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The Limits Of An Economic Society
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Leading Facts Concerning Money
Production A Synthesis Distribution An Analysis
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Production A Synthesis Distribution An Analysis








The essential fact about production, as it is carried on by all
society, is that it is a synthetic operation, by which a grand total
is made up by the contributions of different industries. There is a
corresponding fact about the production which is carried on within a
particular line of business, or, as we should express it, within a
particular subgroup; for within the subgroup there are laborers, on
the one hand, and capitalists, on the other, helping each other to
make a joint product. In our table A''', B''', and C''' are the goods
of which the social income is composed. Subgroups, such as A, A',
etc., help to make this grand total of finished goods; but in A, A',
and all the other subdivisions there are laborers and capitalists
working together. Farming, mining, cotton spinning, shoemaking,
building, and a myriad of other occupations all work together to
create an aggregate of goods which constitute the social income. In
each of these branches of business there are men and working
appliances contributing each a part to the quota that this branch
furnishes.

Distribution as an Analysis

The essential fact about distribution
is that it is an analysis. It reverses the synthetic operation step by
step, resolving the grand total produced by society into shares
corresponding with the amounts contributed by the specific industries,
such as mining, cotton spinning, shoemaking, etc. The men who own and
work the mines do not keep the ore they secure, nor do they wish to
keep it. The ore goes into a stock of goods for the general use of
society, and it constitutes a definite addition to the value of that
stock. As ore it is transmuted into a myriad of forms, merged with
other materials and lost; but the amount that it adds to the total
product of society is definite. It is a certain definable quantity of
wealth, and that quantity of wealth the producers of the ore should
get for themselves. Distribution further resolves the share of each
particular industry into final portions for the use of the laborers
and capitalists in that industry; and these correspond with the
amounts which these laborers and capitalists contribute. The result of
distribution is to fix the rate of wages, the rate of interest, and
the amount of the profits of employers, if such profits exist; and the
general thesis which is here advanced and remains to be proved is
that, if society were without changes and disturbances, if competition
were absolutely free, and if labor and capital were so mobile that the
slightest inducement would cause them to pass from one branch of
business to another,[1] there would be no true profits[2] in any
business, and labor and capital would create and get the whole social
income. Moreover, each laborer and each capitalist would get the
amount of his personal contribution to this sum total. Amid all the
complications of society the modern worker would be in a position akin
to that of the solitary hunter in a primitive forest--his income would
be essentially of his own making and would include all that he makes.
He would not, like the primitive man, get the literal things that he
fashions, but he would get the amount of wealth that he creates--the
value of the literal products which take shape under his hand.

[1] It will be seen that we here assume for the process known
as competition a degree of perfection which it does not
attain in actual life. This process would be absolutely free
if labor could and would instantly abandon one industry and
enter another whenever it appeared that it could create an
increased product by so doing, and if capital also moved with
the same promptness on the smallest inducement. In actual
life there is friction to be overcome in the making of such
transfers, and this constitutes one of the subjects of the
theory of Economic Dynamics and will in later chapters be
fully considered.

Whenever either labor or capital thus moves to a new place in
the group system, it becomes an active competitor of the
labor or capital that was already there. We need a
definition of the competing process. In the case of producing
agents it consists in a rivalry in selling. The laborer who
moves from A' of the table that, in the preceding chapter,
has been used to represent organized industry to B', offers
for sale, as some would say, his service, or more accurately,
the product which his labor can create. The purchasers are
the employers in the subgroup B', and in order to induce them
to accept the new labor it is necessary to offer it at a rate
of pay which will make it worth their while to take it. If
the workers already in this division of the field are getting
just what they are worth, a larger force cannot be employed
at the same rate of wages, because, for a reason that will
later appear, the new labor cannot offer for sale as large a
product as an equal amount of the labor that is already
there. If the transfer to B' were made, the new labor would
have to accept lower pay than the old has been getting, and
the old labor would be forced to accept a cut in its rate of
pay or be supplanted by the new. A rate sufficiently low
would insure the employment of all. If the labor formerly in
this subgroup has been getting less than it is worth, there
will ensue a competition among employers who desire to
realize, each for himself, the margin of profit which can be
made by getting additional labor, and this will either raise
the pay of the men already in this subgroup or call new men
into it, or do both. In any case it will, in the absence of
all trace of monopoly on the side of the employers, end by
giving to the men what they are worth. It is, in fact, such a
bidding for new labor by employers in any branch of business
that moves labor from point to point in the industrial
system. The entrepreneur is the agent in the case, profits
are the lure, and competition--rivalry in buying--is the
means; and competition is, as we use terms, absolutely free
whenever it is certain that the smallest margin of net profit
will set it working and draw labor or capital to the
profit-yielding point.

There is competition among the entrepreneurs at A''' in
selling this finished product to the consuming public, and
among different purchasers in buying it. Whenever the price
of A''' is so high that the whole output of it cannot be
sold, each vender tries to supplant others and insure a sale
of his own product rather than that of any one else.
Competition here is overt and active. When all can be sold at
the current price, finding a market for one vender's supply
does not require that he win away another's customers, and
although the different sellers continue to be rivals and each
would welcome an increase of patronage made at others' cost,
no one is forced to underbid others in order to continue to
sell his accustomed output. Competition is here quiescent,
since actual underbidding and the luring away of rivals'
customers do not take place. When entrepreneurs who are not
now in the subgroup A''' are ready to enter it and to become
rivals of those already there whenever any profit is to be
had by such a course, their competition is not actual but
potential; and yet it is a real influence and serves to deter
producers already in the field from establishing such a price
for their product that the possible competitors will become
real and active ones. These three influences may conceivably
act without obstruction or may be hindered and deprived of
much of their power. In actual life they are subjected to
hindrances, and whether they shall hereafter insure a certain
approximation to the general state which a perfectly free
competition would insure or whether the economic condition of
the world shall be permitted to drift far from that normal
state, depends on the success which governments will have in
reducing or removing the hindrances.

[2] In this treatise the term profits will be used to
designate the net increase which may remain in employers'
hands after paying the wages of labor of every kind and
interest on all capital used. The term gross profits
describes a sum made up of this net profit and interest on
the capital.

Standards of Wages and Interest

This accurate correspondence
between men's incomes and their contributions to the general earnings
of society would exist only in the absence of certain changes and
disturbances which it will be our aim, in the latter part of this
work, to study. These changes give to society the quality that we
shall term dynamic, and we shall examine them at length. What can,
however, be asserted in advance is that the rates of wages and
interest which would prevail if the changes and disturbances were
entirely absent constitute standards toward which, in spite of all the
changes that are going on, actual wages and interest are continually
tending. How nearly in practice the earnings of labor and capital
approximate the ideal rates which perfect competition would establish
is a question which it is not necessary at this point to raise. We
have to define the standard rates and show that fundamental forces
impel the actual rates toward them. The waters of a pond have an ideal
level toward which they tend under the action of gravity; and though a
gale were to force them to one end of the pond and cause the surface
there to stand much higher than the surface at the other end, the
standard level would be unaffected and the steady force of gravity
would all the while be drawing the actual surface toward it. In our
study of Economic Dynamics we shall encounter influences which act
like the gale in the illustration, but at present we are studying what
is more akin to gravity--a fundamental and steady force drawing wages
and interest toward certain definable levels. In our present study of
Economic Statics we must seek to discover how these standards are
fixed, in the midst of the overturnings which industrial society
undergoes.

A''' B''' C''' H'''
A'' B'' C'' H''
A' B' C' H'
A B C H

We have already represented, in a highly simplified form, the
synthesis by which the goods which make up the income of society are
produced. A, B, and C represent different raw materials, and they are
changed by a series of transmutations into A''', B''', and C''', which
stand for all the consumers' goods that the society uses. They
represent food, clothing, furnishings, vehicles, and countless means
of comfort and pleasure.

The Making of Active Instruments of Production

It is necessary
always to have and use a stock of tools, machines, buildings, and
other active instruments of production; and as these wear out in the
using, it is necessary that there should be persons who occupy
themselves in keeping the stock replenished. Under a system of
division of labor there would be special industries devoted to the
making of new appliances of production to take the place of those
which are worn out and discarded, and also to make repairs on those
which are still in use. For illustration, we may let the symbol H'''
represent all active capital goods that the society uses, the various
raw materials which enter into such active goods being represented by
H and the partly made instruments by H' and H''. If the stock of
appliances is not growing larger, just enough of the articles H''' are
made to replace the discarded ones. No producer gets new machinery,
but every one keeps his stock intact.

The Simplified Representation Correct in Principle

We have now a
very simple representation of what actually goes on under the name of
the division of labor, and yet the representation is in essential
points accurate. In reality a very detailed and minute division and
subdivision of industries takes place and the varieties of goods
produced are innumerable. Society, as a whole, is making the most
highly composite product that can be conceived; namely, consumers'
wealth in its countless forms. Each of the grand divisions of
society--the general groups that we have represented by the series of
A's or of B's--makes a complete article; but even that is in its own
way far more composite than the symbol indicates, for it is apt to
contain several kinds of raw material and to be made up of a large
number of distinct utilities, each of which has its own set of
producers. This complexity of the process of production does not
change the principle of distribution, by which the product is
virtually analyzed into its component elements and the value of each
element is assigned to those who create it. This principle can be
clearly represented by assuming that each subgroup has one distinct
utility to create and that it takes only four of these to make an
A''', a B''' or a C'''.

A Synthesis within Each Subgroup

There is within each subgroup a
synthesis going on, and this also may be complex. Labor and capital
dig ore from the ground--an unusually simple process; and yet there
are several distinct operations to be performed before the ore is
ready for smelting. When it comes to fashioning the metal into useful
shapes, the operations become very numerous and require many
subordinate trades even for the making of one product. How many
mechanical operations go to the making of a bicycle, an automobile, or
a steam yacht? Too many to be represented in any table, but not
enough to change at all the principle according to which those who
help to make one of these composite products are paid according to
their contributions to it. We may consider that all the work that is
done in one kind of mill creates one utility. Though there are many
subtrades in making a shoe and many more in making a watch, we may
proceed as though there were only one transformation of the raw
material required in each case. We may let the division between the
contiguous subgroups be made commercially rather than merely
mechanically, and regard the establishments that buy material and sell
it in a more highly wrought condition as moving it forward by one
stage on the road to completion, however many changes they may have
made in it in the different departments of their several mills. The
difference between shoes, on the one hand, and the leather and
findings of which they are made, on the other, thus passes for one
utility. A manufacturer of shoes puts his leather and findings through
many operations before he has shoes for sale; but it is convenient to
call all that the manufacturer imparts to these raw elements before he
makes them over in their new form to the merchant, one subproduct.

Further Complexities which may be Disregarded

One man may be in
several of the general groups. It is possible, for example, that he
may furnish raw materials which enter into more than one finished
article. Iron is so extensively used that it goes into more products
than can easily be counted. The man who digs iron ore contributes to
the making of bridges, rails, locomotives, buildings, machines, ships,
and tools in indefinite number and variety. The price of each of the
articles into which any of this material goes contains in itself the
price of that part of the raw material which goes into it. There is
steel in a ship, and the maker of that part of the output of raw steel
which goes into a ship gets his pay from the price of the vessel; and
so with the crude metal which goes into a bridge, a building, an
engine, etc. What the producer of a material gets from each source
tends, under perfectly free competition, to equal in amount what he
contributes toward the value of the corresponding article. In terms of
our table a miner may furnish ore from which iron is taken for the
making of both A''' and B'''; and if so, when the distributive process
analyzes these products into their elements, the value of what he has
in each case contributed will fall to him. He will be paid according
to the help he has afforded in the making of the A''' and the B''',
and this fact does not change in principle the manner in which the
income of society is divided. If the man helped to make only one
thing, he would get a part of the price of that one thing; but if he
helps to make several, he will get a part of the price of each of
them. Each group has one grand function to perform, such as the making
of an A''', and if the man helps in more than one, and is paid
accordingly, his total pay is according to the amount he produces in
all the different functions he performs, and the principle of
distribution works as perfectly as it would if the man were confined
to the single subgroup A. For simplicity we assume that he is so.

The Functions of Capitalist, Laborer, and Entrepreneur often
performed by One Person

One person may perform several functions,
not only by contributing to the products of several groups, but by
contributing in more than one way to the product of one subgroup. He
may, for example, both labor and furnish capital, and he may, further,
perform a special cooerdinating function which is not labor, in the
technical sense, and scarcely involves any continuous personal
activity at all, but is essential for rendering labor and capital
productive. What this function is we shall presently see. We shall
term it the function of the entrepreneur, using this term in an
unusually strict way. We shall keep this function quite distinct from
the work of the superintendent or manager of a business.

How Much the Term "Labor" Covers

We include under the term labor
all effort expended in a routine way in carrying on business. The
overseers in the shops, the bookkeepers, clerks, secretaries,
treasurers, agents, and, in short, all who perform any of the labor of
management for which they get or can get salaries are laborers in the
comprehensive sense in which we use the word. It comes about that the
employer usually labors; for he does the highest and most responsible
work in his own mill or shop. It is not, however, in his capacity as
entrepreneur, or "undertaker," that he labors; for, as the
entrepreneur, properly speaking, he employs and pays for all the
work that receives a stipend. He may employ himself, indeed, and set
aside a stated sum to pay his own salary; but this means that in his
capacity as entrepreneur he needs a good manager and hires himself
to act in that capacity. Scrupulous fidelity is the most important
quality that a manager can possess, and the employer can always trust
himself to possess it so long as it is his own interests that he
controls.

Entrepreneur and Capitalist

In the same way we include in the
capital of an establishment whatever invested funds the employer
himself supplies, as well as what he hires from others. Here again a
man is likely to serve in more than one capacity, for as an
entrepreneur he hires capital and as a capitalist he lets it out for
hire, so that in the one capacity he hires capital from himself acting
in the other capacity. The man "puts money" into his own business and
gets interest for the use of it.

The Different Functions of the Same Man distinguished in
Business

This distinction between the different functions that one
person may perform is not a mere refinement of theory, but is
something that is recognized in business and has great practical
importance. In a corporation officials who are also stockholders
receive salaries that are usually reckoned on the basis of the amount
that they could get in the market if they were to enter the employment
of other corporations and do the same kind of work they are now doing.
Favoritism may give them considerably more than this amount, but even
then this amount is the basis of the calculation which fixes their
stipend. If they are paid more than their work is worth to their own
corporations, what they get is something besides wages or any other
normal and legitimate income. If they accept for their time less than
they are worth, they make a donation to the corporation. Neither
filching something for nothing out of the returns of the corporation,
nor giving it a gratuity, is to be here assumed as existent, since we
are not dealing with the phenomena of quasi-plunder or eccentric
benevolence. The character of wages of management, as the reward for a
high grade of labor, is recognized in business life, and the salary
of the manager, whether he is a stockholder or not, is usually
expressed in a definite sum of money and is gauged, crudely or
accurately, according to his value as a servant of the company.

Dividends often Composite

In like manner it is important in the
bookkeeping of a company to ascertain how much of the return to the
stockholders is merely interest on the capital they have themselves
invested and how much is true profit, or the net gain which is over
and above interest. In business life a distinction is pretty clearly
maintained between the three kinds of income that have been described;
namely, the reward of labor in all its forms, the reward of capital,
going to whoever furnishes it, and the reward of a cooerdinating
function, or the function of hiring both labor and capital and getting
whatever their joint product is worth above the cost of the elements
which enter into it. This essentially commercial margin of returns
from production above all costs of production is profits in the strict
sense and would be nonexistent in an absolutely static industry. It
comes into existence in consequence of the changes with which social
Economic Dynamics deals.

Three Incomes entirely Distinct

Wages, interest, and profits,
then, are the three incomes that we shall distinguish. We shall keep
profits completely separated from the wages of any kind of labor and
from the interest on any kind of capital. This income falls to the
entrepreneur, otherwise called the undertaker, or the employer and
cooerdinator of labor and capital, and it comes only when the product
of the operations carried on in his establishment exceeds all wages
and all interest that he has to pay.

How a Man could be an Entrepreneur Only

If a man should hire all
the capital that he needs in a business and also all the labor,
including the labor of every man in the office force, and reside
thereafter in a distant country, holding no consultations with his
managers, whatever income he might get would be purely an
entrepreneur's profit. It would not be interest--for that amount
would have to be paid to the men who had loaned the capital--and it
would not be wages--for they would have to be made over to the men
actually doing the work. The absent entrepreneur would be, in the
eye of the law, the purchaser of all the elements which go into the
product, since all the purchases are made in his name. The managers
are only his agents, and when they buy raw materials or supplies for
the mill, they buy them for him and by his authority, and he is under
the obligation to pay for them. Moreover paying wages is, in reality,
buying the share which labor contributes to the product of the mill.
The workmen have a natural right to the value which their work, of
itself and aside from the aid furnished by others, imparts to the
material that is put into their hands, and when they sell their labor,
they are really selling their part of the product of the mill. In like
manner paying interest is buying the share which capital contributes
to the product. The owners of the capital have an original right to
what the machines, the tools, the buildings, the land, and the raw
materials, of themselves and apart from other contributions, put
into the joint product. In reality they sell this share for a
consideration in the form of interest. In a static state labor and
capital together create the whole product of the mill; wages and
interest are the prices that they get for their several
contributions, and the entrepreneur pays these purchase prices and
by virtue of this becomes the owner of the whole product. Having the
product, he sells it in the market for what he can get. If this were
more than the cost to him of all the elements that have gone into it,
he would have a net profit remaining. It would be a remainder accruing
to the owner and seller of the product after the costs of getting a
title to it have been defrayed. Whether the absent entrepreneur of
our illustration gets anything from his business or not depends on the
question whether such a remainder of returns above costs is afforded.

Profits Nil in a Static Society

We shall see that if labor and
capital can move about in the system of groups so freely that each
agent is as productive in one place as it is in another, there will be
no product anywhere in excess of wages and interest. Labor and capital
then create and claim for themselves the whole output of their
industries. When the entrepreneur has given them their shares, by
paying wages and interest, and has paid for raw materials, he has
nothing left. In actual business competition is often sharp enough to
prevent men from getting more than interest on their capital and a
fair return for the labor they spend in directing their business; and
pure theory here assumes that competition is always and everywhere
sharp enough to do this. It is ideally efficient. Labor and capital
are ideally mobile and ready to flow at once to the points where any
net profits can be made. Such a condition implies that society is in a
static state, and we shall see what this condition is. It implies an
absence of organic change in society. The great collective producer
does not alter either its form or its mode of producing wealth.
Industry goes on, indeed, but it goes on in a changeless way.
Reserving the full description of this state for a later chapter, we
note here that the adjustment which would theoretically bring a
society to such a state would preclude all gains for its
entrepreneurs.[3]

[3] The preceding paragraphs may seem to show that if an
entrepreneur ever gets an income, he does it by wresting
from labor and capital a part of their products. We shall see
that in dynamic industry there is a normal way in which he
may get an income without taking anything from the incomes
that labor and capital would get if he did not perform his
part. His return may come from the result of an enabling act
which he performs, whereby both the labor and the capital of
a particular subgroup become more productive than other labor
and capital are and more so than they would be if the
entrepreneur's enabling act were not performed.

The Merging of Functions Desirable

The uniting in one person of
the functions of capitalist, laborer, and entrepreneur contributed
much to the productivity of the small-shop system of former days. The
man who had a few thousand dollars invested in a little shop and
employed a few men to assist him got three different kinds of income,
and the sum of the three was larger than anything he could have
secured if he had been only a laborer or only a small capitalist and
entrepreneur. He worked harder and more intelligently than a hired
superintendent would have done; he was led to be cautious because his
own capital was risked in his business, and yet he was spurred to
enterprise by the fact that when, by virtue of the influences which we
call dynamic, profits were made, he got them. Even in the largest
corporations the same conditions contribute to success, and it is best
that managers should be owners of some part of the capital which they
handle and receivers of some portion of the profits which they try to
secure for their companies. Where competition is sharp, companies
directed by their owners may supplant those of which the direction is
given over to hired managers. The growth of corporations does,
however, tend to put salaried men more and more into controlling
positions and to reduce the power of the body of stockholders, who
perform a joint function as capitalists and entrepreneurs. In itself
this tends to reduce profits and detracts from the advantages which
the incorporation of a business offers.

Distribution primarily Functional rather than Personal

Where men
get incomes that are composed of wages, interest, and profits,
economic science should, in the first instance, tell us how the rates
of wages and interest and the amount of profits are determined. A
study of the static laws of distribution concerns itself with the
reward of labor as such, and the reward of capital as such, while
a study of dynamics takes account of pure profits. When we know
what the rates of wages and interest are, we can tell what any
capitalist-manager should have by knowing how much capital he
furnishes and how much and how well he works as a manager. If the
business is yielding a net profit, over and above the interest on its
capital, we can tell what part of this net income any one stockholder
will get--in the form of a rate of dividends in excess of the rate of
interest--if we know how much of the common stock of the company he
owns. His personal income depends on the incomes attaching to the
functions he performs. The science of distribution should tell us
primarily, not what any man personally gets as a total income and how
well off he is as compared with other men, but in what way the wages
of his labor, the interest on his capital, and the return for the
entrepreneur's function are fixed. In technical terms this is saying
that distribution is primarily functional and not personal. Certain
forces assign certain rewards to different functions which are
involved in the creating of wealth, and the science of distribution
tells us how these forces work--tells us, in short, how wages,
interest, and true profits are, in and of themselves, determined. If
any man works and gets wages, that part of his income will be
determined by the wages law. If he furnishes capital, a second part of
his income will be determined by the interest law. If he also
cooerdinates labor and capital, whatever he may thus gain is determined
by the law of profit. Economic science has to ascertain and state what
these three laws are, though in its static division it has only to
account for two of them.

Costs as well as Gains Apportioned

The term distribution, as
commonly used, denotes a division of the gains of industry; but as we
have said, there are sacrifices which have to be borne in getting the
gains, and these also have to be shared. Wealth benefits men in the
using, but puts burdens upon them in the making; and when all society
does the making, it has to apportion, in some way, not only the
benefits but the burdens. We shall take account of these sacrifices
because of the relation that they bear to the gains. They act as an
ultimate check on production. Men would go on producing indefinitely
if the operation cost them nothing, since it would always be agreeable
to have a further income; but they necessarily encounter pains and
sacrifices that, sooner, or later, bring the enlargement of their
incomes to an end. Much that is of importance occurs at that critical
point where the sacrifices of production put an end to the extension
of it. It is the positive fruits of production that we have first to
consider; and what in this connection we wish first to know is how
wages and interest are determined when industry is carried on in a
social way and under a system of competition. We shall find that these
incomes are always tending toward standards which they would reach if
society were in the state which we have described as static. How they
are forced away from their standards by the changes and disturbances
of actual life, and how the standards themselves change with social
development, will be the subject of the latter part of this treatise.





Next: Value And Its Relation To Different Incomes

Previous: The Socialization Of Industry



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