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1. Select for study some common commodity which pa.s.ses through all or most of the stages of manufacture in your community, as, for example, a hammer, a shoe, flour or canned goods. Make a list of the various individuals who are connected with the production of this commodity.

By whom are these various individuals paid? Does it appear to you that their services bear a close relation to the sums which they receive?

Explain fully.

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

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

4. Select for study a successful entrepreneur in your community.

Outline, either as the result of hearsay, or personal interviews with him, the qualities to which he apparently owes his success.

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

II

6. The law of variable proportions. (Carver, _Elementary Economics_, chapter xxix.)

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

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

9. Reasons for the scarcity of capital. (Carver, _Elementary Economics_, chapter x.x.xvi.)

10. The productivity of capital. (Taussig, _Principles of Economics_, vol. ii, chapter x.x.xviii.)

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

12. The rent of land. (Carver, _Elementary Economics_, chapter x.x.xiii.)

13. Causes of the scarcity of labor. (Carver, _Elementary Economics_, pages 270-271.)

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

15. The nature of profits. (Carver, _Elementary Economics_, chapter x.x.xvi.)

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

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

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

19. The government's share in distribution. (Carver, _Elementary Economics_, chapter x.x.xvii.)

CHAPTER X

BASES OF THE CAPITALISTIC SYSTEM

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

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

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

Professor Carver points out that the method by which animals get their living is either destructive, deceptive, persuasive, or productive.

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

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

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

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

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

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

Free and effective compet.i.tion thus means rivalry in satisfying wants, that rivalry being engaged in for the sake of private gain.

Compet.i.tion tends to harmonize the interests of the individual with the interests of the community, by making the success of the individual depend primarily upon what he accomplishes for his fellows.

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

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

98. FREEDOM.--A large measure of personal liberty is a characteristic of the capitalistic system, To an increasing extent, government is restricting economic activity to productive channels, but with this qualification, the individual is comparatively free to do as he likes.

The laborer is free to move about in search of work, free to seek a better job, free to accept or to reject work offered him. He may abandon his job when he chooses, and remain idle as long as he chooses, or is able. He is repressed by no paternalistic government, embarra.s.sed by no feudal system. He is part and parcel of the compet.i.tive system, guiding his own actions and accepting responsibility for them. To a large extent, the employer is similarly free to hire or discharge men as he sees fit, to initiate a new business, or to withdraw from business altogether. In every case the individual is free, so far as legal restrictions are concerned, to use his money as he chooses. Whether it is h.o.a.rded, invested, or wasted is largely a matter for him to determine.

99. BENEFITS OF THE CAPITALISTIC SYSTEM.--The material prosperity of the modern world has been attained under the capitalistic system of industry. The system was not invented, but has developed and spread from small beginnings because the experience of centuries has proved it to be the best known system which is applicable to human industry.

The starting point of all material prosperity has been the gradual development of government which suppresses violence and fraud, which enforces contracts, and which makes possible the rise of the inst.i.tution of private property. The inception of the Industrial Revolution, and its spread beyond England to Europe, America, and, later, to Asia, were possible only because these bases of capitalism were already laid. To a large extent, thus, the steam engine, the railroad, the steamship, the electric light, and countless other inventions which have helped to revolutionize the world we live in, may be traced directly or indirectly to individual freedom and to the protection of property rights. In so far as science, art, and literature depend, to a considerable degree, upon material prosperity, we may go so far as to say that capitalism is the most important single basis of modern civilization.

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

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

101. THE INEQUALITY OF WEALTH.--In all of the great industrial countries of the world, including the United States, the existing distribution of wealth is roughly in the form of a pyramid, i.e., at the top or apex of the pyramid there is a relatively small number of persons who enjoy large incomes, while at the base there is a large number with relatively small incomes. This inequality is explained by Professor Taussig on two grounds: First, it is likely that some individuals originally secured an economic advantage over their fellows because of inborn superiority of some kind. Second, the economic advantage thus secured has been maintained from generation to generation by inheritance. Where, for example, wealth is invested so that the princ.i.p.al remains intact while a large annual income is thrown off as interest, the heirs may live in affluence, regardless of ability or desert. Thus we have a leisure cla.s.s emerging as the result of inborn differences between men, supplemented by the acc.u.mulation of wealth and its transmission by inheritance.

102. THE QUESTION OF INDUSTRIAL REFORM.--It goes without saying that great inequalities in the distribution of wealth are undesirable. If any improvement is humanly possible, we ought not to rest content so long as millions of our citizens have too few of the good things of life, while others have much more than is necessary for comfort and happiness. The test of an economic system is whether or not it provides a good world to live in, and so long as large numbers of individuals have fewer necessities and comforts than it is possible to give them, our economic system must be considered defective. The people as a group are both the means and the end of progress.

Democracy cannot rest upon any other basis than the greatest good to the greatest number.

103. APPROACHING THE PROBLEM.--In approaching the problem of industrial reform it is necessary to cultivate a fair and sane att.i.tude. We must attack all of the problems of American democracy, certainly. But in so far as some of these problems involve the integrity of the capitalistic system, we should distinguish between ills which are clearly traceable to that system, and defects which obviously would exist under any industrial system. Capitalism cannot be discredited, for example, by pointing out that crime exists in all capitalistic countries. Though capitalism may accentuate some types of crime, our knowledge of human nature leads us to suspect that a considerable amount of crime would exist under any known system of industry. Again, criticism should be constructive; it is easy to point out the defects of an inst.i.tution, but it is quite another thing to provide a good subst.i.tute for that inst.i.tution.

The problem before us is a double one: First, can we remedy the defects of the capitalistic system? And, if so, by what method shall we proceed? Second, if the defects of capitalism cannot be remedied, what industrial system shall be subst.i.tuted for capitalism? It is not a question of whether or not capitalism is faulty, but of whether it is more faulty than the system that would be subst.i.tuted for it. The virtues of capitalism, most authorities believe, clearly outweigh its defects, and though some other system may eventually prove to have as great virtues with fewer defects, the burden of proof is upon those who advocate other systems than capitalism. Until the advantage is clearly shown to be on the side of a rival system, it will be wise to retain capitalism.