workers in control of capital and industry. At the same time, it
avoids the evils of an industrial despotism, of bureaucratic
inefficiency, of individual indifference, and of an all pervading
collective ownership. The resemblances that Socialists sometimes
profess to see between their system and co-operation are superficial
and far less important than the differences. Under both arrangements
the workers would, we are told, own and control the means of
production; but the members of a co-operative society directly own and
immediately control a _definite amount of specific capital_, which is
essentially _private_ property. In a Socialist régime the workers'
ownership of capital would be collective not private, general not
specific, while their control of the productive instruments with which
they worked would be shared with other citizens. The latter would
vastly outnumber the workers in any particular industry, and would be
interested therein not as producers but as consumers. No less obvious
and fundamental are the differences in favour of co-operation as
regards the vital matters of freedom, opportunity, and efficiency.

In so far as the future of co-operation can be predicted from its
past, the outlook is distinctly encouraging. The success attained in
credit, agriculture, and distribution, is a sufficient guarantee for
these departments. While productive co-operation has experienced more
failures than successes, it has finally shown itself to be sound in
principle, and feasible in practice. Its extension will necessarily be
slow, but this is exactly what should be expected by any one who is
acquainted with the limitations of human nature, and the history of
human progress. If a movement that is capable of modifying so
profoundly the condition of the workers as is co-operative production,
gave indications of increasing rapidly, we should be inclined to
question its soundness and permanence. Experience has given us
abundant proof that no mere system or machinery can effect a
revolutionary improvement in economic conditions. No social system can
do more than provide a favourable environment for the development of
those individual capacities and energies which are the true and the
only causal forces of betterment.

Nor is it to be expected that any of the other three forms of
co-operation will ever cover the entire field to which it might,
absolutely speaking, be extended; or that co-operation as a whole will
become the one industrial system of the future. Even if the latter
contingency were possible it would not be desirable. The elements of
our economic life, and the capacities of human nature, are too varied
and too complex to be forced with advantage into any one system,
whether capitalism, Socialism, or co-operation. Any single system or
form of socio-economic organisation would prove an intolerable
obstacle to individual opportunity and social progress. Multiplicity
and variety in social and industrial orders are required for an
effective range of choices, and an adequate scope for human effort. In
a general way the limits of co-operation in relation to the other
forms of economic organisation have been satisfactorily stated by Mr.
Aneurin Williams: "I suggest, therefore, that where there are great
monopolies, either natural or created by the combination of
businesses, there you have a presumption in favour of State and
municipal ownership. In those forms of industry where individuality is
everything; where there are new inventions to make, or to develop or
put on the market, or merely to adopt in some rapidly transformed
industry; where the eye of the master is everything; where reference
to a committee, or appeals from one official to another, would cause
fatal delay: there is the natural sphere of individual enterprise pure
and simple. Between these two extremes there is surely a great sphere
for voluntary association to carry on commerce, manufacture, and
retail trade, in circumstances where there is no natural monopoly, and
where the routine of work is not rapidly changing, but on the whole
fairly well established and constant."[159]

The province open to co-operation is, indeed, very large. If it were
fully occupied the danger of a social revolution would be
non-existent, and what remained of the socio-industrial problem would
be relatively undisturbing and unimportant. The "specialisation of
function" in industrial organisation, as outlined by Mr. Williams,
would give a balanced economy in which the three great socio-economic
systems and principles would have full play, and each would be
required to do its best in fair competition with the other two.
Economic life would exhibit a diversity making strongly for social
satisfaction and stability, inasmuch as no very large section of the
industrial population would desire to overthrow the existing order.
Finally, the choice of three great systems of industry would offer the
utmost opportunity and scope for the energies and the development of
the individual. And this, when all is said, remains the supreme end of
a just and efficient socio-industrial organisation.


REFERENCES ON SECTION II

     FISHER: The Rate of Interest. New York; 1907.

     CASSEL: Nature and Necessity of Interest. London; 1903.

     GONNER: Interest and Saving. London; 1906.

     LANDRY: L'Intérêt du Capital. Paris; 1904.

     MENGER: The Right to the Whole Produce of Labour. London;
     1899.

     CATHREIN-GETTELMAN: Socialism. St. Louis; 1904.

     SKELTON: Socialism: A Critical Analysis. New York; 1911.

     SPARGO: Socialism. Macmillan; 1906.

     WALLING: Socialism As It Is. New York; 1912.

     HILLQUIT-RYAN: Socialism: Promise or Menace? Macmillan; 1914.

     SAVATIER: La Théorie Moderne du Capital et la Justice. Paris;
     1898.

     GARRIGUET: Régime du Travail. Paris; 1908.

     FUNK: Zins und Wucher. Tübingen; 1868.

     HOLYOAKE: The History of Co-operation. London; 1906.

     FAY: Co-operation at Home and Abroad. London; 1908.

     WILLIAMS: Copartnership and Profit-Sharing. Henry Holt & Co.;
     1913.

     MANN, SIEVERS, COX: The Real Democracy. London; 1913.

     Also the works of Taussig, Devas, Antoine, Hobson, Nearing,
     Willoughby, and Hitze, which were given at the end of the
     introductory chapter.

FOOTNOTES:

[153] Professor Scott Nearing estimates the annual income derived from
the ownership of property in the United States; that is, land and all
forms of capital, at from six to nine billion dollars. Professor W. I.
King gives the combined shares of the national income received by the
landowners and the capitalists at more than six and three-quarter
billions in 1910. According to the Census Bulletin on the "Estimated
Valuation of National Wealth," the capital goods of the country were
in 1912 approximately $175,000,000,000.00. At four per cent. this
would mean an annual income of seven billion dollars. The lowest of
the three estimates, six billion dollars, is equivalent to more than
sixty dollars a year for every man, woman, and child in the United
States. If that sum were equally distributed among the whole
population, it would mean an increase of between forty and sixty per
cent. in the income of the majority of workingmen's families! Nor do
present tendencies hold out any hope of an automatic reduction of the
interest-burden in the future. In the opinion of Professor Scott
Nearing, "the present economic tendencies will greatly increase the
amount of property income paid with each passing decade." "Income," p.
199; New York, 1915. See especially ch. vii. According to Professor
Taussig, "the absolute amount of income going to this [the capitalist]
class tends to increase, and its share of the total income tends also
to increase; whereas for the labourers, though their total income may
increase, their share of income of society as a whole tends to
decline." "Principles of Economics," II, 205.

[154] "Lehrbuch der Nationaloekonomie," III, 517.

[155] Fay, "Co-operation at Home and Abroad," p. 340.

[156] Schloss, "Methods of Industrial Remuneration," pp. 353, 354.

[157] Cf., however, Mr. A. R. Orage's work, "National Guilds," London,
1914.

[158] Op. cit., p. 341.

[159] "Copartnership and Profit-Sharing," p. 235.



SECTION III

THE MORAL ASPECT OF PROFITS



CHAPTER XV

THE NATURE OF PROFITS


We have seen that rent goes to the landlord as the price of land use,
while interest is received by the capitalist as the return for the use
of capital. The two shares of the product which remain to be
considered include an element which is absent from both rent and
interest. The use for which profits and wages are paid comprises not
merely the utilisation of a productive factor, but the sustained
exertion of the factor's owner. Like the landowner and the capitalist,
the business man and the labourer put the productive factors which
they control at the disposal of the industrial process; but they do so
only when and so long as they exercise human activity. The shares that
they receive are payments for the continuous output of human energy.
No such significance attaches to rent or interest.


_The Functions and Rewards of the Business Man_

Who is the business man, and what is the nature of his share of the
product of industry? Let us suppose that the salaried manager of a hat
factory decides to set up a business of the same kind for himself. He
wishes to become an entrepreneur, an undertaker, a director of
industry, in more familiar language, a business man. Let us assume
that he is without money, but that he commands extraordinary financial
credit. He is able to borrow half a million dollars with which to
organise, equip, and operate the new enterprise. Having selected a
favourable site, he rents it on a long term lease, and erects thereon
the necessary buildings. He installs all the necessary machinery and
other equipment, hires capable labour, and determines the kinds and
quantities of hats for which he thinks that he can find a market. At
the end of a year, he realises that, after paying for labour of all
sorts, returning interest to the capitalist and rent to the landowner,
defraying the cost of repairs, and setting aside a fund to cover
depreciation, he has left for himself the sum of ten thousand dollars.
This is the return for his labour of organisation and direction, and
for the risk that he underwent. It constitutes the share called
profits, sometimes specified as net profits.

This case is artificial, since it assumes that the business man is
neither capitalist nor landowner in addition to his function as
director of industry. It has, however, the advantage of distinguishing
quite sharply the action of the business man as such. For the latter
merely organises, directs, and takes the risks of the industrial
process, finds a market for the product, and receives in return
neither rent nor interest but only profits. In point of fact, however,
no one ever functions solely as business man. Always the business man
owns some of the capital, and very often some of the land involved in
his enterprise, and is the receiver not only of profits but of
interest and rent. Thus, the farmer is a business man, but he is also
a capitalist, and frequently a landowner. The grocer, the clothier,
the manufacturer, and even the lawyer and the doctor own a part at
least of the capital with which they operate, and sometimes they own
the land. Nevertheless their rewards as business men can always be
distinguished from their returns as capitalists and landowners by
finding out what remains after making due allowance for rent and
interest.

It is a fact that many business men, especially those directing the
smaller establishments, use the term profits to include rent and
interest on their own property. In other words, they describe their
entire income from the business as profits. In the present discussion,
and throughout this book generally, profits are to be understood as
comprising merely that part of the business man's returns which he
takes as the reward of his labour, and as insurance against the risks
affecting his enterprise. Deduct from the business man's total income
a sum which will cover interest on his capital at the prevailing rate
and rent on his land, and you have left his income as business man,
his profits.


_The Amount of Profits_

In a preceding chapter we have seen that where the conditions of
capital are the same, there exists a fairly uniform rate of interest.
No such uniformity obtains in the field of profits. Businesses subject
to the same risks and requiring the same kind of management yield very
different amounts of return to their directors. In a sense the
business man may be regarded as the residual claimant of industry.
This does not mean that he takes no profits until all the other agents
of production have been fully remunerated, but that his share remains
indeterminate until the end of the productive period, say, six months
or a year, while the shares of the other agents are determined
beforehand. At the end of the productive period, the business man may
find that his profits are large, moderate, or small, while the
landowner, the capitalist, and the labourer ordinarily obtain the
precise amounts of rent, interest, and wages that they had expected to
obtain. That there exists no definite upper limit to profits is proved
by the history of modern millionaires. That there exists no rigid
lower limit is proved by the large proportion of enterprises that meet
with failure.

Nevertheless it would be wrong to infer that the volume of profits is
governed by no law whatever, or that they show no tendency toward
uniformity in any part of the industrial field. There is a calculated
or preconceived minimum. No man will embark in business for himself
unless he has reason to expect that it will yield him, in addition to
protection against risks, an income as large as he could obtain by
hiring his services to some one else. In other words, contemplated
profits must be at least equal to the income of the salaried business
manager. No tendency toward uniformity of profits exists among very
large enterprises nor among industries which are constantly adopting
new methods and new inventions. In businesses of small and moderate
size, and in those whose methods have become standardised, such as a
retail grocery store, or a factory that turns out staple kinds of
shoes, profits tend to be about the same in the great majority of
establishments. In such industries the profits of the business man do
not often exceed the salary that he could command as general manager
for some one else in the same kind of business.

Professor King estimates the total volume of profits in the United
States in 1910 as almost eight and one-half billion dollars. This was
27.5 per cent. of the national product, as against 24.6 per cent. in
1890 and 30 per cent. in 1900.[160] He interprets the fall in the wage
earners' share which has taken place since 1890 (53.5 to 46.9 per
cent.) as indicating a considerable increase in the share of those
business men who control the very large industries. "The promoters and
manipulators of these concerns have received, as their share of the
spoils, permanent income claims, in the shape of securities, large
enough to make Croesus appear like a pauper."[161] Moreover, even
outside this monopoly field, the more able and successful business men
seem to have obtained in recent years what might be termed a
relatively large share of the product of industry. The exceptionally
efficient undertakers, those possessing the imagination, foresight,
judgment, and courage to take full advantage of the recent
improvements in the industrial arts, and in the methods of production
generally, seem to have advanced in wealth and income more rapidly
than any other class that has been subject to the operation of
competition.


_Profits in the Joint-Stock Company_

Up to this point we have been considering the independent business
man, the undertaker who manages his enterprise either alone or as a
member of a partnership. In all such concerns it is easy to identify
the business man. Who or where is the business man in a joint stock
company? Where are the profits, and who gets them?

Strictly speaking, there is no undertaker or business man in a
corporation. His functions of ownership, responsibility, and direction
are exercised by the whole body of stockholders through the board of
directors and other officers. It is true that in very many, probably
in most corporations, one or a very few of the largest stockholders
dominate the policies of the concern, and exercise almost as much
power and authority as though they were the sole owners. Neither
these, however, nor any other officer in a corporation receives
profits in the same sense as the independent owner of a business. For
their active services the officers of the corporation are given
salaries; for the risks that they undergo as owners of the stock they
are compensated in the same way as all the other stockholders, that
is, through a sufficiently high rate of dividend. For example, in
railroads the bonds usually pay from four to five per cent., the stock
from five to six per cent. The bonds represent borrowed money, and are
secured by a mortgage on the physical property. The stock represents
the money invested by the owners, and is subject to all the risks of
ownership; hence its holders require the protection which is afforded
by the extra one per cent. which they obtain over that paid to the
bondholders.

While a corporation has no profits in the sense of a reward for
directive activity or a protection against risk, it frequently
possesses profits in the sense of a surplus which remains after costs
and expenses of every kind have been defrayed. These profits are
ordinarily distributed pro rata among the stockholders, either
outright in the form of an extra dividend, or indirectly through
enlargement of the property and business of the company. They are
surplus gains or profits having the same intermittent and speculative
character as the extra gains which the individual business man
sometimes obtains in addition to those profits which are necessary to
remunerate him for his labour, and protect him against risks. They are
not profits in the ordinary economic sense of the term.

FOOTNOTES:

[160] "The Wealth and Income of the People of the United States," 158,
160.

[161] Idem, p. 218.



CHAPTER XVI

THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE


Before taking up the question of the morality of profits, it will be
helpful, if not necessary, to consider the chief rules of justice that
have been or might be adopted in distributing the product of industry
among those who participate actively in the productive process. While
the discussion is undertaken with particular reference to the rewards
of the business man, it will also have an important bearing on the
compensation of the wage earner. The morality of rent and interest
depends upon other principles than those governing the remuneration of
human activity; and it has been sufficiently treated in chapters xii
and xiii. The canons of distribution applicable to our present study
are mainly six in number: arithmetical equality; proportional needs;
efforts and sacrifices; comparative productivity; relative scarcity;
and human welfare.


_The Canon of Equality_

According to the rule of arithmetical equality, all persons who
contribute to the product should receive the same amount of
remuneration. With the exception of Bernard Shaw, no important writer
defends this rule to-day. It is unjust because it would treat unequals
equally. Although men are equal as moral entities, as human persons,
they are unequal in desires, capacities, and powers. An income that
would fully satisfy the needs of one man would meet only 75 per cent.,
or 50 per cent., of the capacities of another. To allot them equal
amounts of income would be to treat them unequally with regard to the
requisites of life and self development. To treat them unequally in
these matters would be to treat them unequally as regards the real and
only purpose of property rights. That purpose is welfare. Hence the
equal moral claims of men which admittedly arise out of their moral
equality must be construed as claims to equal degrees of welfare, not
to equal amounts of external goods. To put the matter in another way,
external goods are not welfare; they are only means to welfare;
consequently their importance must be determined by their bearing upon
the welfare of the individual. From every point of view, therefore, it
is evident that justice in industrial distribution must be measured
with reference to welfare rather than with reference to incomes, and
that any scheme of distribution which provided equal incomes for all
persons would be radically unjust.

Moreover, the rule of equal incomes is socially impracticable. It
would deter the great majority of the more efficient from putting
forth their best efforts and turning out their maximum product. As a
consequence, the total volume of product would be so diminished as to
render the share of the great majority of persons smaller than it
would have been under a rational plan of unequal distribution.


_The Canon of Needs_

The second conceivable rule is that of proportional needs. It would
require each person to be rewarded in accordance with his capacity to
use goods reasonably. If the task of distribution were entirely
independent of the process of production, this rule would be ideal;
for it would treat men as equal in those respects in which they are
equal; namely, as beings endowed with the dignity and the potencies of
personality; and it would treat them as unequal in those respects in
which they are unequal; that is, in their desires and capacities. But
the relation between distribution and production cannot be left out
of account. The product is distributed primarily among the agents of
production only, and it must be so distributed as to give due
consideration to the moral claims of the producer as such. The latter
has to be considered not merely as a person possessing needs, but as a
person who has contributed something to the making of the product.
Whence arise the questions of relative efforts and sacrifices, and
relative productivity.

Since only those who have contributed to the product participate in
the distribution thereof, it would seem that they should be rewarded
in proportion to the efforts and sacrifices that they exert and
undergo. As an example of varying effort, let us take two men of equal
needs who perform the same labour in such a way that the first expends
90 per cent. of his energy, while the second expends 60 per cent. As
an example of varying sacrifice, let us take the ditch digger, and the
driver who sits all day on the dump wagon. In both these examples the
first man expends more painful exertion than the second. This would
seem to make a difference in their moral desert. Justice would seem to
require that in each case compensation should be proportionate to
exertion rather than to needs. At any rate, the claims of needs should
be modified to some extent in favour of the claims of exertion. It is
upon the principle of efforts and sacrifices that we expect our
eternal rewards to be based by the infinitely just Rewarder. The
principle of needs is likewise in conflict with the principle of
comparative productivity. Men generally demand rewards in proportion
to their products. The validity of this demand we shall examine in a
subsequent paragraph.

Like the rule of arithmetical equality, the rule of proportional needs
is not only incomplete ethically but impossible socially. Men's needs
vary so widely and so imperceptibly that no human authority could use
them as the basis of even an approximately accurate distribution.
Moreover, any attempt to distribute rewards on this basis alone would
be injurious to social welfare. It would lead to a great diminution in
the productivity of the more honest, the more energetic, and the more
efficient among the agents of production.


_The Canon of Efforts and Sacrifice_

The third canon of distribution, that of efforts and sacrifices, would
be ideally just if we could ignore the questions of needs and
productivity. But we cannot think it just to reward equally two men
who have expended the same quantity of painful exertion, but who
differ in their needs and in their capacities of self development. To
do so would be to treat them unequally in the matter of welfare, which
is the end and reason of all distribution. Consequently the principle
of efforts and sacrifices must be modified by the principle of needs.
Apparently it must also give way in some degree to the principle of
comparative productivity. When two men of unequal powers make equal
efforts, they turn out unequal amounts of product. Almost invariably
the more productive man believes that he should receive a greater
share of the product than the other. He believes that the rewards
should be determined by productivity.

It is evident that the rule of efforts and sacrifices, like those of
equality and needs, could not be universally enforced in practice.
With the exception of cases in which the worker is called upon
regularly to make greater sacrifices owing to the disagreeable nature
of the task, attempts to measure the amounts of effort and painful
exertion put forth by the different agents of production would on the
whole be little more than rough guesses. These would probably prove
unsatisfactory to the majority. Moreover, the possessors of superior
productive power would in most instances reject the principle of
efforts and sacrifices as unfair, and refuse to do their best work
under its operation.

The three rules already considered are formally ethical, inasmuch as
they are directly based upon the dignity and claims of personality.
The two following are primarily physical and social; for they measure
economic value rather than ethical worth. Nevertheless, they must have
a large place in any system which includes the factor of competition.


_The Canon of Productivity_

According to this rule, men should be rewarded in proportion to their
contributions to the product. It is open to the obvious objection that
it ignores the moral claims of needs and efforts. The needs and
use-capacities of men do, indeed, bear some relation to their
productive capacities, and the man who can produce more usually needs
more; but the differences between the two elements are so great that
distribution based solely upon productivity would fall far short of
satisfying the demands of needs. Yet we have seen that needs
constitute one of the fundamentally valid principles of distribution.
Between productivity on the one hand and efforts and sacrifices on the
other, there are likewise important differences. When men of equal
productive power are performing the same kind of labour, superior
amounts of product do represent superior amounts of effort; when the
tasks differ in irksomeness or disagreeableness, the larger product
may be brought into being with a smaller expenditure of painful
exertion. If men are unequal in productive power their products are
obviously not in proportion to their efforts. Consider two men whose
natural physical abilities are so unequal that they can handle with
equal effort shovels differing in capacity by fifty per cent.
Instances of this kind are innumerable in industry. If these two men
are rewarded according to productivity, one will get fifty per cent.
more compensation than the other. Yet the surplus received by the more
fortunate man does not represent any action or quality for which he is
personally responsible. It corresponds to no larger output of personal
effort, no superior exercise of will, no greater personal desert. It
is based solely upon a richer physical endowment by the Creator.

It is clear, then, that the canon of productivity cannot be accepted
to the exclusion of the principles of needs and efforts. It is not the
only ethical rule of distribution. Is it a valid partial rule?
Superior productivity is frequently due to larger effort and expense
put forth in study and in other forms of industrial preparation. In
such cases it demands superior rewards by the title of efforts and
sacrifices. Where, however, the greater productivity is due merely to
higher native qualities, physical or mental, the greater reward is not
easily justified on purely ethical grounds. For it represents no
personal responsibility, will-effort, or creativeness. Nevertheless,
the great majority of the more fortunately endowed think that they are
unfairly treated unless they are recompensed in proportion to their
products. Sometimes this conviction is due to the fact that such men
wrongly attribute their larger product to greater efforts. In very
many cases, however, the possessors of superior productive power
believe that they should be rewarded in proportion to their products,
regardless of any other principle or factor. Probably the true
explanation of this belief is to be found in man's innate laziness.
While the prevalence of the conviction that superior productivity
constitutes a just title to superior compensation, does create some
kind of a presumption in favour of its correctness, it must be
remembered that presumption is not proof. Weighing this presumption
against the objective considerations on the opposite side of the
argument, we take refuge in the conclusion that the ethical validity
of the canon of comparative productivity can neither be certainly
proved nor certainly disproved.

Like the rules of equality, needs, and efforts, that of productivity
cannot be universally enforced in practice. It is susceptible of
accurate application among producers who perform the same kind of work
with the same kind of instruments and equipment; for example, between
two shovellers, two machine operators, two bookkeepers, two lawyers,
two physicians. As a rule, it cannot be adequately applied to a
product which is brought into existence through a combination of
different processes. The engine driver and the track repairer
contribute to the common product, railway transportation; the
bookkeeper and the machine tender co-operate in the production of
hats; but we cannot tell in either case whether the first contributes
more or less than the second, for the simple reason that we have no
common measure of their contributions. Sometimes, however, we can
compare the productivity of _individuals_ engaged in different
processes; that is, when both can be removed from the industry without
causing it to come to a stop. Thus, it can be shown that a single
engine driver produces more railway transportation than a single track
repairer, because the labour of the latter is not indispensable to the
hauling of a given load of cars. But no such comparison can be made as
between the whole body of engine drivers and the whole body of track
repairers, since both groups are indispensable to the production of
railway transportation. Again, a man can be shown to exert superior
productivity because he affects the productive process at more points
and in a more intimate way than another who contributes to the product
in a wholly different manner. While the surgeon and the attendant
nurse are both necessary to a surgical operation, the former is
clearly more productive than the latter. When due allowance is made
for all such cases, the fact remains that in a large part of the
industrial field it is simply impossible to determine remuneration by
the rule of comparative productivity.


_The Canon of Scarcity_

It frequently happens that men attribute their larger rewards to
larger productivity, when the true determining element is scarcity.
The immediate reason why the engine driver receives more than the
track repairer, the general manager more than the section foreman, the
floorwalker more than the salesgirl, lies in the fact that the former
kinds of labour are not so plentiful as the latter. Were general
managers relatively as abundant as section foremen their remuneration
would be quite as low; and the same principle holds good of every pair
of men whose occupations and products are different in kind. Yet the
productivity of the general managers would remain as great as before.
On the other hand, no matter how plentiful the more productive men may
become, they can always command higher rewards than the less
productive men in the same occupation, for the simple reason that
their products are superior either in quantity or in quality. Men
engaged upon the more skilled tasks are likewise mistaken when they
attribute their greater compensation to the intrinsic excellence of
their occupation. The fact is that the community cares nothing about
the relative nobility, or ingenuity, or other inherent quality of
industrial tasks or functions. It is concerned solely with products
and results. As between two men performing the same task, superior
efficiency receives a superior reward because it issues in a larger or
better product. As between two men performing different tasks,
superior skill receives superior compensation simply because it can
command the greater compensation; and it is able to do this because it
is scarce.

In most cases where scarcity is the immediate determinant of rewards,
the ultimate determinant is, partly at least, some kind of sacrifice.
One reason why chemists and civil engineers are rarer than common
labourers is to be found in the greater cost of preparation. The
scarcity of workers in occupations that require no special degree of
skill is due to unusual hazards and unpleasantness. In so far as
scarcity is caused by the uncommon sacrifices preceding or involved in
an occupation, the resulting higher rewards obviously rest upon most
solid ethical grounds. However, some part of the differences in
scarcity is the result of unequal opportunities. If all young persons
had equal facilities of obtaining college and technical training, the
supply of the higher kinds of labour would be considerably larger than
it now is, and the compensation would be considerably smaller.
Scarcity would then be determined by only three factors; namely,
varying costs of training, varying degrees of danger and
unattractiveness among occupations, and inequalities in the
distribution of native ability. As a consequence, competition would
tend to apportion rewards according to efforts, sacrifices, and
efficiency.

How can we justify the superior rewards of that scarcity which is not
due to unusual costs of any sort, but merely to restricted
opportunity? So far as society is concerned, the answer is simple: the
practice pays. As to the possessors of the rarer kinds of ability,
they are in about the same ethical position as those persons whose
superior productivity is derived entirely from superior native
endowment. In both cases the unusual rewards are due to factors
outside the control of the recipients; to advantages which they
themselves have not brought into existence. In the former case the
decisive factor and advantage is opportunity; in the latter it is a
gift of the Creator. Now we have seen that this sort of productivity
cannot be proved to be immoral as a canon of distribution;
consequently the same statement will hold good of this sort of
scarcity.


_The Canon of Human Welfare_

We say "human" welfare rather than "social" welfare, in order to make
clear the fact that this canon considers the well being of men not
only as a social group, but also as individuals. It includes and
summarises all that is ethically and socially feasible in the five
canons already reviewed. It takes account of equality, inasmuch as it
regards all men as persons, as subjects of rights; and of needs,
inasmuch as it awards to all the necessary participants in the
industrial system at least that amount of remuneration which will meet
the elementary demands of decent living and self development. It is
governed by efforts and sacrifices, at least in so far as they are
reflected in productivity and scarcity; and by productivity and
scarcity to whatever extent is necessary in order to produce the
maximum net results. It would give to every producer sufficient
remuneration to evoke his greatest net contribution to the productive
process. Greatest "net" contribution; for a man's _absolute_ maximum
product may not always be worth the required price. For example: a man
who for a salary of 2500 dollars turns out a product valued at 3000
dollars, should not be given 3000 dollars in order to induce him to
bring forth a product worth 3300 dollars. In this case a salary of
2500 dollars evokes the maximum net product, and represents the reward
which would be assigned by the canon of human welfare. Once the vital
needs of the individual have been safeguarded, the supreme guide of
the canon of human welfare is the principle of maximum net results, or
the greatest product at the lowest cost.

It is not contended here that this canon ought never to undergo
modification or exception. Owing to the exceptional hazards and
sacrifices of their occupation, a combination of producers might be
justified in exacting larger compensation than would be accorded them
by the canon of human welfare on the basis of net results in the
present conditions of supply and scarcity. Unusual needs and
capacities might also justify a strong group in pursuing the same
course. All that is asserted at present is that in conditions of
average competition the canon of human welfare is not unjust. And this
is all that is necessary as a preliminary to the discussion of just
profits.[162]

FOOTNOTE:

[162] A very suggestive discussion of the psychology, the general
principles, and the practical limitations of distributive justice,
will be found in an article by Gustav Schmoller, entitled, "The Idea
of Justice in Political Economy." It is No. 113 in the Publications of
the American Academy of Political and Social Science.



CHAPTER XVII

JUST PROFITS IN CONDITIONS OF COMPETITION


We have seen that profits are that share of the product of industry
which goes to the business man. They comprise that residual portion
which he finds in his hands after he has made all expenditures and
allowances for wages, salaries, interest at the prevailing rate on
both his own and the borrowed capital, and all other proper charges.
They constitute his compensation for his labour of direction, and for
the risks of his enterprise and capital.

In the opinion of most Socialists, profits are immoral because they
are an essential element of an unjust industrial system, and because
they are not entirely based upon labour. Under Socialism the
organising and directing functions that are now performed by the
business man, would be allotted to salaried superintendents and
managers. Their compensation would include no payment for the risks of
capital, and it would be fixed instead of indeterminate. Hence it
would differ considerably from present-day profits.

To the assertion that profits are immoral a sufficient reply at this
time is that Socialism has already been shown to be impracticable and
inequitable. Consequently the system of private industry is
essentially just, and profits, being a necessary element of the
system, are essentially legitimate. The question of their morality is
one of degree not of kind. It will be considered under two principal
heads: the right of the business man to obtain indefinitely large
profits; and his right to a certain minimum of profits.


_The Question of Indefinitely Large Profits_

As a general rule, business men who face conditions of active
competition have a right to all the profits that they can get, so long
as they use fair business methods. This means not merely fair and
honest conduct toward competitors, and buyers and sellers, but also
just and humane treatment of labour in all the conditions of
employment, especially in the matter of wages. When these conditions
are fulfilled, the freedom to take indefinitely large profits is
justified by the canon of human welfare. The great majority of
business men in competitive industries do not receive incomes in
excess of their reasonable needs. Their profits do not notably exceed
the salaries that they could command as hired managers, and generally
are not more than sufficient to reimburse them for the cost of
education and business training, and to enable them to live in
reasonable conformity with the standard of living to which they have
become accustomed.

Efforts and sacrifices are reflected to some extent in the different
amounts of profits received by different business men. When all due
allowance is made for chance, productivity, and scarcity, a
considerable proportion of profits is attributable to harder labour,
greater risk and worry, and larger sacrifices. Like the principle of
needs, that of efforts and sacrifices is a partial justification of
the business man's remuneration.

Those profits which cannot be justified by either of the titles just
mentioned, are ethically warranted by the principles of productivity
and scarcity. This is particularly true of those exceptionally large
profits which can be traced specifically to that unusual ability which
is exemplified in the invention and adoption of new methods and
processes in progressive industries. The receivers of these large
rewards have produced them in competition with less efficient business
men. While the title of productivity does not entirely satisfy the
seeker for decisive ethical sanctions, it is stronger morally than any
opposing considerations that can be invoked. It is probably as strong
as some other principles that we have to accept as the best attainable
in the very difficult field of industrial ethics.

Nevertheless, it would seem that those business men who obtain
exceptionally large profits could be reasonably required to transfer
part of their gains to their employés in the form of higher wages, or
to the consumers in the form of lower prices. Both of these methods
have been followed by Henry Ford, the automobile manufacturer. Neither
of them is certainly demanded by the principles of strict justice;
they rest upon the feebler and less decisive principle of general
equity or fairness.[163] This concept is less definite than those of
charity and justice, and stands midway between them. It comes into
operation when an action is obligatory on stricter grounds than those
of charity, and yet cannot with certainty be required on grounds of
justice. Notwithstanding its vagueness, it is sufficiently strong to
make the average conscientious man feel uncomfortable if he neglects
its prescriptions entirely. It has, therefore, sufficient practical
value to deserve a place in the ethics of distribution. And it seems
to have sufficient application to the problem before us to justify the
statement that the receivers of exceptionally large profits are bound
in equity to share them with those persons who have co-operated in
producing and providing them, namely, wage earners and consumers.

In the field of profits the canon of human welfare is not only sound
ethically but expedient socially. It permits the great majority of
business men to obtain, if they can, sufficient remuneration to meet
their reasonable needs. Whether it requires society to _guarantee_ at
least this amount of profit-income is a question that we shall examine
presently. It encourages efforts, and makes for the maximum social
product by permitting business men to retain all the profits that they
can get in conditions of fair competition. Does it forbid any attempt
by society to limit exceptionally large profit-incomes? If the limit
were placed very high, say, at 50,000 dollars per year, it would not
apparently check the productive efforts of the great majority of
business men, since they never hope to pass that figure. Whether it
would have a seriously discouraging effect upon the activity and
ambition of those who do hope to reach, and of those who have already
reached that level, is uncertain. Among business men who are
approaching or who have passed the 50,000 dollars annual profit-income
mark, the desire to possess more money is frequently weaker as a
motive to business activity than the longing for power and the driving
force of habit. At any rate, the question is not very practical. Any
sustained attempt to limit profits by law would require such extensive
and minute supervision of business that the policy would prove to be
socially intolerable and unprofitable. The espionage involved in the
policy would provoke general resentment, and the amount of profits
that could be diverted either to the State or to private persons would
be relatively insignificant.

Thus far we have been considering the independent business man and
business firm, not the joint stock company or corporation. In the
latter form of organisation, the labour of direction is remunerated by
fixed salaries to the executive officers, while the risks of
enterprise and capital are covered by the regular dividends received
by the whole body of stockholders. Consequently the only revenues
comparable to profits are the surplus gains that remain after wages,
salaries, interest, dividends, rent, and all other expenses and
charges have been met. These are apportioned through one process or
another among the stockholders. On what ethical principle can they be
thus distributed? The general principle of productivity, or superior
productivity, is the only one available. If a corporation which uses
fair methods of competition can obtain surplus gains, while the
majority of its competitors fail to do so, the cause must be sought in
its superior business management. This superiority must be credited to
the whole body of stockholders, even though the great majority of them
are responsible for it only in a very remote way, through their
selection of the executive officers. The stockholders surely have a
better claim to these surplus gains than any other group in the
community. At the same time, they are, like the independent business
man, bound by the principle of equity to share the surplus with the
labourers and consumers.


_The Question of Minimum Profits_

Has the business man a strict right to a minimum living profit? In
other words, have all business men a right to a sufficient volume of
sales at sufficiently high prices to provide them with living profits
or a decent livelihood? Such a right would imply a corresponding
obligation upon the consumers, or upon society, to furnish the
requisite amount of demand at the required prices. Is there such a
right, and such an obligation?

No industrial right is absolute. They are all conditioned by the
possibilities of the industrial system, and by the desires,
capacities, and actions of the persons who enter into industrial
relations with one another. As we shall see later, this statement is
true even of the right to a living wage. When the industrial resources
are adequate, all persons of average ability who contribute a
reasonable amount of labour to the productive process have a right to
a decent livelihood on two conditions: first, that such labour is
their only means of sustenance; and, second, that their labour is
economically indispensable to those who utilise it or its product.
"Economically indispensable" means that the beneficiary of the labour
would rather give the equivalent of a decent livelihood for it than go
without it. While both these conditions are apparently fulfilled in
the case of the great majority of wage earners, they are only rarely
realised with regard to business men. In most instances the business
man who is unable to make living profits could become an employé, and
thus convert his right to a decent livelihood into a right to a living
wage. Even when no such alternative is open to him, he cannot claim a
strict right to living profits, for the second condition stated above
remains unfulfilled. The consuming public does not regard the business
function of such men as economically indispensable. Rather than pay
the higher prices necessary to provide living profits for the
inefficient business men, consumers will transfer their patronage to
the efficient competitors. Should the retail grocer, for example,
raise his prices in the effort to get living profits, his sales would
fall off to such an extent as to reduce his profits still lower. While
the consumers may be willing to fulfil their obligation of furnishing
living profits for all necessary grocers, they are not willing, nor
are they morally bound, to do so in the case of grocers whose
inability to command sufficient patronage at remunerative prices shows
that they are not necessary to the community. The consuming public
does not want to employ such business men at such a cost.

Nor is the State under obligation to ensure living profits for all
business men. To carry out such a policy, either by enforcing a
sufficiently high level of prices, or by subsidising those who fail to
obtain living profits, would be to compel the public to support
inefficiency.

In the foregoing paragraphs we have assumed that the inability of the
business men under consideration to get living profits is due to their
own lack of capacity as compared with their more efficient
competitors. When, however, their competitors are not more efficient,
but are enabled to undersell through the use of unfair methods, such
as adulteration of goods and oppression of labour, a different moral
situation is presented. Honest and humane business men undoubtedly
have a claim upon society to protection against such unfair
competition. And the consumers are under obligation to make reasonable
efforts to withhold their patronage from those business men who
practise dishonesty and extortion.


_The Question of Superfluous Business Men_

Although we have rejected as impractical the proposal to set a legal
limit to profit-incomes, we have to admit that many of the abler
business men would continue to do their best work even if the profits
that they could hope to obtain were considerably smaller in volume.
These men hold a strategic position in industry, inasmuch as they are
not subject to the same degree of constant competition as the other
agents of production.[164] Were the supply of superior business
capacity more plentiful, their rewards would be automatically reduced,
and the burden of profits resting upon society would be to that extent
diminished. On the other hand, the number of mediocre business men,
especially in the distributive industries, is much larger than is
necessary to supply the wants of the community. This constitutes a
second unnecessary volume of payments under the head of profits. Is
there no way by which these wastes can be reduced?

The volume of exceptionally large profits could be diminished by an
extension of the facilities of technical and industrial education.
Thus the number of persons qualifying as superior business men could
be gradually increased, competition among this class of men would be
intensified, and their rewards correspondingly diminished.

The profits that go to superfluous business men, especially in the
class known as middlemen, can be largely eliminated through
combination and co-operation. The tendency to unite into a single
concern a large number of small and inefficient enterprises should be
encouraged up to the point at which the combination threatens to
become a monopoly. That this process is capable of effecting a
considerable saving in business profits as well as in capital, has
been amply demonstrated in several different lines of enterprise. As
we have seen in a preceding chapter, the co-operative movement,
whether in banking, agriculture, or stores, has been distinctly
successful in reducing profits. Millions of dollars are thus diverted
every year from unnecessary profit-receivers to labourers, consumers,
and to the man of small resources generally. Yet the co-operative
movement is only in its infancy. It contains the possibility of
eliminating entirely the superfluous business man, and even of
diminishing considerably the excessive profits of the exceptionally
able business man.

FOOTNOTES:

[163] Cf. pp. 212, 213 of Castelein's "Philosophia Moralis et
Socialis."

[164] Cf. Hobson, "The Industrial System," chapter on "Ability."



CHAPTER XVIII

THE MORAL ASPECT OF MONOPOLY


The conclusion was drawn in the last chapter that the surplus gains of
corporations operating in conditions of competition, can justly be
retained by the stockholders as the remuneration of exceptional
productive efficiency. It is, of course, to be understood that the
proper allowance for interest on the capital is not necessarily the
amount authorised by the stipulated rate of dividend on the stock, but
the prevailing or competitive rate of interest plus an adequate rate
of insurance against the risks of the enterprise. If the prevailing
rate of interest is five per cent., and the risk is sufficiently
protected by an allowance of one per cent., the fair rate of return on
the investment is six per cent. The fact that a concern may actually
award its stockholders ten per cent. dividends, has no bearing on the
determination of the genuine surplus. If the actual surplus that
remains after paying all other charges and allowing ten per cent. on
the stock, is only 50,000 dollars, whereas it would be 100,000 dollars
with an allowance of only six per cent., then the true surplus gains,
or profits, are the latter amount not the former. No part of the
100,000 dollars can be justified as interest on capital. It must all
find its justification as profits proceeding from superior
productivity.

Bearing in mind this distinction between the actual rate of dividend
and the proper allowance for interest on capital, we take up the
question of the morality of profits or surplus gains in conditions of
monopoly.


_Surplus and Excessive Profits_

Several of the great industrial combinations of the United States have
obtained profits which are commonly stigmatised as "excessive." For
example, the Standard Oil Company paid, from 1882 to 1906, an average
annual dividend of 24.15 per cent. on the capital stock, and had
profits in addition at the rate of about 8 per cent. annually;[165]
from 1904 to 1908 the American Tobacco Company averaged 19 per cent.
on its actual investment;[166] and the United States Steel Corporation
obtained an average annual return of 12 per cent. on its investment
from 1901 to 1910.[167] A complete list of the American monopolies
that have reaped more than the competitive rate of return on their
capital would undoubtedly be a very long one.

Is it possible to justify such returns? Has a monopoly a right to take
surplus gains? Let us suppose a concern which is getting 15 per cent.
on its investment. Inasmuch as the risks are smaller than in
competitive enterprises, six per cent. is an ample allowance for
interest. Of the remaining 9 per cent., 4 per cent., we shall assume,
is derived from economies of production as compared with the great
majority of competitive concerns. This portion of the surplus, being
the reward of superior efficiency, may be retained by the owners of
the monopoly quite as justly as similar gains are taken by the
exceptionally efficient corporation in conditions of competition. The
objection that the monopoly ought to share these gains with the
public, since it limits individual opportunity in a socially
undesirable way, has some merit, but it can scarcely be urged on
grounds of strict justice. At most it points only to an obligation in
equity.

By what canon of distribution can the retention of the other 5 per
cent. of surplus gain be justified? Not by the titles of needs and
efforts, for these have already been satisfied through the salaries
paid to those stockholders who perform labour in the management of the
concern. These titles afford no basis for any other claim than that
which proceeds from labour. They cannot be made to justify claims made
on behalf of capital. Not by the title of productivity, for this has
already been remunerated in the 4 per cent. just considered. Not as
interest on capital, for ample allowance has already been made under
this head in the original 6 per cent. As we have seen in an earlier
chapter, the only reasons that give ethical support to interest on
capital are the sacrifice that is involved in some kinds of saving,
the possibility that interest is necessary in order to induce the
provision of sufficient capital, the certainty that the State would be
unable to enforce the abolition of interest, and some presumptive
considerations. Since all of these reasons and ends are satisfied by
the competitive rate of interest, none of them will justify the
exaction of more than the competitive rate. It is not possible to
justify a higher rate on either social or individual grounds.
Therefore, the only basis that is left upon which to defend the
retention of the five per cent. surplus that we are discussing, is the
power of appropriation. The monopoly possesses the economic strength
to take this five per cent. because it is able to impose higher than
competitive prices upon the consumer. Obviously such power has no
greater ethical sanction or validity than the pistol of the
highwayman. In both cases the gains are the product of extortion.

The conclusion that men have no right to more than the competitive
rate of interest, as interest, on their capital, and that a monopoly
has consequently no right to those surplus gains that are not produced
by superior efficiency, is confirmed by public opinion and by the
decisions of the courts. The monopolistic practice of taking more than
the usual rate of returns on capital merely because there exists the
power to take it, is universally condemned as inequitable. In fixing
the charges of public service corporations, the courts with practical
unanimity allow only the rate of return that is obtainable in
competitive conditions of investment.

The statement that the monopoly may retain those surplus gains which
are derived from superior efficiency assumes, of course, that fair
wages have been paid to employés, and fair prices to the sellers of
materials, and that fair methods have been used toward competitors. In
so far as any of these conditions is not met, the monopolistic concern
has no right to surplus gains of any sort. All three of the claims
just mentioned are morally stronger than the claim to superior rewards
because of superior efficiency.


_The Question of Monopolistic Efficiency_

So much for the moral principle. What proportion of the surplus gains
of monopoly are due to extortionate prices rather than to economies in
production, cannot be known even approximately. According to Justice
Brandeis, who is one of the most competent authorities in this field,
only a very small part of these gains are derived from superior
efficiency.[168] Professor E. S. Meade writes: "During a decade
[1902-1912] of unparalleled industrial development, the trusts,
starting with every advantage of large capital, well-equipped plants,
financial connections, and skilled superintendence, have not
succeeded."[169] On the other hand, President Van Hise thinks that,
"the weight of argument is strongly in favour of the increased
efficiency of large combinations of industry on the average."[170] The
difference of opinion existing among students of this subject is due
to lack of adequate data, particularly to the absence of such uniform
and comprehensive systems of accounting as would be required to
provide a basis for reliable general conclusions. Opposing particular
statements may be equally true, because based upon different
instances; but general statements are little better than guesses.

Let us approach the question from another side, that of prices.
Whenever the charges imposed by monopolistic concerns upon their
products are higher than those that would have prevailed under
competition, the surplus gains are obviously to that extent not due to
superior efficiency. They have their source in the arbitrarily made
prices. The Final Report of the United States Industrial Commission,
which was made at the beginning of the year 1902, declared that, "in
most cases the combination has exerted an appreciable power over
prices, and in practically all cases it has increased the margin
between raw materials and finished products."[171] Since the cost of
production had decreased during the preceding decade, this increase in
the margin, and the ensuing increased profits, necessarily involved an
increase in prices to the consumer. Taking the period of 1897-1910,
and comparing the movement of prices between eighteen important
trust-controlled products, and the same number of important
commodities not produced by monopolistic concerns, Professor Meade
concluded that the former were sold at a "much lower" relative level
than the latter.[172] His computations were based upon figures
compiled by the Bureau of Labour. According to the Commissioner of
Corporations, the Standard Oil Company "has taken advantage of its
monopoly power to extort prices much higher than would have existed
under free competition."[173] The same authority shows that the
American Tobacco Company used its power to obtain considerably more
than competitive prices on some of its products.[174] Excessive
prices, as measured by the standards of competition, were also
established by the United States Steel Corporation, the American Sugar
Refining Company, and the combinations in meat packing and in
lumber.[175]

A safe statement would probably be that the greater part of the
surplus gains of the most conspicuous American monopolies have been
due to excessive prices rather than to economies of production.

Let us turn from the subject of unjust monopoly gains to that of
unfair methods used by the great combinations toward their
competitors. These methods are mainly three: discriminative
underselling, exclusive-selling contracts, and advantages in
transportation.


_Discriminative Underselling_

The first of these practices is exemplified when a monopoly sells its
goods at unprofitably low rates in competitive territory, while
maintaining higher prices elsewhere; and when it offers at very low
prices those kinds of goods which are handled by competitors, while
holding at excessively high prices the kinds of commodities over which
it has exclusive control. Both forms of the practice seem to have been
extensively used by most of the monopolistic concerns of America.[176]
The Standard Oil Company has been perhaps the most conspicuous
offender in this field.[177] This practice is unjust because it
violates the fundamental moral principle that a man has a right to
pursue a lawful good without hindrance through illicit means. Among
the illicit means enumerated by the moral theologians are force,
fraud, deception, lying, slander, intimidation, and extortion.[178]

The illicit means employed in discriminative underselling are chiefly
extortion and deception. If the very low prices at which the monopoly
sells in the field which contains competitors were maintained outside
of that field also, and if they were continued not merely until the
independent concerns were driven out of business, but indefinitely
afterward, no injustice would be done the latter. For no man has a
natural right to any particular business. If a powerful concern can
eliminate competitors through low prices made possible by superior
efficiency, the competitors are not unjustly treated. They have no
more just cause of complaint than the inefficient grocer whose custom
is attracted from him by other and more efficient merchants. The
offence is at the worst contrary to charity. But when the monopoly
maintains the low and competition-eliminating prices only locally and
temporarily, when it is enabled to establish and continue these prices
only because it sells its goods at extortionate rates elsewhere, the
latter prices are evidently the instrument or means by which the
competitors are injured and eliminated. In that case the monopoly
violates the right of the competitors to pursue a lawful good immune
from unfair interference. The lawful good is a livelihood from this
kind of business; and the illicit interference is the unjust prices
maintained outside the competitive field.

In the preceding paragraph we have assumed that the extortionate
prices are operative at the same time as the excessively low prices,
but in a different place. Suppose that the former are imposed only
after the independent concerns are eliminated. The injustice to the
competitors remains the same as in the preceding case. Although the
extortionate prices are later in time, they are the instrumental cause
of the destructive low prices through which the competitors were
driven out of business. If the owners of the monopoly were not certain
of their ability to establish the subsequent extortionate prices, they
would not have put into effect the unprofitably low prices. Hence
there is a true causal connection between the former and the latter.
Although the connection is mainly psychical, through the consciousness
of the monopoly owners, it is none the less real and effective. Its
practical effectiveness is seen in the fact that the subsequent
possibility of imposing extortionate prices will induce men to lend
the monopoly money to carry on the process of exterminating
competition. The process is maintained by means of the extortionate
prices quite as effectively as though the two things were
simultaneous.

In so far as the patrons of the independent concerns are deceived into
expecting that the very low prices will be permanent, and in so far as
this impression causes them to withdraw their patronage from the
independents, the latter are injured through another illicit means,
namely, deception. The competitors have a right not to be deprived of
their customers through imposture.

What is the measure of extortionate prices in this connection? How can
we know that the high, competition-eliminating prices are really
extortionate? There are only two possible tests of just price. The
first is the proper cost of production,--fair wages to labour, fair
prices for materials, and fair interest on capital. If the monopoly
does not raise prices above this level, it obviously does not impose
extortionate prices, nor inflict injustice upon the eliminated
competitor. Moreover, if the monopoly has introduced economies of
production it may, as we have seen, justly charge prices somewhat
above the cost-of-production level. But it may not raise them above
the level that would have prevailed under competition. This is the
second test of just price. No possible justification can be found,
except one to be mentioned presently, for charging the consumers
higher prices than they could have obtained under competitive
conditions. At such prices the monopoly will be able to secure the
prevailing rate of interest on its capital, and all the surplus gains
that proceed from superior efficiency. A higher scale of prices will
be, therefore, extortionate, and the competitors who are eliminated
through its instrumentality will be the victims of injustice.[179]

The exception alluded to above occurs when the monopoly uses the
excess which it obtains over the competitive price to pay fair wages
to those labourers who were insufficiently compensated in competitive
conditions. In such a case the eliminated competitors would have no
just claim against the monopoly; for their elimination took place in
the just interest of the producers. The case, however, is purely
academic, since the discriminative underselling practised by our
monopolistic concerns has not been impelled by any such motive, nor
has it achieved any such result.


_Exclusive-Sales Contracts_

The second unfair method employed by monopolies toward competitors is
that of exclusive-selling contracts, sometimes called the "factor's
agreement." It requires the dealer, merchant, or jobber to refrain
from selling the goods produced by independent concerns, on penalty of
being refused the goods produced by the monopoly. The merchant is
compelled to choose between the less important line of wares to be had
from the former, and the more important line obtainable from the
latter. He will not be permitted to handle both. "Here is somebody who
has been buying goods, let us say, by way of illustration, from the
American Tobacco Company, and a rival producer comes in whom the
merchant likes to patronise. He buys goods for a time from the rival,
and an agent of the trust sends him a note to the effect that he must
not buy any more from that rival corporation; that, if he does so, the
trust will give all of its own goods, some of which the merchant is
obliged to have, to another agent. That will probably bring him to
terms."[180] By this method the independent manufacturer can be
deprived of sufficient patronage to injure him seriously, and perhaps
to drive him out of business.

This process is one of intimidation brought to bear upon the merchant.
Through fear of loss he is compelled to discontinue selling the goods
of the competing manufacturer. It is a kind of secondary boycott. As
such, it is an unreasonable interference with the liberty of the
merchant unless its object is to compel him to do something that he
may be reasonably required to do. In the case that we are considering,
the object of the pressure is not of that character; for to drive the
rival manufacturer out of business, or to assist in his expulsion, is
not a reasonable thing. The exclusive-selling contract which is forced
upon the merchant is quite as unreasonable as though its purpose were
to prevent him from, say, patronising manufacturers having red hair.
Being thus unreasonable, thus injurious to individual liberty, it
violates not only the law of charity but that of justice. It
transgresses the merchant's right to enter reasonable contracts with
the rival manufacturer, and if it results in a pecuniary loss to the
former it is an invasion of his rights of property. It likewise
violates the rights of the competitive manufacturer, since it is among
the unfair means which may not be used to prevent a man from pursuing
a legitimate good. It is an unfair means because it involves
unreasonable intimidation, uncharity, and injustice toward the
merchant. When the independent manufacturer is injured through such an
instrumentality, he suffers injustice quite as certainly at the hands
of the monopoly as though his property were destroyed through the
strong-arm methods of hired thugs.


_Discriminative Transportation Arrangements_

Concerning the third unfair method, discriminative advantages in
transportation, the United States Industrial Commission declared: "It
is incontestable that many of the great industrial combinations had
their origin in railroad discrimination. This has been emphasised many
times in the history of the Standard Oil Company, and of the great
monopolies dealing in live stock, dressed beef, and other
products."[181] The American Sugar Refining Company has been several
times convicted of receiving illegal favours from railroads, and has
paid in fines thousands upon thousands of dollars. Sometimes the
monopoly has openly been accorded lower freight rates than its
competitors, and sometimes it has paid the regular charges, and then
received back a part of them as a refund or rebate. At one time the
Standard Oil Company obtained rebates not only on its own shipments,
but on those of its rivals![182]

Special advantages of this sort necessarily involve injustice to the
competitors of the monopoly. If the low rates given to the
monopolistic concern are a sufficiently high price for the service of
carrying freight, the higher charges imposed upon the competing
concerns are extortionate; if the former rates are unprofitably low,
the difference between sufficient and insufficient freight charges is
made up by the independent concerns. In the former case the
independents pay the railroad too much; in the latter case they bear
burdens that should properly rest upon the monopoly. The monopolistic
concern is partly responsible for this injustice inasmuch as it urges
and often intimidates the railroad to establish the discriminating
rates.

All three of the practices that we have been considering are
universally condemned by public sentiment. They are all likewise under
the ban of statutory law. The first two have recently received
detailed and explicit prohibition in the Clayton Anti-Trust Act.


_Natural Monopolies_

Up to this point we have been dealing with private and artificial
monopolies. We turn now to consider briefly those natural and
quasi-public monopolies which are either tacitly or explicitly
recognised as monopolies by public authority, and whose charges are to
a greater or less extent regulated by some department of the State.
Such are, for example; steam railroads and municipal utilities. When
the charges made for the services of these corporations are
_adequately_ regulated by public authority, the owners of such
concerns will have a right to all the surplus gains that they can
obtain. In that case a contract is made between the corporation and
the public which is presumably fair to both parties, and which
represents the social estimate of what is just. If the public
authorities have not sufficiently safeguarded the interests of the
people, if they have permitted the charges to be so high as to provide
excessive returns for the corporation, the latter is under no moral
obligation to refrain from reaping the full benefit of the State's
negligence or incompetence. If, however, the unduly high rates have
been brought about through bribery, extortion, or deception practised
by the corporation, the inequitable contract thus arranged will not
justify the surplus gains thus produced. For example; if the
corporation deliberately and effectively conceals the real value of
its property through stockwatering, and thus misleads the public
authority into permitting charges which return twelve instead of six
per cent. on the actual investment, the corporation cannot forthwith
justly claim the surplus gain represented by the extra six per cent.

When the public authorities either fail entirely to regulate charges,
or do so only spasmodically and partially, the quasi-public monopoly
will not necessarily have a right to all the obtainable surplus gains.
For a long time the express companies of the United States were
permitted to exact what charges they pleased, and even yet the rates
on some of our railroads are not adequately regulated by the State. In
such cases the charges imposed on the public are not an adequate
expression of the social estimate of justice, nor an adequate basis of
legitimate surplus gains. In the absence of sufficient public
regulation, a quasi-public monopoly is morally bound to fix its
charges at such a level as will enable it to obtain only the
prevailing rate of interest on the investment, and such surplus gains
as it can produce through exceptional efficiency. In all such cases
the public service corporation is in the same moral position as the
artificial monopoly: it has no possible basis except superior
efficiency for claiming or getting any returns above the competitive
rate of interest on its capital. Its only possible reason for
obtaining more is the fact that it has the power to take more. This
fact has obviously no moral validity.


_Methods of Preventing Monopolistic Injustice_

How shall the injustices of monopoly be prevented in the future? So
far as quasi-public monopolies are concerned, all students of the
subject are now agreed that these should be permitted to exist under
adequate governmental regulation as to prices and service. The reason
is that in this field successful and useful competition is impossible.
Public utility corporations are natural monopolies, and must be dealt
with by the method of regulation until such time as they are brought
under the ownership and operation of the State. With regard to the
great industrial combinations which have become or threaten to become
artificial monopolies, there exists substantial agreement among
competent authorities on one point, and disagreement on another point.
All admit that the unfair competitive methods described in an earlier
part of this chapter should be stringently prohibited. No possible
reason can be found for legal toleration of these or any other
discriminative, uncharitable, or unjust practices on the part of
stronger toward weaker competitors.

The disagreement among students of monopoly relates to the fundamental
question of permitting or not permitting these combinations to exist.
According to the first theory, of which Mr. Justice Brandeis is the
most distinguished exponent, no new industrial monopolies should be
permitted, and those that we have should be dissolved. The basis of
this theory is the assumption that all the economies and all the
productive efficiency found in monopolistic concerns can be developed
and maintained in smaller business organisations, and that the method
of prevention and dissolution is the simplest means of protecting the
public against the danger of extortionate monopoly prices. Attention
has been called in a preceding paragraph to the impossibility of
determining whether the great monopolistic combinations have on the
average shown themselves to be more efficient than concerns subject
to active and adequate competition. It is significant, however, that
in the discussion of this subject which took place at the twenty-sixth
annual meeting of the American Economic Association, at Minneapolis in
1913, the economists who participated were practically unanimous in
holding that the superior efficiency of the trusts had not been
demonstrated, but was a matter of serious doubt, and that the burden
of proof of their alleged superiority had been definitely shifted upon
those who maintained the affirmative.[183] Probably the great majority
of the whole body of American economists would share these
conclusions.

On the other hand, the opponents of prevention and dissolution, of
whom Mr. George W. Perkins is probably the most conspicuous, point to
the obvious economies of large-scale over small-scale production, and
contend that these are sufficient reason for permitting and even
encouraging the great combinations. The power to oppress competitors
by unjust methods of business, and the public by extortionate prices,
should be kept under rigid control by supervision, and government
regulation of maximum prices. But the arguments advanced in favour of
this position are never conclusive. Most of its advocates fail to
realise, or at least to take adequately into account, the difference
between large-scale production and production by a monopoly. While the
large plant and the large business organisation have in many lines of
manufacture and trade a considerable advantage over the small plant
and the small organisation, there is not a scintilla of evidence to
show that the efficiency of magnitude increases indefinitely with
magnitude. There is no proof that the maximum efficiency is reached
only with the maximum size of the business unit. On the contrary, all
the evidence that we have points to the conclusion that in every field
of industrial and commercial enterprise, all the economies of
magnitude and of combination are obtained long before the concern
becomes a monopoly. There is not an industry of any importance in the
United States in which all the advantages of bigness and concentration
cannot be made operative in concerns that control as low as
twenty-five per cent. of the total product. The highest economy and
efficiency can be obtained without monopoly.

Indeed, this is admitted by the more reasonable advocates of the
regulation and price-fixing policy. While maintaining that
"concentration must go far in order to give the maximum of
efficiency," President Van Hise does not hold "that it should go to
the extent that the element of monopoly enters"; and he would have the
law "declare restraint of trade unreasonable that gets to monopoly,"
and fix the definite per cent. of business control which constitutes a
monopoly.[184] We are justified, therefore, in concluding that the
theory of prevention and dissolution (provided that the competing
units are not made so small as to destroy the certain economies of
magnitude) rather than the theory of permission and regulation,
indicates the sound economic and social policy of dealing with
monopolies.


_Legalised Price Agreements_

President Van Hise advocates the regulation policy in a modified form.
In substance his view is that, while no corporation should be
permitted to control the greater part of any product, monopolistic
price-agreements should be sanctioned and regulated by law. No amount
of restrictive legislation, he maintains, can secure universal
competition in the matter of prices. Experience shows that the
destructive results of cut-throat competition compel the more powerful
competitors to make price agreements in some lines of business.[185]
For example; all the retail grocers in a city are often found selling
certain staples at a uniform price for long periods of time.
Agreements of this sort should, in the opinion of President Van Hise,
be formally permitted by law, with the proviso that a government
commission should fix the maximum and possibly the minimum limits. And
he contends that the task of fixing fair maximum and minimum prices
would be much less difficult than is commonly supposed, and that it
would be much simpler and easier than the task of regulating railway
freight rates.

Whatever may be the merits of this plan, it is not likely to be
embodied in legislation in the near future. So far as we can see now,
the American people are committed to the policy of endeavouring to
restore genuine competition by prohibiting those predatory practices
to which the great monopolies mainly owe their existence. The attempt
will be made to give competition a fair opportunity to prevent both
monopolistic control of products and monopolistic fixing of prices.
Competition has not enjoyed any such opportunity during the last
quarter of a century. If this attempt should fail after a thorough
trial, the time will be at hand for the regulation of prices by the
government. Until that time has arrived (let us hope that it never
will arrive) the State will not, and should not, embark upon such a
large and difficult experiment.

FOOTNOTES:

[165] Report of the Commissioner of Corporations on the Petroleum
Industry, II, 40, 41.

[166] Report of the Commissioner of Corporations on the Tobacco
Industry, II, 26-34.

[167] Report of the Commissioner of Corporations on the Steel
Industry, I, 51. According to F. J. McRae, the expert accountant for
the Stanley congressional investigating committee, this concern
secured 40 per cent. on the _cost_ of its property.

[168] Hearings Before the Interstate Commerce Committee, U. S. Senate,
Part XVI, pages 1146-1166.

[169] _The Journal of Political Economy_, April, 1912, p. 366.

[170] "Concentration and Control," p. 20.

[171] Page 621.

[172] _The Journal of Political Economy_, April, 1912, p. 363.

[173] Report on the Petroleum Industry, II, 74.

[174] Report on the Tobacco Industry, II, 27.

[175] Cf. Van Hise, op. cit., pp. 140, 149, 153, 159.

[176] Final Report of the Industrial Commission, pp. 660-662.

[177] Report on the Petroleum Industry, I, 328-332.

[178] Cf. Lehmkuhl, "Theologia Moralis," I, No. 974.

[179] It may be of interest to recall the mediæval attitude toward
monopolistic exactions, as summarily stated by St. Antoninus, who was
archbishop of Florence in the first half of the fifteenth century:
"When monopolist merchants agree together to preserve a fixed price,
so as to secure an unlimited profit, they are guilty of sinful
trading." He maintained that they should not sell above the market
price, and should be prevented from so doing by law. See his "Summa
Theologica," III, 8, 3, iv, and II, 1, 16, ii. Present day moral
theologians lay down the same doctrine, and in addition condemn the
characteristic monopolistic methods as unjust. See Tanquerey, "De
Justitia," nos. 776, 777; Lehmkuhl, "Theologia Moralis," vol. I, no.
1119.

[180] Clark, "The Problem of Monopoly," p. 35.

[181] Final Report, p. 361.

[182] Report on the Petroleum Industry, pp. 22, 23.

[183] "Papers and Proceedings," pp. 158-194.

[184] Op. cit., pp. 20, 251.

[185] Op. cit., pp. 254-265.



CHAPTER XIX

THE MORAL ASPECT OF STOCK WATERING


In the last chapter we saw that a monopoly has no right to gains in
excess of the competitive rate of interest on its capital, except in
so far as these have been derived from superior efficiency. Now
superior efficiency is clearly present whenever the monopolistic
concern obtains surplus gains by selling its product at competitive
prices, or at the prices that would have prevailed under competition.
Evidently the surplus in such a case is due to the greater
productivity of the monopoly as compared with the average productivity
of competitive concerns. When, however, the monopoly charges prices
above the competitive level, its surplus gains cannot all be
attributed to unusual efficiency. A part if not all of them are the
result simply of the power to take; consequently they are immoral.

One of the means by which some monopolies have obtained unjust surplus
gains is overcapitalisation, or stockwatering. This practice is rarely
found in businesses that are subject to normal competition. So far as
the consumer is concerned, a corporation that cannot fix prices
arbitrarily has nothing to gain by inflating its capital. Unless it
develops exceptional efficiency, it cannot hope to obtain more than
the competitive rate of interest on its capital; if it does become
exceptionally efficient, it can take the resulting surplus gains
without arousing public resentment or criticism. In either case, it
will have no sufficient reason to deceive the public by exaggerating
the amount of its capital. When a competitive concern does water its
stock, the object will be to defraud investors. If the scheme is
successful the unjust surplus gains are taken by one set of
stockholders from another set of stockholders. Whenever anything of
this sort occurs, the deceptive devices employed are so crude and
obvious that they present no special problem for the moralist. Even as
practised by monopolies, stockwatering raises no principle that has
not been already discussed. It does, however, create some special
difficulties in the matter of applying the moral principles involved.
Consequently, it may with advantage be considered in a separate
chapter.

The general definition of overcapitalisation is capitalisation in
excess of the proper valuation of a business. What is the measure of
proper valuation? According to many corporation directors, it is
earning power. If a concern is able to get the prevailing rate of
interest on a capitalisation of ten million dollars, that is the
proper capitalisation for that concern, even though the money actually
invested might not have exceeded five million dollars. In the opinion
of most other persons, however, a company is overcapitalised when the
face value of its securities is greater than the money put into the
business plus the subsequent enhancement in the value of its land.
"The money put into the business," means that which has been expended
for labour, materials, land, equipment, and all other items and costs
of organising the concern, together with the sum that is necessary to
cover the interest not obtained by the investors during the
preparatory period before the business became productively operative.
The increase in the value of the land after its acquisition by the
company also deserves a place in the legitimate valuation, and may
reasonably be represented by an appropriate amount of securities.
Monopolistic corporations have as good a right, generally speaking, to
profit by the "unearned increment" of land as competitive concerns. In
brief, the proper measure of capitalisation is cost: either the
original cost, as just explained and supplemented; or the present
cost of reproducing the business.


_Injurious Effects of Stockwatering_

Stockwatering can become an instrument of unjust gains in two ways:
first, through fraud inflicted upon some of the investors; second,
through the imposition of exorbitant prices upon the consumers. The
former cannot occur so long as the process of inflation does not go
beyond earning power; for in that case all stockholders, barring
dishonest manipulation of the company's receipts, will obtain the
normal rate of interest on their investment. If, however, stock is
sold in excess of the earning power of the concern, those stockholders
who fail to obtain the ordinary rate of interest on their money are
unjustly treated in so far as they have been deceived. And those
officers or other members of the corporation who have profited by the
deception of and injury to these stockholders, are the recipients of
unjust gains. Daniel Drew inflated the capitalisation of the Erie
Railroad from seventeen millions to seventy-eight millions within four
years for the purpose of manipulating the stock market; owing to
excessive issues of stock, the American Shipbuilding Company was
thrown into bankruptcy to the great injury of all but one of its
stockholders;[186] because they issued securities to buy subsidiary
railway lines at exorbitant prices, and to provide extravagant
commissions and discounts for bankers, the directors of the 'Frisco
System forced it into a receivership, after having inflicted a net
loss of four million dollars per year upon the stockholders.[187] Many
other notable performances might be cited where stockwatering, both in
railroads and in industrial concerns, has defrauded investors of
millions of dollars, and enabled a few powerful directors to reap
corresponding enormous profits.

At first sight it would seem that stockwatering is of little or no
importance to the consumer. Since a monopolistic concern endeavours to
fix its prices at the point that will yield the maximum net profit in
any case, the amount of stock in existence would seem to be irrelevant
to the problem. Nevertheless, the presence of a large quantity of
fictitious capital whose owners are calling for dividends, sometimes
constitutes a special force impelling the imposition of higher prices
and charges. "It will happen at times that overcapitalisation does at
least cause a clinging to high prices. The managers of an
overcapitalised monopoly may have to face the fact that great blocks
of securities are outstanding, very likely issued by their
predecessors, and now held by all sorts of investors. They are then
loath to let go any slice of its profits. We have seen that often the
monopoly principle of maximum net profit is not applied in its full
sweep, especially in industries which are potentially subject to
public control. Where abnormal returns on the original investment have
been made, concessions to public opinion in the way of low rates and
better facilities are more likely to come when capitalisation has not
been inflated."[188] The United States Industrial Commission found
that as regards railroads: "In the long run excessive capitalisation
tends to keep rates high; conservative capitalisation tends to make
rates low."[189]

This indirect influence of stockwatering toward excessive rates and
prices becomes effective in two ways. The existence of fictitious
capital conceals from the public the high rate of return that is
obtained on the true valuation, thus preventing effective action for a
reduction in prices and charges; and it sometimes causes the
rate-making authorities to allow rates to be sufficiently high to
yield something to the investors in the inflated capital. If a trust
or a railroad has issued stock having a par value of twice the capital
invested, its rate of dividend on the entire capitalisation will be
only one-half the rate of interest that it is receiving on the
investment. If it pays, for example, seven per cent. on all its stock,
it will be getting fourteen per cent. on its genuine capital. While
the consumers of tobacco, or the patrons of a railroad, would raise no
outcry against seven per cent. dividends, they would probably begin to
agitate for an enforcement of the anti-trust laws, and for a reduction
in freight and passenger charges, if they realised that they were
providing for dividends of fourteen per cent. Nor is the public
adequately protected by government investigations of trusts and
regulation of railway rates. Despite the anti-trust laws, many
American monopolies have for many years received exorbitant profits
through excessive prices imposed upon the consumer; and in many of
these instances overcapitalisation and its resulting concealment of
real profits have been of considerable assistance to the extortionate
monopoly. In fixing railway rates, the Interstate Commerce Commission,
and the various state railroad commissions, have been seriously
hampered by their inability to determine the real investment of the
roads, and to separate the genuine from the fictitious capitalisation.
Not until the year 1913 did the national government begin the task of
making a valuation of interstate railroad property, and the work will
require several years. Very few of the states have made valuations of
the railroads within their borders. In the meantime it is certain that
many of the rates fixed by both the national and the state bodies will
continue, as in the past, to be higher than they would have been if
the true value of the railroads were known and accepted as the basis
of freight and passenger charges.

The second bad effect of stockwatering on the consumer is seen when
rate-fixing bodies deliberately permit the charges of public service
corporations to be high enough to include some returns on that portion
of the capitalisation which is fictitious. It is very difficult for
such authorities to resist entirely the plea of the "innocent
investor." Consequently, railroad commissions and other rate making
authorities, and even the courts, have occasionally made some
provision for dividends on the "water." Chairman Knapp of the
Interstate Commerce Commission admitted a few years ago that, in
considering the reasonableness of a given rate, this body took into
account the financial condition, and therefore the capitalisation of
the railroad.[190] In 1914 and 1915 practically all the great railway
systems of the United States made powerful, and in a measure
successful, appeals to the Interstate Commerce Commission for a rise
in rates on the ground that they were unable to pay the normal rate of
interest on their securities, and hence could not obtain on
advantageous terms new capital needed for improvements. Had the
capitalisation of the roads been kept down to the actual investment,
most of them would have been able to pay the competitive rate of
interest on all their stock, and still have a sufficient surplus to
command excellent credit.


_The Moral Wrong_

When prices or charges are made high enough to provide returns on
fictitious capital, the consumer is treated unjustly. As we have shown
more than once, the consumer cannot rightfully be required to pay for
the products of a monopoly at a greater rate than is necessary to
provide the competitive rate of interest on capital in the average
conditions of efficiency. If some concerns are able to sell at this
price, and still obtain surplus gains, they have a right thereto on
account of their exceptional productivity. But the capital upon which
a monopolistic concern has a claim to the prevailing rate of interest,
is genuine capital: that is, the actual investment as interpreted
above, not an inflated capitalisation. The consumers may justly be
required to pay for the use and benefit of actual productive goods;
but it is not just that they should be compelled to pay for the
supposed use of a capital that has no concrete reality.

The stockholders of the monopolistic corporation which imposes upon
the consumers exorbitant prices or charges through the instrumentality
of inflated capitalisation, can become guilty of this injustice in two
ways: by promoting the improper capitalisation; and by getting
dividends on stock for which they have not given a fair equivalent. As
a rule, the greater part of such guilt and responsibility rests upon
certain special and powerful groups among the stockholders. For
example; the J.P. Morgan syndicate which organised the United States
Steel Corporation received for that service securities to the value of
$63,500,000. "There can be no question," says the Commissioner of
Corporations, "that this huge compensation to the syndicate was
greatly in excess of a reasonable payment."[191] The syndicate was
able to exact this stupendous sum mainly because some of its members
were also in control of some of the companies that were brought into
the combination. "In other words, as managers of the Steel Corporation
these various interests virtually determined their compensation as
underwriters."[192] In the opinion of the minority members of the
Stanley congressional investigating committee, "such a sum bore no
relation whatever to the service rendered, the risk run, and the
capital advanced."[193] The majority of the committee characterised
the transaction in even stronger language. It is clear, therefore,
that the syndicate committed injustice toward the consumers both by
organising a monopoly which afterward imposed unjust prices, and by
taking millions of dollars in securities which its members did not
earn, and on which they received interest through the exorbitant
prices. While this transaction is exceptionally conspicuous, it is
substantially typical of the methods by which many powerful monopolies
have watered their stock to the detriment of the public, and the
advantage of a small group of directors and financiers.


_The "Innocent" Investor_

Is the State obliged to protect, or is even justified in protecting,
the innocent victims of stockwatering? That is to say, should
rate-making authorities fix the charges of public service corporations
high enough to return some interest to the purchasers of fictitious
securities? All the facts and presumptions of the case seem to demand
an answer in the negative. In the first place, it is impossible to
distinguish the "innocent" holders from those who were fully
acquainted with the questionable and speculative nature of the stock
at the time it came into their possession. In the second place, the
civil law has never formally recognised any such claim on the part of
even innocent investors, nor any such obligation on the part of
itself. It has never laid down the principle that any class of
investors in fictitious stock has a legal or moral right to obtain the
normal rate of interest on such stock through the imposition of
sufficiently high charges upon the consumers. Nor have the courts,
except in isolated instances, sanctioned any such principle. On the
contrary, the Supreme Court of the United States, in the case of Smyth
vs. Ames, declared that a railroad "may not impose upon the public the
burden of such increased rates as may be required for the purpose of
realising profits upon such excessive valuation or fictitious
capitalisation." In the third place, when we consider the matter from
the side of morals, we see that the innocent investors are not the
only persons whose rights are involved. If charges are placed high
enough to cover interest on fictitious capital, the cost and the
injury fall upon the consumers. The latter have a right to the
services of utility corporations, such as railways and gas companies,
at a fair price; that is, a price which will return to the capital put
into the concern the prevailing rate of interest, plus whatever gains
are obtained by exceptional efficiency. To require them to pay more
than this, is to compel them to give something for nothing; namely, to
provide interest on capital which does not exist, and from which they
receive no benefit. When, therefore, the State intervenes to secure
fair charges for the consumers, it should base them upon the capital
actually invested and used in the business of public service.

Frequently, however, the State has permitted overcapitalisation, and
charges sufficient to pay normal dividends thereon, for long periods
of years. Has it not thereby encouraged investors to cherish the
expectation that these high charges would be permitted to continue,
and that the fictitious stock would remain indefinitely as valuable as
when it came into their possession? Is it not breaking faith with
these investors when it reduces charges to the basis of the actual
investment? A sufficient answer to these questions is found in the
fact that the State has never officially sanctioned the practice of
stockwatering, nor in any way intimated that it would recognise the
existence of the fictitious stock when it should take up the neglected
task of fixing fair rates and charges. At the most, the civil law has
merely tolerated the practice, and the resulting extortion upon the
public. And there has never been a time when the greater and saner
part of public opinion did not look upon overcapitalisation as at the
least abnormal and irregular. Neither from the civil law nor from
public sentiment have the devices of inflating capitalisation received
that measure of approval which would confer upon investments therein
the legal or the moral status of vested rights. To the "innocent
investor" in watered stocks the maxim, _caveat emptor_, is as fairly
applicable as to the man who has been deceived into lending his money
on insufficient security, or the man who has been induced by the
asseverations of a highly imaginative prospectus to put his money into
a salted gold mine, or the man who buys stolen goods from a pawn shop,
or the man who because of insufficient police protection loses his
purse to a highwayman. In all these cases perfect legal safeguards
would have prevented the loss; yet in none of them does the State
undertake to make the loss good to the innocent victim.

Such seems to be the strict justice of the situation as between the
consumer and the innocent investor. It may sometimes happen that a
particularly grave hardship can be averted from the latter at a
comparatively slight cost to the former. In such a case equity would
seem to require that some concession be made to the investors through
the imposition of somewhat higher charges upon the consumer.


_Magnitude of Overcapitalisation_

Probably the majority of the great steam railroads, street railways,
and gas companies that were organised during the last quarter of the
nineteenth century inflated their capitalisation to a greater or less
extent. Since the year 1900 the trusts have been the chief exponents
and illustrations of the practice. According to President Van Hise,
"the majority of the great concentrations of industry have gone
through two or three stages of reorganisation, the promoters and
financiers each time profiting greatly, sometimes enormously."[194]
For example; in 1908 the "water" in the American Tobacco Company was
estimated by the Commissioner of Corporations at $66,000,000; the
United States Shipbuilding Company diluted its twelve and one-half
million dollars of capital with more than fifty-five millions of
"water"; the United States Steel Corporation contained at the time of
its organisation fictitious capital to the amount of $500,000,000; and
at least fifty per cent. of the common stock of the American Sugar
Refining Company represented no actual investment.[195] Owing to the
penetrating and widespread criticism, and the government
investigations and prosecutions of the last few years, the practice of
stockwatering has very greatly diminished. Perhaps the most flagrant
recent example is that of the Pullman Company, which according to the
testimony of R. T. Lincoln before the Federal Commission on Industrial
Relations, distributed among its stockholders $100,000,000 in stock
dividends between 1898 and 1910.

Nevertheless the temptation to inflate capital will exist until the
device is stringently prohibited by law. Both the nation and the
states ought to adopt the policy of forbidding the sale of stock at
less than par value, and restricting issues of stock to the amount
required for the establishment, equipment, and permanent betterment of
a concern, including a sum to cover the loss of interest to the
investors during the early period of the business. Any extraordinary
risks to which an enterprise is liable can be protected by the simple
device of allowing a correspondingly high rate of interest on the
securities. With such legislation enacted and enforced, neither the
investor nor the consumer could be deceived or defrauded; and the
financing and management of corporations would become less
speculative, and more beneficial to the community. The present chapter
may be fittingly closed with a moderate and significant statement from
the pen of Professor Taussig: "It is doubtful whether the whole
mechanism of irregular and swollen capitalisation was at any time
necessary or wise. Why not provide once for all that securities shall
be issued only to represent what has been invested?... It is
sometimes said that freedom, even recklessness, in the issue of
securities was a useful device, in that it enabled the projectors to
look forward to returns really tempting, and at the same time
concealed these returns from a grudging public.... A more simple and
straightforward way of dealing with the issue of securities might thus
have dampened in some degree the feverish speculation and restless
progress of railway development. But a slower pace would have had its
advantages also, and, not least, restriction of securities would have
saved great complications in the later stages of established monopoly
and needed regulation."[196]

FOOTNOTES:

[186] Cf. Ripley, "Trusts, Pools, and Corporations," pp. 207-210.

[187] See Report of the Interstate Commerce Commission on these
transactions.

[188] Taussig, "Principles of Economics," II, 385, 386.

[189] Final Report, p. 414.

[190] Final Report of the Industrial Commission, p. 413.

[191] Report on the Steel Industry, p. 38.

[192] Idem, p. 39.

[193] _Chicago Record-Herald_, July 29, 1912.

[194] Op. cit., p. 28.

[195] Cf. Van Hise, op. cit., pp. 29, 142, 149.

[196] Op. cit., II, 387, 388.



CHAPTER XX

THE LEGAL LIMITATION OF FORTUNES


If the taxation and other measures of reform suggested in Section I
were fully applied to our land system; if co-operative enterprise were
extended to its utmost practicable limits for the correction of
capitalism; and if the wide extension of educational opportunities,
and the elimination of the surplus gains of monopolies restricted the
profits of the business man to an amount strictly commensurate with
his ability and risks,--if all these results were accomplished the
number of men who could become millionaires through their own efforts
would be so small that their success would arouse popular applause
rather than popular envy. Their claim to whatever wealth they might
accumulate would be generally looked upon as entirely valid and
reasonable. Their pecuniary eminence would be pronounced quite as
deserved as the literary eminence of a Lowell, the scientific eminence
of a Pasteur, or the political eminence of a Lincoln. In such
conditions there could be no disconcerting discussion of the menace of
great fortunes.

In the meantime, these reforms are not realised, nor are they likely
to be even approximately established within the present generation.
For some time to come it will be possible for the exceptionally able,
the exceptionally cunning, and the exceptionally lucky to accumulate
great riches through clever and fortuitous utilisation of special
advantages, natural and otherwise. Moreover, a great proportion of the
large fortunes already in existence will persist, and will be
transmitted to heirs who will in many cases cause them to increase.
Can nothing be done to reduce the size and lessen the number of these
great accumulations? If so, is such a proceeding socially and morally
desirable?


_The Method of Direct Limitation_

The law might directly limit the amount of property to be held by any
individual. If the limit were placed fairly high, say, at one hundred
thousand dollars, it could scarcely be regarded as an infringement on
the right of property. In the case of a family numbering ten members,
this would mean one million dollars. All the essential objects of
private ownership could be abundantly met out of a sum of one hundred
thousand dollars for each person. Moreover, a restriction of this sort
need not prevent a man from bestowing unlimited amounts upon
charitable, religious, educational, or other benevolent causes. It
would, indeed, hinder some persons from satisfying certain unessential
wants, such as, the desire to enjoy gross or refined luxuries, great
financial power, and the control of immense industrial enterprises;
but none of these objects is necessary for any individual's genuine
welfare. In the interest of the social good such private and
unimportant ends may properly be rendered impossible of realisation.

Such a restriction would no more constitute a direct attack upon
private ownership than limitations upon the use and kinds of property.
At present a man may not do what he pleases with his gun, his horse,
or his automobile, nor may he invest his money in the business of
carrying the mails. The limitation of fortunes is just what the word
expresses, a _limitation_ of the right of property. It is not a denial
nor _destruction_ of that right. As a limitation of the amount to be
held by an individual, it does not differ in principle from a
limitation of the kinds of goods that may become the subject of
private ownership. There is nothing in the nature of things nor in the
reason of property to indicate that the right of ownership is
unlimited in quantity any more than it is in quality. The final end
and justification of individual rights of property is human welfare;
that is, the welfare of all individuals severally and collectively.
Now it is quite within the bounds of physical possibility that the
limitation under discussion might be conducive to the welfare of human
beings both as individuals and as constituting society.

Nevertheless the dangers and obstacles confronting any legal
restriction of fortunes are so real as to render the proposal socially
inexpedient. It would easily lend itself to grave abuse. Once the
community had habituated itself to a direct limitation of any sort,
the temptation to lower it in the interest of better distribution and
simpler living would become exceedingly powerful. Eventually the right
of property might take such an attenuated and uncertain form in the
public mind as to discourage labour and initiative, and thus seriously
to endanger human welfare. In the second place, the manifold evasions
to which the measure would lend itself would make it of very doubtful
efficacy. To be sure, neither of these objections is absolutely
conclusive, but taken together they are sufficiently weighty to
dictate that such a proposal should not be entertained so long as
other and less dangerous methods are available to meet the problem of
excessive fortunes.

Four of the nine members of the Federal Commission on Industrial
Relations have suggested that the amount of property capable of being
received by the heirs of any person be limited to one million
dollars.[197] If we assume that by heirs the Commission meant the
natural persons to whom property might come by bequest or succession,
this limitation would permit a family of ten persons to inherit one
hundred thousand dollars each, and a family of five persons to obtain
two hundred thousand dollars apiece. Would such a restriction be a
violation of the right of private ownership? The answer depends upon
the effects of the measure on human welfare. The rights of bequest and
succession are integral elements of the right of ownership; hence they
are based upon human needs, and designed for the promotion of human
life and development. A person needs private property not only to
provide for his personal wants and those of his family during his
lifetime, but also to safeguard the welfare of his dependents and to
assist other worthy purposes, after he has passed away. Owing to the
uncertainty of death, the latter objects cannot be adequately realised
without the institutions of bequest and succession.

All the necessary and rational ends of bequest and succession could be
attained in a society in which no man's heirs could inherit more than
one million dollars. Under such an arrangement very few of the
children of millionaires would be prevented from getting at least one
hundred thousand dollars. That much would be amply sufficient for the
essential and reasonable needs of any human being. Indeed, we may go
further, and lay down the proposition that the overwhelming majority
of persons can lead a more virtuous and reasonable life on the basis
of a fortune of one hundred thousand dollars than when burdened with
any larger amount. The persons who have the desire and the ability to
use a greater sum than this in a rational way are so few that a
limitation law need not take them into account. Corporate persons,
such as hospitals, churches, schools, and other helpful institutions,
should not, as a rule, be restricted as to the amount that they might
inherit; for many of them could make a good use of more than the
amount that suffices for a natural person.

So much for the welfare and rights of the beneficiaries of
inheritance. The owners of estates would not be injured in their
rights of property by the limitation that we are here considering. In
the first place, the number of persons practically affected by the
limitation would be extremely small. Only an insignificant fraction of
property owners ever transmit or expect to be wealthy enough to
transmit to their families more than one million dollars. Of these few
a considerable proportion would not be deterred by the million dollar
limitation from putting forth their best and greatest efforts in a
productive way. They would continue to work either from force of habit
and love of their accustomed tasks, or from a desire to make large
gifts to their heirs during life, or because they wished to assist
some benevolent enterprise. The infinitesimally small number whose
energies would be diminished by the limitation could very safely be
treated as a socially negligible element. The community would be
better off without them.

The limitation of inheritance would, indeed, be liable to abuse.
Circumstances would undoubtedly arise in which the community would be
strongly tempted to make the maximum inheritable amount so low as to
discourage the desire of acquisition, and to deprive heirs of
reasonable protection. While the bad effects of such a limitation
would not be as great as those following a similar abuse with regard
to possessions, they are sufficiently grave and sufficiently probable
to suggest that the legal restriction of bequest and succession should
not be considered except as a last resort, and when the transmission
of great fortunes had become a great and certain public evil.

It seems reasonable to conclude, then, that neither the limitation of
possessions nor the limitation of inheritance is necessarily a direct
violation of the right of property, but that the possible and even
probable evil consequences of both are so grave as to make these
measures of very doubtful benefit. Whether the dangers in question are
sufficiently great to render the adoption of either proposal morally
wrong, is a question that cannot be answered with any degree of
confidence. What seems to be fairly certain is that in our present
conditions legislation of this sort would be an unnecessary and unwise
experiment.


_Limitation Through Progressive Taxation_

Is it legitimate and feasible to reduce great fortunes indirectly,
through taxation? There is certainly no objection to the method on
moral or social principles. As we have seen in chapter viii, taxes are
not levied exclusively for the purpose of raising revenue. Some kinds
of them are designed to promote social rather than fiscal ends. Now,
to prevent and diminish dangerous accumulations of wealth is a social
end which is at least as important as most of the objects sought in
license taxes. The propriety of attempting to attain this end by
taxation is, therefore, to be determined entirely by reference to its
probable effectiveness.

The precise method of taxation available here is a progressive tax on
incomes and inheritances. By a progressive tax is meant one whose rate
advances in some definite proportion to the increases in the amount
taxed. For example, a bequest of 100,000 dollars might pay one per
cent.; 200,000 dollars, two per cent.; 300,000 dollars, three per
cent., and so forth. The reasonableness of the principle of
progression in taxation has been well stated by Professor Seligman:
"All individual wants vary in intensity, from the absolutely necessary
wants of mere subsistence to the less pressing wants which can be
satisfied by pure luxuries. Taxes, in so far as they rob us of the
means of satisfying our wants, impose a sacrifice upon us. But the
sacrifice involved in giving up a portion of what enables us to
satisfy our necessary wants is very different from the sacrifice
involved in giving up what is necessary to satisfy our less urgent
wants. If two men have incomes of one thousand dollars and one hundred
thousand dollars respectively, we impose upon them not equal but very
unequal sacrifices if we take away from each the same proportion, say
ten per cent. For the one thousand dollar individual now has only nine
hundred dollars, and must deprive himself and his family of
necessaries of life; the one hundred thousand dollar individual has
ninety thousand dollars, and if he retrenches at all, which is very
doubtful, he will give up only great luxuries, which do not satisfy
any pressing wants. The sacrifice imposed on the two individuals is
not equal. We are laying on the one thousand dollar man a far heavier
sacrifice than on the one hundred thousand dollar man. In order to
impose equal sacrifices we must tax the richer man not only
absolutely, but relatively, more than the poor man. The taxes must be
not proportional, but progressive; the rate must be lower in the one
case than in the other."[198]

The principle of equality of sacrifices which underlies the
progressive theory does not justify the levelling and communistic
inferences that have sometimes been brought against it. Equality of
sacrifice does not mean equality of satisfied, or unsatisfied, wants
after the tax has been collected. If Brown pays a tax of one per cent.
on his income of two thousand dollars, it does not follow that Jones
with an income of ten thousand dollars should pay a sufficiently high
rate to leave him with only the net amount remaining to Brown; namely,
1980 dollars. Equality of sacrifice means proportional equality of
burden, not equality of net resources after the tax has been deducted.
The object of the progressive rate is to make relatively equal the
sacrifices _caused by the tax itself_, not to equalise the sum total
of burdens or unsatisfied wants that exist among men.

Another objection to progressive taxation is that it readily lends
itself to confiscation of the largest incomes. All that is necessary
to produce this result is to increase the rate with sufficient
rapidity. This could be accomplished either by large steps in the
rate itself or by small steps in the income increases which formed the
basis of the advances in the rate. For example, if the Federal income
tax, which at present levies two per cent. on incomes of more than
three thousand dollars, and three per cent. on incomes of over twenty
thousand dollars, should thereafter progress geometrically with every
geometrically progressive increment of income, the rate on incomes
above $640,000 would be 96 per cent.! Or if the rate should progress
arithmetically with every ten thousand dollars of increase above
twenty thousand dollars, it would be 100 per cent. on incomes of over
$990,000!

To this objection there are two valid answers. Even if the rate should
ultimately reach one hundred per cent. it need not, and on progressive
principles it should not, effect confiscation of an entire income. The
progressive theory is satisfied when the successive rates of the tax
apply to successive increments of income, instead of to the entire
income. For example, the rate might begin at one per cent. on incomes
of one thousand dollars, and increase by one per cent. with every
additional thousand, and yet leave a very large part of the income in
the hands of the receiver. Each one thousand dollars would be taxed at
a different rate, the first at one per cent., the fiftieth at fifty
per cent., and the last at one hundred per cent. If the hundred per
cent. rate were applied to the whole of the higher incomes, it would
be a direct violation of the principle of equality of sacrifice. In
the second place, the progressive theory forbids rather than requires
the rate to go as high as one hundred per cent. While the sacrifices
imposed by a given rate are greater in the case of small than of large
properties, they become approximately equal as between all properties
above a certain high level. After this level is reached, additional
increments of wealth will all be expended either for extreme luxuries,
or converted into new investments. Consequently they will supply
wants of approximately equal intensity. For example, the wants
dependent upon a surplus of 25,000 dollars in excess of an income of
100,000 dollars, and the wants dependent upon a surplus of 75,000
dollars above the same level do not differ materially in strength. To
diminish these surpluses by the same per cent., say, ten, would impose
proportionally equal burdens.

Hence the rate of progression should be degressive; that is, it should
increase at a constant pace until a certain high level of income is
reached, then increase at a steadily diminishing pace, and finally
become uniform on the very highest incomes. For example; if the rate
increased one per cent. with every additional five thousand dollars,
reaching fifteen per cent. on incomes of seventy-five thousand
dollars, it should be on eighty thousand dollars, not sixteen but
fifteen and one-half per cent. On 85,000 dollars the rate should be
15-3/4 per cent.; on 90,000, 15-7/8 per cent.; on 95,000, 15-15/16 per
cent.; and on all sums of 100,000 and over, 16 per cent. The point at
which the increments in the rate began to decline would be that at
which differences in wants began to diminish, and the point at which
the rate became stationary would be that at which wants fell to the
same level of intensity.


_The Proper Rate of Income and Inheritance Taxes_

While the principle of equality of sacrifices forbids a rate of tax
that would reach or approximate confiscation, it gives no definite
indication of the proper scale of progression, or of the maximum limit
that justice would set to the rate. Under our Federal law the highest
rate on incomes is now 13 per cent.; under the Wisconsin law it is 6
per cent.; under the law of Prussia it is 4 per cent.; and under the
British act of 1909 it is about 8-1/2 per cent. Evidently a much
higher rate than any of these would be required to make any impression
upon swollen fortunes. The British government recently (September,
1915) made the maximum rate about 33-1/3 per cent. To be sure, this
is a war measure which probably will not continue after the
restoration of peace. However, if it were made permanent it could not
be proved to be unjust, provided that it were applied to the
_increments_ of income above a certain high limit, but not to these
incomes in their entirety.

Our present inheritance taxes are very low, averaging less than 3 per
cent. throughout the United States. Probably the highest rate is to be
found in Wisconsin, where bequests to non relatives in excess of half
a million dollars are subject to a tax of fifteen per cent. It is
clear that all the existing rates could be raised very considerably
without causing a violation of justice. Some years ago Andrew Carnegie
recommended a tax of fifty per cent. on estates amounting to more than
one million dollars.[199] No country has yet reached this high level
of inheritance taxes. Nevertheless we cannot certainly stigmatise it
as unjust either to the testator or his heirs, nor can we prove that
it is in any other manner injurious to human welfare. All that can be
said with confidence concerning the just rates of inheritance taxation
must take the form of generalisations. The increments of the tax
should correspond as closely as possible to the diminishing intensity
of the wants which the tax deprives of satisfaction; in the case of
each heir a certain fairly high minimum of property should be entirely
exempt; on all the highest estates the rate should be uniform, and it
should fall a long way short of confiscation; and the tax should at no
point be such as to discourage socially useful activity and
enterprise.


_Effectiveness of Such Taxation_

The essential justice of the measures is not the only consideration
affecting high income and inheritance taxes. There remain the
questions of expediency and feasibility. Under the first head the
objection is sometimes raised that taxes which appropriated a
considerable portion of the larger incomes and inheritances would
diminish very materially the social supply of capital. Immense sums of
money would go into the public treasury which otherwise would have
been invested in commerce and industry. Two questions are raised by
this situation: first, whether it might not be better for society to
have these sums devoted, through public works of various kinds, to
consumptive uses instead of to an increase in the supply of capital;
second, whether the reduction in the savings and capital provided by
the persons paying the taxes could be offset by increases in saving
among other classes. Even if it be assumed that the first question
should receive a negative answer, it is not improbable that the second
should be answered in the affirmative. In other words, the increased
saving which the poorer and middle classes would be enabled to make as
a result of the shifting of some of their burden of taxation to the
large incomes and inheritances, might very well counterbalance the
curtailment in the investments of the wealthy classes. Even if this
possibility were not fully realised, even if the net volume of capital
in the community were somewhat diminished, this disadvantage might be
more than neutralised by the wider social benefits of the taxation
policy.

With regard to the feasibility of very heavy income and inheritance
taxes, it is sometimes contended that neither of these measures can be
made effective toward the reduction of abnormal fortunes.[200] It is
held that the successful collection of these taxes requires the
co-operation of the persons affected by them; that if the rate should
go above ten or twelve per cent., the income receiver would evade the
tax in a great variety of ways, while the owner of a large estate
would transfer his property outright to a trust company, which would
after his death make the desired distribution. The man who urges
these objections is a very high authority on taxation, especially on
its administrative side; nevertheless his contentions are not
absolutely conclusive. In particular, it does not seem probable that
high inheritance taxes could be evaded by the simple devices that he
mentions. It ought not to be beyond the power of administrative
ingenuity to find methods of defeating such subterfuges. However, it
is altogether likely that the possibilities of evasion would be
sufficient to prevent the imposition of tax rates that approached
within measurable distance of the borderland of confiscation.

The sum of the matter seems to be that the reduction and prevention of
great fortunes cannot prudently be accomplished by the method of
direct limitation; that these ends may wisely and justly be attained
indirectly, through the imposition of progressive income and
inheritance taxes; but that the extent to which these measures would
be genuinely effective cannot be estimated until they have been given
a thorough trial.

FOOTNOTES:

[197] "Final Report," p. 32.

[198] "Progressive Taxation," pp. 210, 211; cf. Vermeersch,
"Quaestiones de Justitia," pp. 94-126.

[199] "The Gospel of Wealth," pp. 11, 12.

[200] Cf. Dr. T. S. Adams in "Papers and Proceedings of the 27th
Annual Meeting of the American Economic Association," pp. 234, sq.



CHAPTER XXI

THE DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH


The correctives of the present distribution that were proposed before
the beginning of the last chapter related mainly to the apportionment
of the product among the agents of production. They would affect that
distribution which takes place as an integral element of the
productive process, not any disposition which the productive agents
might desire or be required to make of the shares that they had
acquired from the productive process. Such were many of the proposals
regarding land tenure, and all of those concerning co-operative
enterprises and monopoly. In the last chapter we considered the
possibility of neutralising to some extent the abuses of the primary
distribution by the action of government through the taxation of large
fortunes. These were proposals directly affecting the secondary
distribution. And they involved the method of compulsion. In the
present chapter we shall inquire whether desirable changes in the
secondary distribution may not be effected by voluntary action. The
specific questions confronting us here are, whether and how far
proprietors are morally bound to distribute their superfluous wealth
among their less fortunate fellows.


_The Question of Distributing Some_

The authority of revealed religion returns to the first of these
questions a clear and emphatic answer in the affirmative. The Old and
the New Testaments abound in declarations that possessors are under
very strict obligation to give of their surplus to the indigent.
Perhaps the most striking expression of this teaching is that found
in the Gospel according to St. Matthew, ch. 25, verses 32-46, where
eternal happiness is awarded to those who have fed the hungry, given
drink to the thirsty, received the stranger, covered the naked,
visited the sick, and called upon the imprisoned; and eternal
damnation is meted out to those who have failed in these respects. The
principle that ownership is stewardship, that the man who possesses
superfluous goods must regard himself as a trustee for the needy, is
fundamental and all-pervasive in the teaching of Christianity. No more
clear or concise statement of it has ever been given than that of St.
Thomas Aquinas: "As regards the power of acquiring and dispensing
material goods, man may lawfully possess them as his own; as regards
their use, however, a man ought not to look upon them as his own, but
as common, so that he may readily minister to the needs of
others."[201]

Reason likewise enjoins the benevolent distribution of surplus wealth.
It reminds the proprietor that his needy neighbours have the same
nature, the same faculties, capacities, wants, and destiny as himself.
They are his equals and his brothers. Reason, therefore, requires that
he should esteem them as such, love them as such, and treat them as
such; that he should love them not merely by well wishing, but by well
doing. Since the goods of the earth were intended by the Creator for
the common benefit of all mankind, the possessor of a surplus is
reasonably required to use it in such a way that this original purpose
of all created goods will be fulfilled. To refuse is to treat one's
less fortunate neighbour as something different from and less than
oneself, as a creature whose claim upon the common bounty of nature is
something less than one's own. Multiplying words will not make these
truths plainer. The man who does not admit that the welfare of his
neighbour is of equal moral worth and importance with his own
welfare, will logically refuse to admit that he is under any
obligation of distributing his superfluous goods. The man who does
acknowledge this essential equality will be unable to find any logical
basis for such refusal.

Is this obligation one of charity or one of justice? At the outset a
distinction must be made between wealth that has been honestly
acquired and wealth that has come into one's possession through some
violation of rights. The latter kind must, of course, be restored to
those persons who have been wronged. If they cannot be found or
identified the ill-gotten gains must be turned over to charitable or
other worthy objects. Since the goods do not belong to the present
holder by any valid moral title, they should be given to those persons
who are qualified by at least the claim and title of needs.

Some of the Fathers of the Church maintained that all superfluous
wealth, whether well or ill gotten, ought to be distributed to those
in want. St. Basil of Cæsarea: "Will not the man who robs another of
his clothing be called a thief? Is the man who is able and refuses to
clothe the naked deserving of any other appellation? The bread that
you withhold belongs to the hungry; the cloak that you retain in your
chest belongs to the naked; the shoes that are decaying in your
possession belong to the shoeless; the gold that you have hidden in
the ground belongs to the indigent. Wherefore, as often as you were
able to help men and refused, so often you did them wrong."[202] St.
Augustine of Hippo: "The superfluities of the rich are the necessities
of the poor. They who possess superfluities possess the goods of
others."[203] St. Ambrose of Milan: "The earth belongs to all; not to
the rich; but those who possess their shares are fewer than those who
do not. Therefore, you are paying a debt, not bestowing a gift."[204]
Pope Gregory the Great: "When we give necessaries to the needy, we do
not bestow upon them our goods; we return to them their own; we pay a
debt of justice rather than of mercy."[205]

The great systematiser of theology in the thirteenth century, St.
Thomas Aquinas, who is universally recognised as the most
authoritative private teacher in the Church, stated the obligation of
distribution in less extreme and more scientific terms: "According to
the order of nature instituted by Divine Providence, the goods of the
earth are designed to supply the needs of men. The division of goods
and their appropriation through human law do not thwart this purpose.
Therefore, the goods which a man has in superfluity are due by the
natural law to the sustenance of the poor."[206]

That this is the official teaching of the Church to-day is evident
from the words of Pope Leo XIII: "When one has provided sufficiently
for one's necessities and the demands of one's state of life, there is
a duty to give to the indigent out of what remains. It is a duty not
of strict justice, save in case of extreme necessity, but of Christian
charity."[207] Nearly thirteen years earlier, the same Pope had
written: "The Church lays the rich under strict command to give their
superfluity to the poor."[208]

The only difference between the Fathers and Pope Leo XIII and St.
Thomas on this question has reference to the precise nature of the
obligation. According to the Fathers, the duty of distribution would
seem to be a duty of justice. In the passage quoted above from St.
Thomas, superfluities are said to "belong," or to be "due" ("debetur")
to the needy; but the particular moral precept that applies is not
specified. In another place, however, the Angelic Doctor declares that
almsgiving is an act of charity.[209] Pope Leo XIII explicitly says
that the obligation of giving is one of charity, "except in extreme
cases." The latter phrase refers to the traditional doctrine that a
person who is in extreme need; that is, in immediate danger of losing
life, limb, or some equivalent personal good, is justified in the
absence of any other means of succour in taking from his neighbour
what is absolutely necessary. Such appropriation, says St. Thomas, is
not properly speaking theft; for the goods seized belong to the needy
person, "inasmuch as he must sustain life."[210] In a word, the
mediæval and the modern Catholic teaching would make distribution of
superfluous goods a duty of justice only in extreme situations, while
the Fathers laid down no such specific limitation. Nevertheless, the
difference is less important than it appears to be on the surface.
When the Fathers lived, theology had not been systematised nor given a
precise terminology; consequently, they did not always make exact
distinctions between the different classes of virtues and obligations.
In the second place, the Patristic passages that we have quoted, and
others of like import, were mostly contained in sermons addressed to
the rich, and consequently were expressed in hortatory rather than
scientific terms. Moreover, the needs of the time which the rich were
exhorted to relieve were probably so urgent that they could correctly
be classed as extreme, and therefore would give rise to an obligation
of justice on the part of those who possessed superfluous wealth.

The truly important fact of the whole situation is that both the
Fathers and the later authorities of the Church regard the task of
distributing superfluous goods as one of strict moral obligation,
which in serious cases is binding under pain of grievous sin. Whether
it falls under the head of justice or under that of charity, is of no
great practical consequence.


_The Question of Distributing All_

Is a man obliged to distribute _all_ his superfluous wealth? As
regards the support of human life, Catholic moral theologians
distinguish three classes of goods: first, the necessaries of life,
those utilities which are essential to a healthy and humane existence
for a man and his family, regardless of the social position that he
may occupy, or the standard of life to which he may have been
accustomed; second, the conventional necessities and comforts, which
correspond to the social plane upon which the individual or family
moves; third, those goods which are not required to support either
existence or social position. Goods of the second class are said to be
necessary as regards conventional purposes, but superfluous as regards
the maintenance of life, while those of the third class are
superfluous without qualification.

No obligation exists to distribute the first class of goods; for the
possessor is justified in preferring his own primary and fundamental
needs to the equal or less important needs of his neighbours. The
owner of goods of the second class is under obligation to dispense
them to persons who are in extreme need, since the preservation of the
neighbour's life is more important morally than the maintenance of the
owner's conventional standard of living. On the other hand, there is
no obligation of giving any of these goods to meet those needs of the
neighbour which are social or conventional. Here, again, it is
reasonable that the possessor should prefer his own interests to the
equal interests of his fellows. Still less is he obliged to expend any
of the second class of goods for the relief of ordinary or common
distress. As regards the third class of goods, those which are
absolutely superfluous, the proportion to be distributed is
indefinite, depending upon the volume of need. The doctrine of the
moral theologians on the subject is summed up in the following
paragraph.

When the needs to be supplied are "ordinary," or "common"; that is,
when they merely expose a person to considerable and constant
inconvenience, without inflicting serious physical, mental, or moral
injury, they do not impose upon any man the obligation of giving up
all his superfluous goods. According to some moral theologians, the
possessor fulfils his duty in such cases if he contributes that
proportion of his surplus which would suffice for the removal of all
such distress, provided that all other possessors were equally
generous; according to others, if he gives two per cent. of his
superfluity; according to others, if he contributes two per cent. of
his annual income. These estimates are intended not so much to define
the exact measure of obligation as to emphasise the fact that there
exists some degree of obligation; for all the moral theologians agree
that some portion of a man's superfluous goods ought to be given for
the relief of ordinary or common needs. When, however, the distress is
grave; that is, when it is seriously detrimental to welfare; for
example, when a man or a family is in danger of falling to a lower
social plane; when health, morality, or the intellectual or religious
life is menaced,--possessors are required to contribute as much of
their superfluous goods as is necessary to meet all such cases of
distress. If all is needed all must be given. In other words, the
entire mass of superfluous wealth is morally subject to the call of
grave need. This seems to be the unanimous teaching of the moral
theologians.[211] It is also in harmony with the general principle of
the moral law that the goods of the earth should be enjoyed by the
inhabitants of the earth in proportion to their essential needs. In
any rational distribution of a common heritage, the claims of health,
mind, and morals are surely superior to the demands of luxurious
living, or investment, or mere accumulation.

What per cent. of the superfluous incomes in the United States would
suffice to alleviate all the existing grave and ordinary distress?
Nothing like an exact answer is possible, but we can get an
approximation that will have considerable practical value. From the
estimates of family incomes given by Professor W. I. King, it appears
that in 1910 the number of families with annual incomes of less than
one thousand dollars was a little more than ten and three quarter
millions, and that the total incomes of those families receiving more
than ten thousand dollars a year amounted to a little more than three
and three quarter billions.[212] If each of the latter class of
families should expend ten thousand dollars per year for the needs of
life and social position, they would have left nearly two and three
quarter billions for distribution among the ten and three quarter
million families who are below the one thousand dollar level. So far
as the figures of Professor King's table enable us to judge, the
greater part if not all of this sum would be required to bring this
group of families up to that standard. Possibly an income of one
thousand dollars per family is not required to remove all ordinary and
grave distress; and possibly ten thousand dollars is not enough for
the reasonable requirements of some families. If both these
suppositions are true they will tend to cancel each other: the needs
to be met will be less, but the superfluous income to be distributed
will be less also. Whatever be the minimum and maximum limits of
family income that approve themselves to competent students, the
conclusion will probably be inevitable that the greater part of the
superfluous income of the well-to-do and the rich would be required to
abolish all grave and ordinary need.


_Some Objections_

The desirability of such a thoroughgoing distribution of superfluous
incomes appears to be refuted by the fact that a considerable part of
the capital and organising ability that function in industry is
dependent upon the possession of superfluous goods by the richer
classes. That surplus of the larger incomes which is not consumed or
given away by its receivers at present, constitutes no small portion
of the whole supply of savings annually converted into capital. Were
all of it to be withdrawn from industry and distributed among the
needy, the process might involve more harm than good. Moreover, the
very large industrial enterprises are initiated and carried on by men
who have themselves provided a considerable share of the necessary
funds. Without these large masses of personal capital, they would have
much more difficulty in organising these great enterprises, and would
be unable to exercise their present dominating control.

To the first part of this objection we may reply that the distribution
of superfluous goods need not involve any considerable withdrawal of
existing capital from industry. The giving of large amounts to
institutions and organisations, as distinguished from needy
individuals, might mean merely a transfer of capital from one holder
to another; for example, the stocks and bonds of corporations. The
capital would be left intact, the only change being in the persons
that would thenceforth receive the interest. Small donations could
come out of the possessor's income. Moreover, there is no reason why
the whole of the distribution could not be made out of income rather
than out of capital. While the givers would still remain possessed of
superfluous wealth, they would have handed over to needy objects,
persons, and causes the thing that in modern times constitutes the
soul and essence of wealth; namely, its annual revenues.

Nevertheless, the distribution from income would apparently check the
necessary increase of capital, lessen unduly the supply of capital for
the future. Were all, or the greater part of superfluous incomes
devoted to benevolent objects it would be used up for consumption
goods; such as, food, clothing, housing, hospitals, churches, schools.
Would not this check to the increase of capital cause serious injury
to society?

New investment would not be diminished by an amount equal to the whole
amount of income transferred to objects of benevolence. For the
improved position of the poorer classes that had shared in the
distribution would enable them to increase their productive power and
their resources, and therefore to save money and convert it into
capital. Again, their increased consuming power would augment the
demand for goods, bring about a larger use of existing capital
instruments, and therefore lead to an enlargement of the community's
capacity for saving. Thus, the new saving and capital would, partially
at least, take the place of that which was formerly provided by the
possessors of surplus income. In so far as a net diminution occurred
in the community's supply of capital, it would probably be more than
offset, from the viewpoint of social welfare, by the better diffusion
of goods and opportunities among the masses of the population.

The second difficulty noted above, that such a thorough distribution
of superfluous goods would lessen considerably the power of the
captains of industry to organise and operate great enterprises, can be
disposed of very briefly. Those who made the distribution from income
rather than from invested wealth, would still retain control of large
masses of capital. All, however, would have deprived themselves of the
power to enlarge their business ventures by turning great quantities
of their own income back into industry. But if their ability and
character were such as to command the confidence of investors, they
would be able to find sufficient capital elsewhere to equip and carry
on any sound and necessary enterprise. In this case the process of
accumulating the required funds would, indeed, be slower than when
they used their own, but that would not be an unmixed disadvantage.
When the business was finally established, it would probably be more
stable, would respond to a more definite and considerable need, and
would be more beneficial socially, inasmuch as it would include a
larger proportion of the population among its proprietors. And the
diminished authority and control exercised by the great capitalist, on
account of his diminished ownership of the stock, would in the long
run be a good thing for society. It would mean the curtailment of a
species of power that is easily liable to abuse, wider opportunities
of industrial leadership, and a more democratic and stable industrial
system.

Only a comparatively small portion of the superfluous goods of the
country could with advantage be immediately and directly distributed
among needy individuals. The greater part would do more good if it
were given to religious and benevolent institutions and enterprises.
Churches, schools, scholarships, hospitals, asylums, housing projects,
insurance against unemployment, sickness, and old age, and benevolent
and scientific purposes generally,--constitute the best objects and
agencies of effective distribution. By these means social and
individual efficiency would be so improved within a few years that
the distress due to economic causes would for the most part have
disappeared.

The proposition that men are under moral obligation to give away the
greater portion of their superfluous goods or income is, indeed, a
"hard saying." Not improbably it will strike the majority of persons
who read these pages as extreme and fantastic. No Catholic, however,
who knows the traditional teaching of the Church on the right use of
wealth, and who considers patiently and seriously the magnitude and
the meaning of human distress, will be able to refute the proposition
by reasoned arguments. Indeed, no man can logically deny it who admits
that men are intrinsically sacred, and essentially equal by nature and
in their claims to a reasonable livelihood from the common heritage of
the earth. The wants that a man supplies out of his superfluous goods
are not necessary for rational existence. For the most part they bring
him merely irrational enjoyment, greater social prestige, or increased
domination over his fellows. Judged by any reasonable standard, these
are surely less important than those needs of the neighbour which are
connected with humane living. If any considerable part of the
community rejects these propositions the explanation will be found not
in a reasoned theory, but in the conventional assumption that a man
may do what he likes with his own. This assumption is adopted without
examination, without criticism, without any serious advertence to the
great moral facts that ownership is stewardship, and that the Creator
intended the earth for the reasonable support of all the children of
men.


_A False Conception of Welfare and Superfluous Goods_

If all the present owners of superfluous goods were to carry out their
own conception of the obligation, the amount distributed would be only
a fraction of the real superabundance. Let us recall the definition
of absolute superfluity as, that portion of individual or family
income which is not required for the reasonable maintenance of life
and social position. It allows, of course, a reasonable provision for
the future. But the great majority of possessors, as well as perhaps
the majority of others, do not interpret their needs, whether of life
or social position, in any such strict fashion. Those who acquire a
surplus over their present absolute and conventional needs, generally
devote it to an expansion of social position. They move into larger
and more expensive houses, thereby increasing their assumed
requirements, not merely in the matter of housing, but as regards
food, clothing, amusements, and the conventions of the social group
with which they are affiliated. In this way the surplus which ought to
have been distributed is all absorbed in the acquisition and
maintenance of more expensive standards. All classes of possessors
adopt and act upon an exaggerated conception of both the strict and
the conventional necessities. In taking this course, they are merely
subscribing to the current theory of life and welfare. It is commonly
assumed that to be worth while life must include the continuous and
indefinite increase of the number and variety of wants, and a
corresponding growth and variation in the means of satisfying them.
Very little endeavour is made to distinguish between kinds of wants,
or to arrange them in any definite scale of moral importance. Desires
for purely physical goods, such as, food, drink, adornment, and sense
gratifications generally, are put on the same level with the demands
of the spiritual, moral, and intellectual faculties. The value and
importance of any and all wants is determined mainly by the criterion
of enjoyment. In the great majority of cases this means a preference
for the goods and experiences that minister to the senses. Since these
satisfactions are susceptible of indefinite increase, variety, and
cost, the believer in this theory of life-values readily assumes that
no practical limit can be set to the amount of goods or income that
will be required to make life continuously and progressively worth
living. Hence the question whether he has superfluous goods, how much
of a surplus he has, or how much he is obliged to distribute, scarcely
occurs to him at all. Everything that he possesses or is likely to
possess, is included among the necessaries of life and social
position. He adopts as his working theory of life those propositions
which were condemned as "scandalous and pernicious" by Pope Innocent
XI in 1679: "It is scarcely possible to find among people engaged in
worldly pursuits, even among kings, goods that are superfluous to
social position. Therefore, hardly any one is bound to give alms from
this source."

The practical consequences of this false conception of welfare are
naturally most conspicuous among the rich, especially the very rich,
but they are also manifest among the comfortable and middle classes.
In every social group above the limit of very moderate circumstances,
too much money is spent for material goods and enjoyments, and too
little for the intellectual, religious, and altruistic things of life.


_The True Conception of Welfare_

This working creed of materialism is condemned by right reason, as
well as by Christianity. The teaching of Christ on the worth of
material goods is expressed substantially in the following texts: "Woe
to you rich." "Blessed are you poor." "Lay not up for yourselves
treasures on earth." "For a man's life consisteth not in the abundance
of things that he possesseth." "Be not solicitous as to what you shall
eat, or what you shall drink, or what you shall put on." "Seek ye
first the kingdom of God and his justice, and all these things shall
be added unto you." "You cannot serve God and Mammon." "If thou
wouldst be perfect, go, sell what thou hast and give to the poor, and
come follow me." Reason informs us that neither our faculties nor the
goods that satisfy them are of equal moral worth or importance. The
intellectual and spiritual faculties are essentially and intrinsically
higher than the sense faculties. Only in so far as they promote,
either negatively or positively, the development of the mind and soul
have the senses any reasonable claim to satisfaction. They have no
value in themselves; they are merely instruments to the welfare of the
spirit, the intellect, and the disinterested will. Right life
consists, not in the indefinite satisfaction of material wants, but in
the progressive endeavour to know the best that is to be known, and to
love the best that is to be loved; that is, God and His creatures in
the order of their importance. The man who denies the intrinsic
superiority of the soul to the senses, who puts sense gratifications
on the same level of importance as the activities of mind, and spirit,
and disinterested will, logically holds that the most degrading
actions are equally good and commendable with those which mankind
approves as the noblest. His moral standard does not differ from that
of the pig, and he himself is on no higher moral level than the pig.

Those who accept the view of life and welfare taught by Christianity
and reason cannot, if they take the trouble to consider the matter,
avoid the conclusion that the amount of material goods which can be
expended in the rational and justifiable satisfaction of the senses,
is very much smaller than is to-day assumed by the great majority of
persons. Somewhere between five and ten thousand dollars a year lies
the maximum expenditure that any family can reasonably devote to its
material wants. This is independent of the outlay for education,
religion, and charity, and the things of the mind generally. In the
overwhelming majority of cases in which more than five to ten thousand
dollars are expended for the satisfaction of material needs, some
injury is done to the higher life. The interests of health, intellect,
spirit, or morals would be better promoted if the outlay for material
things were kept below the specified limit.

The distribution advocated in this chapter is obviously no substitute
for justice or the deeds of justice. Inasmuch, however, as complete
justice is a long way from realisation, a serious attempt by the
possessors of true superfluous goods to fulfil their obligations of
distribution would greatly counteract and soften existing injustice,
inequality, and suffering. Hence, benevolent giving deserves a place
in any complete statement of proposals for a better distribution of
wealth. Moreover, we are not likely to make great advances on the road
of strict justice until we acquire saner conceptions of welfare, and a
more effective notion of brotherly love. So long as men put the senses
above the soul, they will be unable to see clearly what is justice,
and unwilling to practise the little that they are able to see. Those
who exaggerate the value of sense gratifications cannot be truly
charitable, and those who are not truly charitable cannot perform
adequate justice. The achievement of social justice requires not
merely changes in the social mechanism, but a change in the social
spirit, a reformation in men's hearts. To this end nothing could be
more immediately helpful than a comprehensive recognition of the
stewardship of wealth, and the duty of distributing superfluous goods.


REFERENCES ON SECTION III

     ELY: Monopolies and Trusts. Macmillan; 1900.

     VAN HISE: Concentration and Control. Macmillan; 1912.

     STEVENS: Industrial Combinations and Trusts. Macmillan; 1913.

     RUSSELL: Business, the Heart of the Nation. John Lane; 1911.

     GARRIGUET: Régime du Travail. Paris; 1909. The Social Value
     of the Gospel. St. Louis; 1911.

     HOBSON: Work and Wealth, a Human Valuation. Macmillan; 1914.

     WEST: The Inheritance Tax. New York; 1908.

     SELIGMAN: Progressive Taxation. Princeton; 1908. The Income
     Tax. New York; 1913.

     BOUQUILLON: De Virtutibus Theologicis. Brugis; 1890.

     Also, the works of Taussig, Devas, Hobson, Antoine, Pesch,
     Carver, Vermeersch, Nearing, and King which are cited in
     connection with the introductory chapter.

FOOTNOTES:

[201] "Summa Theologica," 2a. 2ae., q. 66, a. 3.

[202] "Patrologia Graeca," vol. 31, cols. 275, 278.

[203] "Patrologia Latina," vol. 37, col. 1922.

[204] "Patrologia Latina," vol. 14, col. 747.

[205] "Patrologia Latina," vol. 77, col. 87. These and several other
extracts of like tenor may be found in Ryan's "Alleged Socialism of
the Church Fathers," ch. i; St. Louis, 1913.

[206] Op. cit., 2a. 2ae., q. 66, a. 7.

[207] Encyclical, "On the Condition of Labour," May 15, 1891.

[208] Encyclical, "On Socialism, Communism, Nihilism," Dec. 28, 1878.

[209] Op. cit., 2a. 2ae., q. 32, a. 1.

[210] Idem, q. 66, a. 7.

[211] A comprehensive, though brief, discussion of this question and
numerous references are contained in Bouquillon, "De Virtutibus
Theologicis," pp. 332-348. When Pope Leo XIII declared that the rich
are obliged to distribute "out of" their superfluity, he did not mean
that they are free to give only a portion thereof. The particle "de"
in his statement, "officium est de eo quod superat gratificari
indigentibus," is not correctly translated by "some." It means rather
"out of," "from," or "with"; so that the affluent are commanded to
devote their superfluous goods indefinitely to the relief of the
needy. In the Encyclical, "Quot Apostolici Muneris," he used the
expression, "gravissimo divites urget praecepto ut quod superest
pauperibus tribuant," which clearly declares the duty of distributing
all.

[212] "The Wealth and Income of the People of the United States," pp.
224-226.



SECTION IV

THE MORAL ASPECT OF WAGES



CHAPTER XXII

SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE


"It may be that we are not merely chasing a will-o'-the-wisp when we
are hunting for a reasonable wage, but we are at any rate seeking the
unattainable."

Thus wrote Professor Frank Haight Dixon in a paper read at the
twenty-seventh annual meeting of the American Economic Association,
December, 1914. Whether he reflected the opinion of the majority of
the economists, he at least gave expression to a thought that has
frequently suggested itself to every one who has gone into the wage
question free from prejudices and preconceived theories. One of the
most palpable indications of the difficulty to which Professor Dixon
refers is the number of doctrines concerning wage justice that have
been laboriously built up during the Christian era, and that have
failed to approve themselves to the majority of students and thinkers.
In the present chapter the attempt is made to set forth some of the
most important of these doctrines, and to show wherein they are
defective. They can all be grouped under the following heads: The
Prevailing-Rate Theory; Exchange-Equivalence Theories; and the
Productivity Theories.


I. THE PREVAILING-RATE THEORY

This is not so much a systematic doctrine as a rule of expediency
devised to meet concrete situations in the absence of any better
guiding principle. Both its basis and its nature are well exemplified
in the following extract from the "Report of the Board of Arbitration
in the Matter of the Controversy Between the Eastern Railroads and the
Brotherhood of Locomotive Engineers:"[213] "Possibly there should be
some theoretical relation for a given branch of industry between the
amount of the income that should go to labour and the amount that
should go to capital; and if this question were decided, a scale of
wages might be devised for the different classes of employés which
would determine the amount rightly absorbed by labour.... Thus far,
however, political economy is unable to furnish such a principle as
that suggested. There is no generally accepted theory of the division
between capital and labour....

"What, then, is the basis upon which a judgment may be passed as to
whether the existing wage scale of the engineers in the Eastern
District is fair and reasonable? It seems to the Board that the only
practicable basis is to compare the rates and earnings of engineers in
the Eastern District with those of engineers in the Western and
Southern Districts, and with those of other classes of railway
employés."

Six of the seven men composing this board of arbitration subscribed to
this statement. Of the six one is the president of a great state
university, another is a successful and large-minded merchant, the
third is a great building contractor, the fourth is a distinguished
lawyer, the fifth is a prominent magazine editor, and the sixth is a
railway president. The dissenting member represented the employés.
Since the majority could not find in any generally accepted theory a
principle to determine the proper division of the product between
capital and labour, they were perhaps justified in falling back upon
the practical rule that they adopted.

_Not in Harmony with Justice_

From the viewpoint of justice, however, this rule or standard is
utterly inadequate. It is susceptible of two interpretations. "Wages
prevailing elsewhere," may mean either the highest rates or those most
frequently occurring. According to the latter understanding, only
those wages which were below the majority rates should be raised,
while all those above that level ought to be lowered. In almost all
cases this would mean a reduction of the highest wages, as these are
usually paid only to a minority of the workers of any grade. The
adoption of the highest existing rates as a standard would involve no
positive losses, but it would set a rigid limit to all possible gains
in the future. According to either interpretation of the prevailing
rate, the increases in wages which a powerful labour union seeks to
obtain are unjust until they have been established as the prevailing
rates. Thus, the attorney for the street railways of Chicago dissented
from the increases in wages awarded to the employés by the majority of
the board of arbitration in the summer of 1915 because, "these men are
already paid not only a fair wage but a liberal wage, when the wages
in the same employment and the living conditions in other large cities
are taken into consideration, or when comparison is made of these
men's annual earnings with the earnings in any comparable line of work
in the city of Chicago."[214] In other words, the dominant thing is
always the right thing. Justice is determined by the preponderance of
economic force. Now, a rule such as this, which condemns improvement
until improvement has somehow become general, which puts a premium
upon physical and intellectual strength, and which disregards entirely
the moral claims of human needs, efforts, and sacrifices, is obviously
not an adequate measure of either reason or justice. And we may well
doubt that it would be formally accepted as such by any competent and
disinterested student of industrial relations.


II. EXCHANGE-EQUIVALENCE THEORIES

According to these theories, the determining factor of wage justice is
to be found in the wage contract. The basic idea is the idea of
equality, inasmuch as equality is the fundamental element in the
concept of justice. The principle of justice requires that equality
should be maintained between what is owed to a person and what is
returned to him, between the kinds of treatment accorded to different
persons in the same circumstances. Similarly it requires that equality
should obtain between the things that are exchanged in onerous
contracts. An onerous contract is one in which both parties undergo
some privation, and neither intends to confer a gratuity upon the
other. Each exchanger desires to obtain the full equivalent of the
thing that he transfers. Since each is equal in personal dignity an
intrinsic worth to the other, each has a strict right to this full
equivalent. Owing to the essential moral equality of all men, no man
has a right to make of another a mere instrument to his own interests
through physical force or through an onerous contract. Men have equal
rights not only to subsist upon the earth, but to receive benefits
from the exchange of goods.

_The Rule of Equal Gains_

The agreement between employer and employé is an onerous contract;
hence it ought to be made in such terms that the things exchanged will
be equal, that the remuneration will be equal to the labour. How can
this equivalence be determined and ascertained? Not by a direct
comparison of the two objects, work and pay, for their differences
render them obviously incommensurable. Some third term, or standard,
of comparison is required in which both objects can find expression.
One such standard is individual net advantage. Inasmuch as the aim of
the labour contract is reciprocal gain, it is natural to infer that
the gains ought to be equal for the two parties. Net gain is
ascertained by deducting in each case the utility transferred from the
utility received; in other words, by deducting the privation from the
gross return. The good received by the employer when diminished by or
weighed against the amount that he pays in wages should be equal to
the good received by the labourer when diminished by or weighed
against the inconvenience that he undergoes through the expenditure of
his time and energy. Hence the contract should bring to employer and
employé equal amounts of net advantage or satisfaction.

Plausible as this rule may appear, it is impracticable, inequitable,
and unjust. In the vast majority of labour contracts it is impossible
to know whether both parties obtain the same quantity of net
advantage. The gains of the employer can, indeed, be frequently
measured in terms of money, being the difference between the wages
paid to and the specific product turned out by the labourer. In the
case of the labourer no such process of deduction is possible; for
advantage and expenditure are incommensurable. We cannot subtract the
labourer's privation, that is, his expenditure of time and energy,
from his gross advantage, that is, his wages. How can we know or
measure the net benefit obtained by a man who shovels sand ten hours
for a wage of two dollars? How can we deduct his pain-cost from or
weigh it against his compensation?

So far as the two sets of advantages are comparable at all, those of
the employé would seem to be always greater than those of the
employer. A wage of seventy-five cents a day enables the labourer to
satisfy the most important wants of life. Weighed against this gross
advantage, his pain-cost of toil is relatively insignificant. His net
advantage is the greatest that a man can enjoy, the continuation of
his existence. The net advantage received by the employer from such a
wage contract is but a few cents, the equivalent of a cigar or two.
Even if the wage be raised to the highest level yet reached by any
wage earner, the net advantage to the labourer, namely, his
livelihood, will be greater than the net advantage to the employer
from that single contract. Moreover, the sum total of an employer's
gains from all his labour contracts is less quantitatively than the
sum total of the gains obtained by all his employés. The latter gains
provide for many livelihoods, the former for only one. Again, no
general rate of wages could be devised which would enable all the
members of a labour group to gain equally. Differences in health,
strength, and intelligence would cause differences in the pain-cost
involved in a given amount of labour; while differences in desires,
standards of living, and skill in spending would bring about
differences in the satisfactions derived from the same compensation.
Finally, various employers would obtain various money gains from the
same wage outlay, and various advantages from the same money gains.
Hence if the rule of equality of net advantages were practicable it
would be inequitable.

It is also fundamentally unjust because it ignores the moral claims of
needs, efforts, and sacrifices as regards the labourer. As we have
seen in the chapter on profits in competitive conditions, and as we
shall have occasion to recognise again in a later chapter, no canon or
scheme of distributive justice is acceptable that does not give
adequate consideration to these fundamental attributes of human
personality.

_The Rule of Free Contract_

Another form of the exchange equivalence theory would disregard the
problem of _equality_ of gains, and assume that justice is realised
whenever the contract is free from force or fraud. In such
circumstances both parties gain something, and presumably are
satisfied; otherwise, they would not enter the contract. Probably the
majority of employers regard this rule as the only available measure
of practicable justice. The majority of economists likewise subscribed
to it during the first half of the nineteenth century. In the words of
Henry Sidgwick, "the teaching of the political economists pointed to
the conclusion that a free exchange, without fraud or coercion, is
also a fair exchange."[215] Apparently the economists based this
teaching on the assumption that competition was free and general among
both labourers and employers. In other words, the rule as understood
by them was probably identical with the rule of the market rate, which
we shall examine presently. It is not at all likely that the
economists here referred to would have given their moral approval to
those "free" contracts in which the employer pays starvation wages
because he takes advantage of the ignorance of the labourer, or
because he exercises the power of monopoly.

No matter by whom it is or has been held, the rule of free contract is
unjust. In the first place, many labour contracts are not free in any
genuine sense. When a labourer is compelled by dire necessity to
accept a wage that is insufficient for a decent livelihood, his
consent to the contract is free only in a limited and relative way. It
is what the moralists call "_voluntarium imperfectum_." It is vitiated
to a substantial extent by the element of fear, by the apprehension of
a cruelly evil alternative. The labourer does not agree to this wage
because he prefers it to any other, but merely because he prefers it
to unemployment, hunger, and starvation. The agreement to which he
submits in these circumstances is no more free than the contract by
which the helpless wayfarer gives up his purse to escape the pistol of
the robber. While the latter action is free in the sense that it is
chosen in preference to a violent death, it does not mean that the
wayfarer gives, or intends to give, the robber the right of ownership
in the purse. Neither should the labourer who from fear of a worse
evil enters a contract to work for starvation wages, be regarded as
transferring to the employer the full moral right to the services
which he agrees to render. Like the wayfarer, he merely submits to
superior force. The fact that the force imposed upon him is economic
instead of physical does not affect the morality of the transaction.

To put the matter in another way, the equality which justice requires
is wanting in an oppressive labour contract because of the inequality
existing between the contracting parties. In the words of Professor
Ely: "Free contract supposes equals behind the contract in order that
it may produce equality."[216]

Again, the rule of free contract is unjust because it takes no account
of the moral claims of needs. A man whose only source of livelihood is
his labour does wrong if he accepts a starvation wage willingly. Such
a contract, however free, is not according to justice because it
disregards the requirements of reasonable life. No man has a right to
do this, any more than he has a right to perpetrate self mutilation or
suicide.

_The Rule of Market Value_

A third method of interpreting exchange equivalence is based upon the
concept of value. Labour and compensation are thought to be equal when
the value of one is equal to the value of the other. Then the contract
is just and the compensation is just. The only objection to these
propositions is that they are mere truisms. What does value mean, and
how is it to be determined? If it is to receive an ethical
signification; if the value of labour is to be understood as denoting
not merely the value that labour will command in a market, but the
value that labour ought to have,--the statement that wages should
equal the value of labour becomes merely an identical proposition. All
that it tells us is that wages ought to be what they ought to be.

In its simplest economic sense value denotes purchasing power, or
importance in exchange. As such, it may be either individual or
social; that is, it may mean the exchange importance attributed to a
commodity by an individual, or that attributed by a social group. In a
competitive society social value is formed through the higgling of the
market, and is expressed in market price.

Now individual value is utterly impracticable as a measure of exchange
equivalence in the wage contract. Since the value attributed to labour
by the employer differs in the great majority of instances from that
estimated by the labourer himself, it is impossible to determine which
is the true value, and the proper measure of just wages.

The doctrine that the social value or market price of labour is also
the ethical value or just price, is sometimes called the classical
theory, inasmuch as it was held, at least implicitly, by the majority
of the early economists of both France and England.[217] Under
competitive conditions, said the Physiocrats, the price of labour as
of all other things corresponds to the cost of production; that is, to
the cost of subsistence for the labourer and his family. This is the
natural law of wages, and being natural it is also just. Adam Smith
likewise declared that competitive wages were natural wages, but he
refrained from the explicit assertion that they were just wages.
Nevertheless his abiding and oft-expressed faith in the theory that
men's powers were substantially equal, and in the social beneficence
of free competition, implied that conclusion. Although the great
majority of his followers denied that economics had moral aspects,
and sometimes asserted that there was no such thing as just or unjust
wages, their teaching tended to convey the thought that competitively
fixed wages were more or less in accordance with justice. As noted
above, their belief in the efficacy of competition led them to the
inference that a free contract is also a fair contract. By a free
contract they meant for the most part one that is made in the open
market, that is governed by the forces of supply and demand, and that,
consequently, expresses the social economic value of the things
exchanged.

All the objections that have been brought against the rule of the
prevailing rate apply even more strongly to the doctrine of the market
rate. The former takes as a standard the scale of wages most
frequently paid in the market, while the latter approves any scale
that obtains in any group of labourers or section of the market. Both
accept as the ultimate determinant of wage justice the preponderance
of economic force. Neither gives any consideration to the moral claims
of needs, efforts, or sacrifices. Unless we are to identify justice
with power, might with right, we must regard these objections as
irrefutable, and the market value doctrine as untenable.

_The Mediæval Theory_

Another exchange-equivalence theory which turns upon the concept of
value is that found in the pages of the mediæval canonists and
theologians. But it interprets value in a different sense from that
which we have just considered. As the measure of exchange equivalence
the mediæval theory takes objective value, or true value. However, the
proponents of this view did not formally apply it to wage contracts,
nor did they discuss systematically the question of just wages. They
were not called upon to do this; for they were not confronted by any
considerable class of wage earners. In the country the number of
persons who got their living exclusively as employés was extremely
small, while in the towns the working class was composed of
independent producers who sold their wares instead of their
labour.[218] The question of fair compensation for the town workers
was, therefore, the question of a fair price for their products. The
latter question was discussed by the mediæval writers formally, and in
great detail. Things exchanged should have equal values, and
commodities should always sell for the equivalent of their values. By
what rule was equality to be measured and value determined? Not by the
subjective appreciations of the exchangers, for these would sometimes
sanction the most flagrant extortion. Were no other help available,
the starving man would give all he possessed for a loaf of bread. The
unscrupulous speculator could monopolise the supply of foodstuffs, and
give them an exorbitantly high value which purchasers would accept and
pay for rather than go hungry. Hence we find the mediæval writers
seeking a standard of _objective_ value which should attach to the
commodity itself, not to the varying opinions of buyers and sellers.

In the thirteenth century Albertus Magnus[219] and Thomas Aquinas[220]
declared that the proper standard was to be found in labour. A house
is worth as many shoes as the labour embodied in the latter is
contained in the labour embodied in the former. It is worthy of note
that the diagram which Albertus Magnus presents to illustrate this
formula of value and exchange had been used centuries before by
Aristotle. It is likewise noteworthy that this conception of ethical
value bears a striking resemblance to the theory of economic value
upheld by Marxian Socialists. However, neither Aristotle nor the
Schoolmen asserted that all kinds of labour had equal value.

Now this mediæval labour-measure of value could be readily applied
only to cases of barter, and even then only when the value of
different kinds of labour had already been determined by some other
standard. Accordingly we find the mediæval writers expounding and
defending a more general interpretation of objective or true value.

This was the concept of normal value; that is, the average or medium
amount of utility attributed to goods in the average conditions of
life and exchange. On the one hand, it avoided the excesses and the
arbitrariness of individual estimates; on the other hand, it did not
attribute to value the characters of immutability and rigidity.
Contrary to the assumptions of some modern writers, the Schoolmen
never said that value was something as fixedly inherent in goods as
physical and chemical qualities. When they spoke of "intrinsic" value,
they had in mind merely the constant capacity of certain commodities
to satisfy human wants. Even to-day bread has always the intrinsic
potency of alleviating hunger, regardless of all the fluctuations of
human appraisement. The objectivity that the mediæval writers ascribed
to value was relative. It assumed normal conditions as against
exceptional conditions. To say that value was objective merely meant
that it was not wholly determined by the interplay of supply and
demand, but was based upon the stable and universally recognised
use-qualities of commodities in a society where desires, needs, and
tastes were simple and fairly constant from one generation to another.

How or where was this relatively objective value of goods to find
concrete expression? In the "communis aestimatio," or social estimate,
declared the canonists. Objective value and just price would be
ascertained practically through the judgment of upright and competent
men, or preferably through legally fixed prices. But neither the
social estimate nor the ordinances of lawmakers were authorised to
determine values and prices arbitrarily. They were obliged to take
into account certain objective factors. In the thirteenth and
fourteenth centuries, the factors universally recognised as
determinative were the utility or use-qualities of goods, but
especially their cost of production. Later on, in the sixteenth and
seventeenth centuries, risk and scarcity were given considerable
prominence as value determinants. Now cost of production in the Middle
Ages was mainly labour cost; hence the standard of value was chiefly a
labour standard. Moreover, this labour doctrine of true value and
equality in exchanges was strongly reinforced by another mediæval
principle, according to which labour was the supreme if not the only
just title to rewards.

How was labour cost to be measured, and the different kinds of labour
evaluated? By the necessary and customary expenditures of the class to
which the labourer belonged. Mediæval society was composed of a few
definite, easily recognised, and relatively fixed orders or grades,
each of which had its own function in the social hierarchy, its own
standard of living, and its moral right to a livelihood in accordance
with that standard. Like the members of the other orders, the
labourers were conceived as entitled to live in conformity with their
customary class-requirements. From this it followed that the needs of
the labourer became the main determinant of the cost of production,
and of the value and just price of goods. Inasmuch as the standards of
living of the various divisions of the workers were fixed by custom,
and limited by the restricted possibilities of the time, they afforded
a fairly definite measure of value and price,--much more definite than
the standard of general utility. To Langenstein, vice chancellor of
the University of Paris in the latter half of the fourteenth century,
the matter seemed quite simple; for he declared that every one could
determine for himself the just price of his wares by referring to the
customary needs of his rank of life.[221]

Nevertheless, class needs are not and cannot be a standard of
exchange-equivalence. They cannot become a criterion of equality, a
common denominator, a third term of comparison, between labour and
wages. When we say that a given amount of wages is equal to a given
content of livelihood, we express a purely economic, positive, and
mathematical relation: when we say that a given amount of labour is
equal to a given content of livelihood, we are either talking nonsense
or expressing a purely ethical relation; that is, declaring that this
labour _ought to_ equal this livelihood. In other words, we are
introducing a fourth term of comparison; namely, the moral worth or
personal dignity of the labourer. Thus, we have not a single and
common standard to measure both labour and wages, and to indicate a
relation of equality between them. While class needs directly measure
wages, they do not measure labour, either quantitatively, or
qualitatively, or under any other aspect or category.

Aside from this purely theoretical defect, the canonist doctrine of
wage justice was fairly satisfactory as applied to the conditions of
the Middle Ages. It assured to the labourer of that day a certain rude
comfort, and probably as large a proportion of the product of industry
as was practically attainable. Nevertheless it is not a universally
valid criterion of justice in the matter of wages; for it makes no
provision for those labourers who deserve a wage in excess of the cost
of living of their class; nor does it furnish a principle by which a
whole class of workers can justify their advance to a higher standard
of living. It is not sufficiently elastic and dynamic.

_A Modern Variation of the Mediæval Theory_

In spite of its fundamental impossibility, the concept of
exchange-equivalence still haunts the minds of certain Catholic
writers.[222] They still strive to get a formula to express equality
between labour and remuneration. Perhaps the best known and least
vulnerable of the attempts made along this line is that defended by
Charles Antoine, S.J.[223] Justice, he declares, demands an objective
equivalence between wages and labour; and objective equivalence is
determined and measured by two factors. The remote factor is the cost
of decent living for the labourer; the proximate factor is the
economic value of his labour. The former describes the _minimum_ to
which the worker is entitled; the latter comprises perfect and
adequate justice. In case of conflict between the two factors, the
first is determinative of and morally superior to the second; that is
to say, no matter how small the economic value of labour may _seem_ to
be, it never can descend below the requisites of a decent livelihood.

Now, neither of these standards is in harmony with the principle of
exchange-equivalence, nor capable of serving as a satisfactory
criterion of wage justice. Father Antoine argues that labour is always
the moral equivalent of a decent livelihood because the worker expends
his energies, and gives out a part of his life in the service of his
employer. Unless his wage enables the labourer to replace these
energies and conserve his life, it is not the equivalent of the
service. If the wage falls short of this standard the labourer gives
more than he receives, and the contract is essentially unjust. In this
conception of equivalence, energy expended, instead of cost of living,
becomes the term of comparison and the common measure of labour and
remuneration. Energy expended is, however, technically incapable of
providing such a common standard; for it does not measure both related
terms in the same way. The service rendered to the employer is the
_effect_ rather than the equivalent of the energy expended; and the
compensation is a _means_ to the replacement of this energy rather
than its formal equivalent. Moreover, the formula does not even
furnish an adequate rational basis for the claim to a decent minimum
wage. A wage which is merely adequate to the replacement of expended
energy and the maintenance of life, is really inadequate to a decent
livelihood. Such compensation would cover only physical health and
strength, leaving nothing for intellectual, spiritual, and moral
needs. As Father Antoine himself admits and contends, the latter needs
are among the elements of a decent livelihood, and a wage which does
not make reasonable provision for them fails to comply with the
minimum requirements of justice.

The second factor of "objective equivalence" is even more questionable
than the first. To be _completely_ just, says Father Antoine, wages
must be not merely adequate to a decent livelihood, but equivalent to
the "economic value of the labour" ("la valeur économique du
travail"). This "economic value" is determined objectively by the cost
of production, the utility of the product, and the movement of supply
and demand; subjectively, by the judgment of employers and employés.
In case of conflict between these two measures of value, and in case
of uncertainty concerning the objective measure, the decision of the
subjective determinant must always prevail.

These statements are hopelessly ambiguous and confusing. If the
objective measure of "economic value" is to be understood in a purely
positive way, it merely means the wages that actually obtain in a
competitive market. In the purely positive or economic sense, the
utility of labour is measured by what it will command in the market,
the movement of supply and demand is likewise reflected in market
wages, and the determining effect of cost of production is also seen
in the share that the market awards to labour after the other factors
of production have taken their portions of the product. In other
words, the "economic value" of labour is simply its market value.
This, however, is not Father Antoine's meaning; for he has already
declared that the "economic value" of labour is never less than the
equivalent of a decent livelihood, whereas we know that the market
value often falls below that level. In his mind, therefore, "economic
value" has an ethical signification. It indicates at least the
requisites of decent living, and it embraces more than this in some
cases. When? and how much more? Let us suppose a business so
prosperous that it returns liberal profits to the employer and the
prevailing rate of interest on the capital, and yet shows a surplus
sufficient to give all the labourers ten dollars a day. Is "cost of
production" to be interpreted here as allowing only the normal rate of
profits and interest to the business man and the capitalist, leaving
the residue to labour? Or is it to be understood as requiring that the
surplus be divided among the three agents of production? In other
words, is the "economic value" of labour in such cases to be
determined by some ethical principle which tells beforehand how much
the other agents than labour ought to receive? If so, what is this
principle or formula?

None of these questions is satisfactorily answered in Father Antoine's
pages. They are all to be solved by having recourse to the subjective
determinant of "economic value"; namely, the judgment of employers and
employés. Thus his proximate factor of justice in wages, his formula
of complete as against minimum just wages, turns out to be something
entirely subjective, and more or less arbitrary. It is in no sense a
measure of the equivalence between work and pay.

Moreover, it is inadequate as a measure of justice. Should the
majority of both employers and employés fix the "economic value" of
the labour of carpenters at five dollars a day, there would be no
certainty that this decision was correct, and that this figure
represented just wages. Should they determine upon a rate of fifty
dollars a day, we could not be sure that their decision was unjust.
Undoubtedly the combined judgment of employers and employés will set a
fairer wage than one fixed by either party alone, since it will be
less one-sided; but there is no sufficient reason for concluding that
it will be in all cases completely just. Undoubtedly employers and
employés know what wages an industry can afford at prevailing prices,
on the assumption that business ability and capital are to have a
certain rate of return; but there is no certainty that the prevailing
prices are fair, or that the assumed rates of profits and interest are
fair. In a word, the device is too arbitrary.

To sum up the entire discussion of exchange-equivalence theories:
Their underlying concept is fundamentally unsound and impracticable.
All of them involve an attempt to compare two entities which are
utterly incommensurate. There exists no third term, or standard, or
objective fact, which will inform men whether any rate of wages is the
equivalent of any quantity of labour.


III. PRODUCTIVITY THEORIES

The productivity concept of wage justice appears in a great variety of
forms. The first of them that we shall consider is advocated mainly by
the Socialists, and is usually referred to as the theory of the "right
to the whole product of labour."[224]

_Labour's Right to the Whole Product_

We have seen that Adam Smith's belief in the normality and beneficence
of free competition would have logically led him to the conclusion
that competitive wages were just; and we know that this doctrine is
implicit in his writings. On the other hand, his theory that all value
is determined by labour would seem to involve the inference that all
the value of the product belongs to the labourer. As a matter of fact,
Smith restricted this conclusion to primitive and pre-capitalist
societies. Apparently he, and his disciples in an even larger degree,
was more interested in describing the supposed beneficence of
competition than in justifying the distribution that resulted from the
competitive process.

The early English Socialists were more consistent. In 1793 William
Godwin, whom Anton Menger calls "the first scientific Socialist of
modern times," laid down in substance the doctrine that the labourer
has a right to the whole product.[225] In 1805 Charles Hall formulated
and defended the doctrine with greater precision and consistency.[226]
In 1824 the doctrine was stated more fundamentally, systematically,
and completely by William Thompson.[227] He accepted the labour theory
of value laid down by Adam Smith, and formally derived therefrom the
ethical conclusion that the labourer has a right to the whole product.
"Thompson and his followers are only original in so far as they
consider rent and interest to be _unjust_ deductions, which violate
the right of the labourer to the whole product of his labour."[228] He
denounced the laws which empowered the land owner and the capitalist
to appropriate value not created by them, and gave to the value thus
appropriated the name, "surplus value." In the use of this term he
anticipated Karl Marx by several years. His doctrines were adopted and
defended by many other English Socialist writers, and were introduced
into France by the followers of Saint-Simon. "From his works," says
Menger, "the later Socialists, the Saint-Simonians, Proudhon, and
above all, Marx and Rodbertus, have directly or indirectly drawn their
opinions."[229]

Although Saint-Simon never accepted the doctrine of the labourer's
right to the whole product, his disciples, particularly Enfantin and
Bazard, taught it implicitly. In a just social state, they maintained,
every one would be expected to labour according to his capacity, and
would be rewarded according to his product.[230]

Perhaps the most theoretical and extreme statement of the theory that
we are considering is found in the writings of P. J. Proudhon.[231] He
maintained that the real value of products was determined by labour
time, and that all kinds of labour should be regarded as equally
effective in the value-creating process, and he advocated therefore
equality of wages and salaries. For the realisation of this ideal he
drew the outlines of a semi-anarchic social order, of which the main
feature was gratuitous public credit. Neither his theories nor his
proposals ever obtained any considerable number of adherents.

A milder and better reasoned form of the theory was set forth by Karl
J. Rodbertus.[232] Professor Wagner calls him, "the first, the most
original, and the boldest representative of scientific Socialism in
Germany." Yet, as Menger points out, Rodbertus derived many of his
doctrines from Proudhon and the Saint-Simonians. He admitted that in a
capitalist society the value of commodities does not always
correspond to the labour embodied in them, and that different kinds of
labour are productive in different degrees. Therefore, he had recourse
to the concept of a normal, or average, day's labour in any group, and
would have the various members of the group remunerated with reference
to this standard. This was to be brought about by a centralised
organisation of industry in which the whole product would ultimately
go to labour, and the share of the individual worker would be
determined by his contribution of socially necessary labour.

Although Karl Marx adopted and formulated in his own terms the theory
that value is determined by labour, he did not thence deduce the
conclusion that labour has a right to the whole product.[233] Being a
materialist, he consistently rejected conceptions of abstract justice
or injustice, rights or wrongs. In opposition to the methods of his
predecessors, he endeavoured to discover the historical and positive
forces which determined the actual distribution, and to derive
therefrom the laws that were necessarily preparing the way for a new
social order. While he contended that rent receivers and interest
receivers appropriated the surplus value created by labour, he
refrained from stigmatising this process as morally wrong. It was
merely a necessary element of the capitalist system. To call it unjust
was in Marx' view to use language without meaning. As well might one
speak of the injustice of a hurricane or an avalanche. Not the
preaching of abstract justice, but the inevitable transformation of
the capitalist into the collectivist organisation of industry, would
enable labour to obtain its full product.

Nevertheless, it is probably true that a majority of the followers of
Marx have drawn from his labour theory of value the inference that all
the value of the product belongs by a moral right to the labourer. So
deeply fixed in the human conscience is the conception of justice, and
so general is the conviction of the labourer's right to his product,
that most Socialists have not been able to maintain a position of
consistent economic materialism. Indeed, Marx himself did not always
succeed in evading the influence and the terminology of idealistic
conceptions. He frequently thought and spoke of the Socialist régime
as not only inevitable but as morally right, and of the capitalist
system as morally wrong. Despite his rigid, materialistic theorising,
his writings abound in passionate denunciation of existing industrial
evils, and in many sorts of "unscientific" ethical judgments.[234]

In so far as the right to the whole product of labour has been based
upon the labour theory of value, it may be summarily dismissed from
consideration. The value of products is neither created nor adequately
measured by labour; it is determined by utility and scarcity. Labour
does, indeed, affect value, inasmuch as it increases utility and
diminishes scarcity, but it is not the only factor that influences
these categories. Natural resources, the desires and the purchasing
power of consumers determine value quite as fundamentally as does
labour, and cause it to vary out of proportion to the labour expended
upon a commodity.

To-day there are probably not many adherents of the
right-to-the-whole-product doctrine who attempt to base it upon any
theory of value. The majority appeal to the simple and obvious fact
that the labourers, together with the active directors of industry,
are the only human beings who expend energy in the productive process.
The only labour that the capitalist and the landowner perform in
return for the interest and rent that they respectively receive,
consists in choosing the particular goods in which their money is to
be invested. As capitalist and landowner, they do not participate in
the turning out of products. They are owners but not operators of the
factors of production. In the sense, therefore, of active agents the
labourers and the business men are the only producers. Whether land
and capital should be called _productive_, whether the product should
be regarded as _produced_ by land and capital as well as by labour and
undertaking activity, is mostly a matter of terminology. Inasmuch as
they are instrumental in bringing forth the product, land and capital
may properly be designated as productive, but not in the same sense as
labour and business energy. The former are passive factors and
instrumental causes of the product, while the latter are active
factors and original causes. Moreover, the former are non-rational
entities, while the latter are attributes of human beings.

As we have seen in former chapters, it is impossible to prove that
mere ownership of a productive thing, such as a cow, a piece of land,
or a machine, necessarily creates a right to either the concrete or
the conventional product. The formula, "_res fructificat domino_," is
not a self evident proposition. Nor are there any premises available
from which the formula can be logically and necessarily deduced. On
the other hand, we cannot prove conclusively that ownership of
productive property does _not_ give a right to the product. Whence it
follows that the owners of land and capital have at least a
presumptive claim to take rent and interest from their possessions.
Moreover, those owners of capital who would not have saved money
without the hope of interest have a just claim thereto on account of
their sacrifices in saving.

Would the State be justified in abolishing rent and interest, and thus
enabling labour to obtain the whole product? Conceivably this result
might be brought about under the present system of private ownership,
or through the substitution of collectivism. Were the change made by
the former method land and capital would no longer be sought or have
value on account of their annual revenues, but only as receptacles of
saving. They would be desired solely as means of accumulating stores
of goods which might be exchanged for articles of consumption some
time in the future. While we cannot estimate even approximately the
decline that would thus occur in the value of land and capital, we may
safely assert that it would be considerable. Unless the proprietors
received adequate compensation for this loss, they would be compelled
to suffer obvious and grave injustice. Any attempt, however, to carry
out such a scheme, either with or without compensation, would
inevitably fail. Rent might be terminated through the Single Tax, but
interest could not be abolished by any mere legal prohibition. Nor
does Socialism afford a way out; for, as we have seen in a former
chapter, it is an impracticable system. Consequently the theory of the
right to the whole product of labour is confronted by the final
objection that its realisation would involve greater evils and
injustices than those which it seeks to abolish.

Finally, the theory is radically incomplete. It professes to describe
the requirements of justice as between the landowners and capitalists
on the one side, and the wage earners on the other; but it provides no
rule for determining distributive justice as between different classes
of labour. In none of its forms does it provide any comprehensive rule
or principle to ascertain the difference between the products of
different labourers, and to decide how the product belonging to any
group of men as a whole should be divided among the individual
members. Does the locomotive engineer produce more than the section
hand, the bookkeeper more than the salesman, the ditch digger more
than the teamster? These and countless similar questions are, from the
nature of the productive process, unanswerable. Even if it were
ethically acceptable, the doctrine of the right to the whole product
is hopelessly inadequate.

As intimated above, the notion that if the labourer receives
compensation according to his product he receives just compensation,
is one of the most prevalent and fundamental concepts in the
controversy about wage justice. Hence we find it in certain theories
which reject the doctrine of the right to the whole product. According
to these theories, not only the labourer but all the agents of
production should be rewarded in proportion to their productive
contributions. Instead of the whole product, the worker ought to
receive that portion of it which corresponds to his specific
productivity, that is, that portion of the product which represents
his productive influence as compared with the productive efficacy of
land, capital, and business energy.

_Clark's Theory of Specific Productivity_

One of the theories referred to in the last paragraph is that which
has been elaborated in great detail and with great ingenuity by
Professor John Bates Clark. As stated by himself in the opening
sentence of the preface to his "Distribution of Wealth," its main
tenet is, "that the distribution of the income of society is
controlled by a natural law, and that this law, if it worked without
friction, would give to every agent of production the amount of wealth
which that agent creates." In a régime of perfect competition,
therefore, the labourer would get, not the whole product of industry,
but the whole product due to his own exertions.

It is impossible, and indeed unnecessary, to enter upon an extended
examination of this contention. It will be sufficient to state in a
summary way the most obvious and cogent objections. Without making any
examination of Professor Clark's theory, we should expect to find it
unconvincing. For the productive process is by analogy an organic
process, in which every factor requires the co-operation of every
other factor in order to turn out even the smallest portion of the
product. Each factor is in its own order the cause of the whole
product. Consequently no physical portion of the product can be set
aside and designated as wholly due to any one factor. Can we not,
however, distinguish the _proportionate productive influence_ exerted
by each factor, and the proportion of the product which represents
such productive influence? This is the question to which Professor
Clark addresses himself with much ingenuity, subtlety, and labour, and
to which he returns an affirmative answer.[235]

He contends that the amount of product added by the presence of the
least productive labourer in a group or establishment describes the
productivity of that and every other labourer for whom the man in
question can be substituted. Nevertheless this marginal labourer had
the use of _some_ capital, no matter how little or how poor;
consequently the increment of product which follows his activity is
partly due to capital. It represents something other than his own
productive power. If his wage equals the value of this increment of
product, he is receiving something more than his specific product.

In the second place, Professor Clark maintains that the difference
between what a labourer produces when he uses the whole of a certain
supply of capital and what he produces when he has shared that capital
with another labourer, represents the specific productivity of the
relinquished capital. Let us assume that in a given case the
difference is ten units of product. When the first man had the whole
capital to himself, the product was one hundred units; when he shares
the use of it with another, the total product is one hundred and
eighty units. As the two men are assumed to be equally productive,
each has to his credit ninety units of product. Working with half the
capital, the first man finds that the resulting product is ten units
less than when he was using the whole capital. Hence these ten units
represent the portion that the relinquished capital contributed to the
product; and if the productivity of half the capital is ten units,
that of the whole capital must be twenty units. Nevertheless, the ten
units by which the product was enlarged when the man had the whole
capital, did not come into being without his co-operation; hence they
cannot be entirely attributed to the one-half share of the capital. In
other words, the productivity of the relinquished capital seems to be
less than ten units. It also seems to be more than ten units; for we
may assume that if each man were to use one-half the capital
independently of the other, the resulting total product would be less
than one hundred and eighty units, or less than ninety units for each.
Consequently the difference between the product resulting from the
first man's use of the whole capital and that resulting from his use
of half the capital would be more than ten units; and this difference
is specifically attributable to half the capital. Who can say which of
these calculations is correct, or whether either of them is correct?

The method of ascertaining specific productivity which has been
described in the last paragraph is thought by Professor Clark to
receive confirmation from the fact that it leads to the same
conclusion as the first and more direct method; namely, that the
specific productivity of labour is expressed in the product of the
marginal labourer. As a matter of fact, this conclusion is yielded by
both methods; for the specific productivity of the first labourer
appeared as eighty units, which was also the specific productivity of
the second labourer, who was the marginal labourer. As we saw in the
second last paragraph, however, the marginal product is not due to
labour alone; hence the verification provided by the second method is
in reality a refutation.

Apparently the majority of economists do not accept Professor Clark's
theory; for of the nine who discussed certain applications of it at
the nineteenth annual meeting of the American Economic Association
only one approved it, three were non-committal, and five expressed
their dissent.[236]

Even if the theory were true its hypothetical character would deprive
it of any practical value. It assumes a régime of perfect competition,
but this assumption is so seldom realised that no rule based upon it
can throw much light on the question of the productivity of present
day labourers.

Even if it were exactly applicable to existing conditions, that is, if
labourers were actually getting their specific products, the theory
would not provide us with a doctrine of just wages. As we have seen in
former chapters, productivity is neither the only nor the highest canon
of justice, whether as regards the comparative claims of capital and
labour, or as regards the claims of different labourers. The contention
that capital ought to command interest because it aids in bringing
forth the product, is neither self evident nor demonstrable by any
process of reasoning. Even if we should concede that the capitalist has
a right to interest by virtue of the productivity of his capital, we
should not therefore conclude that this right is as cogent as the
corresponding right of the labourer. In the former case the productive
agency is not human nor active, but only material and passive; and the
recipient of the product performs no labour as capitalist, but is left
free to get a livelihood by personal activity. The productivity of
labour differs in all these respects, and the difference is ethically
sufficient to justify the claim that the labourer may sometimes have a
right to a part of the specific product of capital. To sum up the
matter in the words of Professor Wicker: "To have proved that the
capitalist gets in interest what his capital produces is not to have
proved that the capitalist gets what he has earned. To have proved that
the landlord gets what his land produces is not to have proved that the
landlord earns his distributive share.... Economics is not ethics;
explanation is not justification."[237]

Indeed, Professor Clark nowhere explicitly asserts that productivity
is an adequate rule of justice. "We might raise the question," he
says, "whether a rule that gives to a man his product is in the
highest sense just."[238] Scattered throughout his volume, however,
are many expressions which might fairly be interpreted as answering
this question in the affirmative. The statements that distribution
according to product is a "natural law," and that if the labourer does
not get his full specific product he is "despoiled," suggest if they
do not imply that wages according to productivity is not merely the
economic but the ethical norm. At any rate, the assumption of
productivity as the adequate canon of wage justice, is very widely
adopted, and is frequently brought forward to give sanction to
insufficient rates of remuneration. Hence it has been thought well to
show that the economic basis of the assumption, i.e., that the
labourer gets what he produces, is unproved and unprovable.

_Carver's Modified Version of Productivity_

Professor Carver makes no attempt to ascertain or state the exact
physical productivity of labour as compared with that of capital, but
confines his attention to what he calls the "economic" productivity of
a given unit of labour in a given productive process.[239] "Find out
accurately how much the community produces with his [the labourer's]
help, over and above what it produces without his help, and you have
an exact measure of his productivity."[240] By this rule we can
determine a man's productivity not only as compared with his
inactivity in relation to a given industry or establishment, but as
compared with the productivity of some other man who might be
substituted for him. Thus understood, productivity expresses the
economic value of a man to the industrial process in which he
participates. It "determines how much a man is worth, and
consequently, according to our criterion of justice, how much a man
ought to have as a reward for his work."[241]

While this conception of productivity is relatively simple, and the
canon of justice based upon it is somewhat plausible, neither is
adequate. To many situations the productivity test is substantially
inapplicable. The removal from industry of the man who works alone;
for example, the independent shoemaker, blacksmith, tailor, or farmer,
would result not in a certain diminution, but in the entire
non-appearance of the product; and the removal of the capital or tools
would have precisely the same effect. According to the former method,
the labourer is to be credited with the whole product, and capital
with nothing; according to the latter method, capital produces
everything, and labour nothing. Even when several labourers are
employed in an establishment, the test is inapplicable to those who
are engaged upon indispensable tasks; for example, the engineer in the
boiler room of a small factory, and the bookkeeper in a small store.
Remove them, and you have no product at all; hence a rigid enforcement
of Professor Carver's test would award them the whole product. To be
sure, we can get some measure of the productivity of these men by
observing the effect on the product when inferior men are put in their
places; but this merely enables us to tell how much more they are
worth than other men, not their total worth. Moreover, even the
substitution test is not always practicable. The attempt to ascertain
the productivity of a workman of high technical skill by putting in
his place an utterly unskilled labourer, would not yield very
satisfactory results, either to the inquiry or to the industry. In the
majority of such cases, the difference in the resulting product would
probably far exceed the difference in the existing wage rates of the
two men, thus showing that the skilled worker is getting considerably
less than he is "economically worth."

In the field to which it is applicable, namely, that of more or less
unspecialised labour in large establishments, Professor Carver's
theory violates some of the most fundamental conceptions of justice
and humanity. He admits that it takes no account of the labourer's
efforts, sacrifices, or needs, and that when unskilled labour becomes
too plentiful, the value of the product may fall below the cost of
supporting a decent standard of living. While he looks with some
sympathy upon the demand for a minimum wage of two dollars per day, he
contends that unless the labourer really _earns_ that amount, some
other man will be paid less than he earns, "which would be unjust." To
"earn" two dollars a day means, in Professor Carver's terminology, to
add that much value to the product of the establishment in which the
labourer is employed; for this is the measure of the labourer's
productivity. If all the men who are now getting less than two dollars
a day are receiving the full value of their product, and if all the
other workers are likewise given the full value of their product, an
increase in the remuneration of the former will mean a deduction from
the compensation of the latter.

These conclusions of ethical pessimism are extremely vulnerable. As we
have shown in chapter xvi, efforts, sacrifices, and needs are superior
to productivity as claims to reward, and must be given due
consideration in any just scheme of distribution. Professor Carver
would leave them out of account entirely. In the second place, it is
not always nor necessarily ever true that to raise the wages of the
poorest paid labourers will mean to lower the remuneration of those
who are better paid. Many workers, particularly women, are now
receiving less than the measure of their "productivity," less than
they "earn," less than their worth to the employer, less than he would
be willing to pay rather than go without their services. Professor
Carver would, of course, not deny that the wages of all such labourers
could be raised without affecting the remuneration of other workers.
Even when the poorest paid class is receiving all that its members are
at present worth to the employer, an increase in their compensation
would not necessarily come out of the fund available for the better
paid. It could be deducted from excessive profits and interest; for we
know well that in many industries competition does not automatically
keep down these shares to the minimum necessary to retain the services
of business ability and capital. It could be provided to some extent
out of the enlarged product that would result from improvements in the
productive process, and from the increased efficiency of those workers
whose wages had been raised. Finally, the increased remuneration could
be derived from increased prices. When we speak of the unskilled
labourer as getting all that he produces, or all that he earns, we
refer not to his concrete product, but to the value of that product,
to the selling price of the product. Neither this price, nor any other
existing price, has anything about it that is either economically or
ethically sacred. In a competitive market current prices are fixed by
the forces of supply and demand, which often involve the exploitation
of the weak; in a monopoly market they are set by the desires of the
monopolist, which are likewise destitute of moral validity. Hence a
minimum wage law which would raise the price and value of the product
sufficiently to provide living wages for the unskilled workers, thus
increasing their "productivity" and enabling them to "earn" the legal
wage, would neither violate the principles of justice, nor necessarily
diminish the compensation of any other labouring group. To be sure,
the increased prices might be followed by such a lessening of demand
for the product as to diminish employment; but this is another matter
which has no direct bearing on either the economic or the ethical
phases of productivity and earning power. And the disadvantages
involved in the supposition of a reduced volume of employment may
possibly be not so formidable socially as those which accompany a
large volume of insufficiently paid occupations. This question will
receive further consideration in a later chapter.

In the meantime, we conclude that Professor Carver's theory or rule is
inapplicable to a large part of the industrial field, and that where
it does apply it frequently runs counter to some of the fundamental
principles of distributive justice.

FOOTNOTES:

[213] Page 47.

[214] _The Chicago Daily Tribune_, July 17, 1915.

[215] Article on "Political Economy and Ethics," in Palgrave's
Dictionary of Political Economy.

[216] "Property and Contract," II, 603.

[217] Cf. "L'Idée du Juste Salaire," by Léon Polier, ch. iii. Paris;
1903.

[218] Polier, op. cit., pp. 33, sq.; Ryan, "A Living Wage," pp. 26,
sq.

[219] "Ethica," lib. 5, tr. 2, cap. 5.

[220] "Comment. ad Eth.," XXI, 172.

[221] Cf. Polier, op. cit., pp. 66-75; Ryan, op. cit, pp. 93, 94.

[222] Cf. Polier, op. cit., pp. 92-95.

[223] "Cours d'Économie Sociale," pp. 598, sq.

[224] Polier, op. cit., pp. 219-359; Menger, "The Right to the Whole
Produce of Labour"; English Translation. London; 1899.

[225] "Enquiry Concerning Political Justice."

[226] "On the Effects of Civilisation on the People of European
States."

[227] "An Inquiry Into the Principles of the Distribution of Wealth
Most Conducive to Human Happiness."

[228] Menger, op. cit., p. 56.

[229] Op. cit., p. 51.

[230] Cf. Menger, op. cit., pp. 62-73.

[231] "Qu' est-ce que la propriété ou recherches sur la principe du
droit et du gouvernment." 1840.

[232] "Zur Erkentniss unserer staatswirthschaftlichen Zustande," 1842.

[233] "Das Kapital," 1867.

[234] Cf. Polier, op. cit., pp. 352, sq.

[235] Cf. especially chap. xxi, "The Theory of Economic Causation."

[236] "Proceedings," pp. 23-54.

[237] "Proceedings of the 22d Annual Meeting of the American Economic
Association," pp. 160, 161.

[238] Op. cit., p. 8.

[239] "Essays in Social Justice"; especially ch. vii.

[240] Op. cit., pp. 187, 188.

[241] Op. cit., p. 201.



CHAPTER XXIII

THE MINIMUM OF JUSTICE: A LIVING WAGE


Although the principle of needs is somewhat prominent among the
theories of wage justice, it received only incidental mention in the
last chapter. Considered as a comprehensive rule, this principle has
been defended with less energy and definiteness than most of the other
canons. Considered as a partial rule, it is sound and fundamental, and
therefore could not have been classed among theories that are
unacceptable.


_The Principle of Needs_

Many of the early French Socialists of the Utopian school advanced
this formula of distribution: "From each according to his powers; to
each according to his needs." It was also put forward by the German
Socialists in the Gotha Program in 1875. While they have not given to
this standard formal recognition in their more recent platforms,
Socialists generally regard it as the ideal rule for the distant
future.[242] The difficulties confronting it are so great and so
obvious that they would defer the introduction of it to a time when
the operation of their system will, they hope, have eradicated the
historical human qualities of laziness and selfishness. To adopt needs
as the sole rule of distribution would mean, of course, that each
person should be rewarded in proportion to his wants and desires,
regardless of his efforts or of the amount that he had produced. The
mere statement of the proposal is sufficient to refute it as regards
the men and women of whom we have any knowledge. In addition to this
objection, there is the insuperable difficulty of measuring fairly or
accurately the relative needs of any group composed of men, women, and
children. Were the members' own estimates of their needs accepted by
the distributing authority, the social product would no doubt fall far
short of supplying all. If the measurement were made by some official
person or persons, "the prospect of jobbery and tyranny opened up must
give the most fanatical pause." Indeed, the standard of needs should
be regarded as a canon of Communism rather than of Socialism; for it
implies a large measure of common life as well as of common ownership,
and paternalistic supervision of consumption as well as collectivist
management of production.

While the formula of needs must be flatly rejected as complete rule of
distributive justice, or of wage justice, it is valid and
indispensable as a partial standard. It is a partial measure of
justice in two senses: first, inasmuch as it is consistent with the
admission and operation of other principles, such as productivity and
sacrifice; second, inasmuch as it can be restricted to certain
fundamental requisites of life, instead of being applied to all
possible human needs. It can be made to safeguard the minimum demands
of reasonable life, and therefore to function as a minimum standard of
wage justice.

Human needs constitute the primary title or claim to material goods.
None of the other recognised titles, such as productivity, effort,
sacrifice, purchase, gift, inheritance, or first occupancy, is a
fundamental reason or justification of either rewards or possessions.
They all assume the existence of needs as a prerequisite to their
validity. If men did not need goods they could not reasonably lay
claim to them by any of the specific titles just enumerated. First
comes the general claim or fact of needs; then the particular title
or method by which the needs may be conveniently supplied. While these
statements may seem elementary and platitudinous, their practical
value will be quite evident when we come to consider the conflicting
claims that sometimes arise out of the clash between needs and some of
the other titles. We shall see that needs are not merely a physical
reason or impulse toward acquisition and possession, but a moral title
which rationalises the claim to a certain amount of goods.[243]


_Three Fundamental Principles_

The validity of needs as a partial rule of wage justice rests
ultimately upon three fundamental principles regarding man's position
in the universe. The first is that God created the earth for the
sustenance of _all_ His children; therefore, that all persons are
equal in their inherent claims upon the bounty of nature. As it is
impossible to demonstrate that any class of persons is less important
than another in the eyes of God, it is logically impossible for any
believer in Divine Providence to reject this proposition. The man who
denies God or Providence can refuse assent to the second part of the
proposition only by refusing to acknowledge the personal dignity of
the human individual, and the equal dignity of all persons. Inasmuch
as the human person is intrinsically sacred and morally independent,
he is endowed with those inherent prerogatives, immunities, and claims
that we call rights. Every person is an end in himself; none is a mere
instrument to the convenience or welfare of any other human being. The
worth of a person is something intrinsic, derived from within, not
determined or measurable by reference to any earthly object or purpose
without. In this respect the human being differs infinitely from, is
infinitely superior to, a stone, a rose, or a horse. While these
statements help to illustrate what is meant by the dignity of
personality, by the intrinsic worth, importance, sacredness of the
human being, they do not prove the existence of this inherent
juridical quality. Proof in the strict sense is irrelevant and
impossible. If the intrinsic and equal moral worth of all persons be
not self evident to a man, it will not approve itself to him through
any process of argumentation. Whosoever denies it can also logically
deny men's equal claims of access to the bounty of the earth; but he
cannot escape the alternative conclusion that brute force, exercised
either by the State or by individuals, is the only proper determinant
of possessions and of property. Against this monstrous contention it
is not worth while to offer a formal argument.

The second fundamental principle is that the inherent right of access
to the earth is conditioned upon, and becomes actually valid through,
the expenditure of useful labour. Generally speaking the fruits and
potentialities of the earth do not become available to men without
previous exertion. "In the sweat of thy brow thou shalt eat thy
bread," is a physical no less than a moral commandment. There are,
indeed, exceptions: the very young, the infirm, and the possessors of
a sufficient amount of property. The two former classes have claims to
a livelihood through piety and charity, while the third group has at
least a presumptive claim of justice to rent and interest, and a
certain claim of justice to the money value of their goods.
Nevertheless, the general condition is that men must work in order to
live. "If a man will not work neither shall he eat." For those who
refuse to comply with this condition the inherent right of access to
the earth remains only hypothetical and suspended.

The two foregoing principles involve as a corollary a third principle;
the men who are in present control of the opportunities of the earth
are obliged to permit reasonable access to these opportunities by
persons who are willing to work. In other words, possessors must so
administer the common bounty of nature that non-owners will not find
it unreasonably difficult to get a livelihood. To put it still in
other terms, the right to subsist from the earth implies the right to
access thereto on reasonable terms. When any man who is willing to
work is denied the exercise of this right, he is no longer treated as
the moral and juridical equal of his fellows. He is regarded as
inherently inferior to them, as a mere instrument to their
convenience; and those who exclude him are virtually taking the
position that their rights to the common gifts of the Creator are
inherently superior to his birthright. Obviously this position cannot
be defended on grounds of reason. Possessors are no more justified in
excluding a man from reasonable access to the goods of the earth than
they would be in depriving him of the liberty to move from place to
place. The community that should arbitrarily shut a man up in prison
would not violate his rights more fundamentally than the community or
the proprietors who should shut him out from the opportunity of
getting a livelihood from the bounty of the earth. In both cases the
man demands and has a right to a common gift of God. His moral claim
is as valid to the one good as to the other, and it is as valid to
both goods as is the claim of any of his fellows.


_The Right to a Decent Livelihood_

Every man who is willing to work has, therefore, an inborn right to
sustenance from the earth on reasonable terms or conditions. This
cannot mean that all persons have a right to equal amounts of
sustenance or income; for we have seen on a preceding page that men's
needs, the primary title to property, are not equal, and that other
canons and factors of distribution have to be allowed some weight in
determining the division of goods and opportunities. Nevertheless,
there is a certain minimum of goods to which every worker is entitled
by reason of his inherent right of access to the earth. He has a right
to at least a _decent_ livelihood. That is; he has a right to so much
of the requisites of sustenance as will enable him to live in a manner
worthy of a human being. The elements of a decent livelihood may be
summarily described as: food, clothing, and housing sufficient in
quantity and quality to maintain the worker in normal health, in
elementary comfort, and in an environment suitable to the protection
of morality and religion; sufficient provision for the future to bring
elementary contentment, and security against sickness, accident, and
invalidity; and sufficient opportunities of recreation, social
intercourse, education, and church-membership to conserve health and
strength, and to render possible in some degree the exercise of the
higher faculties.

On what ground is it contended that a worker has a right to a decent
livelihood, as thus defined, rather than to a bare subsistence? On the
same ground that validates his right to life, marriage, or any of the
other fundamental goods of human existence. On the dignity of
personality. Why is it wrong and unjust to kill or maim an innocent
man? Because human life and the human person possess intrinsic worth;
because personality is sacred. But the intrinsic worth and sacredness
of personality imply something more than security of life and limb,
and the material means of bare existence. The man who is not provided
with the requisites of normal health, efficiency, and contentment
lives a maimed life, not a reasonable life. His physical condition is
not worthy of a human being. Furthermore, man's personal dignity
demands not merely the conditions of reasonable physical existence,
but the opportunity of pursuing self perfection through the harmonious
development of all his faculties. Unlike the brutes, he is endowed
with a rational soul, and the capacity of indefinite self
improvement. A due regard to these endowments requires that man shall
have the opportunity of becoming not only physically stronger, but
intellectually wiser, morally better, and spiritually nearer to God.
If he is deprived of these opportunities he cannot realise the
potentialities of his nature nor attain the divinely appointed end of
his nature. He remains on the plane of the lower animals. His
personality is violated quite as fundamentally as when his body is
injured or his life destroyed.

While it is impossible to define with mathematical precision the
degree of personal development that is necessary to satisfy the claims
of personal dignity, it is entirely practicable to state with
sufficient definiteness the minimum conditions of such development.
They are that quantity of goods and opportunities which fair-minded
men would regard as indispensable to humane, efficient, and reasonable
life. The summary description of a decent livelihood at the end of the
second last paragraph, would probably be accepted by all men who
really believe in the intrinsic worth of personality.


_The Claim to a Decent Livelihood from a Present Occupation_

The claim of a worker to a decent livelihood from the goods of the
earth does not always imply a strict right to a livelihood from one's
present occupation. To demand this would in some circumstances be to
demand a livelihood not on reasonable but on unreasonable terms; for
the persons in control of the sources could not reasonably be required
to provide a decent livelihood. Their failure to do so would not
constitute an unreasonable hindrance to the worker's access to the
earth in such circumstances. In chapter xvi we saw that not all
business men have a strict right to that minimum of profits which is
required to yield them a decent livelihood: first, because the
direction of industry is not generally the business man's only means
of getting a living; second, because the community, the consumers, do
not regard the presence and activity of all existing business men as
indispensable. Of course, the community is morally bound to pay such
prices for goods as will enable all the necessary business men,
whether manufacturers or traders, to obtain a decent livelihood in
return for their directive functions; but it is not obliged to provide
a livelihood for those business men whose presence is not required,
who could vanish from the field of industrial direction without
affecting either the supply or the price of goods, and whose
superfluous character is proved by the fact that they cannot make a
livelihood at the prevailing prices. They are in the position of
persons whom the community does not desire to employ as business men.
In refusing to pay prices sufficiently high to provide these
inefficient business men with a decent livelihood, the community is
not unreasonably hindering their access to the common goods of the
earth. Such men are really demanding a livelihood on unreasonable
terms.


_The Labourer's Right to a Living Wage_

On the other hand, the wage earner's claim to a decent livelihood is
valid, generally speaking, in his present occupation. In other words,
his right to a decent livelihood in the abstract means in the concrete
a right to a living wage. To present the matter in its simplest terms,
let us consider first the adult male labourer of average physical and
mental ability who is charged with the support of no one but himself,
and let us assume that the industrial resources are adequate to such a
wage for all the members of his class. Those who are in control of the
resources of the community are morally bound to give such a labourer a
living wage. If they fail to do so they are unreasonably hindering his
access to a livelihood on reasonable terms; and his right to a
livelihood on reasonable terms is violated. The central consideration
here is evidently the _reasonableness_ of the process. Unlike the
business man, the rent receiver, and the interest receiver, the
labourer has ordinarily no other means of livelihood than his wages.
If these do not furnish him with a decent subsistence he is deprived
of a decent subsistence. When he has performed an average day's work,
he has done all that is within his power to make good his claim to a
decent livelihood. On the other hand, the community is the beneficiary
of his labour, and desires his services. If, indeed, the community
would rather do without the services of an individual labourer than
pay him a living wage, it is morally free to choose the former
alternative, precisely as it is justified in refusing to pay a price
for groceries that will enable an inefficient grocer to obtain living
profits. Whatever concrete form the right of such persons to a decent
livelihood may take, it is not the right to living wages or living
profits from the occupations in question. Here, however, we are
discussing the labourer to whom the community would rather pay a
living wage than not employ him at all. To refuse such a one a living
wage merely because he can be constrained by economic pressure to work
for less, is to treat him unreasonably, is to deprive him of access to
a livelihood on reasonable terms. Such treatment regards the labourer
as inferior to his fellows in personal worth, as a mere instrument to
their convenience. It is an unreasonable distribution of the goods and
opportunities of the earth.

Obviously there is no formula by which such conduct can be
mathematically demonstrated as unreasonable; but the proposition is as
certain morally as any other proposition that is susceptible of
rational defence in the field of distribution. No man who accepts the
three fundamental principles stated some pages back, can deny the
right of the labourer to a living wage. The man who does not accept
them must hold that all property rights are the arbitrary creation of
the State, or that there is no such thing as a moral right to
material goods. In either supposition the distribution and possession
of the earth's bounty are subject entirely to the arbitrament of
might. There is nothing to be gained by a formal criticism of this
assumption.

What persons, or group, or authority is charged with the obligation
which corresponds to the right to a living wage? We have referred to
"the community" in this connection, but we do not mean the community
in its corporate capacity, i.e., the State. As regards private
employments, the State is not obliged to pay a living wage, nor any
other kind of wage, since it has not assumed the wage-paying function
with respect to these labourers. As protector of natural rights, and
as the fundamental determiner of industrial institutions, the State is
obliged to enact laws which will enable the labourer to obtain a
living wage; but the duty of actually providing this measure of
remuneration rests upon that class which has assumed the wage-paying
function. This is the employers. In our present industrial system, the
employer is society's paymaster. He, not the State, receives the
product out of which all the agents of production must be rewarded.
Where the labourer is engaged in rendering personal services to his
employer, the latter is the only beneficiary of the labourer's
activity. In either case the employer is the only person upon whom the
obligation of paying a living wage can primarily fall.

If the State were in receipt of the product of industry, the
wage-paying fund, it would naturally be charged with the obligation
that now rests immediately upon the employer. If any other class in
the community were the owners of the product that class would be under
this specific obligation. As things are, the employer is in possession
of the product, and discharges the function of wage payer;
consequently he is the person who is required to perform this function
in a reasonable manner.


_When the Employer Is Unable to Pay a Living Wage_

Evidently the employer who cannot pay a living wage is not obliged to
do so, since moral duties suppose a corresponding physical capacity.
In such circumstances the labourer's right to a living wage becomes
suspended and hypothetical, just as the claim of a creditor when the
debtor becomes insolvent. Let us see, however, precisely what meaning
should reasonably be given to the phrase, "inability to pay a living
wage."

An employer is not obliged to pay a full living wage to all his
employés so long as that action would deprive himself and his family
of a decent livelihood. As active director of a business, the employer
has quite as good a right as the labourer to a decent livelihood from
the product, and in case of conflict between the two rights, the
employer may take advantage of that principle of charity which permits
a man to prefer himself to his neighbour, when the choice refers to
goods of the same order of importance. Moreover, the employer is
justified in taking from the product sufficient to support a somewhat
higher scale of living than generally prevails among his employés; for
he has become accustomed to this higher standard, and would suffer a
considerable hardship if compelled to fall notably below it. It is
reasonable, therefore, that he should have the means of maintaining
himself and family in moderate conformity with their customary
standard of living; but it is unreasonable that they should indulge in
anything like luxurious expenditure, so long as any of the employés
fail to receive living wages.

Suppose that an employer cannot pay all his employés living wages and
at the same time provide the normal rate of interest on the capital in
the business. So far as the borrowed capital is concerned, the
business man has no choice; he must pay the stipulated rate of
interest, even though it prevents him from giving a living wage to
all his employés. Nor can it be reasonably contended that the loan
capitalist in that case is obliged to forego the interest due him. He
cannot be certain that this interest payment, or any part of it, is
really necessary to make up what is wanting to a complete scale of
living wages. The employer would be under great temptation to defraud
the loan capitalist on the pretext of doing justice to the labourer,
or to conduct his business inefficiently at the expense of the loan
capitalist. Anyhow, the latter is under no obligation to leave his
money in a concern that is unable to pay him interest regularly. The
general rule, then, would seem to be that the loan capitalist is not
obliged to refrain from taking interest in order that the employés may
have living wages.

Is the employer justified in withholding the full living wage from his
employés to provide himself with the normal rate of interest on the
capital that he has invested in the enterprise? Speaking generally, he
is not. In the first place, the right to any interest at all, except
as a return for genuine sacrifices in saving, is not certain but only
presumptive.[244] Consequently it has no such firm and definite basis
as the right to a living wage. In the second place, the right to
interest, be it ever so definite and certain, is greatly inferior in
force and urgency. It is an axiom of ethics that when two rights
conflict, the less important must give way to the more important.
Since all property rights are but means to the satisfaction of human
needs, their relative importance is determined by the relative
importance of the ends that they serve; that is, by the relative
importance of the dependent needs. Now the needs that are supplied
through interest on the employer's capital are slight and not
essential to his welfare; the needs that are supplied through a living
wage are essential to a reasonable life for the labourer. On the
assumption that the employer has already taken from the product
sufficient to provide a decent livelihood, interest on his capital
will be expended for luxuries or converted into new investments; a
living wage for the labourer will all be required for the fundamental
goods of life, physical, mental, or moral. Evidently, then, the right
to interest is inferior to the right to a living wage. To proceed on
the contrary theory is to reverse the order of nature and reason, and
to subordinate essential needs and welfare to unessential needs and
welfare.

Nor can it be maintained that the capitalist-employer's claim to
interest is a claim upon the product prior to and independent of the
claim of the labourer to a living wage. That would be begging the
question. The product is in a fundamental sense the common property of
employer and employés. Both parties have co-operated in turning it
out, and they have equal claims upon it, in so far as it is necessary
to yield them a decent livelihood. Having taken therefrom the
requisites of a decent livelihood for himself, the employer who
appropriates interest at the expense of a decent livelihood for his
employés, in effect treats their claims upon the common and joint
product as essentially inferior to his own. If this assumption were
correct it would mean that the primary and essential needs of the
employés are of less intrinsic importance than the superficial needs
of the employer, and that the employés themselves are a lower order of
being than the employer. The incontestable fact is that such an
employer deprives the labourers of access to the goods of the earth on
reasonable terms, and gives himself an access thereto that is
unreasonable.

Suppose that all employers who found themselves unable to pay full
living wages and obtain the normal rate of interest, should dispose of
their businesses and become mere loan capitalists, would the condition
of the underpaid workers be improved? Two effects would be certain: an
increase in the supply of loan capital relatively to the demand, and
a decrease in the number of active business men. The first would
probably lead to a decline in the rate of interest, while the second
might or might not result in a diminution of the volume of products.
If the rate of interest were lowered the employing business men would
be able to raise wages; if the prices of products rose a further
increase of wages would become possible. However, it is not certain
that prices would rise; for the business men who remained would be the
more efficient in their respective classes, and might well be capable
of producing all the goods that had been previously supplied by their
eliminated competitors. Owing to their superior efficiency and their
larger output, the existing business men would be able to pay
considerably higher wages than those who had disappeared from the
field of industrial direction. As things are to-day, it is the less
efficient business men who are unable to pay living wages and at the
same time obtain the prevailing rate of interest on their capital. The
ultimate result, therefore, of the withdrawal from business of those
who could not pay a living wage, would probably be the universal
establishment of a living wage.

Of course, this supposition is purely fanciful. Only a small minority
of the business men of to-day are likely to be driven by their
consciences either to pay a living wage at the cost of interest on
their capital, or to withdraw from business when they are confronted
with such a situation. Is this small minority under moral obligation
to adopt either of these alternatives, when the effect of such action
upon the great mass of the underpaid workers is likely to be very
slight? The question would seem to demand an answer in the
affirmative. Those employers who paid a living wage at the expense of
interest would confer a concrete benefit of great value upon a group
of human beings. Those who shrank from this sacrifice, and preferred
to go out of business, would at least have ceased to co-operate in an
unjust distribution of wealth, and their example would not be
entirely without effect upon the views of their fellow employers.


_An Objection and Some Difficulties_

Against the foregoing argument it may be objected that the employer
does his full duty when he pays the labourer the full value of the
product or service. Labour is a commodity of which wages are the
price; and the price is just if it is the fair equivalent of the
labour. Like any other onerous contract, the sale of labour is
governed by the requirements of commutative justice; and these are
satisfied when labour is sold for its moral equivalent. What the
employer is interested in and pays for, is the labourer's activity.
There is no reason why he should take into account such an extrinsic
consideration as the labourer's livelihood.

Most of these assertions are correct, platitudinously correct, but
they yield us no specific guidance because they use language vaguely
and even ambiguously. The contention underlying them was adequately
refuted in the last chapter, under the heads of theories of value and
theories of exchange equivalence. At present it will be sufficient to
repeat summarily the following points: if the value of labour is to be
understood in a purely economic sense it means market value, which is
obviously not a universal measure of justice; if by the value of
labour we mean its ethical value we cannot determine it in any
particular case merely by comparing labour and compensation; we are
compelled to have recourse to some extrinsic ethical principle; such
an extrinsic principle is found in the proposition that the personal
dignity of the labourer entitles him to a wage adequate to a decent
livelihood; therefore, the ethical value of labour is always
equivalent to at least a living wage, and the employer is morally
bound to give this much remuneration.

Moreover, the habit of looking at the wage contract as a matter of
commutative justice in the mere sense of contractual justice, is
radically defective. The transaction between employé and employer
involves other questions of justice than that which arises immediately
out of the relation between the things exchanged. When a borrower
repays a loan of ten dollars, he fulfils the obligation of justice
because he returns the full equivalent of the article that he
received. Nothing else is pertinent to the question of justice in this
transaction. Neither the wealth nor the poverty, the goodness nor the
badness, nor any other quality of either lender or borrower, has a
bearing on the justice of the act of repayment. In the wage contract,
and in every other contract that involves the distribution of the
common bounty of nature, or of the social product, the juridical
situation is vitally different from the transaction that we have just
considered. The employer has obligations of justice, not merely as the
receiver of a valuable thing through an onerous contract, but as the
_distributor_ of the common heritage of nature. His duty is not merely
contractual, but social. He fulfils not only an individual contract,
but a social function. Unless he performs this social and distributive
function in accordance with justice, he does not adequately discharge
the obligation of the wage contract. For the product out of which he
pays wages is not his in the same sense as the personal income out of
which he repays a loan. His claim upon the product is subject to the
obligation of just distribution; the obligation of so distributing the
product that the labourers who have contributed to the product shall
not be denied their right to a decent livelihood on reasonable terms
from the bounty of the earth. On the other hand, the activity of the
labourer is not a mere commodity, as money or pork; it is the output
of a _person_, and a person who has no other means of realising his
inherent right to a livelihood. Consequently, both terms of the
contract, the labour and the compensation, involve other elements of
justice than that which arises out of their assumed mutual
equivalence.

In a word, justice requires the employer not merely to give an
equivalent for labour (an equivalent which is determined by some
arbitrary, conventional, fantastic, or impossible attempt to compare
work and pay) but to fulfil his obligation of justly distributing that
part of the common bounty of the earth which comes into his hands by
virtue of his social function in the industrial process. How futile,
then, to endeavour by word juggling to describe the employer's
obligation in terms of mere equivalence and contractual justice!

Some difficulties occur in connection with the wage rights of adult
males whose ability is below the average, and female and child
workers. Since the dignity and the needs of personality constitute the
moral basis of the claim to a decent livelihood, it would seem that
the inefficient worker who does his best is entitled to a living wage.
Undoubtedly he has such a right if it can be effectuated in the
existing industrial organisation. As already noted, the right of the
workman of average ability to a living wage does not become actual
until he finds an employer who would rather give him that much pay
than do without his services. Since the obligation of paying a living
wage is not an obligation to employ any particular worker, an employer
may refrain from hiring or may discharge any labourer who does not add
to the product sufficient value to provide his wages. For the employer
cannot reasonably be expected to employ any one at a positive loss to
himself. Whence it follows that he may pay less than living wages to
any worker whose services he would rather dispense with than
remunerate at that figure.[245]

Women and young persons who regularly perform a full day's work, have
a right to compensation adequate to a decent livelihood. In the case
of minors, this means living at home, since this is the normal
condition of all, and the actual condition of almost all. Adult
females have a right to a wage sufficient to maintain them away from
home, because a considerable proportion of them live in this
condition. If employers were morally free to pay home-dwelling women
less than those adrift, they would endeavour to employ only the
former. This would create a very undesirable social situation. The
number of women away from home who are forced to earn their own living
is sufficiently large (20 to 25 per cent. of the whole) to make it
reasonable that for their sakes the wage of all working women should
be determined by the cost of living outside the parental precincts.
This is one of the social obligations that reasonably falls upon the
employer on account of his function in the present industrial system.
In all the American minimum wage laws, the standard of payment is
determined by the cost of living away from home. Besides, the
difference between the living costs of women in the two conditions is
not nearly as great as is commonly assumed. Probably it never amounts
to a dollar a week.


_The Family Living Wage_

Up to the present we have been considering the right of the labourer
to a wage adequate to a decent livelihood for himself as an
individual. In the case of an adult male, however, this is not
sufficient for normal life, nor for the reasonable development of
personality. The great majority of men cannot live well balanced
lives, cannot attain a reasonable degree of self development outside
the married state. Therefore, family life is among the essential
needs of a normal and reasonable existence. It is not, indeed, so
vitally necessary as the primary requisites of individual life, such
as food, clothing, and shelter, but it is second only to these.
Outside the family man cannot, as a rule, command that degree of
contentment, moral strength, and moral safety which are necessary for
reasonable and efficient living. It is unnecessary to labour this
point further, as very few would assert that the average man can live
a normal and complete human life without marriage.

Now, the support of the family falls properly upon the husband and
father, not upon the wife and mother. The obligation of the father to
provide a livelihood for the wife and young children is quite as
definite as his obligation to maintain himself. If he has not the
means to discharge this obligation he is not justified in getting
married. Yet, as we have just seen, marriage is essential to normal
life for the great majority of men. Therefore, the material requisites
of normal life for the average adult male, include provision for his
family. In other words, his decent livelihood means a family
livelihood. Consequently, he has a right to obtain such a livelihood
on reasonable terms from the bounty of the earth. In the case of the
wage earner, this right can be effectuated only through wages;
therefore, the adult male labourer has a right to a family living
wage. If he does not get this measure of remuneration his personal
dignity is violated, and he is deprived of access to the goods of the
earth, quite as certainly as when his wage is inadequate to personal
maintenance. The difference between family needs and personal needs is
a difference only of degree. The satisfaction of both is indispensable
to his reasonable life.

Just as the woman worker who lives with her parents has a right to a
wage sufficient to maintain her away from home, so the unmarried adult
male has a right to a family living wage. If only married men get the
latter wage they will be discriminated against in the matter of
employment. To prevent this obviously undesirable condition, it is
necessary that a family living wage be recognised as the right of all
adult male workers. No other arrangement is reasonable in our present
industrial system. In a competitive régime the standard wage for both
the married and the unmarried men is necessarily the same. It will be
determined by the living costs of either the one class or the other.
At present the wage of the unskilled is unfortunately adjusted to the
subsistence cost of the man who is not married. Since two prevailing
scales of wages are impossible, the remuneration of the unmarried must
in the interests of justice to the married be raised to the living
costs of the latter. Moreover, the unmarried labourer needs more than
an individual living wage in order to save sufficient money to enter
upon the responsibilities of matrimony.

Only two objections of any importance can be brought against the male
labourer's claim to a family living wage. The first is that just wages
are to be measured by the value of the labour performed, and not by
such an extrinsic consideration as the needs of a family. It has
already been answered in this and the preceding chapters. Not the
economic but the ethical value of the service rendered, is the proper
determinant of justice in the matter of wages; and this ethical value
is always the equivalent of at least a decent livelihood for the
labourer and his family. According to the second objection, the
members of the labourer's family have no claim upon the employer,
since they do not participate in the work that is remunerated. This
contention is valid, but it is also irrelevant. The claim of the
labourer's family to sustenance is directly upon him, not upon his
employer; but the labourer has a just claim upon the employer for the
means of meeting the claims of his family. His right to this amount of
remuneration is directly based neither upon the needs nor the rights
of his family, but upon his own needs, upon the fact that family
conditions are indispensable to his own normal life. If the wife and
young children were self supporting, or were maintained by the State,
the wage rights of the father would not include provision for the
family. Since, however, family life involves support by the father,
the labourer's right to such a life necessarily includes the right to
a wage adequate to family support.


_Other Arguments in Favour of a Living Wage_

Thus far, the argument has been based upon individual natural rights.
If we give up the doctrine of natural rights, and assume that all the
rights of the individual come to him from the State, we must admit
that the State has the power to withhold and withdraw all rights from
any and all persons. Its grant of rights will be determined solely by
considerations of social utility. In the concrete this means that some
citizens may be regarded as essentially inferior to other citizens,
that some may properly be treated as mere instruments to the
convenience of others. Or it means that all citizens may be completely
subordinated to the aggrandisement of an abstract entity, called the
State. Neither of these positions is logically defensible. No group of
persons has less intrinsic worth than another; and the State has no
rational significance apart from its component individuals.

Nevertheless, a valid argument for the living wage can be set up on
grounds of social welfare. A careful and comprehensive examination of
the evil consequences to society and the State from the under-payment
of any group of labourers, would show that a universal living wage is
the only sound social policy. Among competent social students, this
proposition has become a commonplace. It will not be denied by any
intelligent person who considers seriously the influence of low wages
in diminishing the efficiency, physical, mental, and moral, of the
workers; in increasing the volume of crime, and the social cost of
meeting it; in the immense social outlay for the relief of unnecessary
poverty, sickness, and other forms of distress; and in the formation
of a large and discontented proletariat.[246]

The living wage doctrine also receives strong support from various
kinds of authority. Of these the most important and best known is the
famous encyclical, "On the Condition of Labour," May 15, 1891, by Pope
Leo XIII. "Let it then be granted that workman and employer should, as
a rule, make free agreements, and in particular should agree freely as
to wages; nevertheless, there is a dictate of natural justice more
imperious and ancient than any bargain between man and man; namely,
that the remuneration should be sufficient to maintain the wage earner
and reasonable and frugal comfort." Although the Pope refrained from
specifying whether the living wage that he had in mind was one
adequate merely to an individual livelihood, or sufficient to support
a family, other passages in the Encyclical leave no room for doubt
that he regarded the latter as the normal and equitable measure of
remuneration. Within a dozen lines of the sentence quoted above, he
made this statement: "If the workman's wages be sufficient to maintain
himself, his wife, and his children in reasonable comfort, he will not
find it difficult, if he be a sensible man, to practise thrift; and he
will not fail, by cutting down expenses, to put by some little savings
and thus secure a small income."

All lesser Catholic authorities hold that the adult male labourer has
some kind of moral claim to a family living wage. In all probability
the majority of them regard this claim as one of strict justice, while
the minority would put it under the head of legal justice, or natural
equity, or charity. The differences between their views are not as
important as the agreements; for all the Catholic writers maintain
that the worker's claim is strictly moral in its nature, and that the
corresponding obligation upon the employer is likewise of a moral
character.

The Federal Council of the Churches of Christ in America, representing
the principal Protestant denominations, has formally declared in
favour of "a living wage as a minimum in every industry."

Public opinion likewise accepts the principle of a living wage as the
irreducible minimum of fair treatment for all workers. Indeed, it
would be difficult to find any important person in any walk of life
to-day who would have the temerity to deny that the labourer is
entitled to a wage sufficient for reasonable family life. Among
employers the opinion is fairly general that the narrow margin of
profit in competitive industries renders the burden of paying a family
living wage to all adult males unfairly heavy; but the assertion that
the wage contract is merely an economic transaction, having no
relation to justice, is scarcely ever uttered publicly.


_The Money Measure of a Living Wage_

For self-supporting women a living wage is not less than eight dollars
per week in any city of the United States, and in some of our larger
cities it is from one to two dollars above this figure. The state
minimum wage commissions that have acted in the matter, have fixed the
rates not lower than eight nor higher than ten dollars per week.[247]
These determinations are in substantial agreement with a large number
of other estimates, both official and unofficial.

When the present writer was making an estimate of the cost of decent
living for a family about eleven years ago, he came to the conclusion
that six hundred dollars per year was the lowest amount that would
maintain a man and wife and four or five small children in any American
city, and that this sum was insufficient in some of the larger
cities.[248] Since that time retail prices seem to have risen at least
twenty-five and possibly forty-five per cent.[249] If the six hundred
dollar minimum were correct in 1905 it should, therefore, be increased
to seven hundred and fifty dollars to meet the present range of prices.
That this estimate is too low for some of the more populous cities, has
been fully proved by several recent investigations. In 1915 the Bureau
of Standards put the minimum cost of living for a family of five in New
York City at $840.18. About the same time the New York Factory
Investigating Commission gave the estimate of $876.43 for New York
City, and $772.43 for Buffalo. In 1908, when the cost of living was
from ten to thirty per cent. cheaper than to-day, the United States
Bureau of Labour found that, "according to the customs prevailing in
the communities selected for study," a fair standard of living for a
family of five persons among mill workers, was $600.74 in the South,
and from $690.60 to $731.64 in Fall River, Massachusetts.[250]

According to the "Manly Report" of the Federal Commission on
Industrial Relations, between two-thirds and three-fourths of the
adult male labourers of the United States receive less than $750.00 a
year, and the same proportion of women workers are paid under eight
dollars a week. A considerable majority, therefore, of both male and
female labourers fail to obtain living wages. We are still very far
from having actualised even the minimum measure of wage justice.

FOOTNOTES:

[242] Cf. Skelton, "Socialism: A Critical Analysis," p. 202; Menger,
"The Right to the Whole Produce of Labour," pp. 8, sq.

[243] All the questions treated in this chapter are discussed at much
greater length in the author's work, "A Living Wage"; Macmillan; 1906.

[244] See chapters xii and xiii.

[245] While the statement in the text applies to _all_ labourers of
less than average ability, it obviously is applicable only to
individual cases among those who are up to the average. These are the
workers at the "margin" of the labour force in an establishment, those
who could be discharged without causing the industry to shut down. If
an employer would rather go out of business than pay a living wage to
all his necessary labourers of average ability, he is morally free to
do so; but he may not employ them at less than living wages in order
to obtain interest on his capital.

[246] One of the best statements of the evil social results of low
wages will be found in Webb's "Industrial Democracy," vol. II, pp.
749-766.

[247] See reports of these commissions in Oregon, Washington,
Massachusetts, Minnesota, and California.

[248] "A Living Wage," p. 150.

[249] See Bulletins of the Federal Bureau of Labour Statistics on
"Retail Prices"; and Nearing, "Reducing the Cost of Living."

[250] "Summary of the Report on Condition of Woman and Child Wage
Earners in the United States," pp. 383, 384. The best intensive study
of family cost of living is that published in the volume edited by
Robert C. Chapin, "The Standard of Living Among Workingmen's Families
in New York City"; 1909. It led to the conclusion that anything less
than eight hundred dollars was insufficient for the yearly maintenance
of a husband and wife and three small children in Manhattan.



CHAPTER XXIV

THE PROBLEM OF COMPLETE WAGE JUSTICE


A living wage for all workers is merely the _minimum_ measure of just
remuneration. It is not in every case complete justice. Possibly it is
not the full measure of justice in any case. How much more than a
living wage is due to any or all of the various classes of labourers?
How much more may any group of workers demand without exposing itself
to the sin of extortion? By what principles shall these questions be
answered?

The problem of complete wage justice can be conveniently and logically
considered in four distinct relations, as regards: the respective
claims of the different classes of labourers to a given amount of
money available for wage payments; the claims of the whole body of
labourers, or any group thereof, to higher wages at the expense of
profits; at the expense of interest; and at the expense of the
consumer.


_Comparative Claims of Different Labour Groups_

In the division of a common wage fund, no section of the workers is
entitled to anything in excess of living wages until all the other
sections have received that amount of remuneration. The need of a
decent livelihood constitutes a more urgent claim than any other that
can be brought forward. Neither efforts, nor sacrifices, nor
productivity, nor scarcity can justify the payment of more than living
wages to any group, so long as any other group in the industry remains
below that level; for the extra compensation will supply the
nonessential needs of the former by denying the essential needs of
the latter. The two groups of men will be treated unequally in respect
of those qualities in which they are equal; namely, their personal
dignity and their claims to the minimum requisites of reasonable life
and self development. This is a violation of justice.

Let us suppose that all the workers among whom a given amount of
compensation is to be distributed, have already received living wages,
and that there remains a considerable surplus. On what principles
should the surplus be apportioned? For answer we turn to the canons of
distribution, as explained in chapter xvi. When the elementary needs
of life and development have been supplied, the next consideration
might seem to be the higher or nonessential needs and capacities.
Proportional justice would seem to suggest that the surplus ought to
be distributed in accordance with the varying needs and capacities of
men to develop their faculties beyond the minimum reasonable degree.
As we have already pointed out, this would undoubtedly be the proper
rule if it were susceptible of anything like accurate application, and
if the sum to be distributed were not produced by and dependent upon
those who were to participate in the distribution. However, we know
that the first condition is impracticable, while the second is
non-existent. Inasmuch as the sharers in the distribution have
produced and constantly determine the amount to be apportioned, the
distributive process must disregard nonessential needs, and govern
itself by other canons of justice.

The most urgent of these is the canon of efforts and sacrifices.
Superior effort, as measured by unusual will-exertion, is a
fundamental rule of justice, and a valid title to exceptional reward.
Men who strive harder than the majority of their fellows are ethically
deserving of extra compensation. At least, this is the pure theory of
the matter. In practice, the situation is complicated by the fact
that unusual effort cannot always be distinguished, and by the further
fact that some exceptional efforts do not fructify in correspondingly
useful results. Among men engaged at the same kind of work, superior
effort is to a great extent discernible in the unusually large
product. As such it actually receives an extra reward in accordance
with the canon of productivity. When men are employed at different
tasks, unusual efforts cannot generally be distinguished and
compensated. Hence the general principle is that superior efforts put
forth in the production of utilities, entitle men to something more
than living wages, but that the enforcement of this principle is
considerably hindered by the difficulty of discerning such efforts.

The unusual sacrifices that deserve extra compensation are connected
with the costs of industrial functions and the disagreeable character
of occupations. Under the first head are included the expense of
industrial training and the debilitating effects of the work. Not only
justice to the worker but a farsighted view of social welfare, dictate
that all unusual costs of preparation for an industrial craft or
profession should be repaid in the form of unusual compensation. This
means something more than a living wage. For the same reasons the
unusual hazards and disability resulting from industrial accidents and
diseases should be provided for by higher remuneration. In the absence
of such provision, these costs will have to be borne by parents, by
society in the form of charitable relief, or by the worker himself
through unnecessary suffering and incapacity. The industry that does
not provide for all these costs is a social parasite, the workers in
it are deprived of just compensation for their unusual sacrifices, and
society suffers a considerable loss through industrial friction and
diminished productive efficiency. In so far, however, as any of the
foregoing occupational costs are borne by society, as in the matter of
industrial education, or by the employer, as by the devices of
accident compensation or sickness insurance, they do not demand
provision in the form of extra wages.

Other unusual sacrifices that entitle the worker to more than living
wages, are inherent in disagreeable or despised occupations. The
scavenger and the bootblack ought to get more than the performers of
most other unskilled tasks. On the principles of comparative
individual desert, they should receive larger remuneration than many
persons who are engaged upon skilled but relatively pleasant kinds of
work. For if they were given the choice of expending the time and
money required to fit them for the latter tasks, or of taking up
immediately their present disagreeable labour, they would select the
more pleasant occupations, for the same or even a smaller
remuneration. And the majority of those who are now in the more
skilled occupations would make the same choice. Hence the sacrifices
inherent in disagreeable kinds of work are in many cases as great as
or greater than the sacrifices of preparation for the more pleasant
tasks; consequently the doers of the former are relatively underpaid.
If all wages were regulated by some supreme authority according to the
principles of complete justice, the workers in disagreeable
occupations would receive something more than living wages. Nor would
this determination of rewards be in any way contrary to social welfare
or the principle of maximum net results; for the superior
attractiveness of the other kinds of work would draw a sufficient
supply of labour to offset the advantage conferred by higher wages
upon the disagreeable occupations. The main reason why the latter kind
of labour is so poorly paid now is the fact that it is very plentiful,
a condition which is in turn due to the unequal division of industrial
opportunity. Were the opportunities of technical education and of
entrance to the higher crafts and professions more widely diffused,
the labourers offering themselves for the disagreeable tasks would be
scarcer and their remuneration correspondingly larger. This would be
not only more comfortable to the abstract principles of justice, but
more conducive to social efficiency.

To sum up the discussion concerning the canon of efforts and
sacrifices: Labourers have a just claim to more than living wages
whenever they put forth unusual efforts, and whenever their
occupations involve unusual sacrifices, either through costs of
preparation, exceptional hazards, or inherent disagreeableness. The
precise amount of extra compensation due under any of these heads can
be determined, as a rule, only approximately.

The next canon to be considered as a reason for more than living wages
is that of productivity. This offers little difficulty; for the
unusual product is always visible among men who are performing the
same kind of work, and the employer is always willing to give the
producer of it extra compensation. While superior productive power
which is based solely upon superior native ability has only
presumptive validity as a canon of justice, that is ethically
sufficient in our workaday world. Moreover, the canon of human welfare
demands that superior productivity receive superior rewards, so long
as these are necessary to evoke the maximum net product.

The canon of scarcity has exactly the same value as that of
productivity. Society and the employer are well advised and are
justified in giving extra compensation to scarce forms of labour when
the product is regarded as worth the corresponding price. This remains
true even when the scarcity is due to restricted opportunity of
preparation, rather than to sacrifices of any sort. In that case the
higher rewards are as fully justified as the superior remuneration of
that superior productivity which is based upon exceptional native
endowments. The amount of extra compensation which may properly be
given on account of scarcity is determined either by the degree of
sacrifice involved or by the ordinary operation of competition. When
men are scarce because they have made exceptional sacrifices of
preparation, they ought to be rewarded in full proportion to these
sacrifices. When they are scarce merely because of exceptional
opportunities, their extra compensation should not exceed the amount
that automatically comes to them through the interplay of supply and
demand.

The canon of human welfare has already received implicit application.
When due regard is given to efforts, sacrifices, productivity, and
scarcity, the demands of human welfare, both in its individual and its
social aspects, are sufficiently safeguarded.

In the foregoing pages the attempt has been made to describe the
proportions in which a given wage fund ought to be distributed among
the various classes of labourers who have claims upon the fund. The
first requisite of justice is that all should receive living wages. It
applies to all workers of average ability, even to those who have no
special qualifications of any sort. When this general claim has been
universally satisfied, those groups of workers who are in any wise
special, whose qualifications for any reason differentiate them from
and place them above the average, will have a right to something more
than living wages. They will have the first claim upon the surplus
that remains in the wage fund. Their claims will be based upon the
various canons of distribution explained in detail above; and the
amounts of extra remuneration to which they will be entitled, will be
determined by the extent to which their special qualifications
differentiate them from the average and unspecialised workers. If the
total available wage fund is merely sufficient to provide universal
living wages and the extra compensation due to the specialised groups,
no section of the labour force will be justified in exacting a larger
share. Even though the employer should withhold a part of the amount
due to some weaker group, a stronger group that is already getting its
proper proportion would have no right to demand the unjustly withheld
portion. For this belongs neither to the employer nor to the powerful
labour group, but to the weaker section of labourers.

This does not mean that a powerful body of workers who are already
receiving their due proportion as compared with other labour groups,
would not be justified in seeking any increase in remuneration
whatever. The increase might come out of profits, or interest, or the
consumer, and thus be in no sense detrimental to the rights of the
other sections of labourers. This problem will be considered a little
later. At present we confine our attention to the relative claims of
different labour groups to a definite wage fund.

Suppose, however, that after all workers have received living wages,
and all the exceptional groups have obtained those extra amounts which
are due them on account of efforts, sacrifices, productivity, and
scarcity, there remains a further surplus in the wage fund. In what
proportions should it be distributed? It should be equally divided
among all the labourers. The proportional justice which has been
already established can be maintained only by raising the present
rates of payment equally in all cases. All the average or
unspecialised groups would get something more than living wages, and
all the other groups would have their extra compensation augmented by
the same amount.

Of course, the wage-fund hypothesis which underlies the foregoing
discussion is not realised in actual life, any more than was the "wage
fund" of the classical economists. Better than any other device,
however, it enables us to describe and visualise the comparative
claims of different groups of labourers who have a right to unequal
amounts in excess of living wages.


_Wages Versus Profits_

Let us suppose that the wage fund is properly apportioned among the
different classes of labourers, according to the specified canons of
distribution. May not one or all of the labour groups demand an
increase in wages on the ground that the employer is retaining for
himself an undue share of the product?

As we have seen in the last chapter, the right of the labourers to
living wages is superior to the right of the employer or business man
to anything in excess of that amount of profits which will insure him
against risks, and afford him a decent livelihood in reasonable
conformity with his accustomed plane of expenditure. It is also
evident that those labourers who undergo more than average sacrifices
have a claim to extra compensation which is quite as valid as the
similarly based claim of the employer to more than living profits. In
case the business does not provide a sufficient amount to remunerate
both classes of sacrifices, the employer may prefer his own to those
of his employés, on the same principle that he may prefer his own
claim to a decent livelihood. The law of charity permits a man to
satisfy himself rather than his neighbour, when the needs in question
are of the same degree of urgency or importance. As to those labourers
who turn out larger products than the average, or whose ability is
unusually scarce, there is no practical difficulty; for the employer
will find it profitable to give them the corresponding extra
compensation. The precise question before us, then, is the claims of
the labourers upon profits for remuneration above universal living
wages and above the extra compensation due on account of unusual
efforts, sacrifices, productivity, and scarcity. Let us call the wage
that merely includes all these factors "the equitable minimum."

In competitive conditions this question becomes practical only with
reference to the exceptionally efficient and productive business men.
The great majority have no surplus available for wage payments in
excess of the "equitable minimum." Indeed, the majority do not now pay
the full "equitable minimum"; yet their profits do not provide them
more than a decent livelihood. The relatively small number of
establishments that show such a surplus as we are considering have
been brought to that condition of prosperity by the exceptional
ability of their directors, rather than by the unusual productivity of
their employés. In so far as this exceptional directive ability is due
to unusual efforts and sacrifices, the surplus returns which it
produces may be claimed with justice by the employer. In so far as the
surplus is the outcome of exceptional native endowments, it may still
be justly retained by him in accordance with the canon of
productivity. In other words, when the various groups of workers are
already receiving the "equitable minimum," they have no strict right
to any additional compensation out of those rare surplus profits which
come into existence in conditions of competition.

This conclusion is confirmed by reference to the canon of human
welfare. If exceptionally able business men were not permitted to
retain the surplus in question they would not exert themselves
sufficiently to produce it; labour would gain nothing; and the
community would be deprived of the larger product.

When the employer is a corporation instead of an individual or a
partnership, and when it is operating in competitive conditions, the
same principles are applicable, and the same conclusions justified.
The officers and the whole body of stockholders will have a right to
those surplus profits that remain after the "equitable minimum" has
been paid to the employés. Every consideration that urges such a
distribution in the case of the individual business holds good for the
corporation.

The corporation that is a monopoly will have the same right as the
competitive concern to retain for its owners those surplus profits
which are due to exceptional efficiency on the part of the managers of
the business. That part of the surplus which is derived from the
extortion of higher than competitive prices cannot be justly retained,
since it rests upon no definite moral title. As we saw in the chapter
on monopoly, the owners have no right to anything more than the
prevailing rate of interest, together with a fair return for their
labour and for any unusual efficiency that they may exercise. Should
the surplus in question be discontinued by lowering prices, or should
it be continued and distributed among the labourers? As a rule, the
former course would seem morally preferable. While the labourers, as
we shall see presently, are justified in contending for more than the
"equitable minimum" at the expense of the consumer, their right to do
so through the exercise of monopoly power is extremely doubtful.
Whether this power is exerted by themselves or by the employer on
their behalf, it remains a weapon which human nature seems incapable
of using justly.


_Wages Versus Interest_

Turning now to the claims of the labourers as against the capitalists,
or interest receivers, we perceive that the right to any interest at
all is morally inferior to the right of all the workers to the
"equitable minimum." As heretofore pointed out more than once, the
former right is only presumptive and hypothetical, and interest is
ordinarily utilised to meet less important needs than those supplied
by wages. Through his labour power the interest receiver can supply
all those fundamental needs which are satisfied by wages in the case
of the labourer. Therefore, it seems clear that the capitalist has no
right to interest until all labourers have received the "equitable
minimum." It must be borne in mind, however, that any claim of the
labourer against interest falls upon the owners of the productive
capital in a business, upon the undertaker-capitalist, not upon the
loan-capitalist.

When all the labourers in an industry are receiving the "equitable
minimum," have they a right to exact anything more at the expense of
interest? By interest we mean, of course, the prevailing or
competitive rate that is received on productive capital--five or six
per cent. Any return to the owners of capital in excess of this rate
is properly called profits rather than interest, and its relation to
the claims of the labourers has received consideration in the
immediately preceding section of this chapter. The question, then, is
whether the labourers who are already getting the "equitable minimum"
would act justly in demanding and using their economic power to obtain
a part or all of the pure interest. No conclusive reason is available
to justify a negative answer. The title of the capitalist is only
presumptive and hypothetical, not certain and unconditional. It is,
indeed, sufficient to justify him in retaining interest that comes to
him through the ordinary processes of competition and bargaining; but
it is not of such definite and compelling moral efficacy as to render
the labourers guilty of injustice when they employ their economic
power to divert further interest from the coffers of the capitalist to
their own pockets. The interest-share of the product is morally
debatable as to its ownership. It is a sort of no-man's property (like
the rent of land antecedently to its legal assignment through the
institution of private landownership) which properly goes to the first
occupant as determined by the processes of bargaining between
employers and employés. If the capitalists get the interest-share
through these processes it rightfully belongs to them; if the
labourers who are already in possession of the "equitable minimum"
develop sufficient economic strength to get this debatable share they
may justly retain it as their own.

The foregoing conclusion may seem to be a very unsatisfactory solution
of a problem of justice. However, it is the only one that is
practically defensible. If the capitalist's claim to interest were as
definite and certain as the labourer's right to a living wage, or as
the creditor's right to the money that he has loaned, the solution
would be very simple: the labourers that we are discussing would have
no right to strive for any of the interest. But the claim of the
capitalists is not of this clear and conclusive nature. It is
sufficient when combined with actual possession; it is not sufficient
when the question is of future possession. The title of first
occupancy as regards land is not valid until the land has been
actually occupied; and similarly the claim of the capitalist to
interest is not valid until the interest has been received. If the
economic forces which determine actual possession operate in such a
way as to divert the interest-share to the labourers, they, not the
capitalists, will have the valid moral title, just as Brown with his
automobile rather than Jones with his spavined nag will enjoy the
valid title of first occupancy to a piece of ownerless land which both
have coveted.

This conclusion is confirmed by reference to the rationally and
morally impossible situation that would follow from its rejection. If
we deny to the labourers the moral freedom to strive for higher wages
at the expense of the capitalist, we must also forbid them to follow
this course at the expense of the consumer. For the great majority of
consumers would stand to lose advantages to which they have as good a
moral claim as the capitalists have to interest. Practically this
would mean that the labourers have no right to seek remuneration in
excess of the "equitable minimum"; for such excess must in
substantially all cases come from either the consumer or the
capitalist. On what principle can we defend the proposition that the
great majority of labourers are forever restrained by the moral law
from seeking more than bare living wages, and the specialised
minority from demanding more than that extra compensation which
corresponds to unusual efforts, sacrifices, productivity, and
scarcity? Who has authorised us to shut against these classes the
doors of a more liberal standard of living, and a more ample measure
of self development?


_Wages Versus Prices_

The right of the labourers to the "equitable minimum" implies
obviously the right to impose adequate prices upon the consumers of
the labourer's products. This is the ultimate source of the rewards of
all the agents of production. Suppose that the labourers are already
receiving the "equitable minimum." Are they justified in seeking any
more at the cost of the consumer? If all the consumers were also
labourers the answer would be simple, at least in principle: rises in
wages and prices ought to be so adjusted as to bring equal gains to
all individuals. The "equitable minimum" is adjusted to the varying
moral claims of the different classes of labourers; therefore, any
rise in remuneration must be equally distributed in order to leave
this adjustment undisturbed. It is a fact, however, that a large part
of the consumers are not labourers; consequently they cannot look to
rises in wages as an offset to their losses through rises in prices.
Can they be justly required to undergo this inconvenience for the
benefit of labourers who are already getting the "equitable minimum"?

Let us consider first the case of higher wages versus lower prices. A
few progressive and efficient manufacturers of shoes find themselves
receiving large surplus profits which are likely to continue. So far
as the presumptions of strict justice are concerned, they may, owing
to their superior productivity, retain these profits for themselves.
Seized, however, with a feeling of benevolence, or a scruple of
conscience, they determine to divide future profits of this class
among either the labourers or the consumers. If they reduce prices the
labourers will gain something as users of shoes, but the other wearers
of shoes will also be beneficiaries. If the surplus profits are all
diverted to the labourers in the form of higher wages the other
consumers of shoes will gain nothing. Now there does not seem to be
any compelling reason, any certain moral basis, for requiring the shoe
manufacturers to take one course rather than the other. Either will be
correct morally. Possibly the most perfect plan would be to effect a
compromise by lowering prices somewhat and giving some rise in wages;
but there is no strict obligation to follow this course. To be sure,
since the manufacturers have a right to retain the surplus profits,
they have also a right to distribute them as they prefer. Let us get
rid of this complication by assuming that the manufacturers are
indifferent concerning the disposition of the surplus, leaving the
matter to be determined by the comparative economic strength of
labourers and consumers. In such a situation it is still clear that
either of the two classes would be justified in striving to secure any
or all of the surplus. No definite moral principle can be adduced to
the contrary. To put the case in more general terms: there exists no
sufficient reason for maintaining that the gains of cheaper production
should go to the consumer rather than to the labourer, or to the
labourer rather than to the consumer, so long as the labourer is
already in receipt of the "equitable minimum."

Turning now to the question of higher wages at the cost of higher
prices, we note that this would result in at least temporary hardship
to four classes of persons: the weaker groups of wage earners; all
self employing persons, such as farmers, merchants, and manufacturers;
the professional classes; and persons whose principal income was
derived from rent or interest. All these groups would have to pay more
for the necessaries, comforts, and luxuries of living, without being
immediately able to raise their own incomes correspondingly.

Nevertheless, the first three classes could in the course of time
force an increase in their revenues sufficient to offset at least the
more serious inconveniences of the increase in prices. So far as the
wage earners are concerned, it is understood that all these would have
a right to whatever advance in the money measure of the "equitable
minimum" was necessary to neutralise the higher cost of living
resulting from the success of the more powerful groups in obtaining
higher wages. The right of a group to the "equitable minimum" of
remuneration is obviously superior to the right of another group to
more than that amount. And a supreme wage-determining authority would
act on this principle. It cannot be shown, however, that in the
absence of any such authority empowered to protect the "equitable
minimum" of the weaker labourers, the more powerful groups are obliged
to refrain from demanding extra remuneration. The reason of this we
shall see presently. In the meantime we call attention to the fact
that, owing to the greater economic opportunity resulting from the
universal prevalence of the "equitable minimum" and of industrial
education, even the weaker groups of wage earners would be able to
obtain some increases in wages. In the long run the more powerful
groups would enjoy only those advantages which arise out of superior
productivity and exceptional scarcity. These two factors are
fundamental, and could not in any system of industry be prevented from
conferring advantages upon their possessors.

As regards the self employing classes, the remedy for any undue
hardship suffered through the higher prices of commodities would be
found in a discontinuance of their present functions until a
corresponding rise had occurred in the prices of their own products.
They could do this partly by organisation, and partly by entering into
competition with the wage earners. Substantially the same recourse
would be open to the professional classes. In due course of time,
therefore, the remuneration of all workers, whether employés or self
employed or professional, would tend to be in harmony with the canons
of efforts, sacrifices, productivity, scarcity, and human welfare.

Since the level of rent is fixed by forces outside the control of
labourers, employers, or landowners, the receivers thereof would be
unable to offset its decreased purchasing power by increasing its
amount. However, this situation would not be inherently unjust, nor
even inequitable. Like interest, rent is a "workless" income, and has
only a presumptive and hypothetical justification. Therefore, the
moral claim of the rent receiver to be protected against a decrease in
the purchasing power of his income, is inferior to the moral claim of
the labourer to use his economic power for the purpose of improving
his condition beyond the limits of welfare fixed by the "equitable
minimum." What is true of the rent receiver in this respect applies
likewise to the case of the capitalist. As we saw a few pages back,
the wage earners are morally free to take this course at the expense
of interest. Evidently they may do the same thing when the consequence
is merely a diminution in its purchasing power. To be sure, if capital
owners should regard their sacrifices in saving as not sufficiently
rewarded, owing either to the low rate or the low purchasing power of
interest, they would be free to diminish or discontinue saving until
the reduced supply of capital had brought about a rise in the rate of
interest. Should they refrain from this course they would show that
they were satisfied with the existing situation. Hence they would
suffer no wrong at the hands of the labourers who forced up wages at
the expense of prices.

Two objections come readily to mind against the foregoing paragraphs.
The more skilled labour groups might organise themselves into a
monopoly, and raise their wages so high as to inflict the same degree
of extortion upon consumers as that accomplished by a monopoly of
capitalists. This is, indeed, possible. The remedy would be
intervention by the State to fix maximum wages. Just where the maximum
limit ought to be placed is a problem that could be solved only
through study of the circumstances of the case, on the basis of the
canons of efforts, sacrifices, productivity, scarcity, and human
welfare. The second objection calls attention to the fact that we have
already declared that the more powerful labour groups would not be
justified in exacting more than the "equitable minimum" out of a
common wage fund, so long as any weaker group was below that level;
yet this is virtually what would happen when the former caused prices
to rise to such an extent that the weaker workers would be forced
below the "equitable minimum" through the increased cost of living.
While this contingency is likewise possible, it is not a sufficient
reason for preventing any group of labourers from raising their
remuneration at the expense of prices. Not every rise in prices would
effect the expenditures of the weaker sections of the wage earners. In
some cases the burden would be substantially all borne by the better
paid workers and the self employing, professional, and propertied
classes. When it did fall to any extent upon the weaker labourers,
causing their real wages to fall below the "equitable minimum," it
could be removed within a reasonable time by organisation or by
legislation. Even if these measures were found ineffective, if some of
the weaker groups of workers should suffer through the establishment
of the higher prices, this arrangement would be preferable on the
whole to one in which no class of labourers was permitted to raise its
remuneration above the "equitable minimum" at the expense of prices. A
restriction of this sort, whether by the moral law or by civil
regulation, would tend to make wage labour a status with no hope of
pecuniary progress.

It is true that a universal and indefinite increase of wages at the
expense of prices might at length leave the great majority of the
labourers no better off than they were when they had merely the
"equitable minimum." Such would certainly be the result if the
national product were only sufficient to provide the "equitable
minimum" for all workers, and that volume of incomes for the other
agents of production which was required to evoke from them a fair
degree of productive efficiency. In that case the higher wages would
be an illusion. The gain in the amount of money would be offset by the
loss in its purchasing power. Even so, this condition would be greatly
superior to a régime in which the labourers were universally prevented
from making any effort to raise their wages above a fixed maximum.


_Concluding Remarks_

All the principles and conclusions defended in this chapter have been
stated with reference to the present distributive system, with its
free competition and its lack of legal regulation. Were all incomes
and rewards fixed by some supreme authority, the same canons of
justice would be applicable, and the application would have to be made
in substantially the same way, if the authority were desirous of
establishing the greatest possible measure of distributive justice.
The main exception to this statement would occur in relation to the
problem of raising wages above the "equitable minimum" at the expense
of prices. In making any such increase, the wage-fixing authority
would be obliged to take into account the effects upon the other
classes of labourers, and upon all the non-wage-earning classes.
Substantially the same difficulties would confront the government in a
collectivist organisation of industry. The effect that a rise in the
remuneration of any class would produce, through a rise in the prices
of commodities, upon the purchasing power of the incomes of other
classes, would have to be considered and as nearly as possible
ascertained. This would be no simple task. Simple or not, it would
have to be faced; and the guiding ethical principles would always
remain efforts, sacrifices, productivity, scarcity, and human welfare.

The greater part of the discussion carried on in this chapter has a
highly theoretical aspect. From the nature of the subject matter this
was inevitable. Nevertheless the principles that have been enunciated
and applied seem to be incontestable. In so far as they are enforcible
in actual life, they seem capable of bringing about a wider measure of
justice than any other ethical rules that are available.

Possibly the applications and conclusions have been laid down with too
much definiteness and dogmatism, and the whole matter has been made
too simple. On the other hand, neither honesty nor expediency is
furthered by an attitude of intellectual helplessness, academic
hyper-modesty, or practical agnosticism. If there exist moral rules
and rational principles applicable to the problem of wage justice, it
is our duty to state and apply them as fully as we can. Obviously we
shall make mistakes in the process; but until the attempt is made, and
a certain (and very large) number of mistakes are made, there will be
no progress. We have no right to expect that ready-made applications
of the principles will drop from Heaven.

For a long time to come, however, many of the questions discussed in
this chapter will be devoid of large practical interest. The problem
immediately confronting society is that of raising the remuneration
and strengthening generally the economic position of those labourers
who are now below the level, not merely of the "equitable minimum,"
but of a decent livelihood. This problem will be the subject of the
next chapter.



CHAPTER XXV

METHODS OF INCREASING WAGES


Proposals for the reform of social conditions are important in
proportion to the magnitude of the evils which they are designed to
remove, and are desirable in proportion to their probable efficacy.
Applying these principles to the labour situation, we find that among
the remedies proposed the primacy must be accorded to a minimum wage.
It is the most important project for improving the condition of labour
because it would increase the compensation of some two-thirds of the
wage earners, and because the needs of this group are greater and more
urgent than the needs of the better-paid one-third. The former are
below the level of reasonable living, while the latter are merely
deprived of the opportunities of a more ample and liberal scale of
living. Hence the degree of injustice suffered by the former is much
greater than in the case of the latter. A legal minimum wage is the
most desirable single measure of industrial reform because it promises
a more rapid and comprehensive increase in the wages of the underpaid
than any alternative device that is now available. The superior
importance of a legally established minimum wage is obvious; its
superior desirability will form the subject of the pages that are
immediately to follow.


_The Minimum Wage in Operation_

Happily the advocate of this measure is no longer required to meet the
objection that it is novel and utterly uncertain. For more than twenty
years it has been in operation in Australasia. It was implicit in the
compulsory arbitration act of New Zealand, passed in 1894; for the
wages which the arbitration boards enforce are necessarily the lowest
that the affected employers are permitted to pay; besides, the
district conciliation boards are empowered by the law to fix minimum
wages on complaint of any group of underpaid workers. The first formal
and explicit minimum wage law of modern times was enacted by the state
of Victoria in 1896. In the beginning it applied to only six trades,
but it has been extended at various legislative sessions, so that
to-day it protects substantially all the labourers of the state,
except those employed in agriculture. Since the year 1900 all the
other states of Australia have made provision for the establishment of
minimum wages. At present, therefore, the legal minimum wage in some
form prevails throughout the whole of Australasia.

In 1909 the Trade Boards Act authorised the application of this device
to four trades in Great Britain. In 1913 the provisions of the Act
were made applicable to four other trades, and in 1914 to a third
group of four industries. A special minimum wage law was in 1912
enacted to govern the entire coal mining industry of the country.

The first minimum wage law in the United States was passed in 1912 by
Massachusetts. It has been followed by similar legislation in ten
other states; namely, Arkansas, California, Colorado, Kansas,
Minnesota, Nebraska, Oregon, Utah, Washington, and Wisconsin.
California has adopted a constitutional amendment which specifically
authorises minimum wage legislation for women and minors, and Ohio
added a similar provision to her constitution which applies to men as
well.

The minimum wage statutes of Australasia and Great Britain cover all
classes of workers, but those of the United States are restricted to
minors and women. With the exception of the Utah act, all the
important laws on this subject in all three regions establish minimum
wages indirectly, by authorising commissions and wage boards to
determine the actual rates. In Australasia and Great Britain the
statutes do not attempt to specify any standard to which the wage
determinations of the boards must conform, but the tendency in the
former country in recent years has been to enforce a living wage as
the minimum; that is, wage rates sufficiently high to provide a decent
family livelihood for men, and a reasonable personal livelihood for
women and minors. All the laws in America but one require the
commissions to establish living wages. In Utah no commission is
provided for, as the law itself specifies in terms of money the
minimum rates of remuneration that the employers of women are
permitted to pay.

The effectiveness of the laws that have been put into operation is at
least as great as their friends had dared to hope. According to
Professor M. B. Hammond of Ohio, who investigated the situation on the
spot in the winter of 1911-1912, the people of Australasia have
accepted the minimum wage "as a permanent policy in the industrial
legislation of that part of the world." Professor Hammond's
observations, and the replies of the Chief Factory Inspector of
Melbourne to the New York Factory Investigating Commission, show the
main effects of minimum wage legislation to be as follows: sweating
and strikes have all but disappeared; the efficiency of the workers
has on the whole increased; the number of workers unable to earn the
legal minimum has not been as great as most persons had feared, and
almost all of them have obtained employment at lower remuneration
through special permits; the legal minimum has not only not become the
actual maximum, but is exceeded in the case of the majority of
workers; no evidence exists to show that any industry has been
crippled, or forced to move out of the country; with the exception of
a very few instances, the prices of commodities have not been raised
by the law.[251]

In the four trades of Great Britain which were first brought under the
operation of the Trade Boards Act, and which presented some of the
worst examples of economic oppression, the beneficial effects of the
minimum wage have been even more striking than in Australasia. Wages
have been considerably raised, in some cases as high as one hundred
per cent.; dispirited and helpless workers have gained courage, power,
and self-respect to such an extent as to increase considerably their
membership in trade unions, and to obtain in several instances further
increases in remuneration beyond the legal minimum; the compensation
of the better paid labourers has not been reduced to the level fixed
by the trade boards; the efficiency of both employés and productive
processes has been on the whole increased; the number of persons
forced out of employment by the law is negligible; no important rise
of prices is traceable to the law; and the number of business concerns
unable to pay the increase in wages is too small to deserve serious
consideration. All these results had been established before the
outbreak of the war.[252]

The legal minimum wage has been carried into effect in only four
states of our own country. It covers practically all the industries
employing women and minors in Oregon and Washington, all the working
women and girls of Utah, and the women and minors of a few trades in
Massachusetts. The rates established for experienced women vary from
$7.50 per week in Utah to ten dollars a week for some classes in
Washington. As the first wage determinations were put into effect only
in 1913, American experience has been too short as well as too narrow
to warrant certain conclusions. So far as it has been applied,
however, the legal minimum wage has been as successful in the United
States as in Australasia or Great Britain. All competent witnesses
agree that it has brought a considerable increase in wages to a
considerable proportion of the women and minors in the industries in
which it is operative, and that it has neither thrown any important
number of workers out of employment nor forced any important concern
out of business. Speaking of the three leading industries in which
minimum wages were first established in Washington, the Industrial
Welfare Commission of that state testifies: "Seldom has any piece of
legislation, in prospect, engendered so much discussion and so much
criticism, as did the minimum wage law, with the intricacies of its
ramifications touching almost every industry in the state, large or
small, and the family of nearly every wage earner; seldom, too, has
any law, in actuality, been so well received, its application been
accomplished with so little open opposition, and, for a law of this
character, has been attended with so little industrial disturbance as
that same minimum wage law. None of the dire predictions made prior to
the passage of the law have come about to an extent that questions the
general efficiency of the law. There has been no wholesale discharge
of women employés, no wholesale levelling of wages, no wholesale
replacing of higher paid workers by cheaper help, no tendency to make
the minimum the maximum, while the employers of the state in general
have been following the letter and spirit of the law, and aiding
greatly in its application.... The law, in other words, has advanced
the wages of practically sixty per cent. of the workers in these
industries, and has done it without serious opposition at a time when
business conditions were none too good."[253] The Bureau of Labour
Statistics of the United States investigated the operation of the
minimum wage in the mercantile establishments of Oregon at the end of
the first year. The conclusions of the investigators were in brief
that both the number and the proportion of women getting the legal
minimum ($9.25 per week) for adults had increased, that the proportion
obtaining more than this rate had likewise increased, that those who
had received a rise in remuneration did not show any decline in
efficiency, that women had not been displaced by men, and that the
average increase in the labour cost resulting from the advance in
wages was only three mills on each dollar of sales.[254] The effects
of the Utah law during the first year of its operation were summarised
by the Labour Commissioner, Mr. H. T. Haines, as follows: a rise in
the wages of a "number of women and girls who most needed the
additional sums of money"; increased efficiency of female workers
admitted by most employers; but few cases of women or girls utterly
deprived of employment by the law; none of the higher paid women
suffered a reduction in wages; and ninety per cent. of the employers
are satisfied with the minimum wage statute.[255] So far as the law
has been applied in Massachusetts, it seems to be relatively as
successful as in the other three states.[256]


_The Question of Constitutionality_

The principal reason why the minimum wage laws on the statute books of
the other seven states have not been carried into effect, is the
uncertainty of the validity of minimum wage legislation in our
constitutional system. In November, 1914, a district judge granted a
writ of injunction, restraining the Minimum Wage Commission of
Minnesota from enforcing their wage determinations, on the ground that
the law attempted to delegate legislative power, and that its
provisions violated that section of the fourteenth amendment to the
United States Constitution which forbids any state to deprive a person
of life, liberty, or property without due process of law. One of the
courts of Arkansas has taken substantially the same position. The
second objection urged by the Minnesota judge is probably much the
more serious of the two, and is the one upon which chief emphasis has
been laid in the briefs filed in various courts by the opponents of
minimum wage legislation. As regards labour legislation, "due process
of law" may be practically translated, "reasonable and necessary
exercise of the State's police power." And the police power means that
indefinite power of the State to legislate for the health, safety,
morals, and welfare of the community.[257] Now it is obvious that a
minimum wage law deprives both employer and employé of some liberty of
contract, and also that it virtually deprives the former of some
property, inasmuch as it generally increases his outlay for wages. On
the other hand, this restriction of liberty and equivalent diminution
of property seem to be carried out in harmony with due process of law,
since they constitute an exercise of the police power of the State on
behalf of the general welfare. Some months before the Minnesota judge
granted the writ of injunction against the enforcement of the minimum
wage law of that state, a lower court and the Supreme Court of Oregon
had pronounced the Oregon statute constitutional, as a legitimate
exercise of the police power. An appeal from this judgment was argued
in the Supreme Court of the United States, Dec. 17, 1914, but no
decision has yet (October, 1916) been rendered. Until the highest
court has spoken on the question of constitutionality, no state is
likely to take any further step toward establishing minimum wages.
Should the decision of the Supreme Court be unfavourable valid minimum
wage legislation will be impossible without an amendment of the United
States Constitution.[258]


_The Ethical and Political Aspects_

Whether it be considered from the viewpoint of ethics, politics, or
economics, the principle of the legal minimum wage is impregnable. The
State has not only the moral right but the moral duty to enact
legislation of this sort, whenever any important group of labourers
are receiving less than living wages. One of the elementary functions
and obligations of the State is to protect citizens in the enjoyment
of their natural rights; and the claim to a living wage is, as we have
seen, one of the natural rights of the person whose wages are his only
means of livelihood. Therefore, the establishment of minimum living
wages is not among the so-called "optional functions" of the State in
our present industrial society. Whenever it can be successfully
performed, it is a primary and necessary function. So far as political
propriety is concerned, the State may as reasonably be expected to
protect the citizen against the physical, mental, and moral injury
resulting from an unjust wage contract, as to safeguard his money
against the thief, his body against the bully, or his life against the
assassin. In all four cases the essential welfare of the individual
is injured or threatened through the abuse of superior force and
cunning. Inasmuch as the legal minimum wage is ethically legitimate,
the question of its enactment is, politically speaking, entirely a
question of expediency.


_The Economic Aspect_

Now the question of expediency is mainly economic. A great deal of
nonsense has been written and spoken about the alleged conflict
between the legal minimum wage and "economic law." Economists have
used no such language, indeed; for they know that economic laws are
merely the expected uniformities of social action in given
circumstances. The economists know that economic laws are no more
opposed to a legal minimum wage than to a legal eight hour day, or
legal regulations of safety and sanitation in work places. All three
of these measures tend to increase the cost of production, and
sometimes carry the tendency into reality. A minimum wage law is
difficult to enforce, but not much more so than most other labour
regulations. At any rate, the practical consideration is whether even
a partial enforcement of it will not result in a marked benefit to
great numbers of underpaid workers. It may throw some persons, the
slower workers, out of employment; but here, again, the important
question relates to the balance of good over evil for the majority of
those who are below the level of decent living. At every point,
therefore, the problem is one of concrete expediency, not of agreement
or disagreement with a real or imaginary economic law.

Some of those who oppose the device on the ground of expediency set up
an argument which runs about as follows: the increase in wages caused
by a minimum wage law will be shifted to the consumer in the form of
higher prices; this result will in turn lead to a falling off in the
demand for products; a lessened demand for goods means a reduced
demand for labour; and this implies a diminished volume of employment,
so that the last state of the workers becomes worse than the first.
Not only is this conception too simple, but it proves too much. If it
were correct every rise in wages, howsoever brought about, would be
ill advised; for every rise would set in motion the same fatal chain
of events. Voluntary increases of remuneration by employers would be
quite as futile as the efforts of a labour union. This is little more
than the old wages fund theory in a new dress. And it is no less
contrary to experience.

The argument is too simple because it is based upon an insufficient
analysis of the facts. There are no less than four sources from which
the increased wages required by a minimum wage law might in whole or
in part be obtained. In the first place, higher wages will often give
the workers both the physical capacity and the spirit that make
possible a larger output. Thus, they could themselves equivalently
provide a part at least of their additional remuneration. When,
secondly, the employer finds that labour is no longer so cheap that it
can be profitably used as a substitute for intelligent management,
better methods of production, and up to date machinery, he will be
compelled to introduce one or more of these improvements, and to
offset increased labour cost by increased managerial and mechanical
efficiency. This is what seems to have happened in the tailoring
industry of England. According to Mr. Tawney, "the increased costs of
production have, on the whole, been met by better organisation of work
and by better machinery."[259] In the third place, a part of the
increased wage cost can be defrayed out of profits, in two ways:
through a reduction in the profits of the majority of business
concerns in an industry; but more frequently through the elimination
of the less efficient, and the consequent increase in the volume of
business done by the more efficient. In the latter establishments the
additional outlay for wages might be fully neutralised by the
diminished managerial expenses and fixed charges per unit of product.
This elimination of unfit undertakers would not only be in the
direction of greater social efficiency, but in the interest of better
employment conditions generally; for it is the less competent
employers who are mainly responsible for the evil of "sweating," when
they strive to reduce the cost of production by the only method that
they know; that is, the oppression of labour. Should the three
foregoing factors fall short of providing or neutralising the
increased wages, the recourse would necessarily be to the fourth
source; namely, a rise in the price of products. However, there is no
definite reason for assuming that the rise will in any case be
sufficient to cause a net decrease of demand. In Oregon the increased
labour cost due to the minimum wage law amounted, as we have seen, to
only three mills per dollar of sales in mercantile establishments.
Even if this were all shifted to the consumer--something that is
practically impossible--it would be equivalent to an increase of only
three cents on each ten dollars' worth of purchases, and thirty cents
on each hundred. The reduction in sales on account of such a slight
rise in prices would be infinitesimal. In the case of possibly the
majority of products, the lessened demand on the part of the other
classes might be entirely counterbalanced by the increased demand at
the hands of the workers whose purchasing power had been raised
through the minimum wage law. The effect upon sales, and hence upon
business and production, which follows from an increase in the
effective consuming power of the labouring classes is frequently
ignored or underestimated. So far as consumers' goods are concerned,
it seems certain that a given addition to the income of the
wage-earning classes will lead to a greater increase in the demand
for products than an equal addition to the income of any other section
of the people.

Nevertheless, the possibility must be admitted of some diminution of
employment, owing to higher prices and decreased demand. And it is
certain that some workers would not be worth the legal minimum to
their employers. A part, but probably not all, of these could find
employment at a lower wage, through a system of permits for "slow
workers." Whatever the amount of unemployment resulting from both
these causes, it would undoubtedly be an evil of lesser magnitude than
that which at present follows from the under-payment of a majority of
the labouring population. And it could be remedied by two measures
which are in any case necessary for social welfare, and which would be
hastened by the establishment of a legal minimum wage. These are
adequate and scientific laws and institutions to deal with the general
problem of unemployment, and a comprehensive system of industrial and
vocational training.

These conclusions, then, seem to be justified: the economic objections
to a legal minimum wage are not essentially different from those that
may be urged against any other beneficial labour legislation; and they
have been sufficiently refuted by experience to throw the burden of
proof upon the objectors. Expediency suggests, however, that in the
United States the device should be applied gradually in two respects:
for a few years it ought to be confined to women and minors; and when
it is extended to men, the rates should approach the level of a
complete family living wage by stages, covering, say, three or four
years. The former restriction would enable the law to be carried
through its experimental stages with a minimum disturbance to industry
as a whole, and with a minimum of opposition, and the latter would
greatly reduce the danger of male unemployment.[260]


_Opinions of Economists_

When the present writer made an argument for the legal minimum wage
something more than ten years ago, he was able to find only one
American economist who had touched the subject, and the verdict of
that one was unfavourable.[261] A little over a year ago, Dr. John
O'Grady sent an inquiry to one hundred and sixty economists of the
United States to ascertain their opinions on the same subject. Of the
ninety-four who replied seventy were in favour of a minimum wage law
for women and minors, thirteen were opposed, and eleven were
non-committal; fifty-five favoured such legislation for men, twenty
were against it, and nineteen were disinclined to give a categorical
answer. About three-fourths of those who responded expressed the
opinion that the measure would tend to increase the efficiency both of
the workers and of methods of production.[262]

It is worthy of note that the nine members of the late Federal
Commission on Industrial Relations, although disagreeing widely and
variously on most other important questions and proposals, were all
favourable to a minimum wage law for women and minors.[263]

The most comprehensive and most searching criticism of the legal
minimum wage from the viewpoint of economic theory has been made by
Professor F. W. Taussig.[264] While he does not commit himself
definitely to the assertion that a universal minimum wage of, say,
eight dollars per week, would cause a notable amount of unemployment
among women, he regards this consequence as sufficiently probable to
indicate the "need of going slow in the regulation of women's wages."
Specifically, he would have public wage boards refrain from fixing the
minimum rates high enough to maintain women living away from home. His
final and only serious argument for this position relates to the
marginal effectiveness of women workers. He assumes that all "the
fitful, untrained, indifferent women are got rid of; that all who
offer themselves for work at the age of (say) eighteen years have had
an industrially helpful education,--" and then raises the question
whether all of them will be "able to get distinctly higher wages than
are now current."[265] Obviously the question is not serious unless it
contemplates the probability of unemployment for a _considerable
proportion_. If only one per cent. or less of the women should be
unable to find employment at the higher wages, the net social
advantage of the minimum wage device would be so obvious as to render
Professor Taussig's opposition quite unreasonable. Making the
assumptions quoted above from his pages, let us try to see whether his
apprehensions are economically justifiable.

If they are reasonable or probable they must rest on one of two
fundamental conditions: the occupations available to women are too few
to absorb all that would seek to become wage earners at eight dollars
per week; or a considerable section of them would be unable to produce
such a high wage. Possibly the first of these assumptions is true, but
neither Professor Taussig nor any other authority has presented
evidence to support it, and it is on the face of things not
sufficiently probable to justify hesitation in the advocacy of a
minimum living wage. If the second assumption be correct, if the
product of a considerable section of women (all adequately trained)
would be insufficient to yield them eight dollars per week, in
addition to the other costs of production, the conclusion is
inevitable that the same result would follow the attempt to pay all
male adults (likewise adequately trained) a family living wage of,
say, fifteen dollars per week. For the product of the average man does
not exceed that of the average woman by even as great a ratio as
fifteen to eight. If the average woman is not worth eight dollars a
week to an employer in any kind of woman's occupation, the average man
is not worth fifteen dollars. Therefore, we cannot hope, even with the
aid of a thorough system of industrial and vocational training, to
provide all adult males of average capacity with a family living wage
and the minimum means of living a reasonable life.

This is a veritable counsel of despair. It implies either that the law
of diminishing returns is already operating in this country in such a
way as to prevent the national product from being sufficiently large
to provide a minimum wage of fifteen dollars a week for men, and eight
dollars a week for women; or that the product, though ample for this
purpose, and for all the other necessary payments to the higher priced
workers and to the other agents of production, cannot under our
present industrial system be so distributed as to attain the desired
end. For the first of these hypotheses there is no evidence worthy of
the name. If Professor King is right in his estimate of an average
family income of 1494 dollars annually[266] the difficulty before us
does not lie in the field of production. Professor Taussig seems to
rest his fears on the second hypothesis, on the assumed impossibility
of bringing about the required distribution; for he points out that
increased efficiency of the workers may, like increased efficiency of
the material instrumentalities of production, in the long run redound
mainly to the benefit of the consumers, while wages may be little if
any above the old level. If these fears are justified, if the
difficulty is entirely one of the mechanism of distribution, and if it
cannot be overcome by legal enactment, then is our competitive
organisation of industry bankrupt, and the sooner we find out that
fact definitely the better. If the legal minimum wage will help to
expose such a situation, will show that, no matter how much the
productivity of the workers may be increased, a large proportion of
them must by the very nature of the competitive system be forever
condemned to live below the level of decent existence, then the
minimum wage is worth having merely as an instrument of economic
enlightenment.

Professor Taussig's argument and illustrations[267] seem to
contemplate a condition in which the number of women who become fitted
for a certain trade is excessive relatively to the demand for its
products, and to the supply of women in other industries. Were
industrial training thus misdirected, and were the trained persons
unable or unwilling to distribute themselves over other occupations,
they would, indeed, face precisely the same dilemma as do the
unskilled workers to-day. That is; a majority would be condemned to
insufficient wages, or a minority to unemployment. But we have been
assuming an _adequate_ system of industrial and vocational training, a
well-balanced system, one that would enable the workers to adjust
their supply to the demand throughout the various occupations. In
these conditions the economic axiom that a supply of goods is a demand
for goods should become beneficently effective: the workers should all
be able to find employment, and to obtain the greater part of their
increased product. Surely Professor Taussig does not mean to commit
himself to the view that every increase in the productive power of the
workers will in the long run help them only inasmuch as they are
consumers, the lion's share of the additional product being taken by
other classes. Probably such is the usual result in a régime of
unregulated competition, and unlimited freedom as regards the wage
contract. But this is precisely what we expect a minimum wage law to
correct and prevent. We rely upon this device to enable the workers to
retain for themselves that share of the product which under free
competition would automatically go to the non-labouring consumers. We
hope that blind and destructive economic force can be held in check by
deliberate and beneficent social control.

The fact of the matter seems to be that Professor Taussig's argument
is too hypothetical and conjectural to justify his pessimistic
conclusions. It is unpleasantly suggestive of the reasoning by which
the classical economists tried to show the English labourers the folly
and futility of trade unionism.


_Other Legislative Proposals_

The ideal standard of a minimum wage law is a scale of remuneration
adequate not only to the present needs of individuals and families,
but to savings for the contingencies of the future. Until such time as
the compensation of all labourers has been brought up to this level,
the State should make provision for cheap housing, and for insurance
against accidents, sickness, invalidity, old age, and unemployment.
The theory underlying such measures is that they would merely
supplement insufficient remuneration, and indirectly contribute to the
establishment of genuine living wages. In Europe, housing and
insurance legislation is so common that no reasonable and intelligent
person any longer questions the competency or propriety of such action
by the State.

If an adequate legal minimum wage, in the sense just defined, were
universally established, the State would not be required to do
anything further to effectuate wage justice, except in the matter of
vocational and industrial education. This would qualify practically
all persons to earn at least a living wage, and would enable those
who underwent unusual sacrifices either before or during their
employment to command something over and above. In other words, all
workers would then be able to obtain what we have called "the
equitable minimum." And the labouring class as a whole would possess
sufficient economic power to secure substantially all that was due by
any of the canons of distributive justice.


_Labour Unions_

The general benefits and achievements of labour organisations in the
United States down to the beginning of the present century, cannot be
more succinctly nor more authoritatively stated than in the words of
the United States Industrial Commission: "An overwhelming
preponderance of testimony before the Industrial Commission indicates
that the organisation of labour has resulted in a marked improvement
in the economic condition of the workers."[268] Some of the most
conspicuous and unquestionable proofs of rises in wages effected by
the unions are afforded by the building trades, the printing trades,
the coal mining industry, and the more skilled occupations on the
railroads. Between 1890 and 1907 wages increased considerably more in
the organised than in the unorganised trades.[269]

Nevertheless, when all due credit is given to the unions for their
part in augmenting the share of the product received by labour, there
remain two important obstacles which seriously lessen their efficacy
as a means of raising the wages of the underpaid.

The first is the fact that the unions still embrace only a small
portion of the total number of wage earners. According to Professor
Leo Wolman, a little more than twenty-seven million of the
thirty-eight million persons engaged in "gainful occupations" in the
United States in 1910 were wage earners in the ordinary sense of that
phrase, and of these twenty-seven million only 2,116,317, or 7.7 per
cent., were members of labour organisations.[270] The membership
to-day is about two and three quarter millions. If the total number of
wage earners increased between 1910 and 1916 at the same rate as
during the preceding decade, the organised portion is now somewhat
less than 7.7 per cent. of the whole. Evidently the labour unions have
not grown with sufficient rapidity, nor are they sufficiently powerful
to warrant the hope that they will be soon able to lift even a
majority of the underpaid workers to the level of living wage
conditions.

The second obstacle is the fact that only a small minority of the
members of labour unions are drawn from the unskilled and underpaid
classes, who stand most in need of organisation. The per cent. of
those getting less than living wages that is in the unions is almost
negligible. With the exception of a few industries, the unskilled and
the underpaid show very little tendency to increase notably their
organised proportion. The fundamental reason of this condition has
been well stated by John A. Hobson: "The great problem of poverty ...
resides in the conditions of the low-skilled workman. To live
industrially under the new order he must organise. He cannot organise
because he is so poor, so ignorant, so weak. Because he is not
organised he continues to be poor, ignorant, weak. Here is a great
dilemma, of which whoever shall have found the key will have done much
to solve the problem of poverty."[271]

The most effective and expeditious method of raising the wages of the
underpaid through organisation is by means of the "industrial," as
distinguished from the "trade," or "craft," union. In the former all
the trades of a given industry are united in one compact organisation,
while the latter includes only those who work at a certain trade or
occupation. For example: the United Mine Workers embrace all persons
employed in coal mines, from the most highly skilled to the lowest
grade of unspecialised labour; while the craft union is exemplified in
the engineers, firemen, conductors, switchmen, and other groups having
their separate organisations in the railroad industry. The industrial
union is as much concerned with the welfare of its unskilled as of its
skilled members, and exerts the whole of its organised force on behalf
of each and every group of workers throughout the industry which it
covers. The superior suitability of the industrial type of union to
the needs of the unskilled labourers is seen in the fact that more of
them are organised in the coal mining than in any other industry, and
have received greater benefits from organisation than their unskilled
fellow workers in any other industry. Were the various classes of
railway employés combined in one union, instead of being organised
along the lines of their separate crafts, it is quite improbable that
the unskilled majority would be getting, as they now are getting, less
than living wages. While it is true that the various craft unions in
an industry are often federated into a comprehensive association, the
bond uniting them is not nearly so close, nor so helpful to the weaker
groups of workers as in the case of the industrial unions.

Human nature being what it is, however, the members of the skilled
crafts cannot all be induced or compelled to adopt the industrial type
of organisation. The Knights of Labour attempted to accomplish this,
and for a time enjoyed a considerable measure of success, but in the
end the organisation was unable to withstand those fundamental
inclinations which impel men to prefer the more narrow, homogeneous,
and exclusive type of association. The skilled workers refused to
merge their local and craft interests in the wider interests of men
with whom they had no strong nor immediate bonds of sympathy. Among
labourers, as well as among other persons, the capacity for altruism
is limited by distance in space and occupational condition. The
passion for distinction likewise affects the wage earner, impelling
the higher groups consciously or unconsciously to oppose association
that tends to break down the barrier of superiority. Owing to their
greater resources and greater scarcity, the skilled members of an
industrial union are less dependent upon the assistance of the
unskilled than the latter are dependent upon the former; yet the
skilled membership is always in a minority, and therefore in danger of
being subordinated to the interests of the unskilled majority.

For these and many other reasons it is quite improbable that the
majority of union labourers can be amalgamated into industrial unions
in the near future. The most that can be expected is that the various
occupational unions within each industry should become federated in a
more compact and effective way than now prevails, thus conserving the
main advantages of the local and craft association, while assuring to
the unskilled workers some of the benefits of the industrial union.


_Organisation Versus Legislation_

In the opinion of some labour leaders, the underpaid workers should
place their entire reliance upon organisation. The arguments for this
position are mainly based upon three contentions: it is better that
men should do things for themselves than to call in the intervention
of the State; if the workers secure living wages by law they will be
less likely to organise, or to remain efficiently organised; and if
the State fixes a minimum wage it may some day decide to fix a
maximum.

Within certain limits the first of these propositions is
incontestable. The self education, self reliance, and other
experiences obtained by the workers through an organised struggle for
improvements of any kind, are too valuable to be lightly passed over
for the sake of the easier method of State assistance. Indeed, it
would be better to accept somewhat less, or to wait somewhat longer,
in order that the advantages might be secured through organisation.
However, these hypotheses are not verified as regards the minimum wage
problem. The legal method promises with a high degree of probability
to bring about universal living wages within ten or fifteen years. The
champions of organisation can point to no solid reasons for indulging
the hope that their method would achieve the same result within a half
a century. Therefore, the advantages of the device of organisation are
much more than neutralised by its disadvantages.

The fear that the devotion of the workers to the union would decline
as soon as living wages had been secured by law, seems to have no
adequate basis either in experience or in probability. Speaking of the
establishment of minimum wages in the tailoring industry of Great
Britain, Mr. Tawney declares that it "has given an impetus to trade
unionism among both men and women. The membership of the societies
connected with the tailoring trade has increased, and in several
districts the trade unions have secured agreements fixing the standard
rate considerably above the minimum contained in the Trade Board's
determination."[272] Similar testimony comes from Australasia. Indeed,
this is precisely what we should be inclined to expect; for the
workers whose wages had been raised would for the first time possess
the money and the courage to support unions; and would have sufficient
incentives thereto in the natural desire to obtain something more than
the legal minimum, and in the realisation that organisation was
necessary to give them a voice in the determination of the minimum,
and to enable them to co-operate in compelling its enforcement.
Indeed, general experience shows that organisation becomes normally
efficient and produces its best results only among workers who have
already approximated the level of living wages.

To be sure, the State could set up maximum instead of minimum
wages,--if the employing classes were sufficiently powerful. But all
indications point to a decline rather than an increase in their
political influence, and to a corresponding expansion in the
governmental influence of the labouring classes and their
sympathisers. Moreover, the labour leaders who urge this objection are
inconsistent, inasmuch as they advocate other beneficial labour
legislation. The distinction which they profess to find between laws
that merely remove unfair legal and judicial disabilities and laws
that reduce the length of the working day or fix minimum wages, has no
importance in practical politics or in the mind of the average
legislature. If the political influence of labour should ever become
so weak and that of capital so strong as to make restrictive labour
legislation generally feasible, legislators would not confine their
unfriendly action to the field of positive measures. They would be
quite as ready to pass a law prohibiting strikes as to enact a statute
fixing maximum wages. The formal legalisation of strikes, picketing,
and the primary boycott which is contained in the Clayton Act, and for
which the labour unions worked long and patiently, could conceivably
be seized upon by some future unfriendly Congress as a precedent and
provocation for legislation which would not only repeal all the
favourable provisions of the Clayton Act, but subject labour to
entirely new and far more odious restraints and interferences. The
fact that governments passed maximum wage laws in the past is utterly
irrelevant to the question of wage legislation to-day. A legal minimum
wage, and a multitude of other protective labour laws are desirable
and wise in the twentieth century for the simple reason that labour
and the friends of labour are sufficiently powerful to utilise this
method, and because their influence seems destined to increase rather
than decrease. The contrary hypothesis is too improbable for serious
consideration.

The conclusions that seem justified by a comprehensive and critical
view of all the facts of the situation, are that organisation is not
of itself an adequate means of bringing about living wages for the
underpaid, but that it ought nevertheless to be promoted and extended
among these classes, not only for its direct effect upon wages, but
for its bearing upon legislation. The method of organisation and the
method of legislation are not only not mutually opposed, but are in a
very natural and practical manner complementary.


_Participation in Capital Ownership_

While those workers whose remuneration is below the level of decent
maintenance are not ordinarily in a position to become owners of any
kind of capital, many of them, especially among the unmarried men, can
accumulate savings by making large sacrifices. As a matter of fact,
hundreds of thousands of the underpaid have become interest receivers
through the medium of savings banks, real estate possessions, and
insurance policies. Every effort in this direction is distinctly worth
while, and deserving of encouragement. Labourers who are above the
minimum wage level can, of course, save much larger amounts, and with
less sacrifices than the underpaid classes. In all cases the main
desideratum is that the workers should derive some income from
capital; but it is almost equally important that their capital
ownership should wherever possible take the form of shares in the
industry in which they are employed, or the store at which they buy
their goods. This means co-operative production and co-operative
distribution. The general benefits of the co-operative enterprise
have already been described in chapter xiv. For the wage earner
proprietorship in a co-operative concern is preferable to any other
kind of capital ownership because of the training that it affords in
business management and responsibility, in industrial democracy, and
in the capacity to subordinate his immediate and selfish interests to
his more remote and larger welfare.

Co-operative ownership of the tools with which men work has advantages
of its own over co-operative ownership of the stores from which they
made their purchases, inasmuch as it increases their control over the
conditions of employment, and gives them incentives to efficiency
which results in a larger social product and a larger share thereof
for themselves. As already pointed out in chapter xiv, the ideal type
of productive co-operation is that known as the "perfect" form, in
which the workers are the exclusive owners of the concern where they
exercise their labour. Nevertheless, the "federal" type, in which the
productive concern is directly owned by a wholesale co-operative,
indirectly by the retail co-operative store, and ultimately by the
co-operative consumers,--presents one important advantage. It could be
so modified as to enable the employés of the productive enterprise to
share the ownership of the latter with the wholesale establishment.
Such an arrangement would at once give the workers the benefits of
productive co-operation mentioned above, and render probable a
satisfactory adjustment of the conflicting claims of producers and
consumers. As intimated in chapter xxiv, such a conflict is inherent
in every system of industrial organisation, and will become more
evident and more acute in proportion to the strengthening of the
position of labour.

A final reason for ownership of capital by labour deserves mention
here, even though it has no immediate bearing upon the question of
remuneration. Were all labourers receiving the full measure of wages
to which they are entitled by the canons of distributive justice, it
would still be highly desirable that the majority if not all of them
should possess some capital, preferably in the productive and
distributive concerns in which they were immediately interested. It
does not seem probable that our economic system as now constituted,
with the capital owners and the capital operators for the most part in
two distinct classes, will be the final form of industrial
organisation. Particularly does this arrangement seem undesirable,
incongruous, and unstable in a society whose political form is that of
democracy. Ultimately the workers must become not merely wage earners
but capitalists. Any other system will always contain and develop the
seeds of social discontent and social disorder.


REFERENCES ON SECTION IV

     ADAMS AND SUMNER: Labour Problems. Macmillan; 1905.

     COMMONS AND ANDREWS: Principles of Labour Legislation.
     Harpers; 1916.

     WALKER: The Wages Question. New York; 1876.

     RYAN: A Living Wage. Macmillan; 1906.

     SNOWDEN: The Living Wage. London; Hodder & Stoughton.

     O'GRADY: A Legal Minimum Wage. Washington; 1915.

     BRODA: La Fixation Légale des Salaires. Paris; 1912.

     N. Y. FACTORY INVESTIGATING COMMISSION. Appendix to Vol. III.

     TAWNEY: Minimum Rates in the Chain-Making Industry. London;
     1914.

     Minimum Rates in the Tailoring Industry. London; 1915.

     TURMAN: Le Catholicisme Social. Paris; 1900.

     POTTIER: De Jure et Justitia. Liege; 1900.

     POLIER: L'Idée du Juste Salaire. Paris; 1903.

     MENGER: The Right to the Whole Produce of Labour. London;
     1899.

     GARRIGUET: Régime du Travail. Paris; 1908.

     NEARING: Reducing the Cost of Living. Philadelphia; 1914.

     CHAPIN: The Standard of Living in New York City. New York;
     1909.

     Also the works on co-operation cited in connection with
     Section II, and those of Hobson, Carver, Nearing and
     Streightoff.

FOOTNOTES:

[251] See articles by Hammond in the _American Economic Review_, June,
1913, and in the _Annals of the American Academy of Political and
Social Science_, July, 1913; and page 62 of the Appendix to the third
volume of the Report of the New York State Factory Investigating
Commission.

[252] See the replies of the London Board of Trade to the N. Y.
Factory Investigating Commission, on pages 77, 78 of the volume cited
above; and especially the two monographs by R. H. Tawney, "The
Establishment of Minimum Rates in the Chain-Making Industry," and "The
Establishment of Minimum Rates in the Tailoring Industry." London;
1914 and 1915.

[253] "First Biennial Report of the Industrial Welfare Commission of
Washington," pp. 13, 15.

[254] "Effect of Minimum Wage Determinations in Oregon." Bulletin No.
176 of United States Bureau of Labour Statistics.

[255] From a paper read before the National Convention of the
Association of Government Labour Officials, Nashville, Tenn., June 9,
1914.

[256] See Bulletins of Massachusetts Minimum Wage Commission.

[257] See the excellent and varied series of papers on the subject in
Orth's "The Relation of Government to Property and Industry," pp.
103-178. Ginn & Company; 1915.

[258] The arguments for and against the constitutionality of a legal
minimum wage are adequately presented in the briefs, respectively, of
Louis D. Brandeis and Rome G. Brown, in the cases of Stettler _vs._
O'Hara and Simpson _vs._ O'Hara. The former is published by the
National Consumers' League, New York, and the latter by the Review
Publishing Company, Minneapolis.

[259] "Minimum Rates in the Tailoring Industry," p. 161.

[260] One of the best statements of the economic aspect of the minimum
wage is that by Sidney Webb, in the _Journal of Political Economy_,
Dec., 1912. Probably the most varied and comprehensive general
discussion is the symposium in the _Survey_, Feb. 6, 1915. See
especially the excellent presentation in Commons and Andrews'
"Principles of Labour Legislation," pp. 167-200.

[261] See pages 303, 304 of "A Living Wage"; Macmillan, 1906.

[262] O'Grady, "A Legal Minimum Wage"; Washington, 1915.

[263] "Final Report," pp. 101, 255, 364.

[264] _The Quarterly Journal of Economics_, May, 1916. A somewhat less
unfavourable criticism is contained in the paper by Professor John
Bates Clark in the _Atlantic Monthly_, September, 1913.

[265] Page 436.

[266] "The Wealth and Income of the People of the United States," p.
129.

[267] Page 437.

[268] "Final Report," p. 802. Washington, 1902.

[269] See article by Professor Commons in "The New Encyclopedia of
Social Reform," p. 1233.

[270] _The Quarterly Journal of Economics_, May, 1916, p. 502.

[271] "Problems of Poverty," p. 227. London, 1891.

[272] "Minimum Rates in the Tailoring Industry," p. 96.



CHAPTER XXVI

SUMMARY AND CONCLUSION


Throughout this book we have been concerned with a two-fold problem:
to apply the principles of justice to the workings of the present
distributive system, and to point out the modifications of the system
that seemed to promise a larger measure of actual justice. The
mechanism of distribution was described in the introductory chapter as
apportioning the national product among the four classes that
contribute the necessary factors to the process of production, and the
first part of the problem was stated as that of ascertaining the size
of the share which ought to go to each of these classes.


_The Landowner and Rent_

We began this inquiry with the landowner and his share of the product,
i.e., rent. We found that private ownership of land has prevailed
throughout the world with practical universality ever since men began
to till the soil in settled communities. The arguments of Henry George
against the justice of the institution are invalid because they do not
prove that labour is the only title of property, nor that men's equal
rights to the earth are incompatible with private landownership, nor
that the so-called social production of land values confers upon the
community a right to rent. Private ownership is not only socially
preferable to the Socialist and the Single Tax systems of land tenure,
but it is, as compared with Socialism certainly, and as compared with
the Single Tax probably, among man's natural rights. On the other
hand, the landowner's right to take rent is no stronger than the
capitalist's right to take interest; and in any case it is inferior to
the right of the tenant to a decent livelihood, and of the employé to
a living wage.

Nevertheless, the present system of land tenure is not perfect. Its
principal defects are: the promotion of certain monopolies, as,
anthracite coal, steel, natural gas, petroleum, water power, and
lumber; the diversion of excessive gains to landowners, as indicated
by the recent great increases in the value of land, and the very large
holdings by individuals and corporations; and the exclusion of large
masses of men from the land because the owners will not sell it at its
present economic value. The remedies for these evils fall mainly under
the heads of ownership and taxation. All mineral, timber, gas, oil,
grazing, and water-power lands that are now publicly owned, should
remain the property of the states and the nation, and be brought into
use through a system of leases to private individuals and
corporations. Cities should purchase land, and lease it for long
periods to persons who wish to erect business buildings and dwellings.
By means of taxation the State might appropriate the future increases
of land values, subject to the reimbursement of private owners for
resulting decreases in value; and it could transfer the taxes on
improvements and personal property to land, provided that the process
were sufficiently gradual to prevent any substantial decline in land
values. In some cases the State might hasten the dissolution of
exceptionally large and valuable estates through the imposition of a
supertax.


_The Capitalist and Interest_

The Socialist contention that the labourer has a right to the entire
product of industry, and therefore that the capitalist has no right to
interest, is invalid unless the former alleged right can be
effectuated in a reasonable scheme of distribution; and we know that
the contemplated Socialist scheme is impracticable. Nevertheless, the
refutation of the Socialist position does not automatically prove that
the capitalist has a right to take interest. Of the titles ordinarily
alleged in support of such a right, productivity and service are
inconclusive, while abstinence is valid only in the case of those
capital owners to whom interest was a necessary inducement for saving.
Since it is uncertain whether sufficient capital would be provided
without interest, and since the legal suppression of interest is
impracticable, the State is justified in permitting the practice of
taking interest. But this legal permission does not justify the
individual interest-receiver. His main and sufficient justification is
to be found in the presumptive title which arises out of possession,
in the absence of any adverse claimant with a stronger title to this
particular share of the product.

The only available methods of lessening the burden of interest are a
reduction in the rate, and a wider diffusion of capital through
co-operative enterprise. Of these the former presents no definite or
considerable reasons for hope, either through the rapid increase of
capital or the inevitable extension of the industrial function of
government. The second proposal contains great possibilities of
betterment in the fields of banking, agriculture, stores, and
manufacture. Through co-operation the weaker farmers, merchants, and
consumers can do business and obtain goods at lower costs, and save
money for investment with greater facility, while the labourers can
slowly but surely become capitalists and interest-receivers, as well
as employés and wage-receivers.


_The Business Man and Profits_

Just remuneration for the active agents of production, whether they be
directors of industry or employés, depends fundamentally upon five
canons of distribution; namely, needs, efforts and sacrifices,
productivity, scarcity, and human welfare. In the light of these
principles it is evident that business men who use fair methods in
competitive conditions, have a right to all the profits that they can
obtain. On the other hand, no business man has a strict right to a
minimum living profit, since that would imply an obligation on the
part of consumers to support superfluous and inefficient directors of
industry. Those who possess a monopoly of their products or
commodities have no right to more than the prevailing or competitive
rate of interest on their capital, though they have the same right as
competitive business men to any surplus gains that may be due to
superior efficiency. The principal unfair methods of competition; that
is, discriminative underselling, exclusive-selling contracts, and
discrimination in transportation, are all unjust.

The remedies for unjust profits are to be found mainly in the action
of government. The State should either own and operate all natural
monopolies, or so regulate their charges that the owners would obtain
only the competitive rate of interest on the actual investment, and
only such surplus gains as are clearly due to superior efficiency. It
should prevent artificial monopolies from practising extortion toward
either consumers or competitors. Should the method of dissolution
prove inadequate to this end, the State ought to fix maximum prices.
Inasmuch as overcapitalisation has frequently enabled monopolistic
concerns to obtain unjust profits, and always presents a strong
temptation in this direction, it should be legally prohibited. A
considerable part of the excessive profits already accumulated can be
subjected to a better distribution by progressive income and
inheritance taxes. Finally, the possessors of large fortunes and
incomes could help to bring about a more equitable distribution by
voluntarily complying with the Christian duty of bestowing their
superfluous goods upon needy persons and objects.


_The Labourer and Wages_

None of the theories of fair wages that have been examined under the
heads of "the prevailing rate," "exchange-equivalence," or
"productivity" is in full harmony with the principles of justice. The
minimum of wage justice can, however, be described with sufficient
definiteness and certainty. The adult male labourer has a right to a
wage sufficient to provide himself and family with a decent
livelihood, and the adult female has a right to remuneration that will
enable her to live decently as a self supporting individual. At the
basis of this right are three ethical principles: all persons are
equal in their inherent claims upon the bounty of nature; this general
right of access to the earth becomes concretely valid through the
expenditure of useful labour; and those persons who are in control of
the goods and opportunities of the earth are morally bound to permit
access thereto on reasonable terms by all who are willing to work. In
the case of the labourer, this right of reasonable access can be
effectuated only through a living wage. The obligation of paying this
wage falls upon the employer because of his function in the industrial
organism. And the labourer's right to a living wage is morally
superior to the employer's right to interest on his capital. Labourers
who put forth unusual efforts or make unusual sacrifices have a right
to a proportionate excess over living wages, and those who are
exceptionally productive or exceptionally scarce have a right to the
extra compensation that goes to them under the operation of
competition. Labourers who are receiving the "equitable minimum"
described in the last sentence have a right to still higher wages at
the expense of the capitalist and the consumer, if they can secure
them through the processes of competition; for the additional amount
is an ethically unassigned or ownerless property which may be taken
by either labourer, capitalist, or consumer, provided that there is
no artificial limitation of supply.

The methods of increasing wages are mainly three: a minimum wage by
law, labour unions, and co-operative enterprise. The first has been
fairly well approved by experience, and is in no wise contrary to the
principles of either ethics, politics, or economics. The second has
likewise been vindicated in practice, though it is of only small
efficacy in the case of those workers who are receiving less than
living wages. The third would enable labourers to supplement their
wage incomes by interest incomes, and would render our industrial
system more stable by giving the workers an influential voice in the
conditions of employment, and laying the foundation of that
contentment and conservatism which arise naturally out of the
possession of property.

As a matter of convenience, the foregoing paragraphs may be further
summarised in the following abridgment: The landowner has a right to
all the economic rent, modified by the right of his tenants and
employés to a decent livelihood, and by the right of the State to levy
taxes which do not substantially lower the value of the land. The
capitalist has a right to the prevailing rate of interest, modified by
the right of his employés to the "equitable minimum" of wages. The
business man in competitive conditions has a right to all the profits
that he can obtain, but corporations possessing a monopoly have no
right to unusual gains except those due to unusual efficiency. The
labourer has a right to living wages, and to as much more as he can
get by competition with the other agents of production and with his
fellow labourers.


_Concluding Observations_

No doubt many of those who have taken up this volume with the
expectation of finding therein a satisfactory formula of distributive
justice, and who have patiently followed the discussion to the end,
are disappointed and dissatisfied at the final conclusions. Both the
particular applications of the rules of justice and the proposals for
reform, must have seemed complex and indefinite. They are not nearly
so simple and definite as the principles of Socialism or the Single
Tax. And yet, there is no escape from these limitations. Neither the
principles of industrial justice nor the constitution of our
socio-economic system is simple. Therefore, it is impossible to give
our ethical conclusions anything like mathematical accuracy. The only
claim that is made for the discussion is that the moral judgments are
fairly reasonable, and the proposed remedies fairly efficacious. When
both have been realised in practice, the next step in the direction of
wider distributive justice will be much clearer than it is to-day.

Although the attainment of greater justice in distribution is the
primary and most urgent need of our time, it is not the only one that
is of great importance. No conceivable method of distributing the
present national product would provide every family with the means of
supporting an automobile, or any equivalent symbol of comfort. Indeed,
there are indications that the present amount of product per capita
cannot long be maintained without better conservation of our natural
resources, the abandonment of our national habits of wastefulness,
more scientific methods of soil cultivation, and vastly greater
efficiency on the part of both capital and labour. Nor is this all.
Neither just distribution, nor increased production, nor both
combined, will insure a stable and satisfactory social order without a
considerable change in human hearts and ideals. The rich must cease to
put their faith in material things, and rise to a simpler and saner
plane of living; the middle classes and the poor must give up their
envy and snobbish imitation of the false and degrading standards of
the opulent classes; and all must learn the elementary lesson that
the path to achievements worth while leads through the field of hard
and honest labour, not of lucky "deals" or gouging of the neighbour,
and that the only life worth living is that in which one's cherished
wants are few, simple, and noble. For the adoption and pursuit of
these ideals the most necessary requisite is a revival of genuine
religion.



INDEX


     Abstinence: as a title to interest, 182-186.

     Adams, T. S.: 301, 302.

     Adam Smith: 331, 341.

     Agriculture: co-operation in, 217-220.

     Alaska: leasing system in, 96.

     Altruism: efficacy of under Socialism, 165-167;
       promoted by co-operation, 229.

     Ambrose, Saint: 305.

     American Sugar Refining Company: 267, 272, 289.

     American Tobacco Company: 263, 267, 288.

     Analogy: economic, as justifying interest, 205, 206.

     Anthracite coal: a monopoly, 75, 78, 95, 132.

     Antoine, Charles: 337-340.

     Antoninus, Saint: 270.

     Aquinas, Saint Thomas: 63, 64, 175, 181, 208, 304, 306, 307, 333.

     Arbitration: failure of, 324.

     Ashley, W. J.: 9.

     Astor estate: 88, 89.

     Augustine, Saint: 305.

     Australasia: special land taxes in, 118-120, 131;
       minimum wage in, 401, 402.

     Authorities: Catholic and Protestant, on living wage, 277, 278.


     Basil, Saint: 305.

     Bible, the: on the duty of benevolence, 303, 304, 316, 317.

     Brandeis, Louis D.: 265, 275.

     Business man: functions and rewards of, 237-239, 255-258;
       no right of to minimum profits, 258-260, 362, 363;
       the superfluous, 260, 261.


     Canada: special land taxes in, 117-120.

     Canonist: doctrine of wage justice, 333-336.

     Canons of distributive justice: 243-253.

     Capital: meaning of, 137, 138;
       power of to create value, 146-148;
       Catholic teaching concerning interest on, 175-177;
       titles of to interest, 177-186;
       value of in a no-interest régime, 188-190;
       need for a wider distribution of, 213, 214;
       need for ownership of by labour, 214, 229, 230.

     Capitalists: two kinds of, 138;
       expropriation of, 154-158;
       right of to take interest, 201-209;
       claims of, versus claims of labourers, 367-369, 390-393, 396.

     Carnegie, Andrew: 300.

     Carver, T. N.: 351-355.

     Catholic Church: attitude of toward interest, 172-176.

     Child workers: right of to a living wage, 373.

     Christian conception of welfare: 316-318.

     Clark, J. B.: 271, 347-351.

     Compensation: to landowners, 34-39;
       to capitalists under Socialism, 154-158.

     Competition: alleged failure of, 275-278.

     Confiscation: of land values under the Single Tax, 34-39;
       of capital under Socialism, 154-158;
       of wealth by taxation, 297, 298.

     Constitutionality of minimum wage laws: 405-407.

     Consumer: injury to through stockwatering, 282-288;
       obligations of to business man, 258, 259, 362, 363;
       versus labourer, 393-398.

     Contract: onerous, 326;
       free, as a rule of wage justice, 328-330, 370-372.

     Co-operation: as a partial solvent of capitalism, 210-233;
       essence and kinds of, 214, 215;
       in banking, 216, 217;
       in agriculture, 217-220;
       in stores, 220-222;
       in production, 222-228;
       effect of on social stability, 229, 230;
       as compared with individualism and Socialism, 230, 231;
       province and limitations of, 231-233;
       bearing of on the superfluous business man, 260, 261;
       and on the labouring classes, 423-425.

     Co-partnership: 223, 224.

     Corporation: profits of a, 241, 242, 257, 258, 262, 389.

     Cost of living: 378, 379.

     Cost of production: of capital, 188, 189.

     Credit societies: co-operative, 216, 217.


     Defects of our land system: 74-93;
       monopoly, 75-80;
       excessive gains, 80-89;
       exclusion, 90-93.

     Devas, Charles: 184.

     Disagreeable tasks: 384, 385.

     Dixon, F. H.: 323.

     Discriminative transportation contracts: 272, 273.

     Discriminative underselling: 267-270.

     Distribution of superfluous wealth: 303-319.

     Distributive justice: canons of, 243-253, 381, 382.


     Earth: right of access to, 358-360.

     Economic determinism: inconsistent with ethical judgments, 20, 145,
           146, 343, 344.

     Efficiency: monopolistic, 265-267, 275-277, 279;
       exceptional, 388-390.

     Efforts: exceptional, as claim to rewards, 382-383.

     Efforts and sacrifices: as canons of distribution, 245-247.

     Ely, R. T.: 330.

     Employer: gains of from wage contract, 327, 328;
       obligation of to pay a living wage, 365-372.

     Engels, F.: 20.

     Ensor, E. K.: 50.

     Equal gains: as a canon of wage justice, 326-328.

     Equality: as a canon of justice, 243, 244;
       of men's claims to the bounty of nature, 358, 359;
       of rights to a decent livelihood, 360-363.

     "Equitable minimum": of wages, 388, 390, 392, 393, 395, 397, 398,
           399, 417.

     Equity: meaning of, 256.

     Exchange-equivalence: theories of, 326-340;
       equal gains, 326-328;
       free contract, 328-330;
       market value, 330-332;
       mediæval, 332-336;
       modern, 336-340.

     Exclusion from the land: 90-93.

     Exclusive-sales contracts: 270-272.

     Expropriation: of capitalists under Socialism, 154-158.

     Extrinsic titles: of interest, 172.


     Family living wage: 373-376.

     Fathers of the Church: on private property in land, 62;
       on duty of beneficence, 305, 306.

     Fay, C. R.: 214, 221, 227.

     Fisher, Irving: 196.

     Fortunes: legal limitation of, 291-302;
       directly, 292-295;
       by taxation, 296-302.

     France: co-operative production in, 223.

     Fustel de Coulanges: 9.


     Gains: excessive from land, 80-89;
       from monopolies, 263-265.

     Germany: co-operation in, 216.

     Giffen, Sir Robert: 189.

     Godwin, W.: 341.

     Government ownership: 93-95;
       limitations of, 163-165;
       and rate of interest, 212.

     Great Britain: co-operation in, 220-222;
       income taxes in, 299-300;
       minimum wage in, 401, 402.


     Haines, H. T.: 405.

     Hammond, M. B.: 402.

     Henry George: on primitive common ownership, 17;
       on first occupancy, 21-24;
       on title of labour, 24-29;
       on natural right to land, 30-39;
       on right of community to land values and rent, 39-47;
       on Single Tax, 51, 52.

     Hillquit, Morris: 159.

     Hobson, J. A.: 418.

     Howe, F. C.: 76-78.

     Human welfare: the test of property rights in land, 36-38;
       and of a system of land tenure, 74;
       and of increment taxes, 109-111;
       and of titles of property, 150, 151, 244, 293-295;
       as a canon of distributive justice, 252, 253;
       as justifying profits, 256, 257, 389;
       as justifying higher than living wages, 386.

     Hyndman and Morris: 20.


     Income: distribution of national, 81-83.

     Incomes: injustice of equal, 244;
       progressive taxation of, 297-302.

     Increment taxes: 102-117.

     Inefficiency: of leadership and labour under Socialism, 158-168.

     Inheritance: legal limitation of, 293-295;
       progressive taxation of, 296-302.

     Interest: nature of, 137-140;
       rate of, 141-144;
       alleged intrinsic justifications of, 171-186;
       attitude of Church toward, 172-176;
       extrinsic titles of, 172;
       and the title of productivity, 176-181;
       and the title of service, 181, 182;
       and the title of abstinence, 182-186;
       social and presumptive justifications of, 187-209;
       necessity of, 191-199;
       civil authorization, 201-204;
       how justified, 204-209, a "workless" income, 210;
       possibility of reducing rate, 211-213;
       distinguished from profits, 238, 239;
       versus wages, 390-393.

     Investor: the "innocent," 286, 287.

     Ireland: reduction of rents in, 69-71;
       compulsory sale of land in, 110;
       co-operation in, 217-219.

     Italy: co-operation in, 223.


     Justice: dependence of on charity, 318;
       not found in prevailing-rate theory, 325;
       nor in exchange equivalence theories, 326-340;
       nor in productivity theories, 340-355;
       and the wage contract, 370-372;
       and the legal minimum wage, 407.


     Kautsky, Karl: 153.

     King, W. I: 82, 83, 122, 123, 155, 240, 310, 414.


     Labour: as a title to land, 24-29;
       and to products, 45;
       and to the entire product of industry, 145-152;
       341-347;
       productivity of, 178, 179;
       inefficiency of under Socialism, 162-167;
       mediæval measure of cost of, 336, 337;
       claims of different groups of, 381-387;
       legislative proposals for, 416, 417.

     Labour unions: efficacy and limitations of, 417-420;
       and legislation, 420-423.

     Labourer, the: claim of to rent, 71-73;
       right of to his product, 25, 26, 28, 43, 45, 149, 150, 179, 180;
       gains of from wage contract, 327, 328;
       right of to a living wage, 363-369, 373;
       versus the capitalist, 390-393, 396;
       versus the consumer, 393-398;
       and co-operative enterprise, 423-425.

     Land: distribution of, 16, 17, 87-89;
       large holdings of, 89, 90;
       accessibility to, 91-95;
       the leasing system, 95-97;
       public ownership of, 98-100.

     Landowner: right of to rent, 67-73;
       his share of product, 80-89.

     Landownership: in history, 8-18;
       two theories of, 8, 9;
       in pre-agricultural conditions, 10-12;
       origin of private, 12-14;
       prevalence and benefits of, 15-18;
       arguments against private, 19-47,
         by Socialists, 19-21,
         by Henry George, 21-47;
       private, the best system of tenure, 48-55;
       four elements of, 48;
       a natural right, 55-56.
       See Henry George, Occupancy, Labour, Right, Compensation,
             Confiscation, Defects, Rent.

     Land System: defects of the existing, 74-93.

     Land values: how created by the community, 40-47;
       increase of, 83-86;
       taxation of, 117-130.

     Langenstein: 335.

     Lassalle, F.: 183.

     Large estates: special taxation of, 130-132.

     Leadership: industrial, under Socialism, 158-167.

     Leasing system: 95-97.

     Legislation: for labour, 120-123, 416.

     Liberty: under Socialism, 168-170.

     Liebknecht, W.: 152.

     Life: right to, 57;
       true conception of, 317.

     Limitation of fortunes: 291-302;
       directly, 292-295;
       by taxation, 296-302.

     Livelihood, decent: 360-363;
       the labourer's right to, 363-365;
       the employer's, 366.

     Living wage: the minimum of wage justice, 356-380;
       three fundamental principles, 358-360;
       and a decent livelihood, 360-363;
       right of labourer to, 363-369;
       obligation of employer to pay, 365-372;
       for a family, 373-376;
       and social welfare, 376, 377;
       authorities for, 377, 378;
       money measure of, 378-380;
       versus other titles of reward, 381, 382, 386.

     Loan capitalist: and the claims of the labourer, 366, 367, 390, 391.

     Loans: attitude of Church toward interest on, 172-174;
       and productive capital, 174, 175.


     Maine, Sir Henry: 17.

     Market value: and wage justice, 330-332, 370, 375.

     Marriage: right to, 57, 58;
       and reasonable life, 374.

     Marx, Karl: 145-148, 342, 343, 374.

     Materialism: in current conception of welfare, 314-318.

     Meade, E. S.: 265, 266.

     Menger, A.: 342.

     Middle Ages, doctrines of: on interest, 172, 175, 176, 201;
       on titles of gain, 175;
       on wage justice, 332-336.

     Minimum: of wage justice, 356-380.

     Minimum profits: question of right to, 258-260.

     Minimum wage: 353-355, 400-423;
       in operation, 400-405;
       ethical and political aspects of, 407, 408;
       economic aspect of, 408-416;
       opinions of economists on, 412-416, 420-423.

     Modern: version of exchange-equivalence, 336-340.

     Monopoly: in relation to land, 75-80;
       moral aspect of, 262-278;
       excessive gains of, 263-265;
       efficiency of, 265-267, 275-277;
       discriminative underselling by, 267-270;
       favors to by railroads, 262, 273;
       natural, 273-275;
       suppression versus regulation of, 275-278;
       by labour, 390, 397.


     Natural monopolies: 273-275.

     Natural rights: 57-59. See Rights.

     Nearing, Scott: 83-85;
       154, 210, footnote.

     Needs: as a canon of justice, 244, 246, 356-358;
       classification of, 308, 309;
       exaggerated conception of, 314-318;
       a standard of wage justice in Middle Ages, 335, 336.


     Occupancy, first: as a title to land, 21-24;
       as exemplified in increment taxes, 109.

     Occupation: question of right to a livelihood from a present, 362,
           363.

     Original titles: See Occupancy, Labour.

     Overcapitalization: 279-290. See Stockwatering.

     Ownership: titles of determined by reasonable distribution, 150,
           151.


     Perkins, G. W.: 276.

     Personality: as basis of industrial rights, 358-371, 374.

     Pesch, H.: 215.

     Pope Benedict XIV: 173.
       Clement IV: 23.
       Gregory the Great: 306.
       Innocent XI: 316.
       Leo XIII: 64-66, 306, 309, 377.
       Sixtus V: 176.

     Population: excessive increase of urban, 86.

     Possession: as a partial justification of interest: 205, 206.

     Possessors: obligation of to non-possessors, 359, 360.

     Presumption: as a partial justification of interest, 205;
       and the canon of productivity, 248.

     Prevailing rate theory: of wage justice, 323-325.

     Prices: test of extortionate, 269, 270;
       legalized agreements fixing, 277, 278;
       versus wages, 393-399.

     Principles: three fundamental to living wage doctrine, 358-360.

     Product: distribution of national, 181-183. See Labour, Labourer,
           Right.

     Production: of land values by the community, 39-47;
       co-operation in, 222-228.

     Productivity: as a title to the product, 25, 26, 28, 43, 45, 149,
           150, 179;
       as a title to interest, 172, 173, 176-181, 204, 205;
       of labour and capital, 178-180;
       as a canon of distribution, 246-249, 350, 351;
       as justifying large profits, 255-258, 262, 388, 389;
       as a title to wages, 341-355, 385;
       Clark's theory of, 347-351;
       Carver's theory of, 351-355.

     Profits: nature of, 237-242;
       as compared with interest and rent, 139, 140, 238, 239;
       amount of, 239, 240;
       in a corporation, 241, 242;
       in conditions of competition, 254-261;
       indefinitely large, 255-258;
       minimum, 258-260;
       surplus and excessive, 263-265;
       in natural monopolies, 273, 274;
       versus wages, 388-390.

     "Progress and Poverty": 21, 22, 24, 25, 30, 34, 39, 51, 52.

     Proudhon: 342.

     Public honour: efficacy of under Socialism: 165-167.

     Pullman Company: 289.


     Reform: versus revolution, 94.

     Rent: economic, 3-7;
       commercial, 5;
       how produced by society, 39-47;
       right of landowner to, 67-75;
       right of tenant and labourer to, 69-73, 396;
       increase and amount of, 80-87;
       distribution of, 87-89;
       in United States, 122.

     Rent charges: attitude of theologians toward, 175, 176.

     "Res fructificat domina":
       limitations of this formula, 60, 61, 104, 105, 111, 180, 345.

     Revolution: versus reform, 94.

     Riches: from land, 88, 89.

     Right: of the individual to land, 30-39;
       of the community to land values and rent, 39-47;
       of the producer to his product, see productivity;
       of private landownership, 56-66;
       to take rent, 67-73;
       of access to the earth, 358-360;
       to a decent livelihood, 360-363;
       to a living wage, 363-369, 372, 376.

     Rights: three principal kinds of natural, 57-59;
       of property, as created by the State, 202.

     Rodbertus, K.: 342.

     Roman Congregations: on lawfulness of interest taking, 173, 174.


     Saint-Simon: 342.

     Sacrifice: principle of in taxation, 131, 297;
       as a title to interest, 185-188;
       as a title of reward, 383-385.

     Savers: three kinds of, 183-185.

     Scarcity: effect of on rewards of productive agents, 80;
       as a canon of distributive justice, 250, 251;
       as justifying very large profits, and more than a living wage,
             255-258.

     Schmoller: 253.

     Schoolmen: doctrines of on wage justice, 333-336.

     Seligman, E. R. A.: 101, 296, 297.

     Service: as a title to interest, 181, 182, 204, 205.

     Shifting: of land taxes, 102, 103.

     Sidgwick, H.: 329.

     Single Tax: injustice of, 33-39, 100;
       proposals and defects of, 51, 54, 108.

     Skelton, O. D.: 165.

     Small, A. W.: 171.

     Social benefits: of special taxes on land, 127-130.

     Socialism: as regards land, 49, 51;
       not inevitable, 153;
       expropriation of capitalists by, 154-158;
       inefficiency of, 158-168;
       hostile to individual liberty, 168-170;
       not co-operation, 230, 231.

     Socialists: on private landownership, 19-21;
       on interest, value, and labour, 145-148;
       on the collectivist State, 152, 153;
       on morality of profits, 254;
       on wage justice, 341-347;
       on the principle of needs, 356.

     Socialist party: of the United States, on landownership, 51.

     Spargo, John: 51.

     Specific productivity: as a measure of wage justice, 347-351.

     Speculation: effect of on land values, 92, 93, 103.

     Spencer, Herbert: 23.

     Standard Oil Company: 76, 263, 267.

     State, the: should permit interest, 199-201;
       power of to create property rights, 202-204;
       not obliged to guarantee living profits, 259;
       fixing of maximum prices by, 275-278;
       and the "innocent" investor, 286, 287;
       and the prevention of stockwatering, 289, 290;
       and the limitation of fortunes, 291-302;
       and payment of living wages, 365;
       and minimum wage, 407, 408, 420-423;
       and other labour legislation, 416, 417.

     Stockholders: claim of to surplus gains, 257, 258, 262;
       as related to stockwatering, 279-281, 285.

     Stockwatering: moral aspect of, 279-290;
       definition of, 280;
       injurious effects of, 281-286 and the "innocent" investor, 286,
             287;
       magnitude of, 288, 289;
       prevention of, 289, 290.

     Stores: co-operation in, 220-222.

     Superfluous wealth: duty of distributing, 303-319;
       kinds of, 308, 309;
       a false conception of, 314-316;
       true conception of, 318, 319.
       See Wealth.

     Supertax: on large landed estates, 130-132.

     Supply and demand: as determining rent, 80;
       as determining interest, 143, 144.


     Taussig, F. W.: 198, 214, 282, 289, 290;
       on minimum wage, 412-416.

     Tawney, R. H.: 421.

     Taxation: as a social instrument, 101, 102;
       of increases in land value, 102-117;
       faculty theory of, 107, 108;
       progressive, as a method of limiting fortunes, 296-302.

     Taxes: shifting of to land, 117-130;
       social benefits of, 127-130.

     Tenant: claim of to rent, 69-71.

     Theologians: on private landownership, 62-64;
       on interest, 172-176, 202-204;
       on civil creation of property rights, 202;
       on duty of benevolent distribution, 308, 309.

     Thompson, W.: 341.


     Undertaker: See Business man.

     United States: special land taxes in, 119;
       co-operation in, 218, 263;
       minimum wage in, 401, 403-407.

     United States Commissioner of Corporations, reports of: on Standard
           Oil Company, 76, 263, 267, 268, 272;
       on Steel Corporation, 79, 89, 263, 267, 285;
       on water power ownership, 79, 95;
       on the lumber industry, 85, 89, 94, 132;
       on American Tobacco Company, 263, 267, 288;
       on American Sugar Refining Company, 267, 272, 289.

     United States Shipbuilding Company: 288, 289.

     United States Steel Corporation: 79, 89, 267, 285, 289.

     Use: right, as a confirmatory justification of interest taking,
           206-208.


     Value: Marxian theory of, 145-148, 333, 343, 344;
       relation of to wage justice, 330-340;
       and to a living wage, 370, 375.

     Van Hise, C. R.: 266, 267, 277, 278, 288.


     Wage justice: unacceptable theories of, 323-355;
       prevailing rate theory, 323-325;
       exchange equivalence theory, 326-340;
       productivity theories, 341-355;
       the minimum of, 356-380;
       problem of complete, 381-399;
       claims of different labour groups, 381-387;
       wages versus profits, 388-390;
       wages versus interest, 390-393;
       wages versus prices, 393-399.

     Wages: versus profits, 388-390;
       "equitable minimum" of, 388;
       versus interest, 390-393;
       versus prices, 393-399;
       methods of increasing, 400-425;
       legal minimum, 400-416;
       other legislation for, 416, 417;
       labour unions, 417-423;
       co-operative enterprise, 423-425.

     Wagner, A.: 342.

     Watered stock: 279-290. See Stockwatering.

     Water power: in the United States, 79, 95.

     Wealth, superfluous: duty of distributing, 303-319;
       as regards a part, 303-307;
       as regards the whole, 308-314;
       a duty of charity or of justice, 305-307;
       the supply of capital and business ability, 311-313;
       false and true conceptions of, 314-316.

     Welfare: a false conception of, 314-316;
       true conception of, 316-318;
       social, demands a living wage for all, 376, 377.
       See Human welfare.

     Whittaker, Sir Thomas: 10, 14, 28.

     Wicker, G. R.: 350, 351.

     Williams, A.: 232.

     Wolman, L.: 417, 418.

     Women: right of to a living wage, 373.


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Transcriber's Notes:

Obvious typographical errors were corrected.

Hyphenation inconsistency between "co-partnership" as used by the
author, and "Copartnership" as in the title of a quoted reference,
was retained as in the original.

A few out-of-order index entries were relocated.

Advertisements: "THE MACMILLAN COMPANY Publishers 64-66 Fifth Avenue
New York" appeared at the bottom of each ad page in the original. This
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