The Theory of Business Enterprise
by Thorstein Veblen
1904
Preface
In respect to its point of departure, the following inquiry
into the nature, causes, utility, and further drift of business
enterprise differs from other discussions of the same general
range of facts. Any unfamiliar conclusions are due to this choice
of a point of view, rather than to any peculiarity in the facts,
articles of theory, or method of argument employed. The point of
view is that given by the business man's work, -- the aims,
motives, and means that condition current business traffic. This
choice of a point of view is itself given by the current economic
situation, in that the situation plainly is primarily a business
situation.
A much more extended and detailed examination of the
ramifications and consequences of business enterprise and
business principles would feasible, and should give interesting
results. It might conceivably lead to something of a revision
(modernization) of more than one point in the current body of
economic doctrines. But it should apparently prove more
particulary interesting if it were followed up at large in the
bearing of this modern force upon cultural growth, apart from
what is of immediate economic interest. This cultural bearing of
business enterprise, however, belongs rather in the field of the
sociologist than in that of the professed economist; so that the
present inquiry, in its later chapters, sins rather by exceeding
the legitimate bounds of economic discussion on this head than by
falling short of them. In extenuation of this fault it is said
that the features of general culture touched upon in these
chapters bear too intimately on the economic situation proper to
admit their being left entirely on one side.
Of the chapters included in the volume, the fifth, on Loan
Credit, is taken without substantial change, from Volume IV of
the Decennial Publications of the University of Chicago, where it
appears as a monograph.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter One
Introductory
The material framework of modern civilization is the industrial
system, and the directing force which animates this framework is
business enterprise. To a greater extent than any other known
phase of culture, modern Christendom takes its complexion from
its economic organization. This modern economic organization is
the "Capitalistic System" or "Modern Industrial System," so
called. Its characteristic features, and at the same time the
forces by virtue of which it dominates modern culture, are the
machine process and investment for a profit.
The scope and method of modern industry are given by the
machine. This may not seem to hold true for all industries,
perhaps not for the greater part of industry as rated by the bulk
of the output or by the aggregate volume of labor expended. But
it holds true to such an extent and in such a pervasive manner
that a modern industrial community cannot go on except by the
help of the accepted mechanical appliances and processes. The
machine industries -- those portions of the industrial system in
which the machine process is paramount -- are in a dominant
position; they set the pace for the rest of the industrial
system. In this sense the present is the age of the machine
process. This dominance of the machine process in industry marks
off the present industrial situation from all else of its kind.
In a like sense the present is the age of business
enterprise. Not that all industrial activity is carried on by the
rule of investment for profits, but an effective majority of the
industrial forces are organized on that basis. There are many
items of great volume and consequence that do not fall within the
immediate score of these business principles. The housewife's
work, e.g., as well as some appreciable portion of the work on
farms and in some handicrafts, can scarcely be classed as
business enterprise. But those elements in the industrial world
that take the initiative and exert a far-reaching coercive
guidance in matters of industry go to their work with a view to
profits on investment, and are guided by the principles and
exigencies of business. The business man, especially the business
man of wide and authoritative discretion, has become a
controlling force in industry, because, through the mechanism of
investments and markets, he controls the plants and processes,
and these set the pace and determine the direction of movement
for the rest. His control in those portions of the field that are
not immediately under his hand is, no doubt, somewhat loose and
uncertain; but in the long run his discretion is in great measure
decisive even for these outlying portions of the field, for he is
the only large self-directing economic factor. His control of the
motions of other men is not strict, for they are not under
coercion from him except through the coercion exercised by the
exigencies of the situation in which their lives are cast; but as
near as it may be said of any human power in modern times, the
large business man controls the exigencies of life under which
the community lives. Hence, upon him and his fortunes centres the
abiding interest of civilized mankind.
For a theoretical inquiry into the course of civilized
life as it runs in the immediate present, therefore, aud as it is
running into the proximate future, no single factor in the
cultural situation has an importance equal to that of the
business man and his work.
This of course applies with peculiar force to an inquiry
into the economic life of a modem community. In so far as the
theorist aims to explain the specifically modern economic
phenomena, his line of approach must be from the businessman's
standpoint, since it is from that standpoint that the course of
these phenomena is directed. A theory of the modern economic
situation must be primarily a theory of business traffic, with
its motives, aims, methods, and effects.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter Two
The Machine Process
In its bearing on modern life and modern business, the
"machine process" means something more comprehensive and less
external than a mere aggregate of mechanical appliances for the
mediation of human labor. It means that, but it means something
more than that. The civil engineer, the mechanical engineer, the
navigator, the mining expert, the industrial chemist and
mineralogist, the electrician, -- the work of all these falls
within the lines of the modern machine process, as well as the
work of the inventor who devises the appliances of the process
and that of the mechanician who puts the inventions into effect
and oversees their working. The scope of the process is larger
than the machine.(1*) In those branches of industry in which
machine methods have been introduced, many agencies which are not
to be classed as mechanical appliances, simply, have been drawn
into the process, and have become integral factors in it.
Chemical properties of minerals, e.g., are counted on in the
carrying out of metallurgical processes with much the same
certainty and calculable effect as are the motions of those
mechanical appliances by whose use the minerals are handled. The
sequence of the process involves both the one and the other, both
the apparatus and the materials, in such intimate interaction
that the process cannot be spoken of simply as an action of the
apparatus upon the materials. It is not simply that the apparatus
reshapes the materials; the materials reshape themselves by the
help of the apparatus. Similarly in such other processes as the
refining of petroleum, oil, or sugar; in the work of the
industrial chemical laboratories; in the use of wind, water, or
electricity, etc.
Wherever manual dexterity, the rule of thumb, and the
fortuitous conjunctures of the seasons have been supplanted by a
reasoned procedure on the basis of a systematic knowledge of the
forces employed, there the mechanical industry is to be found,
even in the absence of intricate mechanical contrivances. It is a
question of the character of the process rater than a question of
the complexity of the contrivances employed. Chemical,
agricultural, and animal industries, as carried on by the
characteristically modern methods and in due touch with the
market, are to be included in the modern complex of mechanical
industry.(2*)
No one of the mechanical processes carried on by the use of
a given outfit of appliances is independent of other processes
going on elsewhere. Each draws upon and presupposes the proper
working of many other processes of a similarly mechanical
character. None of the processes in the mechanical industries is
self-sufficing. Each follows some and precedes other processes in
an endless sequence, into which each fits and to the requirements
of which each must adapt its own working. The whole concert of
industrial operations is to be taken as a machine process, made
up of interlocking detail processes, rather than as a
multiplicity of mechanical appliances each doing its particular
work in severalty. This comprehensive industrial process draws
into its scope and turns to account all branches of knowledge
that have to do with the material sciences, and the whole makes a
more or less delicately balanced complex of sub-processes.(3*)
Looked at in this way the industrial process shows two
well-marked general characteristics: (a) the running maintenance
of interstitial adjustments between the several sub-processes or
branches of industry, wherever in their working they touch one
another in the sequence of industrial elaboration; and (b) an
unremitting requirement of quantitative precision, accuracy in
point of time and sequence, in the proper inclusion and exclusion
of forces affecting the outcome, in the magnitude of the various
physical characteristics (weight, size, density, hardness,
tensile strength, elasticity, temperature, chemical reaction,
actinic sensitiveness, etc.) of the materials handled as well as
of the appliances employed. This requirement of mechanical
accuracy and nice adaptation to specific uses has led to a
gradual pervading enforcement of uniformity to a reduction to
staple grades and staple character in the materials handled, and
to a thorough standardizing of tools and units of measurement.
Standard physical measurements are of the essence of the
machine's regime.(4*)
The modern industrial communities show an unprecedented
uniformity and precise equivalence in legally adopted weights and
measures. Something of this kind would be brought about by the
needs of commerce, even without the urgency given to the movement
for uniformity by the requirements of the machine industry. But
within the industrial field the movement for standardization has
outrun the urging of commercial needs, and has penetrated every
corner of the mechanical industries. The specifically commercial
need of uniformity in weights and measures of merchantable goods
and in monetary units has not carried standardization in these
items to the extent to which the mechanical need of the
industrial process has carried out a sweeping standardization in
the means by which the machine process works, as well as in the
products which it turns out.
As a matter of course, tools and the various structural
materials used are made of standard sizes, shapes, and gauges.
When the dimensions, in fractions of an inch or in millimetres,
and the weight, in fractions of a pound or in grammes, are given,
the expert foreman or workman, confidently and without
reflection, infers the rest of what need be known of the uses to
which any given item that passes under his hand may be turned.
The adjustment and adaptation of part to part and of process to
process has passed out of the category of craftsmanlike skill
into the category of mechanical standardization. Hence, perhaps,
the greatest, most wide-reaching gain in productive celerity and
efficiency through modern methods, and hence the largest saving
of labor in modern industry.
Tools, mechanical appliances and movements, and structural
materials are scheduled by certain conventional scales and
gauges; and modern industry has little use for, and can make
little use of, what does not conform to the standard. What is not
competently standardized calls for too much of craftsmanlike
skill, reflection, and individual elaboration, and is therefore
not available for economical use in the processes. Irregularity,
departure from standard measurements in any of the measurable
facts, is of itself a fault in any item that is to find a use in
the industrial process, for it brings delay, it detracts from its
ready usability in the nicely adjusted process into which it is
to go; and a delay at any point means a more or less far-reaching
and intolerable retardation of the comprehensive industrial
process at large. Irregularity in products intended for
industrial use carries a penalty to the nonconforming producer
which urges him to fall into line and submit to the required
standardization.
The materials and moving forces of industry are undergoing a
like reduction to staple kinds, styles, grades, and gauge.(5*)
Even such forces as would seem at first sight not to lend
themselves to standardization, either in their production or
their use, are subjected to uniform scales of measurement; as,
e.g., water-power, steam, electricity, and human labor. The
latter is perhaps the least amenable to standardization, but, for
all that, it is bargained for, delivered, and turned to account
on schedules of time, speed, and intensity which are continually
sought to be reduced to a more precise measurement and a more
sweeping uniformity.
The like is true of the finished products. Modern consumers
in great part supply their wants with commodities that conform to
certain staple specifications of size, weight, and grade. The
consumer (that is to say the vulgar consumer) furnishes his hose,
his table, and his person with supplies of standard weight and
measure, and he can to an appreciable degree specify his needs
and his consumption in the notation of the standard gauge. As
regards the mass of civilized mankind, the idiosyncrasies of the
individual consumers are required to conform to the uniform
gradations imposed upon consumable goods by the comprehensive
mechanical processes of industry. "Local color" it is said, is
falling into abeyance in modern life, and where it is still found
it tends to assert itself in units of the standard gauge.
From this mechanical standardization of consumable goods it
follows, on the one hand, that the demand for goods settles upon
certain defined lines of production which handle certain
materials of definite grade, in certain, somewhat invariable
forms and proportions; which leads to well-defined methods and
measurements in the processes of production, shortening the
average period of "ripening" that intervenes between the first
raw stage of the product and its finished shape, and reducing the
aggregate stock of goods necessary to be carried for the supply
of current wants, whether in the raw or in the finished form.(6*)
Standardization means economy at nearly all points of the process
of supplying goods, and at the same time it means certainty and
expedition at neatly all points in the business operations
involved in meeting current wants. Besides this, the
standardization of goods means that the interdependence of
industrial processes is reduced to more definite terms than
before the mechanical standardization came to its present degree
of elaborateness and rigor. The margin of admissible variation,
in time, place, form, and amount, is narrowed. Materials, to
answer the needs of standardized industry, must be drawn from
certain standard sources at a definite rate of supply. Hence any
given detail industry depends closely on receiving its supplies
from certain, relatively few, industrial establishments whose
work belongs earlier in the process of elaboration. And it ma
similarly depend on certain other, closely defined, industrial
establishments for a vent of its own specialization and
standardization product.(7*) It may likewise depend in a strict
manner on special means of transportation.(8*)
Machine production leads to a standardization of services
as well as of goods. So, for instance, the modern means of
communication and the system into which these means are organized
are also of the nature of a mechanical process, and in this
mechanical process of service and intercourse the life of all
civilized men is more or less intimately involved. To make
effective use of the modern system of communication in any way or
all of its ramifications (streets, railways, steamship lines,
telephone, telegraph, postal service, etc.), men are required to
adapt their needs and their motions to the exigencies of the
process whereby this civilized method of intercourse is carried
into effect. The service is standardized, and therefore the use
of it is standardized also. Schedules of time, place, and
circumstance rule throughout. The scheme of everyday life must be
arranged with a strict regard to the exigencies of the process
whereby this range of human needs is served, if full advantage is
to be taken of this system of intercourse, which means that, in
so far, one's plans and projects must be conceived and worked out
in terms of those standard units which the system imposes.
For the population of the towns and cities, at least, much
the same rule holds true of the distribution of consumable goods.
So, also, amusements and diversions, much of the current
amenities of life, are organized into a more or less sweeping
process to which those who would benefit by the advantages
offered must adapt their schedule of wants and the disposition of
their time and effort. The frequency, duration, intensity, grade,
and sequence are not, in the main, matters for the free
discretion of the individuals who participate. Throughout the
scheme of life of that portion of mankind that clusters about the
centres of modern culture the industrial process makes itself
felt and enforces a degree of conformity to the canon of accurate
quantitative measurement. There comes to prevail a degree of
standardization and precise mechanical adjustment of the details
of everyday life, which presumes a facile and unbroken working of
all those processes that minister to these standardized human
wants.
As a result of this superinduced mechanical regularity of
life, the livelihood of individuals is, over large areas,
affected in an approximately uniform manner by any incident which
at all seriously affects the industrial process at any point.(9*)
As was noted above, each industrial unit, represented by a
given industrial "plant", stands in close relations of
interdependence with other industrial processes going forward
elsewhere, near or far away, from which it receives supplies --
materials, apparatus, and the like -- and to which it turns over
its output of products and waste, or on which it depends for
auxiliary work, such as transportation. The resulting
concatenation of industries has been noticed by most modern
writers. It is commonly discussed under the head of the division
of labor. Evidently the prevalent standardization of industrial
means, methods, and products greatly increases the reach of this
concatenation of industries, at the same time that it enforces a
close conformity in point of time, volume and character of the
product, whether the product is goods or services.(10*)
By virtue of this concatenation of processes the modern
industrial system at large bears the character of a
comprehensive, balanced mechanical process. In order to an
efficient working of this industrial process at large, the
various constituent sub-processes must work in due coordination
throughout the whole. Any degree of maladjustment in the
interstitial coordination of this industrial process at large in
some degree hinders its working. Similarity, any given detail
process or any industrial plant will do its work to full
advantage only when due adjustment is had between its work and
the work done by the rest. The higher the degree of development
reached by a given industrial community, the more comprehensive
and urgent becomes this requirement of interstitial adjustment.
And the more fully a given industry has taken on the character of
a mechanical process, and the more extensively and closely it is
correlated in its work with other industries that precede or
follow it in the sequence of elaboration, the more urgent, other
things equal, is the need of maintaining the proper working
relations with these other industries, the greater is the
industrial detriment suffered from any derangement of the
accustomed working relations, and the greater is the industrial
gain to be derived from a closer adaptation and a more facile
method of readjustment in the event of a disturbance, -- the
greater is also the chance for an effectual disturbance of
industry at the particular point. This mechanical concatenation
of industrial processes makes for solidarity in the
administration of any group of related industries, and more
remotely it makes for solidarity in the management of the entire
industrial traffic of the community.
A disturbance at any point, whereby any given branch of
industry fails to do its share in the work of the system at
large, immediately affects the neighbouring or related branches
which come before or after it in the sequence, and is transmitted
through their derangement to the remoter portions of the system.
The disturbance is rarely confined to the single plant or the
single line of production first affected, but spreads in some
measure to the rest. A disturbance at any given point brings more
or less derangement to the industrial process at large. So that
any maladjustment of the system involves a larger waste than
simply the disabling of one or two members in the complex
industrial structure.
So much is clear, that the keeping of the balance in the
comprehensive machine process of industry is a matter of the
gravest urgency if the productive mechanism is to proceed with
its work in an efficient manner, so as to avoid idleness, waste,
and hardship. The management of the various industrial plants and
processes in due correlation with all the rest, and the
supervision of the interstitial adjustments of the system, are
commonly conceived to be a work of greater consequence to the
community's well-being than any of the detail work involved in
carrying on a given process of production. This work of
interstitial adjustment, and in great part also the more
immediate supervision of the various industrial processes, have
become urgent only since the advent of the machine industry and
in proportion as the machine industry has advanced in compass and
consistency.
It is by business transactions that the balance of working
relations between the several industrial units is maintained or
restored, adjusted and readjusted, and it is on the same basis
and by the same method that the affairs of each industrial unit
are regulated. The relations in which any independent industrial
concern stands to its employees, as well as to other concerns,
are always reducible to pecuniary terms. It is at this point that
the business man comes into the industrial process as a decisive
factor. The organization of the several industries as well as the
interstitial adjustments and discrepancies of the industrial
process at large are of the nature of pecuniary transactions and
obligations. It therefore rests with the business men to make or
mar the running adjustments of industry. The larger and more
close-knit and more delicately balanced the industrial system,
and the larger the constituent units, the larger and more
far-reaching will be the effect of each business move in the
field.
NOTES:
1. Cf. Cooke Taylor, Modern Factory System, pp. 74-77.
2. Even in work that lies so near the fortuities of animate
nature as dairying, stock-breeding, and the improvement of crop
plants, a determinate, reasoned routine replaces the rule of
thumb. By mechanical control of his materials the dairyman, e.g.,
selectively determines the rate and kind of the biological
processes that change his raw material into finished product. The
stock-breeder's aim is to reduce the details of the laws of
heredity, as they apply within his field, to such definite terms
as will afford him a technologically accurate routine of
breeding, and then to apply this technological breeding process
to the production of such varieties of stock as will, with the
nearest approach to mechanical exactness and expedition, turn the
raw materials of field and meadow into certain specified kinds
and grades of finished product. The like is true of the
plant-breeders. Agricultural experiment stations and bureaus, in
all civilized countries, are laboratories working toward an
effective technological control of biological factors, with a
view to eliminating fortuitous, disserviceable, and useless
elements from the processes of agricultural production, and so
reducing these processes to a calculable, expeditious, and
wasteless routine.
3. Cf. Sombart, Moderne Kapitalismus, vol. II, ch. III.
4. Twelfth Census (U.S.): "Manufactures," pt. I, p. xxxvi.
5.. E.g., lumber, coal, paper, wool and cotton, grain, leather,
cattle for the packing houses. All these and many others are to
an increasing extent spoken for, delivered, and disposed of under
well-defined staple grades as to quality and dimensions, weight
and efficiency.
6. Well shown in the case of wheat and flour; but the like is
true as regards the stocks of other commodities carried by
producers, jobbers, retailers, and consumers.
7. Well illustrated by the interdependence of the various
branches of iron and steel production.
8. As seen, e.g., in the dependence of oil production or oil
refining on the pipe lines and their management, or in the
dependence of the prairie farmers on the railway lines, etc.
9. It may be noted in this connection, on the one hand, that a
population which is in no degree habituated to the modern
industrial process is unable to adapt its mode of life to the
requirements of this method of supplying human wants, and so can
derive but little benefit, and possibly great discomfort, from a
forcible intrusion of the machine industry; as, for instance,
many of the outlying barbarian peoples with whom the Western
industrial culture is now enforcing a close contact. On the other
hand, it is also true that even the most adequately trained
modern community, among whom the machine industry is best at
home, does not respond with fruitless alacrity to the demands and
opportunities which this system holds out. The adaptation of
habits of life and of ideals and aspirations to the exigencies of
the machine process is not nearly complete, nor does the
untrained man instinctively fall into line with it. Even the
best-trained, severely disciplined man of the industrial towns
has his seasons of recalcitrancy.
10. The dependence of one process upon the working of the others
is sometimes very strict, as, for instance, in the various
industries occupied with iron, including the extraction and
handling of the ore and other raw materials. In other cases the
correlation is less strict, or even very slight, as, e.g., that
between the newspaper industry and lumbering, through the
wood-pulp industry, the chief component of the modern newspaper
being wood-pulp.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter Three
Business Enterprise
The motive of business is pecuniary gain, the method is
essentially purchase and sale. The aim and usual outcome is an
accumulation of wealth.(1*) Men whose aim is not increase of
possessions do not go into business, particularly not on an
independent footing.
How these motives and methods of business work out in the
traffic of commercial enterprise proper - in mercantile and
banking business does not concern the present inquiry, except so
far as these branches of business affect the course of industrial
business in the stricter sense of the term. Nor is it necessary
were to describe the details of business routine, whether in the
mercantile pursuits or in the conduct of an industrial concern.
The point of the inquiry is that characteristically modern
business that is coextensive with the machine process described
above and is occupied with the large mechanical industry. The aim
is a theory of such business enterprise in outline sufficiently
full to show in what manner business methods and business
principles, in conjunction with the mechanical industry,
influence the modern cultural situation. To save space and
tedium, therefore, features of business traffic that are not of a
broad character and not peculiar to this modern situation are
left on one side, as being already sufficiently familiar for the
purpose in hand.
In early modern times, before the regime of the machine
industry set in, business enterprise on any appreciable scale
commonly took the form of commercial business - some form of
merchandising or banking. Shipping was the only considerable line
of business which involved an investment in or management of
extensive mechanical appliances and processes, comparable with
the facts of the modern mechanical industry.(2*) And shipping was
commonly combined with merchandising. But even the shipping trade
of earlier times had much of a fortuitous character, in this
respect resembling agriculture or any other industry in which
wind and, weather greatly affect the outcome. The fortunes of men
in shipping were on a more precarious footing than to-day, and
the successful outcome of their ventures was less a matter of
shrewd foresight and daily pecuniary strategy than are the
affairs of the modern large business concerns in transportation
or the foreign trade. Under these circumstances the work of the
business man was rather to take advantage of the conjunctures
offered by the course of the seasons and the fluctuations of
demand and supply than to adapt the course of affairs to his own
ends. The large business man was more of a speculative buyer and
seller and less of a financiering strategist than he has since
become.
Since the advent of the machine age the situation has
changed. The methods of business have, of course, not changed
fundamentally, whatever may be true of the methods of industry;
for they are, as they had been, conditioned by the facts of
ownership. But instead of investing in the goods as they pass
between producer and consumer, as the merchant does, the business
man now invests in the processes of industry; and instead of
staking his values on the dimly foreseen conjunctures of the
seasons and the act of God, he turns to the conjunctures arising
from the interplay of the industrial processes, which are in
great measure under the control of business men.
So long as the machine processes were but slightly developed,
scattered, relatively isolated, and independent of one another
industrially, and so long as they were carried on on a small
scale for a relatively narrow market, so long the management of
them was conditioned by circumstances in many respects similar to
those which conditioned the English domestic industry of the
eighteenth century. It was under the conditions of this inchoate
phase of the machine age that the earlier generation of
economists worked out their theory of the business man's part in
industry. It was then still true, in great measure, that the
undertaker was the owner of the industrial equipment, and that he
kept an immediate oversight of the mechanical processes as well
as of the pecuniary transactions in which his enterprise was
engaged; and it was also true, with relatively infrequent
exceptions, that an unsophisticated productive efficiency was the
prime element of business success.(3*) A further feature of that
precapitalistic business situation is that business, whether
handicraft or trade, was customarily managed with a view to
earning a livelihood rather than with a view to profits on
investment.(4*)
In proportion as the machine industry gained ground, and as
the modern concatenation of industrial processes and of markets
developed, the conjunctures of business grew more varied and of
larger scope at the same time that they became more amenable to
shrewd manipulation. The pecuniary side of the enterprise came to
require more unremitting attention, as the chances for gain or
loss through business relatIons simply, aside from mere
industrial efficiency, grew greater in number and magnitude. The
same circumstances also provoked a spirit of business enterprise,
and brought on a systematic investment for gain. With a fuller
development of the modern closeknit and comprehensive industrIal
system, the point of chief attention for the business man has
shifted from the old-fashioned surveillance and regulation of a
given industrial process, with which his livelihood was once
bound up, to an alert redistribution of investments from less to
more gainful ventures,(5*) and to a strategic control of the
conjunctures of business through shrewd investments and
coalitions with other business men.
As shown above, the modern industrial system is a
concatenation of processes which has much of the character of a
single, comprehensive, balanced mechanical process. A disturbance
of the balance at any point means a differential advantage (or
disadvantage) to one or more of the owners of the sub-processes
between which the disturbance falls; and it may also frequently
mean gain or loss to many remoter members in the concatenation of
processes, for the balance throughout the sequence is a delicate
one, and the transmission of a disturbance often goes far. It may
even take on a cumulative character, and may thereby seriously
cripple or accelerate branches of industry that are out of direct
touch with those members of the concatenation upon which the
initial disturbance falls. Such is the case, for instance, in an
industrial crisis, when an apparently slIght initial disturbance
may become the occasion of a widespread derangement. And such, on
the other hand, is also the case when some favorable condition
abruptly supervenes in a given industry, as, e.g., when a sudden
demand for war stores starts a wave of prosperity by force of a
large and lucrative demand for the products of certain
industries, and these in turn draw on their neighbors in the
sequence, and so transmit a wave of business activity.
The keeping of the industrial balance, therefore, and
adjusting the several industrial processes to one another's work
and needs, is a matter of grave and far-reaching consequence in
any modern community, as has already been shown. Now, the means
by which this balance is kept is business transactions, and the
men in whose keeping it lies are the business men. The channel by
which disturbances are transmitted from member to member of the
comprehensive industrial system is the business relations between
the several members of the system; and, under the modern
conditions of ownership, disturbances, favorable or unfavorable,
in the field of industry are transmitted by nothing but these
business relations. Hard times or prosperity spread through the
system by means of business relations, and are in their primary
expression phenomena of the business situation simply. It is only
secondarily that the disturbances in question show themselves as
alterations in the character or magnitude of the mechanical
processes involved. Industry is carried on for the sake of
business, and not conversely; and the progress and activity of
industry are conditioned by the outlook of the market, which
means the presumptive chance of business profits.
All this is a matter of course which it may seem simply
tedious to recite.(6*) But its consequences for the theory of
business make it necessary to keep the nature of this connection
between business and industry in mind. The adjustments of
industry take place through the mediation of pecuniary
transactions, and these transactions take place at the hands of
the business men and are carried on by them for business ends,
not for industrial ends in the narrower meaning of the phrase.
The economic welfare of the community at large is best served
by a facile and uninterrupted interplay of the various processes
which make up the industrial system at large; but the pecuniary
interests of the business men in whose hands lies the discretion
in the matter are not necessarily best served by an unbroken
maintenance of the industrial balance. Especially is this true as
regards those greater business men whose interests are very
extensive. The pecuniary operations of these latter are of large
scope, and their fortunes commonly are not permanently bound up
with the smooth working of a given Sub-process in the industrial
system. Their fortunes are rather related to the larger
conjunctures of the industrial system as a whole, the
interstitial adjustments, Or to conjunctures affecting large
ramifications of the system. Nor is it at all uniformly to their
interest to enhance the smooth working of the industrial system
at large in so far as they are related to it. Gain may come to
them from a given disturbance of the system whether the
disturbance makes for heightened facility or for widespread
hardship, very much as a speculator in grain futures may be
either a bull or a bear. To the business man who aims at a
differential gain arising out of interstitial adjustments or
disturbances of the industrial system, it is not a material
question whether his operations have an immediate furthering or
hindering effect upon the system at large. The end is pecuniary
gain, the means is disturbance of the industrial system, - except
so far as the gain is sought by the old-fashioned method of
permanent investment in some one industrial or commercial plant,
a case which is for the present left on one side as not bearing
on the point immediately in hand.(7*) The point immediately in
question is the part which the business man plays in what are
here called the interstitial adjustments of the industrial
system; and so far as touches his transactions in this field it
is, by and large, a matter of indifference to him whether his
traffic affects the system advantageously or disastrously. His
gains (or losses) are related to the magnitude of the
disturbances that take place, rather than to their. bearing upon
the welfare of the community.
The outcome of this management of industrial affairs through
pecuniary transactions, therefore, has been to dissociate the
interests of those men who exercise the discretion from the
interests of the community. This is true in a peculiar degree and
increasingly since the fuller development of the machine industry
has brought about a closeknit and wide-reaching articulation of
industrial processes, and has at the same time given rise to a
class of pecuniary experts whose business is the strategic
management of the interstitial relations of the system. Broadly,
this class of business men, in so far as they have no ulterior
strategic ends to serve, have an interest in making the
disturbances of the system large and frequent, since it is in the
conjunctures of change that their gain emerges. Qualifications of
this proposition may be needed, and it will be necessary to
return to this point presently.
It is, as a business proposition, a matter of indifference to
the man of large affairs whether the disturbances which his
transactions set up in the industrial system help or hinder the
system at large, except in so far as he has ulterior strategic
ends to serve. But most of the modern captains of industry have
such ulterior ends, and of the greater ones among them this is
peculiarly true. Indeed, it is this work of far-reaching business
strategy that gives them full title to the designation, "Captains
of Industry." This large business strategy is the most admirable
trait of the great business men who with force and insight swing
the fortunes of civilized mankind. And due qualification is
accordingly to be entered in the broad statement made above. The
captain's strategy is commonly directed to gaining control of
some large portion of the industrial system. When such control
has been achieved, it may be to his interest to make and maintain
business conditions which shall facilitate the smooth and
efficient working of what has come under his control, in case he
continues to hold a large interest in it as an investor; for,
other things equal, the gains from what has come under his hands
permanently in the way of industrial plant are greater the higher
and more uninterrupted its industrial efficiency.
An appreciable portion of the larger transactions in railway
and "industrial" properties, e.g., are carried out with a view to
the permanent ownership of the properties by the business men
into whose hands they pass. But also in a large proportion of
these transactions the business men's endeavors are directed to a
temporary control of the properties in order to close out at an
advance or to gain some indirect advantage; that is to say, the
transactions have a strategic purpose. The business man aims to
gain control of a given block of industrial equipment - as, e.g.,
given railway lines or iron mills that are strategically
important - as a basis for further transactions out of which gain
is expected. In such a case his efforts are directed, not to
maintaining the permanent efficiency of the industrial equipment,
but to influencing the tone of the market for the time being, the
apprehensions of other large operators, or the transient faith of
investors.(8*) His interest in the particular block of industrial
equipment is, then, altogether transient, and while it lasts it
is of a factitious character.
The exigencies of this business of interstitial disturbance
decide that in the common run of cases the proximate aim of the
business man is to upset or block the industrial process at some
one or more points. His strategy is commonly directed against
other business interests and his ends are commonly accomplished
by the help of some form of pecuniary coercion. This is not
uniformly true, but it seems to be true in appreciably more than
half of the transactions in question. In general, transactions
which aim to bring a coalition of industrial plants or processes
under the control of a given business man are directed to making
it difficult for the plants or processes in question to be
carried on in severalty by their previous owners or managers.(9*)
It is commonly a struggle between rival business men, and more
often than not the outcome of the struggle depends on which side
can inflict or endure the greater pecuniary damage. And pecuniary
damage in such a case not uncommonly involves a setback to the
industrial plants concerned and a derangement, more or less
extensive, of the industrial system at large.
The work of the greater modern business men, in so far as
they have to do with the ordering of the scheme of industrial
life, is of this strategic character. The dispositions which they
make are business transactions, "deals," as they are called in
the business jargon borrowed from gaming slang. These do not
always involve coercion of the opposing interests; it is not
always necessary to "put a man in a hole" before he is willing to
"come in on" a "deal." It may often be that the several parties
whose business interests touch one another will each see his
interest in reaching an amicable and speedy arrangement; but the
interval that elapses between the time when a given "deal" is
seen to be advantageous to one of the parties concerned and the
time when the terms are finally arranged is commonly occupied
with business manoeuvres on both or all sides, intended to "bring
the others to terms." In so playing for position and endeavoring
to secure the largest advantage possible, the manager of such a
campaign of reorganization not infrequently aims to "freeze out"
a rival or to put a rival's industrial enterprise under suspicion
of insolvency and "unsound methods," at the same time that he
"puts up a bluff" and manages his own concern with a view to a
transient effect on the opinions of the business community. Where
these endeavors occur, directed to a transient derangement of a
rival's business or to a transient, perhaps specious, exhibition
of industrial capacity and earning power on the part of one's own
concern, they are commonly detrimental to the industrial system
at large; they act temporarily to lower the aggregate
serviceability of the comprehensive industrial process within
which their effects run, and to make the livelihood and the peace
of mind of those involved in these industries more precarious
than they would be in the absence of such disturbances. If one is
to believe any appreciable proportion of what passes current as
information on this head, in print and by word of mouth, business
men whose work is not simply routine constantly give some
attention to manoeuvring of this kind and to the discovery of new
opportunities for putting their competitors at a disadvantage.
This seems to apply in a peculiar degree, if not chiefly, to
those classes of business men whose operations have to do with
railways and the class of securities called "industrials." Taking
the industrial process as a whole, it is safe to say that at no
time is it free from derangements of this character in any of the
main branches of modern industry. This chronic state of
perturbation is incident to the management of industry by
business methods and is unavoidable under existing conditions. So
soon as the machine industry had developed to large proportions,
it became unavoidable, in the nature of the case, that the
business men in whose hands lies the conduct of affairs should
play at cross-purposes and endeavor to derange industry. But
chronic perturbation is so much a matter of course and prevails
with so rare interruptions, that, being the normal state of
affairs, it does not attract particular notice.
In current discussion of business, indeed ever since the
relation of business men to the industrial system has seriously
engaged the attention of economists, the point to which attention
has chiefly been directed is the business man's work as an
organizer of comprehensive industrial processes. During the later
decades of the nineteenth century, particularly, has much
interest centred, as there has been much provocation for its
doing, on the formation of large industrial consolidations; and
the evident good effects of this work in the way of heightened
serviceability and economies of production are pointed to as the
chief and characteristic end of this work of reorganization. So
obvious are these good results and so well and widely has the
matter been expounded, theoretically, that it is not only
permissible, but it is a point of conscience, to shorten this
tale by passing over these good effects as a matter of common
notoriety. But there are other features of the case, less
obtrusive and less attractive to the theoreticians, which need
more detailed attention than they have commonly received.
The circumstances which condition the work of consolidation
in industry and which decide whether a given move in the
direction of a closer and wider organization of industrial
processes will be practicable and will result in economies of
production, -- these circumstances are of a mechanical nature.
They are facts of the comprehensive machine process. The
conditions favorable to industrial consolidation on these grounds
are not created by the business men. They are matters of "the
state of industrial arts," and are the outcome of the work of
those men who are engaged in the industrial employments rather
than of those who are occupied with business affairs. The
inventors, engineers, experts, or whatever name be applied to the
comprehensive class that does the intellectual work involved in
the modern machine industry, must prepare the way for the man of
pecuniary affairs by making possible and pitting in evidence the
economies and other advantages that will follow from a
prospective consolidation.
But it is not enough that the business man should see a
chance to effect economies of production and to heighten the
efficiency of. industry by a new combination. Conditions
favorable to consolidation on these grounds must be visible to
him before he can make the decisive business arrangements; but
these conditions, taken by themselves, do not move him. The
motives of the business man are pecuniary motives, inducements in
the way of pecuniary gain to him or to the business enterprise
with which he is identified. The end of his endeavors is, not
simply to effect an industrially advantageous consolidation, but
to effect it under such circumstances of ownership as will give
him control of large business forces or bring him the largest
possible gain. The ulterior end sought is an increase of
ownership, not industrial serviceability. His aim is to contrive
a consolidation in which he will be at an advantage, and to
effect it on the terms most favorable to his own interest.
But it is not commonly evident at the outset what are the
most favorable terms that he can get in his dealings with other
business men whose interests are touched by the proposed
consolidation, or who are ambitious to effect some similar
consolidation of the same or of competing industrial elements for
their own profit. It rarely happens that the interests of the
business men whom the prospective consolidation touches all
converge to a coalition on the same basis and under the same
management. The consequence is negotiation and delay. It commonly
also happens that some of the business men affected see their
advantage in staving off the coalition until a time more
propitious to their own interest, or until those who have the
work of consolidation in hand can be brought to compound with
them for the withdrawal of whatever obstruction they are able to
offer.(10*) Such a coalition involves a loss of independent
standing, or even a loss of occupation, to many of the business
men interested in the deal. If a prospective industrial
consolidation is of such scope as to require the concurrence or
consent of many business interests, among which no one is very
decidedly preponderant in pecuniary strength or in strategic
position, a long time will be consumed in the negotiations and
strategy necessary to define the terms on which the several
business interests will consent to come in and the degree of
solidarity and central control to which they will submit.
It is notorious, beyond the need of specific citation, that
the great business coalitions and industrial combinations which
have characterized the situation of the last few years have
commonly been the outcome of a long-drawn struggle, in which the
industrial ends, as contrasted with business ends, have not been
seriously considered, and in which great shrewdness and tenacity
have commonly been shown in the staving off of a settlement for
years in the hope of more advantageous terms. The like is true as
regards further coalitions, further consolidations of industrial
processes which have not been effectcd, but which are known to be
feasible and desirable so far as regards the mechanical
circumstances of the case. The difficulties in the way are
difficulties of ownership, of business interest, not of
mechanical feasibility.
These negotiations and much of the strategy that leads up to
a business consolidation are of the nature of derangements of
industry, after the manner spoken of above. So that business
interests and manoeuvres commonly delay consolidations,
combinations, correlations of the several plants and processes,
for some appreciable time after such measures have become
patently advisable on industrial grounds. In the meantime the
negotiators are working at cross-purposes and endeavoring to put
their rivals in as disadvantageous a light as may be, with the
result that there is chronic derangement, duplication, and
misdirected growth of the industrial equipment while the strategy
is going forward, and expensive maladjustment to he overcome when
the negotiations are brought to a close.(11*)
Serviceability, industrial advisability, is not the decisive
point. The decisive point is business expediency and business
pressure. In the normal course of business touching this matter
of industrial consolidation, therefore, the captain of industry
works against, as well as for, a new and more efficient
organization. He inhibits as well as furthers the higher
organization of industry.(12*) Broadly, it may be said that
industrial consolidations and the working arrangements made for
the more economical utilization of resources and mechanical
contrivances are allowed to go into effect only after they are
long overdue.
In current economic theory the business man is spoken of
under the name of "entrepreneur" or "undertaker," and his
function is held to be the coordinating of industrial processes
with a view to economics of production and heightened
serviceability. The soundness of this view need not be
questioned. It has a great sentimental value and is useful in
many ways. There is also a modicum of truth in it as an account
of facts. In common with other men, the business man is moved by
ideals of serviceability and an aspiration to make the way of
life easier for his fellows. Like other men, he has something of
the instinct of workmanship. No doubt such aspirations move the
great business man less urgently than many others, who are, on
that account, less successful in business affairs. Motives of
this kind detract from business efficiency, and an undue yielding
to them on the part of business men is to be deprecated as an
infirmity. Still, throughout men's dealing with one another and
with the interests of the community there runs a sense of equity,
fair dealing, and workmanlike integrity; and in an uncertain
degree this bent discountenances gain that is got at an undue
cost to others, or without rendering some colorable equivalent.
Business men are also, in a measure, guided by the ambition to
effect a creditable improvement in the industrial processes which
their business traffic touches. These sentimental factors in
business exercise something of a constraint, varying greatly from
one person to another, but not measurable in its aggregate
results. The careers of most of the illustrious business men show
the presence of some salutary constraint of this kind. Not
infrequently an excessive sensitiveness of this kind leads to a
withdrawal from business, or from certain forms of business which
may appeal to a vivid fancy as peculiarly dishonest or peculiarly
detrimental to the community.(13*) Such grounds of action, and
perhaps others equally genial and equally unbusinesslike, would
probably be discovered by a detailed scrutiny of any large
business deal. Probably in many cases the business strategist,
infected with this human infirmity, reaches an agreement with his
rivals and his neighbors in the industrial system without
exacting the last concession that a ruthless business strategy
might entitle him to. The result is, probably, a speedier
conclusion and a smoother working of the large coalitions than
would follow from the unmitigated sway of business
principles.(14*)
But the sentiment which in this way acts in constraint of
business traffic proceeds on such grounds of equity and fair
dealing as are afforded by current business ethics; it acts
within the range of business principles, not in contravention of
them; it acts as a conventional restraint upon pecuniary
advantage, not in abrogation of it. This code of business ethics
consists, after all, of mitigations of the maxim, Caveat emptor.
It touches primarily the dealings of man with man, and only less
directly and less searchingly inculcates temperance and
circumspection as regards the ulterior interests of the community
at large. Where this moral need of a balance between the services
rendered the community and the gain derived from a given business
transaction asserts itself at all, the balance is commonly sought
to be maintained in some sort of pecuniary terms; but pecuniary
terms afford only a very inadequate measure of serviceability to
the community.
Great and many are the items of service to be set down to the
business man's account in connection with the organization of the
industrial system, but when all is said, it is still to be kept
in mind that his work in the correlation of industrial processes
is chiefly of a permissive kind. His furtherance of industry is
at the second remove, and is chiefly of a negative character. In
his capacity as business man he does not go creatively into the
work of perfecting mechanical processes and turning the means at
hand to new or larger uses. That is the work of the men who have
in hand the devising and oversight of mechanical processes. The
men in industry must first create the mechanical possibility of
such new and more efficient methods and correlations, before the
business man sees the chance, makes the necessary business
arrangements, and gives general directions that the contemplated
industrial advance shall go into effect. The period between the
time of earliest practicability and the effectual completion of a
given consolidation in industry marks the interval by which the
business man retards the advance of industry. Against this are to
be offset the cases, comparatively slight and infrequent, where
the business men in control push the advance of industry into new
fields and prompt the men concerned with the mechanics of the
case to experiment and exploration in new fields of mechanical
process.
When the recital is made, therefore, of how the large
consolidations take place at the initiative of the business men
who are in control, it should be added that the fact of their
being in control precludes industrial correlations from taking
place except by their advice and consent. The industrial system
is organized on business principles and for pecuniary ends. The
business man is at the centre; he holds the discretion and he
exercises it freely, and his choice falls out now On one side,
now on the other. The retardation as well as the advance is to be
set down to his account.
As regards the economies in cost of production effected by
these consolidations, there is a further characteristic feature
to be noted, a feature of some significance for any theory of
modern business. In great measure the saving effected is a saving
of the costs of business management and of the competitive costs
of marketing products and services, rather than a saving in the
prime costs of production. The heightened facility and efficiency
of the new and larger business combinations primarily affect the
expenses of office work and sales, and it is in great part only
indirectly that this curtailment and consolidation of business
management has an effect upon the methods and aims of industry
proper. It touches the pecuniary processes immediately, and the
mechanical processes indirectly and in an uncertain degree. It is
of the nature of a partial neutralization of the wastes due to
the presence of pecuniary motives and business management, - for
the business management involves waste wherever a greater number
of men or transactions are involved than are necessary to the
effective direction of the mechanical processes employed. The
amount of "business" that has to be transacted per unit of
product is much greater where the various related industrial
processes are managed in severalty than where several of them are
brought under one business management. A pecuniary discretion has
to be exercised at every point of contact or transition, where
the process or its product touches or passes the boundary between
different spheres of ownership. Business transactions have to do
with ownership and changes of ownership. The greater the
parcelment in point of ownership, the greater the amount of
business work that has to be done in connection with a given
output of goods or services, and the slower, less facile, and
less accurate on the whole, is the work. This applies both to the
work of bargain and contract, wherein pecuniary initiative and
discretion are chiefly exercised, and to the routine work of
accounting, and of gathering and applying information and
misinformation.
The standardization of industrial processes, products,
services, and consumers, spoken of in an earlier chapter, very
materially facilitates the business man's work in reorganizing
business enterprises on a larger scale; particularly does this
standardization serve his ends by permitting a uniform routine in
accounting, invoices, contracts, etc., and so admitting a large
central accounting system, with homogeneous ramifications, such
as will give a competent conspectus of the pecuniary situation of
the enterprise at any given time.
The great, at the present stage of development perhaps the
greatest, opportunity for saving by consolidation, in the common
run of cases, is afforded by the ubiquitous and in a sense
excessive presence of business enterprise in the economic system.
It is in doing away with unnecessary business transactions and
industrially futile manoeuvring on the part of independent firms
that the promoter of combinations finds his most telling
opportunity. So that it is scarcely an over-statement to say that
probably the largest, assuredly the securest and most
unquestionable, service rendered by the great modern captains of
industry is this curtailment of the business to be done, this
sweeping retirement of business men as a class from the service
and the definitive cancelment of opportunities for private
enterprise.
So long as related industrial units are under different
business managements, they are, by the nature of the case, at
cross-purposes, and business consolidation remedies this untoward
feature of the industrial system by eliminating the peCuniary
element from the interstices of the system as far as may be. The
interstitial adjustments of the industrial system at large are in
this way withdrawn from the discretion of rival business men, and
the work of pecuniary management previously involved is in large
part dispensed with, with the result that there is a saving of
work and an avoidance of that systematic mutual hindrance that
characterizes the competitive management of industry. To the
community at large the work of pecuniary management, it appears,
is less serviceable the more there is of it. The heroic role of
the captain of industry is that of a deliverer from an excess of
business management. It is a casting out of business men by the
chief of business men.(15*)
The theory of business enterprise sketched above applies to
such business as is occupied with the interstitial adjustments of
the system of industries. This work of keeping and of disturbing
the interstitial adjustments does not look immediately to the
output of goods as its source of gain, but to the alterations of
values involved in disturbances of the balance, and to the
achievement of a more favorable business situation for some of
the enterprises engaged. This work lies in the middle, between
commercial enterprise proper, on the one hand, and industrial
enterprise in the stricter sense, on the other hand. It is
directed to the acquisition of gain through taking advantage of
those conjunctures of business that arise out of the
concatenation of processes in the industrial system.
In a similar manner commercial business may be said to be
occupied with conjunctures that arise out of the circumstances of
the industrial system at large, but not originating in the
mechanical exigencies of the industrial processes. The
conjunctures of commercial business proper are in the main
fortuitous, in so far that they are commonly not initiated by the
business men engaged in these commercial pursuits. Commercial
business, simply as such, does not aim to guide the course of
industry.
On the other hand, the large business enterprise spoken of
above initiates changes in industrial organization and seeks its
gain in large part through such alterations of value levels as
take place on its own initiative. These alterations of the value
levels, of course, have their effect upon the output of goods and
upon the material welfare of the community; but the effect which
they have in this way is only incidental to the quest of profits.
But apart from this remoter and larger guidance of the course
of industry, the business men also, and more persistently and
pervasively, exercise a guidance over the course of industry in
detail. The production of goods and services is carried on for
gain, and the output of goods is controlled by business men with
a view to gain. Commonly, in ordinary routine business, the gains
come from this output of goods and services. By the sale of the
output the business man in industry "realizes" his gains. To
"realize" means to convert salable goods into money values. The
sale is the last step in the process and the end of the business
man's endeavor.(16*) When he has disposed of the output, and so
has converted his holdings of consumable articles into money
values, his gains are as nearly secure and definitive as the
circumstances of modern life admit. It is in terms of price that
he keeps his accounts, and in the same terms he computes his
output of products. The vital point of production with him is the
vendibility of the output, its convertibility into money values,
not its serviceability for the needs of mankind. A modicum of
serviceability, for some purpose or other, the output must have
if it is to be salable. But it does not follow that the highest
serviceability gives the largest gains to the business man in
terms of money, nor does it follow that the output need in all
cases have other than a factitious serviceability. There is, on
the one hand, such a possibility as overstocking the market with
any given line of goods, to the detriment of the business man
concerned, but not necessarily to the immediate disadvantage of
the body of consumers. And there are, on the other hand, certain
lines of industry, such as many advertising enterprises, the
output of which may be highly effective for its purpose but of
quite equivocal use to the community. Many well-known and
prosperous enterprises which advertise and sell patent medicines
and other proprietary articles might be cited in proof.
In the older days, when handicraft was the rule of the
industrial system, the personal contact between the producer and
his customer was somewhat close and lasting. Under these
circumstances the factor of personal esteem and disesteem had a
considerable play in controlling the purveyors of goods and
services. This factor of personal contact counted in two
divergent ways: (1) producers were careful of their reputation
for workmanship, even apart from the gains which such a
reputation might bring; and (2) a degree of irritation and
ill-will would arise in many cases, leading to petty trade
quarrels and discriminations on other grounds than the gains to
be got, at the same time that the detail character of dealings
between producer and consumer admitted a degree of petty knavery
and huckstering that is no longer practicable in the current
large-scale business dealings. Of these two divergent effects
resulting from close personal relations between producer and
consumer; the former seems on the whole to have been of
preponderant consequence. Under the system of handicraft and
neighborhood industry, the adage that "Honesty is the best
policy" seems on the whole to have been accepted and to have been
true. This adage has come down from the days before the machine's
regime and before modern business enterprise. Under modern
circumstances, where industry is carried on on a large scale, the
discretionary head of an industrial enterprise is commonly
removed from all personal contact with the body of customers for
whom the industrial process under his control purveys goods or
services. The mitigating effect which personal contact may have
in dealings between man and man is therefore in great measure
eliminated. The whole takes on something of an impersonal
character. One can with an easier conscience and with less of a
sense of meanness take advantage of the necessities of people
whom one knows of only as an indiscriminate aggregate of
consumers. Particularly is this true when, as frequently happens
in the modern situation, this body of consumers belongs in the
main to another, inferior class, so that personal contact and
cognizance of them is not only not contemplated, but is in a
sense impossible. Equity, in excess of the formal modicum
specified by law, does not so readily assert its claims where the
relations between the parties are remote and impersonal as where
one is dealing with one's necessitous neighbors who live on the
same social plane. Under these circumstances the adage cited
above loses much of its axiomatic force. Business management has
a chance to proceed on a temperate and sagacious calculation of
profit and loss, untroubled by sentimental considerations of
human kindness or irritation or of honesty.
The broad principle which guides producers and merchants,
large and small, in fixing the prices at which they offer their
wares and services is what is known in the language of the
railroads as "charging what the traffic will bear."(17*) Where a
given enterprise has a strict monopoly of the supply of a given
article or of a given class of services this principle applies in
the unqualified form in which it has been understood among those
who discuss railway charges. But where the monopoly is less
strict, where there are competitors, there the competition that
has to be met is one of the factors to be taken account of in
determining what the traffic will bear; competition may even
become the most serious factor in the case if the enterprise in
question has little or none of the character of a monopoly. But
it is very doubtful if there are any successful business ventures
within the range of the modern industries from which the monopoly
element is wholly absent.(18*) They are, at any rate, few and not
of great magnitude. And the endeavor of all such enterprises that
look to a permanent continuance of their business is to establish
as much of a monopoly as may be. Such a monopoly position may be
a legally established one, or one due to location or the control
of natural resources, or it may be a monopoly of a less definite
character resting on custom and prestige (good-will). This latter
class of monopolies are not commonly classed as such; although in
character and degree the advantage which they give is very much
the same as that due to a differential advantage in location or
in the command of resources. The end sought by the systematic
advertising of the larger business concerns is such a monopoly of
custom and prestige. This form of monopoly is sometimes of great
value, and is frequently sold under the name of good-will,
trademarks, brands, etc. Instances are known where such
monopolies of custom, prestige, prejudice, have been sold at
prices running up into the millions.(19*)
The great end of consistent advertising is to establish such
differential monopolies resting on popular conviction. And the
advertiser is successful in this endeavor to establish a
profitable popular conviction, somewhat in proportion as he
correctly apprehends the manner in which a popular conviction on
any given topic is built up.(20*) The cost, as well as the
pecuniary value and the magnitude, of this organized fabrication
of popular convictions is indicated by such statements as that
the proprietors of a certain well-known household remedy, reputed
among medical authorities to be of entirely dubious value, have
for a series of years found their profits in spending several
million dollars annually in advertisements. This case is by no
means unique.
It has been said,(21*) no doubt in good faith and certainly
with some reason, that advertising as currently carried on gives
the body of consumers valuable information and guidance as to the
ways and means whereby their wants can be satisfied and their
purchasing power can be best utilized. To the extent to which
this holds true, advertising is a service to the community. But
there is a large reservation to be made on this head. Advertising
is competitive; the greater part of it aims to divert purchases,
etc., from one channel to another channel of the same general
class.(22*) And to the extent to which the efforts of advertising
in all its branches are spent on this competitive disturbance of
trade, they are, on the whole, of slight if any immediate service
to the community. Such advertising, however, is indispensable to
most branches of modern industry; but the necessity of most of
the advertising is not due to its serving the needs of the
community nor to any aggregate advantage accruing to the concerts
which advertise, but to the fact that a business concern which
falls short in advertising fails to get its share of trade. Each
concert must advertise, chiefly because the others do. The
aggregate expenditure that could advantageously be put into
advertising in the absence of competition would undoubtedly be
but an inconsiderable fraction of what is actually incurred, and
necessarily incurred under existing circumstances.(23*)
Not all advertising is wholly competitive, or at least it is
not always obviously so. In proportion as an enterprise has
secured a monopoly position, its advertising loses the air of
competitive selling and takes on the character of information
designed to increase the use of its output independently. But
such an increase implies a redistribution of consumption on the
part of the customers.(24*) So that the element of competitive
selling is after all not absent in these cases, but takes the
form of competition between different classes of wares instead of
competitive selling of different brands of the same class of
wares.
Attention is here called to this matter of advertising and
the necessity of it in modern competitive business for the light
which it throws on "cost of production" in the modern system,
where the process of production is under the control of business
men and is carried on for business ends. Competitive advertising
is an unavoidable item in the aggregate costs of industry. It
does not add to the serviceability of the output, except it be
incidentally and unintentionally. What it aims at is the sale of
the output, and it is for this purpose that it is useful. It
gives vendibility, which is useful to the seller, but has no
utility to the last buyer. Its ubiquitous presence in the costs
of any business enterprise that has to do with the production of
goods for the market enforces the statement that the "cost of
production" of commodities under the modern business system is
cost incurred with a view to vendibility, not with a view to
serviceability of the goods for human use.
There is, of course, much else that goes into the cost of
competitive selling, besides the expenses of advertising,
although advertising may be the largest and most unequivocal item
to be set down to that account. A great part of the work done by
merchants and their staff of employees, both wholesale and
retail, as well as by sales-agents not exclusively connected with
any one mercantile house, belongs under the same head. Just how
large a share of the costs of the distribution of goods fairly
belongs under the rubric of competitive selling can of course not
be made out. It is largest, on the whole, in the case of
consumable goods marketed in finished form for the consumer, but
there is more or less of it throughout. The goods turned out on a
large scale by the modern industrial processes, on the whole,
carry a larger portion of such competitive costs than the goods
still produced by the old-fashioned detail methods of handicraft
and household industry; although this distinction does not hold
hard and fast. In some extreme cases the cost of competitive
selling may amount to more than ninety per cent. of the total
cost of the goods when they reach the consumer. In other lines of
business, commonly occupied with the production of staple goods,
this constituent of cost may perhaps fall below ten per cent of
the total. Where the average, for the price of finished goods
delivered to the consumers, may lie would be a hazardous
guess.(25*)
It is evident that the gains which accrue from this business
of competitive selling and buying bear no determinable relation
to the services which the work in question may render the
community. If a comparison may be hazarded between two unknown
and indeterminate quantities, it may perhaps be said that the
gains from competitive selling bear something more of a stable
relation to the service rendered than do the gains derived from
speculative transactions or from the financiering operations of
the great captains of industry. It seems at least safe to say
that the converse will not hold true. Gains and services seem
more widely out of touch in the case of the large-scale
financiering work. Not that the work of the large business men in
reorganizing and consolidating the industrial process is of
slight consequence; but as a general proposition, the amount of
the business man's gains from any given transaction of this
latter class bear no traceable relation to any benefit which the
community may derive from the transaction.(26*)
As to the wages paid to the men engaged in the routine of
competitive selling, as salesmen, buyers, accountants, and the
like, - much the same holds true of them as of the income of the
business men who carry on the business on their own initiative.
Their employers pay the wages of these persons, not because their
work is productive of benefit to the community, but because it
brings a gain to the employers. The point to which the work is
directed is profitable sales, and the wages are in some
proportion to the efficiency of this work as counted in terms of
heightened vendibility.
The like holds true for the work and pay of the force of
workmen engaged in the industrial processes under business
management. It holds, in a measure, of all modern industry that
produces for the market, but it holds true, in an eminent degree,
of those lines of industry that are more fully under the guidance
of modern business methods. These are most closely in touch with
the market and are most consistently guided by considerations of
vendibility. They are also, on the whole, more commonly carried
on by hired labor, and the wages paid are competitively adjusted
on grounds of the vendibility of the product. The brute
serviceability of the output of these industries may be a large
factor in its vendibility, perhaps the largest factor; but the
fact remains that the end sought by the business men in control
is a profitable sale, and the wages are paid as a means to that
end, not to the end that the way of life may be smoother for. the
ultimate consumer of the goods produced.(27*)
The outcome of this recital, then, is that wherever and in so
far as business ends and methods dominate modern industry the
relation between the usefulness of the work (for other purposes
than pecuniary gain) and the remuneration of it is remote and
uncertain to such a degree that no attempt at formulating such a
relation is worth while. This is eminently and obviously true of
the work and gains of business men, in whatever lines of business
they are engaged. This follows as a necessary consequence of the
nature of business management.
Work that is, on the whole, useless or detrimental to the
community at large may be as gainful to the business man and to
the workmen whom he employs as work that contributes
substantially to the aggregate livelihood. This seems to be
peculiarly true of the bolder flights of business enterprise. In
so far as its results are not detrimental to human life at large,
such unproductive work directed to securing an income may seem to
be an idle matter in which the rest of the community has no
substantial interests. Such is not the case. In so far as the
gains of these unproductive occupations are of a substantial
character, they come out of the aggregate product of the other
occupations in which the various classes of the community engage.
The aggregate profits of the business, whatever its character,
are drawn from the aggregate output of goods and services; and
whatever goes to the maintenance of the profits of those who
contribute nothing substantial to the output is, of course,
deducted from the income of the others, whose work tells
substantially.
There are, therefore, limits to the growth of the
industrially parasitic lines of business just spoken of. A
disproportionate growth of parasitic industries, such as most
advertising and much of the other efforts that go into
competitive selling, as well as warlike expenditure and other
industries directed to turning out goods for conspicuously
wasteful consumption, would lower the effective vitality of the
community to such a degree as to jeopardize its chances of
advance or even its life. The limits which the circumstances of
life impose in this respect are of a selective character, in the
last resort. A persistent excess of parasitic and wasteful
efforts over productive industry must bring on a decline. But
owing to the very high productive efficiency of the modern
mechanical industry, the margin available for wasteful
occupations and wasteful expenditures is very great. The
requirements of the aggregate livelihood are so far short of the
possible output of goods by modern methods as to leave a very
wide margin for waste and parasitic income. So that instances of
such a decline, due to industrial exhaustion, drawn from the
history of any earlier phase of economic life, carry no
well-defined lesson as to what a modern industrial community may
allow itself in this respect.
While it is in the nature of things unavoidable that the
management of industry by modern business methods should involve
a large misdirection of effort and a very large waste of goods
and services, it is also true that the aims and ideals to which
this manner of economic life gives effect act forcibly to offset
all this incidental futility. These pecuniary aims and ideals
have a very great effect, for instance, in making men work hard
and unremittingly, so that on this ground alone the business
system probably compensates for any wastes involved in its
working. There seems, therefore, to be no tenable ground for
thinking that the working of the modern business system involves
a curtailment of the community's livelihood. It makes up for its
wastefulness by the added strain which it throws upon those
engaged in the productive work.
NOTES:
1. The ulterior ground of efforts directed to the accumulation of
wealth is discussed at some length in the Theory of the Leisure
Class, ch. II. and V, and the economic bearing of the business
man's work is treated in a paper on "Industrial and Pecuniary
Employments," in the Proceedings of the thirteenth annual meeting
of the American Economic Association. Cf. also Marshall,
Principles of Economics (3d ed.), bk. I. ch. III, bk. IV. ch.
XII, bk. V. ch. IV, bk. VII. ch. VII and VIII; Bagehot, Economic
Studies, especially pp. 53 et seq.; Walker, Wages Question, ch.
XIV; and more especially Sombart, Moderne Kapitalismus, vol. I.
ch. I, VIII, XIV, XV; Marx, Kapital, bk. I. ch. IV; Schmoller,
Grundriss, bk. II. ch. VII.
2. It is significant that joint-stock methods of organization and
management -- that is to say, impersonally capitalistic methods
-- are traceable, for their origin and early formulation, to the
shipping companies of early modern times. Cf. K. Lehmann, Die
geschichtliche Entwickelung des Aktienrechts bis zum Code de
Commerce. The like view is spoken for by Ehrenberg, Zeitglter der
Fugger; see vol. II. pp. 325 et seq.
3. Cf. Cantillon, Essai sur le Commerce, 1e partie, ch. III, VI,
IX, XIV, XV, Wealth of Nations, bk. I; Bucher, Enstehung der
Volks wirtschaft (3d ed.), ch. IV and V; Sombart, Kapitalismus,
Vol. I bk. I.
4. Sombart, vol. I. ch. IV-VIII; Ashley, Economic History and
Theory, bk. II, ch. VI, especially pp. 389-397.
5. Cf. Marshall, Principles of Economics, on the "Law of
Substitution," e.g. bk. VI. ch. I. The law of substitution
implies freedom of investment and applies fully only in so far as
the investor in question is not permanently identified with a
given industrial plant or even with a given line of industry. It
requires great facility in shifting from one to another point of
investment. It is therefore only as the business situation has
approached the modern form that the law of substitution has come
to be of considerable importance to economic theory; for a theory
of business, such as business was in mediaeval and early modern
times, this law need scarcely have been formulated.
6. See Sombart, Kapitalismus, vol. 1. chap. VIII.
7. It is chiefly the passive owner of stock and the like that
holds permanently to a given enterprise, under the fully
developed modem business conditions. The active business man of
the larger sort is not in this way bound to the glebe of the
given business concern.
8. Cf. testimony of J.B. Dill, Report of the Industrial
Commission, vol. I. pp. 1078, 1080-1085; "Digest of Evidence,"
p., 77. also testimony of various witnesses on stock speculation
and corporate management, and particularly the special report to
the Commission, on "Securities of Industrial Combinations and
Railroads," vol. XIII., especially pp. 920-922.
9. The history of the formation of any one of the great
industrial coalitions of modem times will show how great and
indispensable a factor in the large business is the invention and
organization of difficulties desired to force rival enterprises
to come to terms. E.g. the manoeuvres preliminary to the
formation of the United States Steel Corporation, particularly
the movements of the Carnegie Company, show how this works on a
large scale. Cf. E.S. Meade, Trust Finance, pp. 204-217. Report
of the Industrial Commission, vol. XIII., "Review of Evidence,"
pp. v-vii, with the testimony relating to this topic. The
pressure which brings about a new adjustment (coalition) is
commonly spoken of as "excessive competition."
10. Cf., e.g., the accounts of the formation of the United States
Steel Corporation or the Shipbuilding Company.
11. Witness the rate wars and the duplications of inefficient
track and terminal equipment among the railways, and the similar
duplications in the iron and steel industry. The system of
railway terminals in Chicago, e.g., is an illuminated
object-lesson of systematic ineptitude.
12. The splendid reach of this inhibitory work of the captain of
industry, as well as of his aggressive work of consolidation, is
well shown, for instance, in the history and present position of
the railway industry in America. It is and has for a long term of
years been obvious that a very comprehensive unification or
consolidation, in respect of the mechanical work to be done by
the railway system, is eminently desirable and feasible, -
consolidation of a scope not only equalling, but far out
reaching, the coalitions which have lately been effected or
attempted. There is no hazard in venturing the assertion that
several hundreds of men who are engaged in the mechanical work of
railroading, in one capacity and another, are conversant with
feasible plans for economizing work and improving the service by
more comprehensive and closer correlation of the work; and it is
equally obvious that nothing but the diverging interests of the
business men concerned hinders these closer and larger feasible
correlations from being put into effect. It is easily within the
mark to say that the delay which railway consolidation has
suffered up to the present, from business exigencies as distinct
from the mechanical circumstances of the case, amounts to an
average of at least twenty years. Ever since railroading began in
this country there has been going on a process of reluctant
consolidation, in which the movements of the business men in
control have tardily followed up the opportunities for economy
and efficient service which the railroad industry has offered.
And their latest and boldest achievements along this line, as
seen from the standpoint of mechanical advisability, have been
foregone conclusions since a date so far in the past as to be
forgotten, and taken at their best they fall short to-day by not
less than some fifty per cent. of their opportunities. Cf. Report
of the Industrial Commission, vol. XIX., "Transportation,"
especially pp. 304-348.
Like other competitive business, but more particularly such
business as has to do with the interstitial adjustments of the
industrial system, the business of railway consolidation is of
the nature of a game, in which the end sought by the players is
their own pecuniary gain and to which the industrial
serviceability of the outcome is incidental only. This is
recognized by popular opinion and is made much of by popular
agitators, who take the view that when once the game between the
competing business interests has been played to a finish, in the
definitive coalition of the competitors under one management,
then the game will go on as a somewhat one-sided conflict between
the resulting monopoly and the community at large.
So again, as a further illustration, it is and from the
outset has been evident that the iron-ore beds of northern
Wisconsin, Michigan, and Minnesota ought, industrially speaking,
to have been worked as one collective enterprise. There are also
none but business reasons why practically all the ore beds and
iron and steel works in the country are not worked as one
collective enterprise. It is equally evident that such
correlations of work as are permitted by the business coalitions
already effected in this field have resulted in a great economy
of production, and that the failure to carry these coalitions
farther means an annual waste running up into the millions. Both
the economies so effected and the waste so incurred are to be set
down to the account of the business manners who have gone so far
and have failed to go farther. The like is obvious as regards
many other branches of industry and groups of industries.
13. Illustrative instances will readily suggest themselves. Many
a business man turns by preference to something less dubious than
the distilling of whiskey or the sale of deleterious household
remedies. They prefer not to use deletrious adulterants, even
within the limits of the law. They will rather use wool than
shoddy at the same price. The officials of a railway commonly
prefer to avoid wrecks and manslaughter, even if there is no
pecuniary advantage in choosing the more humane course. More than
that, it will be found true that the more prosperous of the
craft, especially, take pride and pains to make the service of
their roads or the output of their mills as efficient, not simply
as the pecuniary advantage of the concern demands, but as the
best pecuniary results will admit. Instances are perhaps not
frequent, but they are also not altogether exceptional, where a
prosperous captain of industry will go out of his way to heighten
the serviceability of his industry even to a degree that is of
doubtful pecuniary expediency for himself. Such aberrations are,
of course, not large; and if they are persisted in to any very
appreciable extent the result is, of course, disastrous to the
enterprise. The enterprise in such a case falls out of the
category of business management and falls under the imputation of
philanthropy.
14. The captains of the first class necessari1y are relatively
exempt from these unbusinesslike scruples.
15. See Report of the Industrial Commission. vol. I., Testimony
of J.W. Gates, pp. 1029-1039; S. Dodd, pp. 1049-1050; N.B.
Rogers, p. 1068; vol. XIII, C.M. Schwab, pp. 451, 459, H.B.
Butler, p. 490; L.R. Hopkins, pp. 346, 347; A.S. White, pp. 254,
256.
16. Cf. Marx, Kapital, bk. I, pt. II.
17. The economic principle of "charging what the traffic will
bear" is discussed with great care and elaboration by R. T. Ely,
Monopolies and Trusts, ch. III, "The Law of Monopoly Price." Cf.,
for illustration of the practical working of this principle,
testimony of C.M. Schwab, Report of the Industrial Commission,
vol. XIII. pp. 453-455.
18. "Monopoly" is here used in that looser sense which it has
colloquially, not in the strict sense of an exclusive control of
the supply, as employed, e g., by Mr Ely in the volume cited
above. This usage is the more excusable since Mr. Ely finds that
a "monopoly" in the strict sense of the definition practically
does not occur in fact. Cf. Jenks, The Trust Problem, ch. IV.
19. E.g. the prestige value of Ivory Soap.
20. Cf. W.D. Scott, The Theory of Advertising; J. L. Mahin, The
Commercial Value of Advertising, pp. 4-6, 12-13, 15; E.
Fogg-Meade, "The Place of Advertising in Modern Business,"
Journal of Political Economy, March 1901; Sombart, vol. II. ch.
XX-XXI; G. Tarde, Psychologie Economique, vol. I. pp. 187-190.
The writing and designing of advertisements (letterpress,
display, and illustrations) has grown into a distinct calling; so
that the work of a skilled writer of advertisements compares not
unfavorably, in point of lucrativeness, with that of the avowed
writers of popular fiction.
The psychological principles of advertising may be formulated
somewhat as follows: A declaration of fact, made in the form and
with the incidents of taste and expression to which a person is
accustomed, will be accepted as authentic and will be acted upon
if occasion arises, in so far as it does not conflict with
opinions already accepted. The acceptance of an opinion seems to
be almost entirely a passive matter. The presumption remains in
favor of an opinion that has once been accepted, and an
appreciable burden of proof falls on the negative. A competent
formulation of opinion on a given point is the chief factor in
gaining adherents to that opinion, and a reiteration of the
statement is the chief factor in carrying conviction. The truth
of such a formulation is a matter of secondary consequence, but a
wide and patent departure from known fact generally weakens its
persuasive effect. The aim of the advertiser is to arrest
attention and then present his statement in such a manner that it
is easily assimilated into the habits of thought of the person
whose conviction is to be influenced. When this is effectually
done a reversal of the conviction so established is a matter of
considerable difficulty. The tenacity of a view once accepted in
this way is evidenced, for instance, by the endless number and
variety of testimonials to the merits of well-advertised but
notoriously worthless household remedies and the like.
So acute an observer as Mr Sombart is still able to hold the
opinion that "auf Schwindel ist dauerud noch nie ein Unternehmen
begrundet worden" (Kopitalismus, vol. II. p. 376). Mr Sombart has
not made acquaintance with the adventures of Elijah the Restorer,
nor is he conversant with American patent-medicine enterprise.
With Mr. Sombart's view may be contrasted that of Mr L.F. Ward,
an observer of equally large outlook and acumen:
"The law of mind as it operates in society as an aid to
competition and in the interest of the individual is essentially
immoral. It rests primarily on the principle of deception. It is
an extension to other human beings of the method applied to the
animal world by which the latter was subjected to man. This
method was that of the ambush and the snare. Its ruling principle
was cunning. Its object was to deceive, circumvent, ensnare, and
capture. Low animal cunning was succeeded by more refined kinds
of cunning. The more important of these go by the names of
business shrewdness, strategy, and diplomacy, none of which
differ from ordinary cunning in anything but the degree of
adroitness by which the victim is outwitted. In this way social
life is completely honeycombed with deception." "The Psychologic
Basis of Social Economics," Ann. of Am. Acad., vol. III. pp. 83
84 [475-476].
21. Fogg-Meade, "Place of Advertising in Modern Business," pp.
218, 224-236.
22. Advertising and other like expedients for the sale of goods
aim at changes in the "substitution values" of the goods in
question, not at an enhancement of the aggregate utilities of the
available output of goods.
23. Cf. Jenks, The Trust Problem, pp. 21-28; Report of the
Industrial Commission, vol. XIX. pp. 611-612.
24. Cf. Bohm-Bawerk, Positive Theory of Capital, bk. III, ch. V,
VII-IX, on the value of alternative and complementary goods.
25. Where competitive selling makes up a large proportion of the
aggregate final cost of the marketed product, this fact is likely
to show itself in an exceptionally large proportion of good-will
in the capitalization of the concerns engaged in the given line
of business; as, e.g., the American Chicle Company.
26. Cf. Ed. Hahn, Die Wirtschaft der Welt am Ausgang des XIX
Jahrhunderts. - "In unserem heutigen Wirtsehaftsleben ist der
Gewinn durch den Zuwachs der Produktion, mit dem fruhere
Jahrhunderte rechneten, ganz und gar zuruckgedrangt, er ist
unwesentlich geworden."
27. It might, therefore, be feasible to set up a theory to the
effect that wages are competitively proportioned to the
vendibility of the product; but there is no cogent ground for
saying that the wages in any department of industry, under a
business regime, are proportioned to the utility which the output
has to any one else than the employer who sells it. When it is
further taken into account that the vendibility of the product in
very many lines of production depends chiefly on the wastefulness
of the goods (cf. Theory of the Leisure Class, ch. V), the
divergence between the usefulness of the work and the wages paid
for it seems wide enough to throw the whole question of an
equivalence between work and pay out of theoretical
consideration. Cf., however, Clark, The Distribution of Wealth,
especially ch. VII. and XXII.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 4
Business Principles
The physical basis of modern business traffic is the machine
process, as described in Chapter II. It is essentially a modern
fact, - late and yet in its early stages of growth, especially as
regards its wider sweep in the organization of the industrial
system. The spiritual ground of business enterprise, on the other
hand, is given by the institution of ownership. "Business
principles" are corollaries under the main proposition of
ownership; they are principles of property, - pecuniary
principles. These principles are of older date than the machine
industry, although their full development belongs within the
machine era. As the machine process conditions the growth and
scope of industry, and as its discipline inculcates habits of
thought suitable to the industrial technology, so the exigencies
of ownership condition the growth and aims of business, and the
discipline of ownership and its management inculcates views and
principles (habits of thought) suitable to the work of business
traffic.
The discipline of the machine process enforces a
standardization of conduct and of knowledge in terms of
quantitative precision, and inculcates a habit of apprehending
and explaining facts in terms of material cause and effect. It
involves a valuation of facts, things, relations, and even
personal capacity, in terms of force. Its metaphysics is
materialism and its point of view is that of causal sequence.(1*)
Such a habit of mind conduces to industrial efficiency, and the
wide prevalence of such a habit is indispensable to a high degree
of industrial efficiency under modern conditions. This habit of
mind prevails most widely and with least faltering in those
communities that have achieved great things in the machine
industry, being both a cause and an effect of the machine
process.
Other norms of standardization, more or less alien to this
one, and other grounds for the valuation of facts, have prevailed
elsewhere, as well as in the earlier phases of the Western
culture. Much of this older standardization still stands over, in
varying degrees of vigor or decay, in that current scheme of
knowledge and conduct that now characterizes the Western culture.
Many of these ancient norms of thought which have come down from
the discipline of remote and relatively primitive phases of the
cultural past are still strong in the affections of men, although
most of them have lost greatly in their power of constraint. They
no longer bind men's convictions as they once did. They are
losing their axiomatic character. They are no longer self-evident
or self-legitimating to modern common sense, as they once were to
the common sense of an earlier time.
These ancient norms differ from the modern norms given by the
machine in that they rest on conventional, ultimately sentimental
grounds; they are of a putative nature. Such are, e.g., the
principles of (primitive) blood relationship, clan solidarity,
paternal descent, Levitical cleanness, divine guidance,
allegiance, nationality. In their time and under the
circumstances which favored their growth these were, all and
several, powerful factors in controlling human conduct and
shaping the course of events. In their time each of these
institutional norms served as a definitive ground of
authentication for such facts as fell under its particular scope,
and the scope of each was very wide in the day of its best vigor.
As time has brought change of circumstances, the facts of life
have gradually escaped from the constraint of these ancient
principles; so that the dominion which they now hold over the
life of civilized men is relatively slight and shifty.
It is among these transmitted institutional habits of thought
that the ownership of property belongs. It rests on the like
general basis of use and wont. The binding relation of property
to its owner is of a conventional, putative character. But while
these other conventional norms cited above are in their decline,
this younger one of the inherited institutions stands forth
without apology and shows no apprehension of being crowded into
the background of sentimental reminiscence.
In absolute terms the institution of ownership is ancient, no
doubt; but it is young compared with blood-relationship, the
state, or the immortal gods. Especially is it true that its
fuller development is relatively late. Not until a comparatively
late date in West European history has ownership come to be
emancipated from all restrictions of a non-pecuniary character
and to stand in a wholly impersonal position, without admixture
of personal responsibility or class prerogative.(2*) Freedom and
inviolability of contract has not until recently been the
unbroken rule. Indeed, it has not even yet been accepted without
qualification and extended to all items owned. There still are
impediments in the way of certain transfers and certain
contracts, and there are exemptions in favor of property held by
certain privileged persons, and especially by certain sacred
corporations. This applies particularly to the more backward
peoples; but nowhere is the "cash nexus" free from all admixture
of alien elements. Ownership is not all-pervading and
all-dominant, but it pervades and dominates the affairs of
civilized peoples more freely and widely than any other single
ground of action, and more than it has ever done before. The
range and number of relations and duties that are habitually
disposed of on a pecuniary footing are greater than in the past,
and a pecuniary settlement is final to a degree unknown in the
past. The pecuniary norm has invaded the domain of the older
institutions, such as blood-relationship, citizenship, or the
church, so that obligations belonging under the one or the other
of these may now be assessed and fulfilled in terms of a money
payment, although the notion of a pecuniary liquidation seems to
have been wholly remote from the range of ideas - habits of
thought - on which these relations and duties were originally
based.
This is not the place for research into the origin and the
primitive phases of ownership, nor even for inquiry into the
views of property current in the early days of the Western
culture. But the views current on this head at present - the
principles which guide men's thinking and roughly define the
right limits of discretion in pecuniary matters - this
common-sense apprehension of what are the proper limits, rights,
and responsibilities of ownership, is an outgrowth of the
traditions, experiences, and speculations of past generations.
Therefore some notice of the character of these traditional views
and the circumstances out of which they have arisen in the recent
past is necessary to an understanding of the part which they play
in modern life.(3*) The theory of property professed at a given
time and in a given cultural region shows what is the habitual
attitude of men, for the time being, on questions of ownership;
for any theory that gains widespread and uncritical acceptance
must carry a competent formulation of the deliverances of common
sense on the matter with which it deals. Otherwise it will not be
generally accepted. And such a commonplace view is in its turn an
outcome of protracted experience on the part of the community.
The modern theories of property run back to Locke,(4*) or to
some source which for the present purpose is equivalent to Locke;
who, on this as on other institutional questions, has been proved
by the test of time to be a competent spokesman for modern
culture in these premises. A detailed examination of how the
matter stood in the theoretical respect before Locke, and whence,
and by what process of selection and digestion, Locke derived his
views, would lead too far afield. The theory is sufficiently
familiar, for in substance it is, and for the better part of two
centuries has been, held as an article of common sense by nearly
all men who have spoken for the institution of property, with the
exception of some few and late doubters.(5*)
This modern European, common-sense theory says that ownership
is a "Natural Right." What a man has made, whatsoever "he hath
mixed his labor with," that he has thereby made his property. It
is his to do with it as he will. He has extended to the object of
his labor that discretionary control which in the nature of
things he of right exercises over the motions of his own person.
It is his in the nature of things by virtue of his having made
it. "Thus labor, in the beginning, gave a right of property." The
personal force, the functional efficiency of the workman shaping
material facts to human use, is in this doctrine accepted as the
definitive, axiomatic ground of ownership; behind this the
argument does not penetrate, except it be to trace the workman's
creative efficiency back to its ulterior source in the creative
efficiency of the Deity, the "Great Artificer." With the early
spokesmen of natural rights, whether they speak for ownership or
for other natural rights, it is customary to rest the case
finally on the creator's discretionary dispositions and
workmanlike efficiency. But the reference of natural rights back
to the choice and creative work of the Deity has, even in Locke,
an air of being in some degree perfunctory; and later in the
life-history of the natural-rights doctrine it falls into
abeyance; whereas the central tenet, that ownership is a natural
right resting on the productive work and the discretionary choice
of the owner, gradually rises superior to criticism and gathers
axiomatic certitude. The Creator presently, in the course of the
eighteenth century, drops out of the theory of ownership.
It may be worth while to indicate how this ultimate ground of
ownership, as conceived by modern common sense, differs from the
ground on which rights of the like class were habitually felt to
rest in mediaeval times. Customary authority was the proximate
ground to which rights, powers, and privileges were then
habitually referred. It was felt that if a clear case of
devolution from a superior could be made out, the right claimed
was thereby established; and any claim which could not be brought
to rest on such an act, or constructive act, of devolution was
felt to be in a precarious case. The superior from whom rights,
whether of ownership or otherwise, devolved held his powers by a
tenure of prowess fortified by usage; the inferior upon whom
given rights and powers devolved held what fell to his lot by a
tenure of service and fealty sanctioned by use and wont. The
relation was essentially a personal one, a relation of status, of
authority and subservience. Hereditary standing gave a
presumption of ownership, rather than conversely. In the last
resort the chain of devolution by virtue of which all rights and
powers of the common man pertained to him was to be traced back
through a sequence of superiors to the highest, sovereign secular
authority, through whom in turn it ran back to God. But neither
in the case of the temporal sovereign nor in that of the divine
sovereign was it felt that their competence to delegate or
devolve powers and rights rested on a workmanlike or creative
efficiency. It was not so much by virtue of His office as creator
as it was by virtue of His office as suzerain that the Deity was
felt to be the source and arbiter of human rights and duties. In
the course of cultural change, as the medieval range of ideas and
of circumstances begins to take on a more modern complexion,
God's creative relation to mundane affairs is referred to with
growing frequency and insistence in discussions of all questions
of this class; but for the purpose in hand His creative relation
to human rights does not supersede His relation of sovereignty
until the modern era is well begun. It may be said that God's
tenure of office in the medieval conception of things was a
tenure by prowess, and men, of high and low degree, held their
rights and powers of Him by a servile tenure. Ownership in this
scheme was a stewardship. It was a stewardship proximately under
the discretion of a secular lord, more remotely under the
discretion of the divine Overlord. And the question then pressing
for an answer when a point of competency or legitimacy was raised
in respect of any given human arrangement or institution was not,
What hath God wrought? but, What hath God ordained?
This medieval range of conceptions first began to break down
and give place to modern notions in Italy, in the Renaissance.
But it was in the English-speaking communities that the range of
ideas upon which rests the modern concept of natural rights first
gathered form and reached a competent expression. This holds true
with respect to the modern doctrines of natural rights as
contrasted with the corresponding ancient doctrines. The
characteristically modern traits of the doctrine of natural
rights are of English derivation. This is peculiarly true as
regards the natural right of ownership. The material, historical
basis of this English right of ownership, considered as a habit
of thought, is given by the modern economic factors of handicraft
and trade, in contrast with the medieval institutions of status
and prowess. England, as contrasted with the Continent, during
modern times rapidly substituted the occupation of the merchant
and the ubiquitous free artisan as the tone-giving factors of her
everyday life, in place of the prince, the soldier, and the
priest. With this change in the dominant interests of everyday
life came a corresponding change in the discipline given by the
habits of everyday life, which shows itself in the growth of a
new range of ideas as to the meaning of human life and a new
ground of finality for human institutions. New axioms of right
and truth supplant the old as new habits of thought supersede the
old.
This process of substitution, as a struggle between rival
concepts of finality in political theory, reached a dramatic
climax in the revolution of 1688. As a battle of axioms the
transition comes to a head in the controversy between John Locke
and Sir Robert Filmer. Filmer was the last effective spokesman of
the medieval axiom of devolution. Locke's tracing of natural
rights, the right of property among the rest, back to the
workmanlike performance of the Creator, marks the form in which,
at the point of transition, the modern view pays its respects to
the superseded axiom of devolution and takes leave of it.
The scope given to the right of ownership in later modern
times is an outgrowth of the exigencies of mercantile traffic, of
the prevalence of purchase and sale in a "money economy." The
habits of thought enforced by these exigencies and by the
ubiquitous and ever recurring resort to purchase and sale decide
that ownership must naturally, normally, be absolute ownership,
with free and unqualified discretion in the use and disposal of
the things owned. Social expediency may require particular
limitations of this full discretion, but such limitations are
felt to be exceptional derogations from the "natural" scope of
the owner's discretion.
On the other hand, the metaphysical ground of this right of
ownership, the ultimate fact by virtue of which such a
discretionary right vests in the owner, is his assumed creative
efficiency as a workman; he embodies the work of his brain and
hand in a useful object, - primarily, it is held, for his own
personal use, and, by further derivation, for the use of any
other person to whose use he sees fit to transfer it. The
workman's force, ingenuity, and dexterity was the ultimate
economic factor, - ultimate in a manner patent to the common
sense of a generation habituated to the system of handicraft, how
ever doubtful such a view may appear in the eyes of a generation
in whose apprehension the workman is no longer the prime mover
nor the sole, or even chief, efficient factor in the industrial
process. The free workman, master of his own motions and with
discretion as to what he would turn his efforts to, if to
anything, had by Locke's time become an habitual fact in the life
of the English community to such a degree that free labor, of the
character of handicraft, was accepted uncritically as the
fundamental factor in all human economy, and as the presumptive
original fact in industry and in the struggle for wealth. So
settled did this habit of thought become that no question was
entertained as to the truth of the assumption.
It became a principle of the natural order of things that
free labor is the original source of wealth and the basis of
ownership. In point of historical fact, no doubt, such was not
the pedigree of modern industry or modern ownership; but the
serene, undoubting assumption of Locke and his generation only
stands out the more strongly and unequivocally for this its
discrepancy with fact. It is all the more evidently a competent
expression of the trend which English common sense was following
at this time, since this doctrine of a "natural" right of
property based on productive labor carries all before it, in the
face of the facts. In this matter English thought, or rather
English common sense, has led; and the advanced Continental
peoples have followed the English lead as the form of economic
organization exemplified by the English-speaking communities has
come to prevail among these Continental peoples.
Such a concept belongs to the regime of handicraft and petty
trade, and it is from, or through, the era of handicraft that it
has come down to the present.(6*) It fits into the scheme of
handicraft, and it is less fully in consonance with the facts of
life in any other situation than that of handicraft. Associated
with the system of handicraft, as its correlate, was the system
of petty trade; and as the differentiation of occupations was
carried to a high degree, purchase and sale came to prevail very
generally, and the community acquired a commercial complexion and
commercial habits of thought. Under these circumstances the
natural right of ownership came to comprise an extreme freedom
and facility in the disposal of property. The whole sequence of
growth of this natural right is, of course, to be taken in
connection with the general growth of individual rights that
culminated in the eighteenth-century system of Natural Liberty.
How far the English economic development is to be accounted the
chief or fundamental factor in the general growth of natural
rights is a question that cannot be taken up here. The outcome,
so far as it immediately touches the present topic, was that by
the time of the industrial revolution a fairly consistent
standardization of economic life had been reached in terms of
workmanship and price. The writings of Adam Smith and his
contemporaries bear witness to this. And this eighteenth-century
standardization stands over as the dominant economic institution
of later times.(7*) Such, in outline, seem to be the historical
antecedents and the spiritual basis of the modern institution of
property, and therefore of business enterprise as it prevails in
the present.(8*)
This sketch of the genesis of the modern institution of
property and of modern business principles may seem dubious to
those who are inclined to give it a more substantial character
than that of a habit of thought, - that is to say, those who
still adhere to the doctrine of natural rights with something of
the eighteenth-century naivete. But whatever may be accepted as
the ulterior grounds of that cultural movement which culminated
in the system of Natural Liberty, it is plain that the industrial
and commercial experience of western Europe, and primarily of
England, from the fifteenth to the eighteenth century, had much
to do with the outcome of the movement in so far as natural
liberty touches economic matters. It is as an outcome of this
recently past phase of economic development that we have
incorporated in the law, equity, and common sense of to-day,
these peculiarly free and final property rights and obligations,
that is to say, those peculiar principles that control current
business and industry. We owe to the eighteenth century a very
full discretIon and free swing in all pecunIary matters. It has
given freedom of contract, together with security and ease of
credit engagements, whereby the competitive order of business has
been definitively installed.(9*)
The subject-matter about which this modern pecuniary
discretion turns, with all its freedom and inviolability of
contract, is money values. Accordingly there underlies all
pecuniary contracts. an assumption that the unIt of money value
does not vary. Inviolability of contracts involves this
assumption. It is accepted unquestioningly as a point of
departure in all business transactions. In the making and
enforcement of contracts it is a fundamental point of law and
usage that money does not vary.(10*) Capitalization as well as
contracts are made in its terms, and the plans of the business
men who control industry look to the money unit as the stable
ground of all their transactions. Notoriously, business men are
jealous of any attempt to change the value or lessen the
stability of the money unit, which goes to show how essential a
principle in business traffic is the putative invariability of
the money unit.(11*)
Usage fortified by law decides that when prices vary the
variation is held to occur in the value of the vendible
commodities, not in the value of the money unit, since money is
the standard of value. There is, of course, no intention here to
question the position, familiar to all economists, that
fluctuations in the course of prices may as well be due to
variation on the part of the money metals as to a variation on
the part of the articles whose prices fluctuate. In so far as the
distinction so made between variations in the one or the other
member of a value ratio has a meaning - which it is not always
clear that it has - it does not touch the argument. It is a
matter of common notoriety, which has also had the benefit of
reiterated statistical proof, that, as measured, for instance, in
terms of livelihood or of labor, the value of money has varied
incontinently throughout the course of history.
But in the routine of business throughout the nineteenth
century the assumed stability of the money unit has served as an
axiomatic principle, in spite of facts which have from time to
time shown the falsity of that assumption.(12*)
The all-dominating issue in business is the question of gain
and loss. Gain and loss is a question of accounting, and the
accounts are kept in terms of the money unit, not in terms of
livelihood, nor in terms of the serviceability of the goods, nor
in terms of the mechanical efficiency of the industrial or
commercial plant. For business purposes, and so far as the
business man habitually looks into the matter, the last term of
all transactions is their outcome in money values. The base line
of every enterprise is a line of capitalization in money values.
In current business practice, variations from this base line are
necessarily rated as variations on the part of the other factors
in the case, not as variations of the base line. The business man
judges of events from the standpoint of ownership, and ownership
runs in terms of money.(13*)
Investments are made for profit, and industrial plants and
processes are capitalized on the basis of their profit-yielding
capacity. In the accepted scheme of things among business men,
profits are included as intrinsic to the conduct of business. So
that, in place of the presumption in favor of a simple pecuniary
stability of wealth, such as prevails in the rating of
possessions outside of business traffic, there prevails within
the range of business traffic the presumption that there must in
the natural course of things be a stable and orderly increase of
the property invested. Under no economic system earlier than the
advent of the machine industry does profit on investment seem to
have been accounted a normal or unquestionably legitimate source
of gain. Under the agrarian-manorial regime of the Middle Ages it
was not felt that the wealth of the large owners must, as a
matter of course, increase by virtue of the continued employment
of what they already had in hand - whatever may be the historical
fact as regards the increase of wealth in their hands.
Particularly, it was not the sense of the men of that time that
wealth so employed must increase at any stated, "ordinary" rate
per time unit. Similarly as regards other traffic in those days,
even as regards mercantile ventures. Gain from investment was
felt to be a fortuitous matter, not reducible to a stated rate.
This is reflected, e.g., in the tenacious protests against the
taking or paying of interest and in the ingenious sophistries by
which the payment of interest was defended or explained away.
Only under more settled commercial relations during the era of
handicraft did the payment of interest gradually come to be
accepted into full legitimacy. But even then gains from other
business employments than mercantile traffic were apparently
viewed as an increase due to productive labor rather than as a
profit on investment.(14*) In industrial pursuits, as distinct
from mercantile traffic proper, profits apparently come to figure
as a regular and ordinary incident only when the industries come
to be carried on on a mercantile basis by relatively large
employers working with hired labor.
This orderly increase is, of course, taken account of in
terms of the money unit. The "ordinary" rate of profits in
business is looked upon as a matter of course by the body of
business men. It is part of their common-sense view of affairs,
and is therefore a normal phenomenon.(15*) Gain, they feel, is
normal, being the purpose of all their endeavors; whereas a loss
or a shrinkage in the values invested is felt to be an untoward
accident which does not belong in the normal course of business,
and which requires particular explanation. The normality, or
matter-of-course character, of profits in the modern view is well
shown by the position of those classical economists who are
inclined to include "ordinary profits" in the cost of production
of goods.
The precise meaning of "ordinary profits" need not detain the
argument. It may mean net average profits, or it may mean
something else. The phrase is sufficiently intelligible to the
business community to permit the business men to use it without
definition and to rest their reasoning about business affairs on
it as a secure and stable concept; and it is this commonplace
resort to the term that is the point of interest here.
At any given time and place there is an accepted ordinary
rate of profits, more or less closely defined, which, it is felt,
should accrue to any legitimate and ordinarily judicious business
venture. However shifty the definition of this rate of profits
may be, in concrete, objective terms, it is felt by the men of
affairs to be of so substantial and consistent a character that
they habitually capitalize the property engaged in any given
business venture on the basis of this ordinary rate of profits.
Due regard being had to any special advantages and drawbacks of
the individual case, any given business venture or plant is
capitalized at such a multiple of its earning-capacity as the
current ordinary rate of profits will warrant.(16*)
Proceeding on the common-sense view built up out of this
range of habits of thought with respect to normal profits and
price phenomena, the business community holds that times are
ordinary or normal so long as the accepted or reasonable rate of
profits accrues on the accustomed capitalization; whereas times
are good or brisk if the rate of gain is accelerated, and hard or
dull if profits decline. This is the meaning of the phrases,
"brisk times" and "dull times," as currently used in any business
community.
Under the exigencies of the quest of profits, as conditioned
by the larger industry and the more sweeping business
organization of the last few decades, the question of capital in
business has increasingly become a question of capitalization on
the basis of earning-capacity, rather than a question of the
magnitude of the industrial plant or the cost of production of
the appliances of industry. From being a sporadic trait, of
doubtful legitimacy, in the old days of the "natural" and "money"
economy, the rate of profits or earnings on investment has in the
nineteenth century come to take the central and dominant place in
the economic system. Capitalization, credit extensions, and even
the productiveness and legitimacy of any given employment of
labor, are referred to the rate of earnings as their final test
and substantial ground. At the same time the "ordinary rate of
profits" has become a more elusive idea. The phenomenon of a
uniform rate of profits determined by competition has fallen into
the background and lost something of its matter-of-fact character
since competition in the large industry has begun to shift from
the position of a stable and continuous equilibration to that of
an intermittent, convulsive strain in the service of the larger
business men's strategy. The interest of the business community
centres upon profits and upon the shifting fortunes of the
profit-maker, rather than upon accumulated and capitalized goods.
Therefore the ultimate conditioning force in the conduct and aims
of business is coming to be the prospective profit-yielding
capacity of any given business move, rather than the aggregate
holdings or the recorded output of product.
But this latest development in the field of industrial
business has not yet come to control the field. It is rather an
inchoate growth of the immediate present than an accomplished
fact even of the recent past, and it can be understood only by
reference to those conditions of the recent past out of which it
comes. Therefore it is necessary to turn back to a further
consideration of the old-fashioned business traffic as it used to
go on by the competitive method before the competitive order
began seriously to be dislocated and take on an intermittent
character, as well as to a consideration of that resort to credit
which has, in large part, changed the competitive system of
business from what it was at the beginning of the nineteenth
century to what it has become at its close.
NOTES:
1. See ch. IX.
2. Cf. e.g. E. Jenks, Law and Politics in the Middle Ages, ch. VI
and VII.
3. "It has been said that the science of one age is the common
sense of the next. It might with equal truth be said that the
equity of one age becomes the law of the next. If positive law is
the basis of order, ideal right is the active factor in
progress." - H.S. Foxwell, Introduction to Menger's Right to the
Whole Produce of Labor, p. XI. Cf. the entire passage.
4. See the essay, of Civil Government, ch. V.
5. Apart from the familiar historical materials for the study of
the growth of national rights, including the right of property,
there are a number of late writings that may be consulted; e.g.
Jellinek, Declaration of the Rights of Man and of the Citizen;
Ritchie, Natural Rights; Bonar, chapters relating to this topic
in Philosophy and Political Economy; Hoffding, History of Modern
Philosophy, vol. I; Albee, History of English Utilitarianism;
and, lately come to hand, Scherger, Evolution of Modern Liberty.
These and other writers treat of natural rights and the law of
nature chiefly in other bearings than that of ownership; while
the legal writers treat the subject from the legal rather than
the de facto standpoint. It is also not unusual to spend
attention chiefly on the pedigree of the doctrines rather than on
the genesis and growth of the concepts. An endeavor at a genetic
account of the modern concepts of ownership is found in Jenks,
Law and Politics in the Middle Ages, so also in Cunningham,
Western Civilization in its Economic Aspects.
6. What appears to be necessary to the development of such a
sentiment is that neither slavery nor the machine system shall be
present in sufficient force to give a pronounced bias to the
community's habits of thought, at the same time that each member
of the community, or each minor group of persons, habitually
carries on its own work at its own discretion and for its own
ends. Such a situation may or may not involve handicraft as that
term is specifically understood. A presumption of similar import,
but less pronounced and less defined, seems to prevail in an
uncertain degree among many peoples on a low stage of culture.
The tenet, accordingly, has some claim to stand as an egression
of "natural" right, even when "natural" is taken in an
evolutionary sense.
7. Taken by and large, the standardization of conduct, knowledge,
and ideals Current in the eighteenth century, and consonant with
the eighteenth-century economic situation, is in the last
analysis reducible to terms of workmanlike efficiency rather than
terms of material cause and effect. This leaning to personal,
workmanlike efficiency as an ultimate term shows itself even in
the science of that time, e.g. in the quasi-personal character
imputed to the so-called "natural laws" which then largely
occupied scientific speculation; similarly in the Romantic
literature and political philosophy.
8. As late as the close of the sixteenth century English law and
usage in the matter of loans for interest and other contracts of
a pecuniary character were in a less advanced state, admitted a
less full and free discretion, than the corresponding development
on the Continent; but from about that time the English rapidly
gains on the Continental community in the habitual acceptance and
application of these "business principles," and it has since then
held the lead in this respect. Cf. Ashley, Economic History, vol.
II. ch. VI.
9. Cf. Sombart, Kapitalismus, vol. II. ch. II.
10. On the putative stability of the money unit, cf. W.W.
Carlile, The Evolution of Modern Money, pt. II. ch. IV.
11. Economists are in the habit of speaking of money as a medium
of exchange, a "great wheel" for the circulation of goods. In the
same connection business traffic is spoken of as a means of
obtaining goods suitable for consumption, the end of all purchase
and sale being consumable goods, not money values. It may be true
in some profound philosophical sense that money values are not
the definitive term of business endeavor, and that the business
man seeks through the mediation of money to satisfy his craving
for consumable goods. Looking at the process of economic life as
a whole and taking it in its rationalized bearing as a collective
endeavor to purvey goods and services for the needs of collective
humanity, the office of the money unit - money transactions,
exchange, credit, and all the rest that make up the phenomena of
business - is perhaps justly rated as something subsidiary,
serving to facilitate the distribution of consumable goods to the
consumers, the Consumption of goods being the objective point of
all this traffic. Such is the view of this matter given by the
rationalistic, normalizing speculations of the eighteenth-century
philosophers; and such is, in substance, the view spoken for by
those economists who still consistently remain at the standpoint
of the eighteenth century. The contention need neither be
defended nor refuted here, since it does not seriously touch the
facts of modern business. Within the range of business
transactions this ulterior end does not necessarily come into
view, at least not as a motive that guides the transactions from
day to day. The matter is not so conceived in business
transactions, it does not so appear on the face of the negotiable
instruments, it is not in this manner that the money unit enters
into the ruling habits of thought of business men.
12. Still, latterly, in the traffic of some of the more
wide-awake business men, account is practically taken of the
variations of the unit of value. What may be the future effects
of habitual and incontinent variations of the unit, such as
prevail in the present, is of course impossible to foretell.
These variations seem due mainly to the extensive prevalence of
credit relations; and the full development of credit relations in
business is apparently a matter of the future rather than of the
recent past, in spite of the great improvements that have been
made in the use of credit. The modern conventional imputation of
stability to the money unit dates back to the regime of a "money
economy," such as prevailed under the circumstances of handicraft
and the earlier huckstering commerce, and it holds its place in
the developed "credit economy" largely as a survival of this more
elementary past phase of economic life.
13. The conventional acceptance of the money unit as an
invariable measure of value and standard of wealth is of very
ancient derivation. (Cf. Carlile, Evolution of Modern Money, pt.
II. ch. I; Ridgeway, Origin of Metallic Currency and Weight
Standards, ch. I, II) Its present-day consequences are also of
first-rate importance, as will be indicated in a later chapter.
14. Cf., e.g., Mun, England's Treasure, particularly ch. II;
Ashley, Economic History and Theory, bk. II. ch. VI. pp. 391-397.
This, essentially handicraft, presumption is reflected even in
the classical economists, who feel a moral necessity of
explaining profits on some basis of productivity, or even of
workmanship in some sophisticated sense. The whole discussion of
the doctrine of Wages of Superintendence will serve to illustrate
the case; the point is well shown in Mr Davidson's article on
"Earnings of Management" in Palgrave's Dictionary of Political
Economy.
15. The "ordinary" rate, of course, differs in detail from one
line of business to another, as well as from place to place.
16. This statement applies with greater aptness to the business
situation of England during the earlier three-quarters of the
nineteenth century, and to the American situation of the third
quarter of the century, than it does to the situation of the last
decade. Qualifications required by the later phases of business
development will be noted presently.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter Five
The Use of Loan Credit
Credit serves two main uses in the regular course of such
business as is occupied with the conduct of industry. - (a) that
of deferred payments in the purchase and sale of goods - book
accounts, bills, checks, and the like belong chiefly under this
head; and (b) loans or debts - notes, stock shares,
interest-bearing securities, deposits, call loans, etc., belong
chiefly here. These two categories of credit extension are by no
means clearly distinct. Forms of credit which commonly serve the
one purpose may be turned to the other use; but the two uses of
credit are, after all, broadly distinguishable. For many purposes
of economic theory such a distinction might not be serviceable,
or even practicable; it is here made merely for present use. It
is chiefly with credit of the latter class, or rather with credit
in so far as it is turned to use for the latter purpose, that
this inquiry is concerned.
Suppose due credit arrangements have already been made - in
the way of investments in stocks, interest-bearing securities and
the like - such as to place the management of the industrial
equipment in competent hands. This supposition is not a violent
one, since a condition roughly approximating to this prevails in
any quiescent period of industry when there is no appreciable
depression. Under these "normal" conditions, the capital invested
in any given industrial venture is turned over within a certain,
approximately definite, length of time. The length of time
occupied by the turnover may vary from one establishment to
another, but in any given case the length of the turnover is one
of the important factors that determine the chances of gain for
the business concern in question. Indeed, if the general
conditions of the trade and of the market are given, the two
factors which determine the status and value of a given sound
concern, as seen from the business man's standpoint, are the
magnitude of the turnover and the length of time it occupies.
The business man's object is to get the largest aggregate
gain from his business. It is manifestly for his interest, as far
as may be, to shorten the process out of which his earnings are
drawn,(1*) or, in other words, to shorten the period in which he
turns over his capital. If the turnover consumes less than the
time ordinarily allowed in the line of industry in which he is
engaged, he gains more than the current rate of profits in that
line of business, other things equal; whereas he loses if the
turnover takes more than the normal time. This fact is forcibly
expressed in the maxim, "Small profits and quick returns." There
are two chief means of shortening the interval of the turnover,
currently resorted to in industrial business. The first is the
adoption of more efficient, time-saving industrial processes.
Improvements of industrial plant and industrial processes having
this in view are gaining in importance in the later developments
of business, since a closer attention is now given to the time
element in investments, and great advances have been made in this
direction.(2*) A second expedient for accelerating the rate of
turnover is the competitive pushing of sales, through larger and
more urgent advertising and the like. It is needless to say that
this means of accelerating business also receives due attention
at the hands of modern business men.
But the magnitude of the turnover, "the volume of business,"
is of no less consequence than its rapidity. It is, of course, a
trite commonplace that the earnings of any industrial business
are a joint function of the rate of turnover and the volume of
business.(3*) The business man may reach his end of increased
earnings by either the one or the other expedient, and he
commonly has resource to both if he can. His means of increasing
the magnitude of the turnover is a resort to credit and a close
husbanding of his assets. He is under a constant incentive to
increase his liabilities and to discount his bills receivable.
Indebtedness in this way comes to serve much the same purpose, as
regards the rate of earnings, as does a time-saving improvement
in the processes of industry.(4*) The effect of the use of credit
on the part of a business man so placed is much the same as if
his capital had been turned over a greater number of times in the
year. It is accordingly to his interest to extend his credit as
far as his standing and the state of the market will admit.(5*)
But on funds obtained on credit the debtor has to pay
interest, which, being deducted from the gross earnings of the
business, leaves, as net gain due to his use of credit, only the
amount by which the increment of gross earnings exceeds the
interest charge. This sets a somewhat elastic limit to the
advantageous use of loan credit in business. In ordinary times,
however, and under capable management, the current rate of
business earnings exceeds the rate of interest by an appreciable
amount; and in times of ordinary prosperity, therefore, it is
commonly advantageous to employ credit in the way indicated.
Still more so in brisk times, when opportunities for earnings are
many and promise to increase. To turn the proposition about, so
as to show the run of business motives in the case: whenever the
capable business manager sees an appreciable difference between
the cost of a given credit extension and the gross increase of
gains to be got by its use, he will seek to extend his credit.
But under the regime of competitive business whatever is
generally advantageous becomes a necessity for all competitors.
Those who take advantage of the opportunities afforded by credit
are in a position to undersell any others who are similarly
placed in all but this respect. Speaking broadly, recourse to
credit becomes the general practice, the regular course of
competitive business management, and competition goes on on the
basis of such a use of credit as an auxiliary to the capital in
hand. So that the competitive earning capacity of business
enterprises comes currently to rest on the basis, not of the
initial capital alone, but of capital plus such borrowed funds as
this capital will support.
The competitive rate of earnings is brought to correspond
with this basis of operation; the consequence being that under
such competitive employment of credit the aggregate earnings of
an enterprise resting on a given initial capital will be but
slightly larger than it might have been if such a general
recourse to credit to swell the volume of business did not
prevail. But since such use of credit prevails generally, a
further consequence is that any concern involved in the open
business competition, which cannot or does not take recourse to
credit to swell its volume of business, will be unable to earn a
"reasonable" rate of profits. So that the general practice drives
all competitors to the use of the same expedient; but since the
advantage to be derived from this expedient is a competitive
advantage only, the universality of the practice results in but a
slight, if any, increase of the aggregate earnings of the
business community. Borrowed funds afford any given business
concern a differential advantage as against other competitors;
but it is, in the main, a differential advantage only. The
competitive use of such funds in extending business operations
may, incidentally, throw the management of some portion of the
industrial process into more competent or less competent hands.
So far as this happens, the credit operations in question and the
use of the borrowed funds may increase or diminish the output of
industry at large, and so may affect the aggregate earnings of
the business community. But, apart from such incidental shifting
of the management of industry to more competent (or less
competent) hands, this competitive use of borrowed funds has no
aggregate effect upon earnings or upon the industrial output.
The current or reasonable rate of profits is, roughly, the
rate of profits at which business men are content to employ the
actual capital which they have in hand.(6*) A general resort to
credit extension as an auxiliary to the capital in hand results,
on the whole, in a competitive lowering of the rate of profits,
computed on capital plus credit, to such a point as would not be
attractive to a business man who must confine himself to the
employment of capital without credit extension. On an average, it
may be said, the aggregate earnings of the aggregate capital with
credit extension are but slightly greater than the aggregate
earnings of the same capital without credit extension would be in
the absence of a competitive use of credit extension. But under
modern conditions business cannot profitably be done by any one
of the competitors without the customary resort to credit.
Without the customary resort to credit a "reasonable" return
could not be obtained on the investment.
To the extent to which the competitive recourse to credit is
of the character here indicated - to the extent to which it is a
competitive bidding for funds between competent managers - it may
be said that, taken in the aggregate, the funds so added to
business capital represent no material capital or "production
goods." They are business capital, only. they swell the volume of
business, as counted in terms of price, etc., but they do not
directly swell the volume of industry, since they do not add to
the aggregate material apparatus of industry, or alter the
character of the processes employed, or enhance the degree of
efficiency with which industry is managed.
The "buoyancy" which a speculative inflation of values gives
to industrial business may indirectly increase the material
output of industry by enhancing the intensity with which the
industrial process is carried on under the added stimulus; but
apart from this psychological effect the expansion of business
capital through credit extension has no aggregate industrial
effect. This secondary effect of credit inflation may be very
considerable and is always present in brisk times. It is commonly
obvious enough to be accounted the chief characteristic of a
period of "prosperity." For a theory of industry this indirect
effect of credit inflation would be its main characteristic, but
for a theory of business it occupies the place of a corollary
only.
To the view set forth above, - that borrowed funds do not
increase the aggregate industrial equipment, - the obj ection may
present itself th at all funds borrowed represent property owned
by some one (the lender or his creditors), and transferred, in
usufruct, by the loan transaction to the borrower; and that these
funds can, therefore, be converted to productive uses, like any
other funds, by drawing into the industrial process, directly or
indirectly, the material items of wealth whose fluent form these
funds are.(7*) The objection fails at two points: (a) while the
loans may be covered by property held by the lender, they are not
fully covered by property which is not already otherwise engaged;
and even if such were the case, it would (b) not follow that the
use of these funds would increase the technical (material) outfit
of industry.
As to the first point (a): Loans made by the financial houses
in the way of deposits or other advances on collateral are only
to a fractional extent covered by liquid assets;(8*) and anything
but liquid assets is evidently beside the point of the present
question. An inconsiderable fraction of these loans is
represented by liquid assets. The greater part of the advances
made by banking houses, for instance, rest on the lender's
presumptive ability to pay eventually, on demand or at maturity,
any claims that may in the course of business be presented
against the lender on account of the advances made by him. It is
a business truism that no banking house could at a moment meet
all its outstanding obligations.(9*) A necessary source of
banking profits, e.g., is a large excess of the volume of
business over reserves.
As to (b): Another great part of the basis of such loans is
made up of invested funds and collateral held by the lender.
These at the same time are much of the basis on which rests the
lender's presumptive ability to pay claims presented. But these
investments, in industry or real estate, in interest-bearing
securities and collateral of whatever description, represent
future income of the lender's debtors (as, e.g., government and
municipal securities), or property which is already either
engaged in the industrial process or tied up in forms of wealth
(as, e.g., real estate) which do not lend themselves to
industrial uses. Loans obtained on property which has no present
industrial use, which cannot in its present form or under
existing circumstances be employed in the processes of industry
(as, e.g., speculative real estate), or loans on property which
is already engaged in the industrial process (as, e.g., stocks,
industrial plant, goods on hand, real estate in use),(10*)
represent, for the purpose in hand, nothing more substantial than
a fictitious duplication of material items that cannot be drawn
into the industrial process. Therefore such loans cannot, at
least not directly, swell the aggregate industrial equipment or
enhance the aggregate productivity of industry; for the items
which here serve as collateral are already previously in use in
industry to the extent to which they can be used. Property of
these kinds - what is already in use in industry and what is not
of use for industrial purposes - may be "coined into means of
payment," and so may be made to serve as additional pecuniary
(business) capital, but such property is mechanically incapable
of serving as additional material (industrial) capital. To a very
considerable extent the funds involved in these loans, therefore,
have only a pecuniary (business) existence, not a material
(industrial) one; and, so far as that is true, they represent, in
the aggregate, only fictitious industrial equipment. Even such
inconsiderable portion of them, however, as represents metallic
reserves also adds nothing to the effective material apparatus of
industry; since money as such, whether metallic or promissory, is
of no direct industrial effect; as is evident from the well-known
fact that the absolute quantity of the precious metals in use is
a matter of no consequence to the conduct of either business or
industry, so long as the quantity neither increases nor decreases
by an appreciable amount. Nummus nummum non parit.
So that all advances made by banking houses or by other
creditors in a like case, - whether the advances are made on
mortgage, collateral or personal notes, in the form of deposits,
note issues, Or. what not; whether they are taken to represent
the items of property covered by the collateral, the cash
reserves of the banks, or the general solvency of the creditor or
debtor, - all these "advances" go to increase the "capital" of
which business men have the disposal; but for the material
purposes of industry, taken in the aggregate, they are purely
fictitious items.(11*) Cash loans (such as savings-bank deposits
(12*) and the like) belong in the same category. All these
advances afford the borrower a differential advantage in bidding
against other business men for the control and use of industrial
processes and materials, they afford him a differential advantage
in the distribution of the material means of industry; but they
constitute no aggregate addition to the material means of
industry at large. Funds of whatever character are a pecuniary
fact, not an industrial one; they serve the distribution of the
control of industry only, not its materially productive work.
Loan credit in excess of what may serve to transfer the
management of industrial materials from the owner to a more
competent user - that is to say, in so far as it is not, in
effect, of the nature of a lease of industrial plant - serves, on
the whole, not to increase the quantity of the material means of
industry nor, directly, to enhance the effectiveness of their
use; but, taken in the aggregate, it serves only to widen the
discrepancy between business capital and industrial equipment. So
long as times are brisk this discrepancy ordinarily goes on
widening through a progressive extension of credit. Funds
obtained on credit are applied to extend the business; competing
business men bid up the material items of industrial equipment by
the use of funds so obtained; the value of the material items
employed in industry advances; the aggregate of values employed
in a given undertaking increases, with or without a physical
increase of the industrial material engaged; but since an advance
of credit rests on the collateral as expressed in terms of value,
an enhanced value of the property affords a basis for a further
extension of credit, and so on.(13*)
Now, the base line of business transactions is the money
value (market or exchange value, price) of the items involved,
not their material efficiency. The value of the money unit is by
conventional usage held to be invariable, and the lenders
perforce proceed on this assumption, so long as they proceed at
all.(14*) Consequently, any increase of the aggregate money
values involved in the current industrial business enterprises
will afford a basis for an extension of loans, indistinguishable
from any other block of capitalized values, even if the increase
of capitalized values is due to credit advances previously made
on the full cash value of the property hypothecated, The
extension of loans on collateral, such as stock and similar
values involved in industrial business, has therefore in the
nature of things a cumulative character. This cumulative
extension of credit through the enhancement of prices goes on, if
otherwise undisturbed, so long as no adverse price phenomenon
obtrudes itself with sufficient force to convict this cumulative
enhancement of capitalized values of imbecility. The extension of
credit proceeds on the putative stability of the money value of
the capitalized industrial material, whose money value is
cumulatively augmented by this extension itself. But the money
value of the collateral is at the same time the capitalized value
of the property, computed on the basis of its presumptive
earning-capacity. These two methods of rating the value of
collateral must approximately coincide, if the capitalization is
to afford a stable basis for credit; and when an obvious
discrepancy arises between the outcome given by the two ratings,
then a rerating will be had in which the rating on the basis of
earning-capacity must be accepted as definitive, since earnings
are the ground fact about which all business transactions turn
and to which all business enterprise converges. A manifest
discrepancy presently arises in this way between the aggregate
nominal capital (capital plus loans) engaged in business, on the
one hand, and the actual rate of earning-capacity of this
business capital, on the other hand; and when this discrepancy
has become patent a period of liquidation begins.
To give a readier view of the part played by loan credit in
this discrepancy between the business capital and the
earning-capacity of industrial concerns, it will be in place to
indicate more summarily what are the factors at play.
The earnings of the business community, taken as a whole, are
derived from the marketable output of goods and services turned
out by the industrial process - disregarding such earnings as
accrue to one concern merely at the cost of another. The
effective industrial capital, from the use of which this output,
and therefore these earnings, arise, is the aggregate of
capitalized material items actually engaged in industry. The
business capital, on the other hand, is made up of this
capitalized industrial material taken as a fund of values, plus
good-will, plus whatever funds are obtained on credit by using
this capitalized industrial material as collateral, plus funds
obtained on other, non-industrial, property used as collateral.
Through the competitive use of funds obtained on credit, as
spoken of above, the nominal value of the capitalized industrial
material is cumulatively augmented so as to make it approximately
equal to its original capitalization plus whatever funds are
obtained on credit of all kinds. On this basis of an expanded
collateral a further extension of credit takes place, and the
funds so obtained are incorporated in the business capital and
turned to the like competitive use, and so on.(15*) Capital and
earnings are counted in terms of the money unit. Counted in these
terms, the earnings (industrial output) are also increased by the
process of iflation though credit, since the competitive Use of
funds spoken of acts to bid up prices of whatever products are
used in industry, and of whatever speculative property is
presumed to have some eventual industrial use. But the nominal
magnitude (value) of the earnings is not increased in as large a
ratio as that of the business capital; since the demand whereby
the values of the output are regulated is not altogether a
business demand (for productive goods), but is in great part, and
indeed in the last resort mainly, reducible to a consumptive
demand for finished goods.(16*)
Looking at credit extension and its use for purposes of
capital as a whole, the outcome which presents itself most
strikingly at a period of liquidation is the redistribution of
the ownership of industrial property incident to the liquidation.
The funds obtained on credit are in great measure invested
competitively in the same aggregate of material items that is
already employed in industry apart from the use of loan credit,
with the result that the same range of items of wealth are rated
at a larger number of money units. In these items of wealth -
which, apart from the use of credit, are owned by their nominal
owners - the creditors, by virtue of the credit extension, come
to own an undivided interest proportioned to the advances which
they have made. The aggregate of these items of property comes
hereby to be potentially owned by the creditors in approximately
the proportion which the loans bear to the collatcral plus the
loans. The outcome of credit extension, in this respect, is a
situation in which the creditors have become potential owners of
such a fraction of the industrial equipment as would be
represented by the formula: (17*)
loans/capitalization (=collateral + loans)
In a period of liquidation this potential ownership on the part
of the creditors takes effect to the extent to which the
liquidation is carried through.(18*)
The precise measure and proportion in which the industrial
property of the business community passes into the hands of the
creditors in a period of liquidation can, of course, not be
specified; it depends on the degree of shrinkage in values, as
well as on the degree of thoroughness with which the liquidation
is carried out, and perhaps on other still less ascertainable
causes, among which is the degree of closeness of organization of
the business community. It is, however, through the shrinkage of
market values of the output and the industrial plant that the
transfer of ownership to the creditor class takes place. In case
no shrinkage of values took place, no such general transfer of
ownership to the creditors as a class would become evident.
In point of fact, the shrinkage commonly supervenes, in the
course of modern business, when a general liquidation comes;
although it is conceivable that the period of acute liquidation
and its attendant shrinkage of values need not supervene. Such
would probably be the case in the absence of competitive
investment in industrial material on a large scale. Secondary
effects, such as perturbations of the rate of interest,
insolvency, forced sales, and the like, need scarcely be taken up
here, although it may be well to keep in mind that these
secondary effects are commonly very considerable and farreaching,
and that they may in specific instances very materially affect
the outcome.
The theoretical result of this summary sketch of loan credit
so far seems to be: (a) an extension of loan credit beyond that
involved in the transference of productive goods from their
owners to more competent users is unavoidable under the regime of
competitive business - credit expansion is normally in some
degree "abnormal" or "excessive"; (b) such a use of credit does
not add to the aggregate of industrially productive equipment nor
increase its material output of product, and therefore it does
not add materially to the aggregate gross earnings obtained by
the body of business men engaged in industry, as counted in
material terms of wealth or of permanent values;(19*) (c) it
diminishes the aggregate net profits obtained by the business men
engaged in industry, as counted in such terms, in that it
requires them to pay interest, to creditors outside the
industrial process proper, on funds which, taken as an aggregate,
represent no productive goods and have no aggregate productive
effect; (d) there results an overrating of the aggregate capital
engaged in industry, compared with the value of the industrial
equipment at the starting-point, by approximately the amount of
the aggregate deposits and loans on collateral; (e) the
overrating swells the business capital, thereby raises the
valuation of collateral, and gives rise to a further extension of
credit, with further results of a like nature; (f) commonly
beginning at some point where the extension of credit is
exceptionally large in proportion to the material substratum of
productive goods, or where the discrepancy between nominal
capital and earning-capacity is exceptionally wide, the
overrating is presently recognized by the creditor and a
settlement ensues; (g) on the consequent withdrawal of credit a
forced rerating of the aggregate capital follows, bringing the
nominal aggregate into approximate accord with the facts of
earning-capacity; (h) the shrinkage which takes place in reducing
the aggregate rating of business capital from the basis of
capital goods plus loans to the basis of capital goods alone,
takes place at the expense of debtors and nominal owners of
industrial equipment, in so far as they are solvent; (i) in the
period of liquidation the gain represented by the credit
inflation goes to the creditors and claimants of funds outside
the industrial process proper, except that so much as is
cancelled in bad debts is written off; (j) apart from secondary
effects, such as heightened efficiency of industry due to
inflated values, changes of the rate of interest, insolvency,
etc., the main final outcome is a redistribution of the ownership
of property whereby the creditor class, including holders and
claimants of funds, is benefited.
Since the modern industrial situation began to take form,
there have been two principal forms of credit transactions
current in the usage of the business community for the purpose of
investment: the old-fashioned loan, the usage of which has come
down from an earlier, day. and the stock share, whereby funds are
invested in a joint stock company or corporation. The latter is a
credit instrument, so far as touches the management of the
property represented, in that (in earlier usage at least) it
effects a transfer of a given body of property from the hands of
an owner who resigns discretion in its control to a board of
directors who assume the management of it. In addition to these
two methods of credit relation there has, during the late-modern
industrial period, come into extensive use a third class of
expedients, viz. debentures of one form and another - bonds of
various tenor, preferred stock, preference shares, etc., ranging,
in point of technical character and degree of liability, from
something approaching the nature of a bill of sale to something
not readily distinguishable in effect from a personal note. The
typical (latest and most highly specialized) instrument of this
class is the preferred stock. This is in form a deed of ownership
and in effect an evidence of debt. It is typical of a somewhat
comprehensive class of securities in use in the business
community, in the respect that it sets aside the distinction
between capital and credit. In this respect, indeed, preferred
stock, more adequately perhaps than any other instrument,
reflects the nature of the "capital concept" current among the
up-to-date business men who are engaged in the larger industrial
affairs.
The part which debenture credit, nominal and virtual, plays
in the financing of modern industrial corporations is very
considerable, and the proportion which it bears in the
capitalization of these corporations apparently grows larger as
time passes and shrewder methods of business gain ground. In the
field of the "industrials" proper, debenture credit has not until
lately been employed with full effect. It seems to be from the
corporation finance of American railway companies that business
men have learned the full use of an exhaustive debenture credit
as an expedient for expanding business capital. It is not an
expedient newly discovered, but its free use, even in railway
finance, is relatively late. Wherever it prevails in an
unmitigated form, as with some railway companies, and latterly in
many other industrial enterprises, it throws the capitalization
of the business concerns affected by it into a peculiar,
characteristically modern, position in relation to credit. When
carried out thoroughly it places virtually the entire capital,
comprising the whole of the material equipment, on a credit
basis. Stock being issued by the use of such funds as will pay
for printing the instruments, a road will be built or an
industrial plant established by the use of funds drawn from the
sale of bonds; preferred stock or similar debentures will then be
issued, commonly of various denominations, to the full amount
that the property will bear, and not infrequently somewhat in
excess of what the property will bear. When the latter case
occurs, the market quotations of the securities will, of course,
roughly adjust the current effective capitalization to the run of
the facts, whatever the nominal capitalization may be. The common
stock in such a case represents "goodwill," and in the later
development it usually represents nothing but "good-will."(20*)
The material equipment is covered by credit instruments
debentures. Not infrequently the debentures cover appreciably
more than the value of the material equipment, together with such
property as useful patent rights or trade secrets; in such a case
the good-will is also, to some extent, covered by debentures, and
so serves as virtual collateral for a credit extension which is
incorporated in the business capital of the company. In the ideal
case, where a corporation is financed with due perspicacity,
there will be but an inappreciable proportion of the market value
of the company's good-will left uncovered by debentures. In the
case of a railway company, for instance, no more should be left
uncovered by debentures than the value of the "franchise," and
probably in most cases not that much actually is uncovered.
Whether capitalized good-will (including "franchise" if
necessary) is to be rated as a credit extension is a nice
question that can apparently be decided only on a legal
technicality. In any case so much seems clear - that good-will is
the nucleus of capitalization in modern corporation finance. In a
well financed, flourishing corporation, good-will, indeed,
constitutes the total remaining assets after liabilities have
been met, but the total remaining assets may not nearly equal the
total market value of the company's good-will; that is to say,
the material equipment (plant, etc.) of a shrewdly managed
concern is hypothecated at least once, commonly more than once,
and its immaterial properties (good-will), together with the
evidences of its indebtedness, may also to some extent be drawn
into the hypothecation.(21*)
What has just been said of the part borne by good-will and
debentures in the capitalization of corporations should be taken
in connection with what was said above (pp. 100-104) as to the
nature of the securities offered as collateral in procuring a
credit extension. The greatcr part of the securities used as
collateral, and so "coined into means of payment," are evidences
of debt, at the first remove or farther from their physical
basis, instruments of credit recording a previous credit
extension.
In the earlier period of growth of this debenture
financiering in industry, as, e.g., in the railroad financiering
of the third quarter of the nineteenth century, the process of
expansion by means of debenture credit, in any given case, was
worked out gradually, over a more or less extended period of
time. But as the possibilities of this expedient have grown
familiar to the business community, the time consumed in
perfecting the structure of debentures in each case has been
reduced; until it is now not unusual to perfect the whole
organizztion, with its load of debentures, at the inception of a
corporate enterprise. In such a case, when a corporation starts
with a fully organized capital and debt, the owners of the
concern are also its creditors; they are, at the start, the
holders of both common and preferred stock, and probably also of
the bonds of the company - so adding another increment of
confusion to the relation between modern capital and credit, as
seen from the old-fashioned position as to what capitalization
and its basis should be.
This syncopated process of expanding capital by the help of
credit financiering, however, is seen at its best in the
latter-day reorganizations and coalitions of industrial
corporations; and as this class of transactions also illustrate
another interesting and characteristically modern feature of
credit financiering, the whole matter may best be set out in the
way of a sketch of what takes place in a case of coalition of
industrial corporations on a large scale such as recent
industrial history has made familiar.
The avowed end of these latter-day business coalitions is
economy of production and sale and an amicable regulation of
intercorporate relations. So far as bears on the functioning of
credit in the attendant business transactions, the presence or
absence of these purposes, of course, does not affect the course
of events or the outcome. These avowed incentives do not touch
the credit operations involved. On the other hand, the need of
large credit in consummating the deal, as well as the presumptive
gains to be drawn from the credit relations involved, offer
inducements of their own to men who are in a position to effect
such a coalition. Inducements of this kind seem to have been of
notable effect in bringing on some of the recent operations of
this class.
Credit operations come into these transactions mainly at two
points: in the "financing" of the deal, and in the augmentation
of debentures; and at both of these points there is a chance of
gain on the one hand to the promoter (organizer) and the credit
house which finances the operation, and on the other hand to the
stockholders. The gain which accrues to the two former is the
more unequivocal, and this seems in some cases to be the dominant
incentive to effect the reorganization. The whole operation of
reorganization may, therefore, best be taken up from the point of
view of the promoter, who is the prime mover in the matter.
A reorganization of industrial concerns on a large scale,
such as are not uncommon at the present time, involves a campaign
of business strategy, engaging, it is said, abilities and
responsibilities of a very high order. Such a campaign of
business strategy, as carried out by the modem captains of
industry, runs, in the main, on credit relations, in the way of
financial backing, options, purchases, leases, and the issuance
and transfer of stock and debentures. In order to carry through
these large "deals," in the first place, a very substantial basis
of credit is required, either in the hands of the promoter
(organizer) himself or in the hands of a credit house which
"finances" the organization for him.
The strategic use of credit here involved is, in effect, very
different from the old-time use of loan credit in investments. In
transactions of this class the time element, the credit period,
is an inconspicuous factor at the most; it plays a very
subordinate and uncertain part. The volume of credit at the
disposal of a given strategist is altogether the decisive point,
as contrasted with the lapse of time over which the incident
credit extension may run. The usefulness of the credit extension
is not measured in terms of time, nor are the gains which accrue
to the creditor in the case proportioned to the length of time
involved.
This follows from the peculiar nature of the work which these
great captains of industry have in hand, and more remotely,
therefore, from the peculiar character of the earnings which
induce them to undertake the work. Their work, though it is of
the gravest consequence to industry, is not industrial business,
in that it is not occupied with anything like the conduct of a
continuous industrial process. Nor is it of the same class as
commercial business, or even banking business, in that there is
no investment in a continued sequence of transactions. It differs
also from stock and produce speculation, as that is currently
conceived,(22*) in that it does not depend on the lapse of time
to bring a change of circumstances; although it has many points
of similarity with stock speculation. In its details this work
resembles commercial business, in that it has to do with
bargaining; but so does all business, and this peculiar work of
the trust promoter differs from mercantile business in the
absence of continuity. Perhaps its nearest business analogue is
the work of the real estate agent.
The volume of credit involved is commonly very great; whereas
the credit period, the lapse of time, is a negligible factor.
Indeed, if an appreciable credit period intervenes, that is a
fortuitous circumstance. The time element in these credit
operations is in abeyance, or at the best, it is an indeterminate
magnitude. Hence the formula shown above (p. 95, n. 3) is
practically not applicable to business of this class. So far as
bears upon the credit operations involved in these transactions
of the large finance, the question about which interest turns is
almost exclusively the volume of the turnover; its velocity is a
negligible quantity. Such strategic use of credit is not confined
to the business of making or marring industrial coalitions. It is
habitually to be met with in connection with stock (and produce)
speculation, and ramifications of the like use of credit run
through the dealings of the business community at large in many
directions; but it rarely attains the magnitude in the service of
stock speculation which it reaches in the campaign incident to a
trust-making deal. The form of credit extension employed in these
transactions with indeterminate time also varies. The older and
more familiar form is that of the call loan, together with the
stock exchange transactions for which call loans are largely
used. Here the time element is present, especially in form; but
the credit period is somewhat indeterminate, as is also the gain
that accrues to the creditor from the transaction; although the
creditor's gain here continues to be counted at a (variable) rate
per cent. per time-unit. The strategic use of credit in the
affairs of the large business finance has much in common with the
call loan. Indeed, the call loan in set form is often resorted to
as a valuable auxiliary recourse, although the larger
arrangements for financing such a campaign of business strategy
are not usually put in the form of a call loan. The arrangement
between the promoter and the financial agent is commonly based on
a less specific stipulation as to collateral, and the payment for
credit obtained takes even less, if any, account of the length of
the credit period. In financing a campaign of coalition the
credit house that acts as financial agent assumes, in effect, an
even less determinate credit responsibility. Here, too, the gains
accruing to the creditor are no longer, even nominally, counted
per cent. per time-unit, but rather in the form of a bonus based
mainly on the volume of the turnover, with some variable degree
of regard to other circumstances.
Answering to the essentially timeless character of the gains
accruing to the financial agent, the earnings of the promoter
engaged in transactions of this class are also not of the nature
of profits per cent. per time-unit, but rather a bonus which
commonly falls immediately into the shape of a share in the
capitalization of the newly organized concern. Much of the
increment of capital, or capitalization, that goes to the
promoter is scarcely distinguishable from an increase of the
liabilities of the new corporation (e.g. preferred stock); and
the remainder (e.g. common stock) has also some of the
characteristics of a credit instrument. It is worth noting that
the cost of reorganization, including the bonus of the promoter
and the financial agent, is, in the common run of cases, added to
the capitalization; that is to say, as near as this class of
transactions may be spoken of in terms borrowed from the
old-fashioned business terminology, what answers to the
"interest" due the creditor on the credit extension involved is
incorporated in the "capital" of the debtor, without
circumlocution or faltering.(23*)
The line between credit and capital, or between debt and
property, in the values handled throughout these strategic
operations of coalition, remains somewhat uncertain. Indeed, the
old-fashioned concepts of "debt" and "property," or "liabilities"
and "assets," are not fairly applicable to the facts of the case
- except, of course, in the way of a technical legal distinction.
The old-fashioned law and legal presumptions and the
new-fashioned facts and usages are parting company, at this point
as well as at some others in the affairs of modern business.
When such a large transaction in the reorganization of
industrial concerns has been completed, the values left in the
hands of the former owners of the concerns merged in the new
coalition are only to a fractional and uncertain extent of the
nature of material goods. They are in large part debentures, and
much of the remainder is of a doubtful character. A large
proportion of the nominal collective capital resulting in such
cases is made up of the capitalized good-will of the concerns
merged.(24*) This good-will is chiefly a capitalization of the
differential advantages possessed by the several concerns as
competitors in business, and is for the most part of no use for
other than competitive business ends. It has for the most part no
aggregate industrial effect. The differential advantages
possessed by business concerns as competitors disappear when the
competitors are merged, in the degree in which they cease to
compete with rival bidders for the same range of business. To
this aggregate defunct good-will of the consolidated concerns
(which in the nature of things can make only an imaginary
aggregate) is added something in the way of an increment of
good-will belonging to the new corporation as such;(25*) and the
whole is then represented, approximately, by the common stock
issued. The nominal capital of the concerns merged (in good part
based on capitalized goodwill) is aggregated, after an
appraisement which commonly equalizes the proportion of each by
increasing the nominal shares of all. This aggregate is covered
with common and preferred stock, chiefly preferred, which is a
class of debentures issued under the form of capital. The stock,
common and preferred, goes to the owners of the concerns merged,
and to the promoter and the financial agent, as indicated above.
In case bonds are issued, these likewise go to the former owners,
in so far as they do not replace outstanding liabilities of the
concerns merged.
"Capital" in the enlightened modern business usage means
"capitalized presumptive earning-capacity," and in this
capitalization is comprised the usufruct of whatever credit
extension the given business concern's industrial equipment and
good-will will support.(26*) By consequence the effectual
capitalization (shown by the market quotations) as contrasted
with the nominal capital (shown by the par value of the stock of
all descriptions) fluctuates with the fluctuations of the
prevalent presumption as to the solvency and earning-capacity of
the concern and the good faith of its governing board.
When the modern captain of industry reorganizes and
consolidates a given range of industrial business concerns,
therefore, and gives them a collective form and name as an
up-to-date corporation, the completed operation presents, in
syncopated form and within a negligible lapse of time, all that
intricate process of cumulative augmentation of business capital
through the use of credit which otherwise may come gradually in
the course of business competition. At the same time it involves
a redistribution of the ownership of the property engaged in
industry, such as otherwise occurs at a period of liquidation.
The result is, of course, not the same at all points, but the
equivalence between the two methods of expanding business capital
and distributing the gains is close in some respects. The
resemblances and the differences between the two processes, so
far as relates to credit, are worth noticing. The trust-maker is
in some respects a surrogate for a commercial crisis.
When credit extension is used competitively in the
old-fashioned way for increasing the business of competing
concerns, as spoken of above (pp. 94-100, 109-114), the expansion
of business capital through credit operations occupies a period
of some duration, commonly running over an interval recognized as
a period of speculative advance or "rising prosperity." The
expansion of capitalized values then takes place more or less
gradually through a competitive enhancement of the prices of
industrial equipment and the like. The creditors then commonly
come in for their resulting share in the industrial equipment
only at the period of liquidation, with its attendant shrinkage
of values. In the timeless credit transactions involved in the
modern reorganizations of industrial business, on the other hand,
the creditors' claim takes effect without an appreciable lapse of
time, a liquidation, or a shrinkage of values.
The whole process of credit extension, augmentation of
business capital, and distribution of proceeds is reduced to a
very simple form. The credit extension is effected in two main
forms: (a) the "financing" undertaken by the credit house in
conjunction with the promoter, and (b) the issuance of
debentures. The bonus of the financing house and promoter, as
well as the debentures, are all included in the recapitalization,
together with an increment of good-will and any other incidental
items of expense or presumptive gain. The resulting collective
capitalization (assets and liabilities) is then distributed to
the several parties concerned in the transaction. The outcome, so
far as touches the present argument, being that when the
operation is completed the ownership of the recapitalized
industrial equipment, with whatever other property is involved,
appears distributed between the former owners, the promotcr, and
the credit house which financed the operation. But, by virtue of
the debentures distributed, the former owners, together with the
other parties named, appear in the role of creditors of the new
corporation as well as owners of it; they commonly come out of
the transaction with large holdings of preferred stock or similar
debentures at the same time that they hold the coommon stock. The
preferr.ed stock, of course, is presently disposed of by the
large holders to outside parties. The material equipment is then
practically the same as it was before; the business capital has
been augmented to comprise such proportion of the goodwill of the
several concerns incorporated as had not previously been
capitalized and hypothecated, together with the good-will imputed
to the new corporation and such debentures as these items of
wealth will float.
The effective capitalization resulting is, of course,
indicated by the market quotations of the securities issued
rather than by their face value. The value of the corporation's
business capital so indicated need suffer no permanent shrinkage;
it will suffer none if the monopoly advantage (good-will) of the
new corporation is sufficient to keep its earning-capacity up to
the rate on which the capitalization is based.
It appears, then, that in the affairs of latterday business,
as shown by modern corporation finance, capital and credit
extension are not always distinguishable in fact, nor does there
appear to be a decisive business reason why they should be
distinguished. "Capital" means "capitalized putative
earning-capacity," expressed in terms of value, and this
capitalization comprises the use of all feasible credit
extension. The business capital of a modern corporation is a
magnitude that fluctuates from day to day; and in the quotations
of its debentures the magnitude of its credit extension also
fluctuates from day to day with the course of the market. The
precise pecuniary magn itude of the business community's invested
wealth, as well as the aggregate amount of the community's
indebtedness, depends from hour to hour on the quotations of the
stock exchange; and it rarely happens that it remains nearly the
same in the aggregate from one week's end to the next. Both
capital and credit, therefore, vary from hour to hour. and,
within narrow limits, from place to place. The magnitude and
fluctuations of business capital, - "capital" in the sense in
which that term is used in business affairs, - of course, stand
in no hard and fast relation to the material magnitude of the
industrial equipment; nor do variations in the magnitude of the
business capital reflect variations in the magnitude or the
efficiency of the industrial equipment in any but the loosest and
most indecisive manner. So also, and for the same reason, the
magnitude and the variations of the aggregate credit afloat at a
given time bear, at the most, but a remote, indirect, and shifty
relation to the aggregate of material wealth and the material
changes to which this wealth is subject. All this applies with
peculiar cogency wherever and in so far as industry and business
are carried on hy modern expedients and in due contact with the
market.
NOTES:
1. This, of course, has nothing to say to Bohm-Bawerk's theory of
the enhancement of production through lengthening the processes
of industry. His theory of the "roundabout method" applies to the
technical, material efficiency of the mechanical process; whereas
the point in question here is the interval occupied in the
turning over of a given business capital. Bohm-Bawerk's position
may be questionable, however, on other grounds.
2. Cf., e.g., Werner Sombart, "Der Stil des modernen
Wirthschaftslebens." Achiv fur soz. Gestzg. u. Statistik, vol.
XVII, pp. 1-20, especially pp. 4-15. Reprinted as ch. IV, vol. II
of Der moderne Kapitalismus (Leipzig, 1902).
3. Cf., e.g., Marshall, Principles of Economics (3d ed.), bk VI,
ch. VII, secs. 3 and 4.
4. Cf. Laughlin, Principles of Money, p. 86.
5. The turnover will count for more in gross earnings at current
rates if instead of his own capital alone the business man also
engages whatever funds he can borrow by using his capital as
collateral. The turnover counted on capital (value of the
industrial equipment) plus credit, at current rates, will be
greater than that counted on the capital aaone used without
credit extension. The turnover may be expressed as the product of
the mass of values employed multiplied by the velocity. Hence, if
credit be taken as an indeterminate fraction (capital/n) of the
capital used as collateral, we may say that
Turnover = (1/time)(capital + capital/n), i.e.
T = (1/t)(c + c/n) = (c + c/n)/t; t = (c + c/n)/T
The algebraic statement serves to bring out the equivalence
between an acceleration of the rate of turnover and an increase
of the volume of business capital. Cf. Jevons, Theory of
Political Economy, pp. 249-258.
Sombart is mistaken in saying (Kapitalismus, vol. II. ch. VI,
p. 74) that the use of credit lengthens the time of turnover of
capital. Credit shortens the time relatively to the magnitude of
the turnover; i.e. a given initial capital by the help of credit
turns over a larger pecuniary magnitude in a given time: (c +
c/n)/t > c/t.
6. Marshall, as above.
7. Cf. Laughlin, Principles of Money, ch. IV.
8. Property convertible into cash at will.
9. The legally obligatory reserve for the National Banks, for
instance, is 25 per cent of combined note circulation and
deposits in central reserve banks, 15 per cent in others. --
Revised Statutes, 5191.
10. This takes accountof advance made by other lenders than the
regular banking houses who exclude mortgages on real estate from
their collateral; such, e.g., as the long time advances
(investments in securities) made by saving banks, insurance
companies, minor private and mortgage banks, private lenders,
etc.
11. This truism is frequently overlooked in theoretical
discussions; hence, as the present argument requires its
recognition, it is here stated in this explicit way.
12. The cash loans made by depositors to savings banks in the
form of deposits.
13. Cf. Twelfth Census of the United States, vol. VII, p. c.
14. Few, perhaps, would in set terms maintain an argument that
the value of money does not vary, but still fewer would, in a
credit transaction, proceed on a supposition at variance with
that position. As the economists are accustomed to say, money is
the standard of deferred payments. It is also, in the
unreflecting apprehension of those who have practically to deal
with wealth phenomena, felt to be the standard and inflexible
measure of wealth. The fact that this convertional usage is
embodied in law acts acts greatly to fortify the naive acceptance
of money and price as the definitive terms of wealth. See pp.
82-86 above.
15. Cf. Knies, Geld and Credit, vol. II, ch. VI, sec. C,
especially pp. 303 et seq.
16. The enhancement of the market value of the output does not,
in fact, keep pace with the inflation of business capital during
a period of speculative advance. In order that it should do so,
and afford nominal earnings proportionate to the inflated
capital, it would be necessary that incomes should increase
proportionately to the inflation of capital; but, even if this
happened, the expenses of production would thereby be so
increased (through the advance of wages and the like) as to
offset the entire of values for all consumptive goods and leave
only the advance in the values of productive goods as a net
margin from which to draw an increase of earnings. The
discrepancy under discussion, however, is not due entirely to the
presence of credit, and a fully detailed analysis of the causes
out of which it arises can, therefore, not properly be presented
in this place.
17. So long as the rating of the capitalized property remains
undisturbed, the formual which expresses the creditors' claim
maintain the form given above. It then signifies nothing more
than that the creditors hold a claim on such a proportion of the
aggregate capitalized property involved as their advances bear to
the aggreage capitalization. But so soon as a rerating of the
capitalized property enters the problem the formula becomes
loans/(capitalization + delta capitalization)
or loans/(capitalization - delta capitalization),
according as the rerating of capitalization is in the direction
of enhancement or depreciation: 1/(cap + delta cap) or 1/(cap -
delta cap). During brisk times, when capitalization advances,the
claim represented by a given loan covers a decreasing proportion
of the aggregate capitalized property involved 1/(cap + delta
cap); the denominator increases and teh quotient consequently
decreases. Whereas, in a period of liquidation the ratio of the
creditors' claim to the aggregate capitalization increases by
force of the lowered rating of the capitalized property 1/(cap -
deltal cap).
18. All those who, at a period of liquidation, are holders of
fluent funds or of claims to fixed sums of money are, for the
present purpose, in the position of creditors.
19. This disregards the indirect effects of a speculative advance
in the way of heightened intensity of application and fuller
employment of the industrial plant.
20. See chapter VI.
21. The question of "stock watering" "overcapitalization" and the
like is scarcely pertinent in the case of a large industrial
corporation financed as the modern situation demands. Under
modern circumstances the common stock can scarcely fail to be all
"water", unless in a small concern or under incompetent
management. Nothing but "water" - under the name of good-will -
belongs in the common stock; whereas the preferred stock, which
represents material equipment, is a debenture.
"Overcapitalization," on the other hand, if it means anything
under modern business conditions, must mean overcapitalization as
compared with earning-capacity, for there is nothing else
pertinent to compare it with; and earning-capacity fluctuates,
while the basis (interest rates) on which the earning-capacity is
to be capitalized also fluctuates independently.
In effect, the adjustment of capitalization to
earning-capacity is taken care of by the market quotations of
stock and other securities; and no other method of adjustment is
of any avail, because capitalization is a question of value, and
market quotations are the last resort in questions of value. The
value of any stock listed on the exchange, or otherwise subject
to purchase and sale, fluctuates from time to time; which comes
to the same thing as saying that the effectual capitalization of
the concern, represented by the securities quoted, fluctuates
from time to time. It fluctuates more or less, sometimes very
slowly, but always at least so much as to compensate the
long-period fluctuations of discount rates in the money market;
which means that the purchase price of a given fractional
interest in the corporation as a going concern fluctuates so as
to equate it with the capitalized value of its putative
earning-capacity, computed at current rates of discount and
allowing for risks. Cf. Report of the Industrial Commission, vol.
I. p. 587 (Testimony of Rogers); vol. XIII. pp. 106-107
(Testimony of E.R. Chapman). See also Chapter VI below.
22. See, e.g. Emery, Speculation on the Stock and Produce
Exchanges of the United States, ch. IV; Hadley, Economics, ch.
IV.
23. Report of the Industrial Commission, vol. I, (Testimony of
W.H. Moore) pp. 960-963, (W.E. Reis) p. 949, (Gates) p. 1032;
vol. IX. (T.L. Greene) p. 491; vol. XIII, p. viii, with
corresponding testimony. See also Chapter VI below.
24. Report of the Industrial Commission, vol. I (Testimony of
Dodd) pp. 1054-1055, 1057, 1058-1059, (Gates) pp. 1021-1022; vol.
XIII, p. ix, with testimony.
25. Report of the Industrial Commission, vol. I (Testimony of Dos
Passos) p. 1179; vol. XIII (C.R. Flint) p. 48. Testimony to the
same effect recurs elsewhere in the Report. See p. 125, n. 1
above.
26. See Chapter VI below.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 6
Modern Business Capital
What has been said on the use of loan credit has anticipated
much of what is peculiar in modern business capital. Such is
necessarily the case, since it is in the extensive use of credit
that the later phases of the management of capital contrast most
strikingly with the corresponding features of earlier business
traffic. To follow the terminological precedents set by German
writers, the late-modern scheme of economic life is a "credit
economy," as contrasted with the "money economy" that
characterizes early-modern times. The nature of business capital
and its relations to the industrial process under the later, more
fully developed, credit economy is in some degree different from
what it was before the full and free use of credit came to occupy
its present central position in business traffic; and more
particularly is it at variance with the theoretical expositions
of the economists of the past generation.
It has been the habit of economists and others to speak of
"capital" as a stock of the material means by which industry is
carried on, - industrial equipment, raw materials, and means of
subsistence. This view is carried over from the situation in
which business and industry stood at the time of Adam Smith and
of the generation before Adam Smith, from whose scheme of life
and of thought he drew the commonplace materials and conceptions
with which his speculations were occupied. It further carries
over the point of view occupied by Adam Smith and the generation
to whom he addressed his speculations. That is to Say, the
received theoretical formulations regarding business capital and
its relations to industry proceed on the circumstances that
prevailed in the days of the "money economy," before credit and
the modern corporation methods became of first-class consequence
in economic affairs. They canvass these matters from the point of
view of the material welfare of the community at large, as seen
from the standpoint of the utilitarian philosophy. In this system
of social philosophy the welfare of the community at large is
accepted as the central and tone-giving interest, about which a
comprehensive, harmonious order of nature circles and gravitates.
These early speculations on business traffic turn about the
bearing of this traffic upon the wealth of nations, particularly
as the wealth of nations would stand in a "natural" scheme of
things, in which all things should work together for the welfare
of mankind.
The theory, or what there is in the way of a theory, of
business capital in the received body of doctrines is worked out
from the point of view and for the theoretical purposes of the
eighteenth century scheme of natural liberty, natural rights, and
natural law; and the received theorems concerning the part played
by capital and by the capitalist are substantially of the
character of laws of nature, as that term was understood during
the period to which these theorems owe their genesis. What these
received theorems declare concerning the nature and normal
function of capital and of the capitalist need not be recited
here; their content is familiar enough to all readers, lay and
learned. Also the merits of such a point of view for purposes of
economic theory, and the adequacy of the received concept of
capital for the purposes to which it was originally applied, need
not detain the inquiry. Modern business management does not take
that point of view, nor does "capital" carry such a meaning to
the modern business man; because the guiding circumstances under
which modern business is carried on are not those supposed to be
given by a beneficent order of nature, nor do the controlling
purposes of business traffic include that general well-being
which constituted the final term of Adam Smith's social
philosophy.
As a business proposition, "capital" means a fund of money
values; and since the credit economy and corporation finance have
come to be the ruling factors in industrial business, this fund
of money values (taken as an aggregate) bears but a remote and
fluctuating relation to the industrial equipment and the other
items which may (perhaps properly) be included under the
old-fashioned concept of industrial capital.(1*)
Capital has been spoken of as the capitalized (aggregated)
cost of industrial equipment, etc.,(2*) a view which had its
significance for economic theory a hundred years ago; but since
corporation finance has come to pervade the management of
business this view is no longer of particular use for a
theoretical handling of the facts. To avoid the tedium of
argument it may be conceded that under the old dispensation, of
partnerships and individual management in business, the basis of
capitalization was the cost of the material equipment owned by
any given concern; and so far as the methods of partnership and
private firms still prevails such may still be the current method
of capitalization, especially de jure. But in so far as business
procedure and business conceptions have been shaped in the image
of the modem corporation (or limited liability company), the
basis of capitalization has gradually shifted, until the basis is
now no longer given by the cost of material equipment owned, but
by the earning-capacity of the corporation as a going
concern.(3*)
A given corporation's capital is, of course, de jure a
magnitude fixed in the past by an act of legislature chartering
the company, or by an issuance of stock by the company under the
terms of its charter or of the acts which enable it. But this de
jure capitalization is nominal only, and there are few, if any,
cases in which the effective capital of a company coincides with
its de jure capital. Such could be the case only so long as all
the securities which go to make up the company's capital were
quoted at par on the market. The effective capitalization of any
modern company, that is to say, the capitalization which is
effective for current business purposes as distinct from the
formal requirements of the charter, is given by the quotations of
the company's securities, or by some similar but less overt
market valuation in case the company's capital is not quotable on
the market. The effective (business) capitalization, as distinct
from the de jure capitalization, is not fixed permanently and
inflexibly by a past act of incorporation or stock issue. It is
fixed for the time being only, by an ever recurring valuation of
the company's properties, tangible and intangible, on the basis
of their earning-capacity. (4*)
In this capitalization of earning-capacity the nucleus of the
capitalization is. not the cost of the plant, but the concern's
good-will, so called, as has appeared in the last preceding
chapter.(5*) "Good-will" is a somewhat extensible term, and
latterly it has a more comprehensive meaning than it once had.
Its meaning has, in fact, been gradually extended to meet the
requirements of modern business methods. Various items, of very
diverse character, are to be included under the head of
"good-will"; but the items included have this much in common that
they are "immaterial wealth," "intangible assets"; which, it may
parenthetically be remarked, signifies among other things that
these assets are not serviceable to the community, but only to
their owners. Good-will taken in its wider meaning comprises such
things as established customary business relations, reputation
for upright dealing, franchises and privileges, trade-marks,
brands, patent rights, copyrights, exclusive use of special
processes guarded by law or by secrecy, exclusive control of
particular sources of materials. All these items give a
differential advantage to their owners, but they are of no
aggregate advantage to the community.(6*) They are wealth to the
individuals concerned differential wealth; but they make no part
of the wealth of nations.(7*)
It is in the industrial corporations that this capitalization
of good-will is seen to the best advantage - including, under the
term "industrial corporations," railway companies, iron and steel
concerns, mines, etc., as well as what are known in the stock
market specifically as "industrials." The corporation is, of
course, not the only form of business concern in the industrial
field, but it is the typical, characteristic form of business
organization for the management of industry in modem times, and
the peculiarities of modem capital are therefore best seen in
these modern corporations. Many of these corporations have grown
out of partnerships and firms previously existing, and such is
still the genesis of many of the corporations that come forward
from time to time. In such a case of conversion from partnership
or firm to corporation the rule is that the new corporation takes
over a body of good-will, under one form and name or another,
previously pertaining to the partnership which it displaces.
Conversely, when a flourishing partnership or similar private
firm has gained an assured footing of good-will, in the way of
any or all of the items enumerated under that term above, its
lot, as prescribed by modern business exigencies, is to go up
into a corporation, either by simple conversion into the
corporate form or through coalition with other firms into a
larger corporate whole. There is in this matter no hard and fast
rule, of course. On the one hand, the approved methods of
corporation finance may in some measure be resorted to by a
private firm, Without formal conversion of the concern into the
corporate form; and on the other hand, an incorporated company
may continue to carry on its business after the manner usual with
privately owned concerns. But taken by and large, it will be
found that with the assumption of the corporate form is
associated a more modern method of capitalization and a freer use
of credit. The advantages which the corporate form offers in
these respects are commonly not neglected. The more archaic forms
of organization and business management, in which recourse is
commonly not had to the characteristic methods of corporation
finance, prevail chiefly in those "backward" lines of industry in
which monopoly or other differential advantages of an intangible
nature are not readily attainable; such, e.g., as farming,
fishing, local merchandising, and the minor mechanical trades and
occupations. In this range of industries large (corporate)
organization has hitherto been virtually impracticable, and here
at the same time differential advantages, of the nature of
good-will (as indicated above), are relatively scant and
precarious. Where extensive differential advantages of this kind
come in, the corporate form of organization is also likely to
come in.
The cases are also frequent where a corporation starts out
full-fledged from the beginning, without derivation from a
previously existing private firm. Where this happens, the start
is commonly made with some substantial body of immaterial goods
on which to build up the capitalization; it may be a franchise,
as in the case of a railway, telegraph, telephone, street-car,
gas, or water company; or it may be the control of peculiar
sources of material, as in the case of an oil or natural gas
company, or a salt, coal, iron, or lumber company; or it may be a
special industrial process, patented or secret; or it may be
several of these. When a corporation begins its life history
without such a body of immaterial differential advantages, the
endeavors of its management are early directed to working up a
basis of good-will in the way of trade-marks, clientele, and
trade connections which will place it in something of a monopoly
position, locally or generally (8*) Should the management not
succeed in these endeavors to gain an assured footing on some
such "immaterial" ground, its chances of success among rival
corporations are precarious, its standing is insecure, and its
managers have not accomplished what is looked for at their hands.
The substantial foundation of the industrial corporation is its
immaterial assets.
The typical modern industrial corporation is a concern of
sufficient magnitude to be of something more than barely local
consequence, and extends its trade relations beyond the range of
the personal contact of its directive officials. Its properties
and its debts are also commonly owned, in part at least, by
persons who stand in no direct personal relation to the board of
managers. In an up-to-date corporation of this character the
typical make-up of the corporate capital, or capitalization, is
somewhat as follows: The common stock approximately covers the
immaterial properties of the concern, unless these immaterial
properties are disproportionately large and valuable; in case of
a relatively small and local corporation the common stock will
ordinarily somewhat more than cover the value of the immaterial
property and comprise something of the plant; in case of the
larger concerns the converse is likely to be true, so that here
the immaterial property, intangible assets, is made to serve in
some measure as a basis for other securities as well as for the
common stock. The common stock, typically, represents intangible
assets and is accounted for by valuable trade-marks, patents,
processes, franchises, etc. Whatever material properties,
tangible assets, are in hand or to be acquired are covered by
preferred stock or other debentures. The various forms of
debentures account for the material equipment and the working
capital (the latter item corresponding roughly to the economists'
categories of raw materials, wages fund, and the like). Of these
debentures the preferred stock is the most characteristic modern
development. It is, de jure, counted as a constituent of the
concern's capital and the principal is not repayable; in this
(legal) respect it is not an evidence of debt or a credit
instrument.(9*) But it has little voice in the direction of the
concern's business policy.(10*) In practice the management rests
chiefly on the holdings of common stock. This is due in part to
the fact that the preferred bears a stated rate of dividends and
is therefore taken up by scattered purchasers as an investment
security to a greater extent than the common. In this (practical)
respect it amounts to a debenture. Its practical character as a
debenture is shown by the stated rate of dividends, and where it
is "cumulative" that feature adds a further step of assimilation
to the ordinary class of debentures. Indeed, in point of
practical effect preferred stock is in some respects commonly a
more pronounced credit instrument than the ordinary mortgage; it
alienates the control of the property which it represents more
effectually than the ordinary bond or mortgage loan, in that it
may practically be a debt which, by its own terms, cannot be
collected, so that by its own terms it may convey a credit
extension from the holder to the issuing corporation in
perpetuity. Its effect is to convey the discretionary control of
the material properties which it is held to represent into the
hands of the holders of the common stock of the concern. The
discretionary management of the corporate capital is, by this
device, quite as effectually as by the use of ordinary credit
instruments, vested in the common stock, which is held to
represent the corporation's goodwill. The discretionary disposal
of the entire capital vests in securities representing the
intangible assets. In this sense, then, the nucleus of the modern
corporate capitalization is the immaterial goods covered by the
common stock.(11*)
This method of capitalization, therefore, effects a somewhat
thoroughgoing separation between the management and the ownership
of the industrial equipment. Roughly speaking, under corporate
organization the owners of the industrial material have no voice
in its management, and where preferred stock is a large
constituent of the capital this alienation of control on the
parts of the owners may be, by so much, irrevocable. Preferred
stock is, practically, a device for placing the property it
represents in perpetual trust with the holders of the common
stock, and, with certain qualifications, these trustees are not
answerable for the administration of the property to their
trustors. The property relation of the owners to their property
is at this point attenuated to an extreme degree. For most
business purposes, it should be added, the capital covered by
other forms of debentures is in much the same position as that
covered by the preferred stock.(12*)
The various descriptions of securities which in this way
represent corporate capital are quotable on the market and are
subject to market fluctuations; whereby it comes about that the
aggregate effective magnitude of the corporate capital varies
with the tone of the market, with the manoeuvres of the business
men to whom is delegated the management of the companies, and
with the accidents of the seasons and the chances of peace and
war. Accordingly, the amount of the business capital of a given
concern, or of the business community as a whole, varies in
magnitude in great measure independently of the mechanical facts
of industry, as was noted above in speaking of loan credit.(13*)
The market fluctuations in the amount of capital proceed on
variations of confidence on the part of the investors, on current
belief as to the probable policy or tactics of the business men
in control, on forecasts as to the seasons and the tactics of the
guild of politicians, and on the indeterminable, largely
instinctive, shifting movements of public sentiment and
apprehension. So that under modern conditions the magnitude of
the business capital and its mutations from day to day are in
great measure a question of folk psychology rather than of
material fact.
But in this uncertain and shifting relation of the business
capital to the material equipment there are one or two points
which may be set down as fairly secure. Since the credit
instruments involved in modern capitalization may be used as
collateral for a further credit extension, as noted in the
chapter on loan credit,(14*) the aggregate nominal capital in
hand at a given time is, normally, larger by an appreciable
amount than the aggregate value of the material properties
involved;(15*) and at the same time the current value of these
material properties is also greater than it would be in the
absence of that credit financiering for which corporate
capitalization affords a basis.(16*)
German writers have familiarized economic readers with the
terms "credit economy," "money economy" (Geldwirtschaft), and
"natural economy" (Naturalwirtschaft), the later-modern scheme of
economic life being characterized as a "credit economy." What
characterizes the early-modern scheme, the "money economy," and
sets it off in contrast with the natural economy (distribution in
kind) that went before it in West-European culture, is the
ubiquitous resort to the market as a vent for products and a
source of supply of goods. The characteristic feature of this
money economy is the goods market. About the goods market
business and industrial interests turn in early modern times; and
to this early-modern system of industrial life the current
doctrines of political economy are adapted, as indicated above.
The credit economy - the scheme of economic life of the
immediate past and the present - has made an advance over the
money economy in the respect which chiefly distinguishes the
latter. The goods market, of course, in absolute terms is still
as powerful an economic factor as ever, but it is no longer the
dominant factor in business and industrial traffic, as it once
was. The capital market has taken the first place in this
respect. The capital market is the modern economic feature which
makes and identifies the higher "credit economy" as such. In this
credit economy resort is habitually had to the market as a vent
for accumulated money values and a source of supply of
capital.(17*)
Trading under the old regime was a traffic in goods; under
the new regime there is added, as the dominant and characteristic
trait, trading in capital. Both in the capital and in the goods
market there are professional traders, as well as buyers and
sellers who resort to the market to dispose of their holdings and
to supply their needs of what the market affords. In either class
of trading the ends sought by those engaged in the business are
generically the same. The endeavors of those who are in the
business of trading, who buy in order to sell and sell in order
to buy, are directed to the pecuniary gain that is to be got
through an advantageous discrepancy between the price paid and
the price obtained; but on the part of those who resort to the
market to supply their needs the end sought is not the same in
the two cases. The last buyer of goods buys for consumption, but
the last negotiator of capital buys for the sake of the ulterior
profit; in substance he buys in order to sell again at an
advance. The advance which he has in view is to come out of the
prospective earnings of the capital for which he negotiates. What
he has in view as his ulterior end in the transaction is the
conversion of the values for which he negotiates into a larger
outcome of money values, - whatever process of production and the
like may intervene between the inception and the goal of his
traffic.(18*)
The value of any given block of capital, therefore, turns on
its earning-capacity; or, as the mathematical expression has it,
the value of capital is a function of its earning-capacity, (19*)
not of its prime cost or of its mechanical efficiency. It is only
more remotely, and through the mediation of the earning-capacity,
that these last-named factors sensibly affect the value of the
capital. This earning-capacity of capital depends in its turn,
not so much on the mechanical efficiency of the valuable items
bought and sold in the capital market, as on the tension of the
market for goods. To recur to an expression already employed in a
similar connection, the question of earning-capacity of capital
relates primarily to its effectiveness for purposes of
vendibility, and only at the second remove to its effectiveness
in the way of material serviceability. But the earning-capacity
which in this way affords ground for the valuation of marketable
capital (or for the market capitalization of the securities
bought and sold) is not its past or actual earning-capacity, but
its presumptive future earning-capacity; so that the fluctuations
in the capital market -the varying market capitalization of
securities - turn about imagined future events. The forecast in
the case may be more or less sagacious, but, however sagacious,
it retains the character of a forecast based on other grounds
besides the computation of past results.
All capital which is put on the market is in this way
subjected to an interminable process of valuation and revaluation
- i.e. a capitalization and recapitalization - on the basis of
its presumptive earning-capacity, whereby it all assumes more or
less of a character of intangibility. But the most elusive and
intangible items of this marketable capital are, of course, those
items which consist of capitalized good-will, since these are
intangible goods from start to finish. It is upon this factor of
good-will in capital that a change in presumptive
earning-capacity falls most immediately, and this factor shows
the widest and freest market fluctuations. The variations in the
capitalized value of merchantable good-will are relatively wide
and unstable, as is shown by the quotations of common stock.
In the capital market the commodity in which trading is done,
then, is the capitalized putative earning-capacity of the
property covered by the securities bought and sold. This property
is in part tangible, in part intangible, the two categories being
seldom clearly distinguishable. The items bought and sold are put
into merchantable form by being standardized in terms of money
and subdivided into convenient imaginary shares, which greatly
facilitates the traffic. The earning-capacity on which the market
capitalization runs and about which the traffic in merchantable
capital turns is a putative earning-capacity. It follows that
this putative earning-capacity of a given block of capital, as it
takes shape in the surmises of outside investors, may differ
appreciably from the actual earning-capacity of the capital as
known to its managers; and it may readily be to the latter's
interest that such a discrepancy between actual and imputed
earning-capacity should arise.(20*) When, e.g., the putative
earning-capacity of the capital covered by a given line of
securities, as shown by the market quotations, rises appreciably
above what is known to its managers to be its actual
earning-capacity, the latter may find their advantage in selling
out, or even in selling short; while in the converse case they
will be inclined to buy. Moreover, putative earning-capacity is
the outcome of many surmises with respect to prospective earnings
and the like; and these surmises will vary from one man to the
next, since they proceed on an imperfect, largely conjectural,
knowledge of present earning-capacity and on the still more
imperfectly known future course of the goods market and of
corporate policy. Hence sales of securities are frequent, both
because outsiders vary in their estimates and forecasts, and
because the information of the outsiders does not coincide with
that of the insiders. The consequence is that a given block of
capital, representing, e.g., a controlling interest in a given
industrial enterprise, may, and in practice it commonly will,
change owners much more frequently than a given industrial plant
was wont to change owners under the old regime, before the fully
developed corporation finance came to occupy the field of
industrial business.(21*)
It follows, further, that under these circumstances the men
who have the management of such an industrial enterprise,
capitalized and quotable on the market, will be able to induce a
discrepancy between the putative and the actual earning-capacity,
by expedients well known and approved for the purpose. Partial
information, as well as misinformation, sagaciously given out at
a critical juncture, will go far toward producing a favorable
temporary discrepancy of this kind, and so enabling the managers
to buy or sell the securities of the concern with advantage to
themselves. If they are shrewd business men, as they commonly
are, they will aim to manage the affairs of the concern with a
view to an advantageous purchase and sale of its capital rather
than with a view to the future prosperity of the concern, or to
the continued advantageous sale of the output of goods or
services produced by the industrial use of this capital.
That is to say, the interest of the managers of a modern
corporation need not coincide with the permanent interest of the
corporation as a going concern; neither does it coincide with the
interest which the community at large has in the efficient
management of the concern as an industrial enterprise. It is to
the interest of the community at large that the enterprise should
be so managed as to give the best and largest possible output of
goods or services; whereas the interest of the corporation as a
going concern is that it be managed with a view to maintaining
its efficiency and selling as large an output as may be at the
best prices obtainable in the long run; but the interest of the
managers, and of the owners for the time being, is to so manage
the enterprise as to enable them to buy it up or to sell out as
expeditiously and as advantageously as may be. The interest of
the community at large demands industrial efficiency and
serviceability of the product; while the business interest of the
concern as such demands vendibility of the product; and the
interest of those men who have the final discretion in the
management of these corporate enterprises demands vendibility of
the corporate capital. The community's interest demands that
there should be a favorable difference between the material cost
and the material serviceability of the output; the corporation's
interest demands a favorable pecuniary difference between
expenses and receipts, cost and sale price of the output; the
corporation directorate's interest is that there should be a
discrepancy, favorable for purchase or for sale as the case may
be, between the actual and the putative earning-capacity of the
corporation's capital.
It has been noted in an earlier chapter that there
unavoidably results a discrepancy, not uncommonly a divergence,
between the industrial needs of the community and the business
needs of the corporations. Under the regime of the old-fashioned
"money economy," with partnership methods and private ownership
of industrial enterprises, the discretionary control of the
industrial processes is in the hands of men whose interest in the
industry is removed by one degree from the interests of the
community at large. But under the regime of the more adequately
developed "credit economy," with vendible corporate capital,(22*)
the interest of the men who hold the discretion in industrial
affairs is removed by one degree from that of the concerns under
their management, and by two degrees from the interests of the
community at large.
The business interest of the managers demands, not
serviceability of the output, nor even vendibility of the output,
but an advantageous discrepancy in the price of the capital which
they manage. The ready vendibility of corporate capital has in
great measure dissociated the business interest of the
directorate from that of the corporation whose affairs they
direct and whose business policy they dictate, and has led them
to centre their endeavors upon the discrepancy between the actual
and the putative earning-capacity rather than upon the permanent
efficiency of the concern. Their connection with the concern is
essentially transient; it can be terminated speedily and silently
whenever their private fortune demands its severance. Instances
are abundant, more particularly in railway management, where this
discrepancy between the business interest of the concern and the
private business interest of the managers for the time being has
led to very picturesque developments, such as could not occur if
the interests of the management were bound up with those of the
corporation in the manner and degree that once prevailed. The
fact is significant that the more frequent and striking instances
of such management of corporate affairs for private ends have
hitherto occurred in railroading, at the same time that the
methods and expedients of modern corporation finance have also
first and most widely reached a fair degree of maturity in
railroading. It holds out a suggestion as to what may fairly be
looked for when corporation finance shall have made itself more
thoroughly at home in the "industrials" proper. Indeed, the field
of the "industrials" is by no means barren of instances
comparable with the maturer and more sagacious railroad
financiering.(23*)
The stock market interest of those men who have the
management of industrial corporations is a wide and multifarious
one. It is not confined to the profitable purchase and sale of
properties whose management they may have in hand. They are also
interested in making or marring various movements of coalition or
reorganization, and to this ulterior end it is incumbent on them
to "manipulate" securities with a view to buying and selling in
such a manner as to gain control of certain lines of
securities.(24*) Hence it is a rule of this class of business
traffic to cultivate appearance, - to avoid, or sometimes to
court, the appearance of sin. So that under this leadership the
course of industrial affairs is, in great measure, if not
altogether, guided with a view to a plausible appearance of
prosperity or of adversity, as the case may be. Under given
circumstances it may as well become the aim of men in control to
make an adverse showing as a favorable one. The higher exigencies
of the captain of industry's personal fortunes, as distinct from
those of the corporation controlled by him, may from time to time
be best sewed by an apparent, if not an actual, mismanagement of
industrial affairs. A convincing appearance of decline or
disaster will lower the putative earning-capacity of the concern
below its real earning-capacity and so will afford an
advantageous opportunity for buying with a view to future advance
or with a view to strategic control. Various other expedients
looking to the like outcome are well known to the craft, besides
bona fide mismanagement. A given line of securities may be
temporarily depressed by less heroic tactics; but the point in
question here is the fact that under this system of corporation
finance the affairs of the corporation are in good part managed
for tactical ends which are of interest to the manager rather
than to the corporation as a going concern.
What was said in speaking of credit extension without a
determinate time interval (25*) applies to this class of
business, with a slight change of phrase. In this higher
development of corporation finance, in the manipulations of
vendible capital, the interval of the turnover spoken of above
becomes an indeterminate factor. The gains of the business come
to have but an uncertain and shifty relation to the lapse of time
and cannot well be calculated per cent. per time-unit. There is,
therefore, on these higher levels of business management,
properly speaking no ascertainable ordinary rate of earnings. The
capital which may be distinctively regarded as operative in the
business of manipulation, the valuable items specifically
employed in the traffic in vendible corporate capital, is made up
of the operator's good-will and his financial solvency. Solvency
on a large scale is requisite to carrying on traffic of this
class, but the collateral on which this extensive solvency
constructively rests is to but a partial extent drawn into the
business as a basis for an actual credit extension. What counts
in the case is the solvency of the operator rather than an
outright resort to the credit extension which this solvency might
afford. The working capital involved in these transactions is
accordingly of a peculiarly elusive character, and the time
element in the use of this capital is hard to determine, if such
a time element can properly be said to enter into the case at
all.
More in detail, the business man in pursuit of gain along
this line must, in the ordinary case, be possessed of large
holdings of property, this being the basis of the solvency
necessary to the business. These holdings are commonly in the
form of securities in the concern whose vendible capital is the
subject of his traffic, as well as in other corporations. These
securities represent capital, tangible and intangible, which is
already employed in the ordinary business of the concern by which
they have been issued; the capital, therefore, is already in use
to the full extent and is presumably yielding the ordinary rate
of earnings. But the solvency for which the ownership of this
capital affords a basis may further be useful in enabling the
owner to carry on a traffic in vendible corporate capital without
withdrawing any appreciable portion of his holdings from the
lucrative investments in which they have been placed. In other
words, he is able, under modern circumstances, to make a
secondary use of his investments for the purpose of trading in
vendible corporate capital; but this secondary use of investments
bears no hard and fast quantitative relation to the investments
in question, nor does it in any determinate way interfere with
the ordinary employment of this invested capital in the
commonplace conduct of the corporations' business traffic. The
capital employed, as well as the potential credit extension which
it affords for the purposes of this higher business traffic, is
therefore in a peculiar degree intangible, and, in respect of its
amount, highly elusive.
Much the same is true of the good-will employed in this
traffic. It is also in good part good-will which already serves
the purposes of the commonplace business traffic of the
corporations on whose securities the business man in question
rests his solvency. So that in this higher business traffic the
good-will engaged is also here turned to a secondary use. The
business economies which are in this way made practicable by a
reduplication of uses and made to inure to the greater business
men's profit are of great magnitude; but the magnificent
additions which are in this way made to the business community's
capitalizable forces need scarcely be dwelt on here.
The elusive and flexuous character of the elements of wealth
engaged, as well as the absence of an ascertainable ordinary rate
of earnings in this line of business, has led economists to speak
of this traffic in vendible capital as a "speculative"
business.(26*) The mere buying and selling of stocks by outsiders
for a rise or a decline is of course a speculative business; it
is a typical form of speculative business. But in so far as such
buying and selling is carried on by the managers of the
corporations whose securities are the subject of the traffic, and
especially where the securities are bought and sold with a view
to the control of the corporations in question and their
management for private, tactical ends, a characterization of the
business as "speculative" is inadequate and beside the point.
This higher reach of corporation financiering has little if any
more of a speculative character than what belongs to the
commonplace business management of any industrial enterprise. In
all business enterprise that stands in relations with the market
and depends on vendibility of its output there is more or less
uncertainty as to the outcome.(27*) In this sense all industrial
business, as well as commercial business, has something of a
speculative character. But it is little to the purpose on that
account to lump industrial enterprises and corporation
financiering together as "speculative business" and deal with
them as if this were their most salient and consequential
bearing. What speculative risk there is in these lines of
business is incidental, and it neither affords the incentive to
engaging in these pursuits nor does it bound the scope of their
bearing upon economic affairs. The speculative risk involved is
no greater, relatively to the magnitude of the interests
involved, in this larger traffic that deals in vendible capital
than it is in the ordinary lines of business traffic that deal in
vendible products. In both cases there may be speculation, but in
both cases it is a side issue. Indeed, as near as one may
confidently hold an opinion on so dark a question, the certainty
of gain, though perhaps not the relative amount of it, seems
rather more assured in the large-scale manipulation of vendible
capital than in business management with a view to a vendible
product.
What may obscure the question is the fact that the
manipulations involved in this traffic in vendible capital
commonly impose increased risks upon the business concerns
engaged in industry - the corporations whose capital is involved,
as well as other firms. The everyday business of the corporations
whose securities are involved, as well as of other business
concerns engaged in rival or related lines of industry, is
rendered more hazardous than it might be in the absence of this
financiering traffic in vendible capital. The manipulations carry
risk, not so much to the manipulators as such, as to the
corporations whose properties are the subject of manipulation;
but since the manipulators commonly own but a relatively small
proportion of the properties involved or touched by their
manipulations, the risks which arise do not fall chiefly on them.
To this is to be added, as of prime importance for the whole
question, that the manipulators have the advantage of being able,
in great part, to foresee the nature, magnitude, and incidence of
the risks which they create. Rightly seen, this, of course, goes
to say that the increased speculative risk due to the traffic in
vendible capital does not fall on that traffic, but on the
business enterprise engaged about the output of vendible goods.
The traffic in vendible capital is not without its speculative
risks, but the risks which it creates fall with relatively
greater weight upon the business men who are not immediately
concerned in this traffic. Indeed, so secure and lucrative is
this class of business, that it is chiefly out of gains accruing,
directly and indirectly, from such traffic in vendible capital
that the great modern fortunes are being accumulated; and both
the rate and the magnitude of these accumulations, whether taken
absolutely or relatively to the total increase of wealth, surpass
all recorded phenomena of their kind. Nothing so effective for
the accumulation of private wealth is known to the history of
human culture.
The aim and substantial significance of the "manipulations"
of vendible capital here spoken of is an ever recurring
recapitalization of the properties involved, whereby the
effective capitalization of the corporations whose securities are
the subject of the traffic is increased and decreased from time
to time. The fluctuations, or pulsations, of this effective
capitalization are shown by the market quotations of the
securities, as noted above.(28*) It is out of these variations in
capitalization that the gains of the traffic arise, and it is
also through the means of these variations of capitalization that
the business men engaged in this higher finance are enabled to
control the fortunes of the corporations and to effect their
strategic work of coalition and reorganization of business
enterprises. Hence this traffic in vendible capital is the
pivotal and dominant factor in the modern situation of business
and industry.(29*) It has been noted above that what may be
called the working capital on which this higher corporation
finance proceeds is made up, chiefly, of two elements: the
solvency (and consequent potential credit) of the men engaged,
and the "good-will" of these men. Both of these elements are of a
somewhat intangible and elusive character, resting, as they do,
somewhat indirectly and shiftily on elements already elsewhere
engaged in business enterprise. The solvency in question rests in
large part on the capital of the corporations whose
capitalization is subject to the fluctuations induced by the
traffic in vendible capital. It is therefore necessarily a
somewhat indeterminate and unstable magnitude. To this is to be
added the "floating capital" and banking capital at the disposal
of these men. If a common-sense view be taken of the business,
the good-will engaged must also be added to the assets. There is
involved a very considerable and very valuable body of good-will,
appertaining to the financiers engaged and to the financing firms
associated with them.(30*) This goodwill and this solvency is
capital, for the purpose in hand, as effectually as the good-will
and securities incorporated in the capitalization of any
corporation engaged in industrial business.
But hitherto this particular category of goodwill has not
been formally capitalized. There may be peculiar difficulties in
the way of reducing this good-will to the form of a fund,
expressing it in terms of a standard unit, and so converting it
into quotable common stock, as has been done with the
corresponding good-will of incorporated industrial enterprises.
So also as regards the body of solvency engaged, - the potential
credit, or credit capacity, of the promoters and financiers.
Perhaps this latter had best also be treated as an element of
good-will; it is difficult to handle under any other, more
tangible, conception. It may be difficult to standardize, fund,
and capitalize these unstable but highly efficient factors of
business enterprise; but the successful capitalization of
good-will and credit extensions in the case of the modern
industrial corporations argues that this difficulty should not be
insurmountable in case an urgent need, - that is to say, the
prospect of a profitably vendible result, - should press for a
formal capitalization of these peculiar elements of business
wealth. There can be no question, e.g., but that the good-will
and large solvency belonging to such a firm as J.P. Morgan and
Company for the purposes of this class of business enterprise are
an extremely valuable and substantial asset, as is also, and more
unequivocally, the good-will of the head of that firm. These
intangible assets, immaterial goods, should, in all consistency,
be reduced to standard units, funded, issued as common stock, and
so added to the statistical aggregate of the country's
capitalized wealth.
It is safe to affirm that this good-will of the great
reorganizer has in some measure entered in capitalized form into
the common stock of the United States Steel Corporation, as also
into that of some of the other great combinations that have
latterly been effected. The "good-will" of Mr Carnegie and his
lieutenants, as well as of many other large business men
connected with the steel industry, has also no doubt gone to
swell the capitalization of the great corporation. But good-will
on this higher level of business enterprise has a certain
character of inexhaustibility, so that its use and capitalization
in one corporation need not, and indeed does not, hinder or
diminish the extent to which it may be used and capitalized in
any other corporation.(31*) The case is analogous, though
scarcely similar, to that of the workmanlike or artistic skill of
a handicraftsman, or an artist, which may be embodied in a given
product without abating the degree of skill possessed by the
workman. Like other good-will, though perhaps in a higher degree
of sublimation, it is of a spiritual nature, such that, by virtue
of the ubiquity proper to spiritual bodies, the whole of it may
undividedly be present in every part of the various structures
which it has created. Indeed, the fact of such good-will having
been incorporated in capitalized form in the stock of any given
corporation seems rather to augment than to diminish the amount
at which it may advantageously be capitalized in the stock of the
next corporation into which it enters. It has also the
correlative spiritual attribute that it may imperceptibly and
inscrutably withdraw its animating force from any one of its
creatures without thereby altering the material circumstances of
the corporation which suffers such an intangible shrinkage of its
forces.
There can be no question but that the good-will of the
various great organizers and their financiering houses has
repeatedly been capitalized, probably to its full amount, in the
common stock of the various corporations which they have created;
but taken in the sense of an asset belonging to the financing
house as a corporation, it is not known that this item of
immaterial wealth has yet been formally capitalized and offered
in quotable shares on the market or included in the schedules of
personal property.(32*)
The sublimation of business capital that has been going
forward in recent times has grave consequences for the owners of
property as well as for the conduct of industry. In so far as
invested property is managed by the methods of modem corporation
finance, it is evident that the management is separated from the
ownership of the property, more and more widely as the scope of
corporation finance widens. The discretion, the management, lies
in the hands of the holders of the intangible forms of property;
and with the extension of corporation methods it is increasingly
true that this management, again, centres in the hands of those
greater business men who hold large blocks of these intangible
assets. The reach of a business man's discretionary control,
under corporation methods, is not proportioned simply to the
amount of his holdings. If his holdings are relatively small,
they give him virtually no discretion. Whereas if they are
relatively large, they may give him a business discretion of much
more than a proportionate reach. The effective reach of a
business man's discretion might be said to increase as the square
of his holdings; although this is to be taken as a suggestive
characterization rather than as an exact formula.
Among the holdings of industrial property that count in this
way toward control of the business situation, the intangible
assets (represented by common stock, good-will, and the like) are
chiefly of consequence. Hence follow these two results: the
fortunes of property owners are in large measure dependent on the
discretion of others the owners of intangible property; and the
management of the industrial equipment tends strongly to centre
in the hands of men who do not own the industrial equipment, and
who have only a remote interest in the efficient working of this
equipment. The property of those who own less, or who own only
material goods, is administered by those who own more, especially
of immaterial goods; and the material processes of industry are
under the control of men whose interest centres on an increased
value of the immaterial assets.(33*)
NOTES:
1. The distinction between business capital and "industrial
capital" or "capital goods" has been shown by Knies, Geld und
Credit, vol. I. ch. II. pp. 40-60. Distinctions having a very
similar erect in some bearings are to be found in Rodbertus
("private capital" and "national capital"), in Bohm-Bawerk
("acquisitive capital" and "productive capital," or "private
capital" and "social capital"), in Clark ("capital" and "capital
goods"). Similar distinctions are made by various writers to help
out the incompetency of the received definition of the term. The
merit of these distinctions does not concern the present inquiry,
since they are made for other purposes than that here aimed at.
The distinction made above is not an attempt to recast the
terminology of economic theory, but is simply an expedient for
present use. It amounts to an unqualified acceptance of the
concept (more or less well defined) which business men habitually
attach to the term "capital." Mr F.A. Fetter has latterly spoken
for the restriction of "capital," as a technical term,
practically to what is here called "business capital." Mr
Fetter's "capital concept," however, should probably not be taken
to cover intangible assets. The practical distinction is visible
in the testimony of various witnesses before the Industrial
Commission, as also in the special report on "Securities,"
Report, vol. XIII.
2. Even so late and competent a student of corporate capital as
J. von Korosi is bound by this antique preconception, and his
work has suffered in consequence. See Finanzielle Ergebnisse der
Actiengesellschaften, p. 3.
3. This state of the case is brought out, in a veiled manner, by
the well-known proposition, expounded in varying form by various
writers, that the cost of equipment on which capitalization must,
in theory, take place is the cost of reproduction of all valuable
items included, tangible and intangible.
4. "Nothing is more illusive and delusive than the idea that if a
corporation's stock be only paid in in money at the outset it is
therefore better off than one that has issued its stock for
property that could not be converted for one cent on the dollar.
The question is what assets the corporation has got at the time
of the particular transaction, and that can be ascertained only
by present inquiry." - Testimony of F.L. Stetson, Report of the
Industrial Commission, vol. I. p. 976. Cf. Meade, Trust Finance,
ch. XVI and XVIII.
5. Earning-capacity is practically accepted as the effective
basis of capitalization for corporate business concerns,
particularly for those whose securities are quoted on the market.
It is in the stock market that this effective capitalization
takes place. But the law does not recognize such a basis of
capitalization; nor are business men generally ready to adopt it
in set form, although they constantly have recourse to it, in
effect, in operations of investment and of credit extension. Cf.
Report of the Industrial Commission, vol. I. pp. 6, 17, 21 (Test.
F.B. Thurber); p. 967 (Test. F.L. Stetson); pp. 585-587 (Test.
H.H. Rogers); pp. 110-111, 124 (Test. H.O. Havemeyer); pp. 1021,
1032 (Test. J.W. Gates); pp. 1054-1055 (Test S. Dodd); vol. XIII.
pp. 287-288 (Test. H. Burn); p. 388 (Test. J. Morris); pp.
107-108 (Test. E.R. Chapman). See Quarterly Journal of Economics,
February 1903, pp. 344-345, "The Holyoke Water Case," for an
illustrative decision.
6. The advantages afforded their owners by these intangible
assets have latterly been discussed by economists under such
headings as "Rent" or "Quasi-Rent." These discussions, it is
believed, are of great theoretical weight. In business practice,
however, the items in question are treated as capital, which must
avail as an excuse for including them here in business Capital.
7. Compare Bohm-Bawerk's and Clark's distinctions between
"private" and "social" capital, and between "capital" and
"capital goods."
8. See Chapter III above.
9. On the books of the corporation it is, of course, carried as
an item of liability; as is the common stock; but that is a
technical expedient of accountancy, and does not touch the
substantial question.
10. See testimony of various witnesses on "Capitalization" before
the Industrial Commission, vols. I, IX, XIII.
11. As one of many illustrative cases, the Rubber Goods
Manufacturing Company may be taken as a typical instance of a
corporation organized in a conservative but up-to-date manner for
permanent success and stable value. Its authorized issue of stock
is $25,000,000 7 per cent cumulative preferred, and $25,000,000
common. The actual issue in 1901 was about $8,000,000 preferred
and $17,000,000 common, of which the preferred was presumed to
cover the value of the tangible assets. Another coalition
organized by the same promoter (Mr C.R. Flint), the American
Chicle Company, illustrates the same general feature. The
preferred stock of this company ($3,000,000) "in round numbers
was three times the amount of tangible assets," while the common
stock ($6,000,000) represents no tangible assets. The aggregate
capitalization is about nine times the tangible assets. The
witness says that this corporation has been proved by events to
be "on a conservative basis from the fact that the company has
paid 8 per cent on its common stock," which has been selling at
80. - Report of the Industrial Commission, vol. XIII. pp. 47, 50.
12. It may be argued that this identification of the common stock
with the intangible assets holds true in theory only, in the
sense that this is the view held by the business men who occupy
themselves with such matters; while in point of fact no
distinction of this nature between common and preferred stock is
or can practically be maintained after the stock has once found
its way into the market. It might seem, in other words, that when
the stock has once passed the stage of organization and gone into
the hands of the purchasers, each share represents nothing but an
undivided interest in the aggregate capitalization of the
concern, so that the particular item of wealth represented by a
given share or given form of security can no longer be
identified.
On the face of the situation such appears to be the case, but
there are facts which argue for the view set out above. It is,
e.g., well known that whenever circumstances arise which
immediately affect the value of the good-will of a corporation,
it is the quotations of the common stock that first and most
decidedly are affected. If the goodwill of the concern makes a
great and rapid gain, e.g. through manoeuvres which put it in a
position of monopoly or through changes in the goods market which
greatly increase the demand for the concern's product, and the
like, it is the quotation of the common stock that measures and
registers the advantage which thereby accrues to the concern, and
the market fluctuation of the common stock is likewise the
instrument by means of which manipulations are carried through
that affect these intangible assets. At the same time this rule
does not hold hard and fast, as is seen in case of a liquidation
when the capital of the concern may have shrunk to such
dimensions that the entire capital, including the intangible
assets, will no more than satisfy the claims represented by the
debentures. Still, in point of practical fact, the (theoretical)
preconception of businessmen that the common stock in some
intelligible sense covers the intangible assets is fairly borne
out by everyday experience, taken by and large.
A curious parallel might be traced between the current
endeavors of the business community to organize and manage the
industrial equipment on the basis of immaterial assets and the
medieval business perplexities and actions relative to loans on
interest. In both cases the business community has had to face
untried exigencies together with a popular, traditional prejudice
that discountenances the expedients by which these exigencies are
to be met. The medieval presumption was that the management of
productive goods and the profits accruing from their use must go
to their users. (Cf. Ashley, Economic History, vol. I. ch. III,
vol. II ch. VI; Endemann, Die nationalokonomische Grundsatze der
kanonistischen Lehre.) The modern presumption is that the
management of the equipment and the gains from such management
must vest in the owner. The modern exigencies decide that the
equipment must be managed by others than the owners and that
profits must largely accrue to those who financially manage the
concern. The expedient by which this result is sought to be
reached is the fiction of intangible assets and the impersonal,
irrevocable credit extension covered by the preferred stock. The
effect is to dissociate ownership from management. This is the
necessary outcome of a "credit economy" consistently and fully
carried through. The management of the material equipment of
industry is thrown into the hands of those who own the immaterial
wealth; that is to say, those who own the claim to manage the
equipment. The current prejudice which insists on management by
the owners is set aside by feigning that this claim has an
industrial value, and so capitalizing it on the basis of the
differential advantage which accrues to its holders.
13. See also a discussion by E.S. Meade, Quarterly Journal of
Economics, February 1902, pp. 217 et seq., of how "good-will" may
vary in magnitude, or even disappear, when a concern eaters a
larger coalition; also, on the same general head, W.F.
Willoughby," Integration of Industry in the United States,"
ibid., November 1902.
14. p. 113 above.
15. cap' = cap + cap/n > cap, in which cap' is the nominal
capital, as increased by the credit element cap/n.
16. mat' = mat + (1/n)(cap/n) > mat, in which mat' is the current
value of the material equipment,as increased (over mat) by the
competitive demand for equipment due to the credit element cap/n.
One of the substantial secondary benefits to be noted as flowing
from these modem business expedients is the effect of corporation
finance upon the aggregate nominal wealth of the community. A
given community, possessed of a given complement of material
wealth, is richer in capital if a large proportion of its
industrial equipment is capitalized and managed by corporation
methods, quite apart from any increase in the material items of
which the community is possessed. (Cf. Twelfth Census of the
United States, "Manufactures," pt. I. p. xcvi) Wealth may in this
way be increased (about twofold on an average), inexpensively, by
the simple expedient of incorporating the community's business
concerns in the form of joint-stock companies. The more highly
involved and the more widely extended the corporation
financiering is, the richer, in statistical terms of capital, is
the community, other things equal. Among these other things are
the material facts of the case.
17. The commodities bought and sold in the goods market are the
outcome of a process of production and are useful for a material
purpose; those bought and sold in the capital market are the
outcome of a process of valuation and are useful for purposes of
pecuniary gain.
18. Cf. Marx, Kapital (4th ed.) bk. I, ch. IV.
19. Effective capital = current market value of nominal capital =
presumptive earning capacity x purchase period, neglecting
fortuitous and incalculable items which may affect any given
case.
If nominal capital = cap, effective capital = cap', presumed
annual earnings = ea', and the purchase period of capitalized
property (years' purchase) = yp = 1/interest rate per annum, we
have cap <> cap' = ea' x yp = ea'/int.
This equation between cap' and ea' is disturbed by the
presence in any given case of variable factors which cannot be
included in the equation, but it remains true after all
qualification has been made that cap' = f(ea'/int).
20. Something of this kind is the usual ground of the obstinate
resistance which most business men oppose to publicity of
accounts. In lines of business, as, e.g. railroading, in which
accounts are readily and effectually sophisticated ("doctored"),
the objections to publicity are commonly less strenuous.
21. Cf., e.g., Eberstadt, Deutsche Kapitalismarkt.
22. The capital of any industrial concern under the "money
economy" is, of course, also vendible, but with relative
difficulty; while the readier vendibility of modern corporate
capital is so characteristic and consequential a factor in
business and contrasts so broadly with the old-fashioned business
methods that it may fairly be spoken of as vendibility par
excellence. The "holding company" is the mature development of
this traffic in vendible capital in industrial business.
23, It may be noted, by the way, that the question of the
turnover (spoken of on p. 95 above) becomes, under the
circumstances of the modern corporation finance, in great part a
question of the interval between the purchase and sale of the
capital engaged in industry on the one hand, and of the magnitude
of the discrepancy between actual and putative earning-capacity
on the other hand, rather than a question of the period of the
industrial process and the magnitude of the output and its price.
The formula there shown becomes: --
turnover = capital/time (actual earning capacity/n = putative
earning capacity - actual earning capacity)
in which capital is the amount of the operator's investment in
the concern's securities, the time is the interval between
purchase and sale of the securities, and the putative earning
capacity is taken to exceed the actual earning capacity by an
indeterminate fraction of the latter.
24. Cf. Chapter III above.
25, Cf. Chapter V above.
26. Cf. Emery, "Place of the Speculator in the Theory of
Distribution." Proceedings of the twelfth annual meeting of the
American Economic Association; also "Discussion" following Mr
Emery's paper.
27. Well shown in Mr Emery's paper cited above.
28. p. 154.
29. As is true of good-will and credit extensions generally, so
with respect to the good-will and credit strength of these
greater business men ; it affords a differential advantage and
gives a differential gain. In the traffic of corporation finance
this differential gain is thrown immediately into the form of
capital and so is added to the nominal capitalized wealth of the
community. What it gives to its holders in this capitalized form
is a claim to a proportionate share in the existing wealth. If
other things are supposed to remain the same (which may not be
the case), the claim so enforced by the great financiers on the
basis of good-will and credit extension deducts that much from
the wealth held by the rest, the previous holders, as counted in
terms of material wealth; as counted in term of money value, of
course, the holdings of previous holders do (or need) not suffer,
since the new claim take the form of an edition to the number of
capitalized value units, although the increased aggregate number
of value units constitutes a claim on the same aggregate mass of
wealth as before. The pro rata reduction of the material
magnitude of the several shares of wealth is not felt as an
impoverishment, because it does not take the form of a reduction
of the nominal value of the shares.
This capitalization of the gains arising from a differential
advantage results in a large "saving" and increase of capital.
The wealth so drawn in by the financiers (entrepreneurs) is
nearly all held as capital, very little of it being consumed in
current expenses of living. It has been cogently argued that the
profits of the undertakers is the chief and normal source of
capitalized savings in the modern situation, and the method here
indicated seem to be the method by which such saving is chiefly
effected. An extremely suggestive discussion of the undertaker's
gains in this connection occurs in a paper by L.V. Birck
("Driftsherrens Geviust"), read before the Danish Economic
Association, December 1901. More immediately to the point still
is V. Schou's discussion of Mr Birck's paper. (See
Nationalokonomisk Tidsskrift, January-February 1902, pp. 76,
78-80) J.B. Clark, in lectures hitherto unprinted, follows a line
of analysis somewhat closely parallel with Schou, though not
carried to quite the same length.
This process of combined recapitalization and saving may be
stated formally as follows: The initial value of the properties
submitted for coalition and recapitalization, cap, is in the
normal case augmented by the increment delta, making the
effective value of the properties = cap + delta, in effective
units, Uc. This augmented effective value of the properties =
Uc(cap + delta) is capitalized at a nominal value of cap' =
Un(cap + delta), in nominal units, Un, nominally equivalent to
Uc. In the recapitalization the number of units of capitalization
is increased by an element of intangible assets assigned the
owners on account of a presumed increase of earning-capacity due
to the coalition. This element of good-will due to coalition may
be called co. Further there is added the bonus of the promoter,
taken as a block of stock in the new capitalization, pro. Hence
Un(cap') = Un(cap + delta) = Un(cap + co + pro). Un (pro) = Un
(cap' - cap - co) = Un (delta - co) is evidently a secure gain to
the promoter of Uc(delta - co) , which is a fraction of the
effective value Uc(cap + delta). This is saved by him in the
capitalized form. The account of the former owners of the
properties will then stand as follows: Uc(cap + delta - pro) <>
Uc(cap) according as Uc delta <> Uc(pro). The nominal gain of the
owners, co, may or may not be a real gain according as the event
may prove that the promoter's bonus has not or has absorbed the
entire effective augmentation of value, delta, due to the
coalition ; it is therefore a problematical gain, which may or
may not, in the event, prove to be an effective element of
capitalized savings.
The constitution of delta will decide what is the ultimate
source of the savings effected by this transaction. If delta
consists entirely of economies of production, the capitalized
savings held by the promoter and former owners as a result of the
transaction represent new values added to, or saved to, the
aggregate wealth of the community. If delta consists entirely of
good-will in the shape of monopoly advantage, the saving is
effected at the cost of the community and for the benefit of the
promoter and owners; it is then an involuntary or subconscious
saving on the part of the community, whereby a part of the
community's wealth at large passes into the hands of the
recapitalized corporation. Where delta is made up of these two
constituents together, the result, as regards the present point,
should be plain without discussion. If, on the other hand, delta
= 0, so that cap' = cap, then the promoter's savings; pro, are
secured at the cost of the former owners; Uc(cap' - pro) = Uc(cap
+ (delta = 0) - pro) = Uc(cap - pro). Whereas if Uc(pro) =
Uc(delta), Uc(co) = 0, leaving the owners without effective
profit or loss in spite of any nominal increase of the
capitalization.
30. "Good-will" in this field of enterprise most frequently takes
the form of a large ability to help or hinder other financiers
and financing houses in any similar manoeuvres in which they may
be engaged, or an ability to put them in the way of lucrative
financing transactions. The guild of financiers is commonly split
up into more or less well-defined factions, each comprising an
extensive ramification of financing houses and financiers
furthering one another's endeavors under more or less settled
working arrangements. These working arrangements are a large part
of the financiers' "good-will."
31. This category of good-will stands in a relation to the
creation of vendible capital similar to that which the corporate
good-will of an industrial business concern bears to the creation
of vendible products.
32. Parenthetically it may be remarked that the failure to
capitalize such items of good-will is likely to involve a virtual
evasion of the tax on personal property, and may, therefore, be
questionable on moral grounds.
The case of J.P. Morgan and Company is, of course, not here
cited as being a unique or peculiar instance, but simply as a
typical and striking illustration of what happens and of what
might be accomplished in a number of large and very consequential
cases of the same class.
33. This dissociation of the business control from workmanlike
efficiency and from immediate contact with or ownership of the
industrial plant gives the existing situation a superficial
resemblance to the feudal system, in so far as touches the
immateriality of the captain's connections with the everyday life
and interests of the community of whose affairs he is master. It
gives a certain plausibility to the attempted interpretation of
latter-day economic developments in feudalistic terms. - See
Ghent, Our Benevolent Feudalism.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 7
The Theory of Modern Welfare
Before business principles came to dominate everyday life the
common welfare, when it was not a question of peace and war,
turned on the ease and certainty with which enough of the means
of life could be supplied. Since business has become the central
and controlling interest, the question of welfare has become a
question of price. Under the old regime of handicraft and petty
trade, dearth (high prices) meant privation and might mean famine
and pestilence; under the new regime low prices commonly mean
privation and may on occasion mean famine. Under the old regime
the question was whether the community's work was adequate to
supply the community's needs; under the new regime that question
is not seriously entertained.
But the common welfare is in no less precarious a case. The
productive efficiency of modern industry has not done away with
the recurrence of hard times, or of privation for those classes
whose assured pecuniary position does not place them above the
chances of hard times. Distress may not be so extreme in modern
industrial communities, it does not readily reach the famine
mark; but such a degree of privation as is implied in the term
"hard times" recurs quite as freely in modern civilized countries
as among the industrially less efficient peoples on a lower level
of culture. The oscillation between good times and bad is as wide
and as frequent as ever, although the average level of material
well-being runs at a higher mark than was the case before the
machine industry came in.
This visible difference between the old order and the new is
closely dependent on the difference between the purposes that
guide the older scheme of economic life and those of the new.
Under the old order, industry, and even such trade as there was,
was a quest of livelihood; under the new order industry is
directed by the quest of profits. Formerly, therefore, times were
good or bad according as the industrial processes yielded a
sufficient or an insufficient output of the means of life.
Latterly times are good or bad according as the process of
business yields an adequate or inadequate rate of profits. The
controlling end is different in the present, and the question of
welfare turns on the degree of success with which this different
ulterior end is achieved. Prosperity now means, primarily,
business prosperity; whereas it used to mean industrial
sufficiency.
A theory of welfare which shall account for the phenomena of
prosperity and adversity under the modern economic order must,
accordingly, proceed on the circumstances which condition the
modern situation, and need not greatly concern itself with the
range of circumstances that made or marred the common welfare
under the older regime, before the age of machine industry and
business enterprise.(1*) Under the old order, when those in whose
hands lay the discretion in economic affairs looked to a
livelihood as the end of their endeavors, the welfare of the
community was regulated "by the skill, dexterity, and judgment
with which its labor was generally applied."(2*) What would mar
this common welfare was the occasionally disastrous act of God in
the way of unpropitious seasons and the like, or the act of man
in the way of war and untoward governmental exactions. Price
variations, except as conditioned by these untoward intrusive
agencies, had commonly neither a wide nor a profound effect upon
the even course of the community's welfare. This holds true, in a
general way, even after resort to the market had come to be a
fact of great importance in the life of large classes, both as an
outlet for their products and as a base of supplies of consumable
goods or of raw materials, - as in the better days of the
handicraft system.
Until the machine industry came forward, commerce (with its
handmaiden, banking) was the only branch of economic activity
that was in any sensible degree organized in a close and
comprehensive system of business relations. "Business" would then
mean "commerce," and little else. This was the only field in
which men habitually took account of their own economic
circumstances in terms of price rather than in terms of
livelihood. Price disturbances, even when they were of
considerable magnitude, seem to have had grave consequences only
in commerce, and to have passed over without being transmitted
much beyond the commercial houses and the fringe of occupations
immediately subsidiary to commercial business.
Crises, depressions, hard times, dull times, brisk times,
periods of speculative advance, "eras of prosperity," are
primarily phenomena of business; they are, in their origin and
primary incidence, phenomena of price disturbance, either of
decline or advance. It is only secondarily, through the mediation
of business traffic, that these matters involve the industrial
process or the livelihood of the community. They affect industry
because industry is managed on a business footing, in terms of
price and for the sake of profits. So long as business enterprise
habitually ran its course within commercial traffic proper, apart
from the industrial process as such, so long these recurring
periods of depression and exaltation began and ended within the
domain of commerce.(3*) The greatest field for business profits
is now afforded, not by commercial traffic in the stricter sense,
but by the industries engaged in producing goods and services for
the market. And the close-knit, far-reaching articulation of the
industrial processes in a balanced system, in which the
interstitial adjustments are made and kept in terms of price,
enables price disturbances to be transmitted throughout the
industrial community with such celerity and effect that a wave of
depression or exaltation passes over the whole community and
touches every class employed in industry within a few weeks. And
somewhat in the same measure as the several modern industrial
peoples are bound together by the business ties of the world
market, do these peoples also share in common any wave of
prosperity or depression which may initially fall upon any one
member of this business community of nations. Exceptions from
this rule, of course, are such periods of prosperity or
depression as result from local (material) accidents of the
seasons and the like, - accidents that may inflict upon one
community hardships which through the mediation of prices are
transmuted into gain for the other communities that are not
touched by the calamitous act of God to which the disturbance is
due.
The true, or what may be called the normal, crises,
depressions, and exaltations in the business world are not the
result of accidents, such as the failure of a crop. They come in
the regular course of business. The depression and the exaltation
are in a measure bound together. In the recent past, since
depression and exaltation have been normal features of the
situation, every strongly marked period of exaltation
(prosperity) has had its attendant period of depression; although
it does not seem to follow in the nature of things that a wave of
depression necessarily has its attendant reaction in the way of a
period of business exaltation. In the recent past - the last
twenty years or so - it has been by no means anomalous to have a
period of hard times, or even a fairly pronounced crisis, without
a wave of marked exaltation either preceding or following it in
such close sequence as conveniently to connect the two as action
and reaction. But it would be a matter of some perplexity to a
student of this class of phenomena to come upon a wave of marked
business exaltation (prosperity) that was not promptly followed
by a crisis or by a period of depression more or less pronounced
and prolonged. Indeed, as the organization of business has
approached more and more nearly to the relatively consummate
situation of to-day, - say during the last twenty years of the
nineteenth century, - periods of exaltation have, on the whole,
grown less pronounced and less frequent, whereas periods of
depression or "hard times" have grown more frequent and
prolonged, if not more pronounced. It might even be a tenable
generalization, though perhaps unnecessarily broad, to say that
for a couple of decades past the normal condition of industrial
business has been a mild but chronic state of depression, and
that any marked departure from commonplace dull times has
attracted attention as a particular case calling for a particular
explanation. The causes which have given rise to any one of the
more pronounced intervals of prosperity during the past two
decades are commonly not very difficult to trace; but it would be
a bootless quest to go out in search of special causes to which
to trace back each of the several periods of dull times that
account for the greater portion of the past quarter of a century.
Under the more fully developed business system as it has stood
during the close of the century dull times are, in a way, the
course of nature; whereas brisk times are an exceptional
invention of man or a rare bounty of Providence.
What current economic theory has to say on the common welfare
is more frequently found under the caption of crisis and
depression than in any other one connection. And the theory of
crisis and depression has, as is well known, been one of the less
happy passages in the economists' repertory of doctrines. It has
been customary to approach the problem from the side of the
industrial phenomena involved - the mechanical facts of
production and consumption; rather than from the side of business
enterprise - the phenomena of price, earnings, and
capitalization. This untoward accident of a false start is
probably accountable for the fact that no tenable theory of these
phenomena has yet been offered. The solutions attempted have
commonly proceeded by an analysis of industrial life apart from
business enterprise; that is to say, they have sought to explain
the occurrence of crises under that old-fashioned "natural
economy" or "money economy" under which crises did not normally
occur.(4*)
Taking as a point of departure the patent fact that crises,
depressions, and brisk times are in their first incidence
phenomena of business, of prices and capitalization, an
explanation of their appearance and disappearance, and of their
bearing upon the common welfare, may be sought by harking back to
those business principles that underlie modern capitalistic
enterprise. An analysis of the current, common-sense business
views of price and investment should indicate the genesis and
manner of growth of these mass movements of the business
community, as well as the character of those circumstances which
may further or inhibit such movements. Business depression and
exaltation are, at least in their first incidence, of the nature
of psychological fact, just as price movements are a
psychological phenomenon.
The everyday circumstances which condition the modern
business management of industry are sufficiently well known, and
they have already been reviewed in some detail in earlier
chapters; but they may perhaps advantageously be outlined again
in so far as they bear immediately on the question in hand.
(1) Industry is carried on by means of investment, which is
made with a view to pecuniary gain (the earnings). The business
man's endeavors in managing the affairs of the concern in which
investment has been made look to the same end. The gains are kept
account of as a percentage on the investment, and both they and
the industrial plant or process through the management of which
they are procured are counted in terms of money, and, indeed, in
no other terms. The plant or process (or the investment, whatever
form it takes) is capitalized on the basis of the gains which
accrue from it, and this capitalization proceeds on the ground
afforded by the current rate of interest, weighted by
consideration of any prospective change in the earning-capacity
of the concern. The management of the concern is effected by a
more or less intricate and multifarious sequence of bargains. The
decisive consideration at every point in this traffic of
investment and administration is the consideration of price in
one relation or another.
(2) The industry to which the business men in this way resort
as the ways and means of gain is of the nature of a mechanical
process, or it is some employment (as commerce or banking) that
is closely bound up with the mechanical industries. Broadly, it
is such industry as lies under the dominion of the machine, in
that it is involved in that comprehensive quasi-mechanical
process of modern industrial life that has been discussed in an
earlier chapter. This implication of each industry in a
comprehensive system, or this articulation with other branches of
industry, is of such a nature as to place each industrial concern
in dependence on one or more other branches of industry, from
which it draws its materials, appliances, etc., and to which it
disposes of its output; and these relations of dependence and
articulation form an endless sequence. That is to say, the
interindustrial relations into which any branch of industry
necessarily enters do not run to a final term in any direction;
within the process of industry at large there is no member that
stands in the relation of an initial term to any sequence of
processes. The ramification of industrial dependence is without
limits. The method of these relations of one concern to another,
or of one branch of industry to another, is that of bargaining,
contracts of purchase and sale. It is a pecuniary relation, in
the last resort a price relation, and the balance of this system
of interstitial relations is a price balance.
(3) These interstitial pecuniary relations, between the
several concerns or branches of industry that make up the
comprehensive industrial system at large, involve credit
relations of greater or less duration. The bargaining, by means
of which industry is managed and the interstitial relations
adjusted, takes the form of contracts for future performance. All
industrial concerns of appreciable size are constantly involved
in such contracts, which are, on an average, of considerable
magnitude and duration, and commonly extend in several
directions. These contracts may be of the nature of loans,
advances, outstanding accounts, engagements for future delivery
or future acceptance, but in the nature of the case they involve
credit obligations. Credit, whether under that name or under the
name of orders, contracts, accounts, and the like, is inseparable
from the management of modern industry in all that concerns the
working relations between businesses that are not under one
ownership, or between which the relations resting on separate
ownership have not been placed in abeyance by some such expedient
as lease, pool, syndicate, trust agreement, and the like. Credit
relations of one kind and another are also found expedient and
profitable at many points where their employment is not precisely
unavoidable. These extended credit relations are requisite to the
most expeditious and profitable conduct of business, and so to
the highest degree of success of the business. Under the regime
of the machine industry and modern business methods it is
probably fair to say that the use of credit, apart from loan
capital and leases, unavoidably goes to the extent required to
cover all goods in process of elaboration, from the raw material
to the finished goods, in so far as the goods change hands (in
point of ownership) during the process.
(4) The conduct of industry by competing business concerns
involves an extensive use of loan credit, as spoken of in Chapter
V above.
The four conditions recited are characteristic features of
that recent past during which brisk times, crises, and
depressions followed one another with some regularity as
incidents of the normal course of business.(5*) Certain
qualifications of this characterization are necessary to fit the
immediate present. These will be indicated presently.
In brisk times the use of credit is large; it may be as a
cause or an effect of the acceleration of business; most commonly
it seems to be both a cause and an effect. No appreciable
business acceleration takes place without an extension of credit,
at least in the form of contracts of purchase and sale for future
performance, if not also in the form of loans. In times of
protracted depression the use of credit seems on the whole to be
somewhat restricted, at least such is the current apprehension of
the case among business men. Still, it cannot confidently be said
that seasons of protracted depression are due solely to an
absence of credit relations or to an unwillingness to enter into
credit relations. A comparison of the course of interest rates,
e.g., does not warrant the generalization that the readiness with
which loans can be negotiated need be appreciably different in
brisk and in dull times.(6*) The readiness with which contracts
of purchase and sale are negotiated is appreciably greater in
brisk times than in times of depression; that, indeed, is the
obvious difference between the two.
Of the three phases of business activity, depression,
exaltation, and crisis, the last named has claimed the larger and
livelier attention from students, as it is also the more
picturesque phenomenon. An industrial crisis is a period of
liquidation, cancelment of credits, high discount rates, falling
prices and "forced sales," and shrinkage of values. It has as a
sequel, both severe and lasting, a shrinkage of capitalization
throughout the field affected by it. It leaves the business men
collectively poorer, in terms of money value; but the property
which they hold between them may not be appreciably smaller in
point of physical magnitude or of mechanical efficiency than it
was before the liquidation set in. It commonly also involves an
appreciable curtailment of industry, more severe than lasting;
but the effects which a crisis has in industry proper are
commonly not commensurate with its consequences in business or
with the importance attached to a crisis by the business
community. It does not commonly involve an appreciable
destruction of property or a large waste of the material articles
of wealth. It leaves the community at large poorer in point of
market values, but not necessarily in terms of the material means
of life. The shrinkage incident to a crisis is chiefly a
pecuniary, not a material, shrinkage; it takes place primarily in
the intangible items of wealth, secondarily in the price rating
of the tangible items. Apart from such rerating of wealth, the
most substantial immediate effect of a crisis is an extensive
redistribution of the ownership of the industrial equipment, as
noted in speaking of the use of credit.
The play of business exigencies which lead to such a period
of liquidation seems to run somewhat as follows: Many firms have
large bills payable falling due at near dates, at the same time
that they hold bills receivable also in large amounts. To meet
the demand of their creditors they call upon their debtors, who
may in their turn have bills receivable or may hold loans on
collateral. The initial move in the sequence of liquidation may
be the calling in of a call loan, or a call for additional
collateral on a call loan. At some point, earlier or later, in
the sequence of liabilities the demand falls upon the holder of a
loan on collateral which is, in the apprehension of his creditor,
insufficient to secure ready liquidation, either by a shifting of
the loan or by a sale of the collateral. The collateral is
commonly a block of securities representing capitalized wealth,
and the apprehension of the creator may be formulated as a doubt
of the conservative character of the effective capitalization on
which it rests. In other words, there is an apprehension that the
property represented by the collateral is over-capitalized, as
tested by the current quotations, or by the apprehended future
quotations, of the securities in question. The market
capitalization of the collateral has taken place on the basis of
high prices and brisk trade which prevail in such a period of
business exaltation as always precedes an acute crisis. When such
a call comes upon a given debtor, the call is passed along to the
debtors farther along in the sequence of liabilities, and the
sequence of liquidations thereby gets under way, with the effect,
notorious through unbroken experience, that the collateral all
along the line declines in the market. The crisis is thereby in
action, and the further consequences follow as a wellknown matter
of course. All this is familiar matter, known to business men and
students by common notoriety.
The immediate occasion of such a crisis, then, is that there
arises a practical discrepancy between the earlier effective
capitalization on which the collateral has been accepted by the
creditors, and the subsequent effective capitalization of the
same collateral shown by quotations and sales of the securities
on the market. But since the earlier capitalization commonly, in
the normal case, comes out of a period of business prosperity,
the point of inquiry is as to the ground and method of this
effective capitalization of collateral during the period of
prosperity that goes before a crisis, and this, in turn, involves
the question of the nature and causes of a period of prosperity.
The manner in which the capitalization of collateral, and
thereby the discrepancy between the putative and actual
earning-capacity of capital, is increased by loan credit during
an era of prosperity has been indicated in some detail in Chapter
V above. But it may serve to enforce the view there taken, if it
can be shown on similar lines that a period of prosperity will
bring on a like discrepancy between putative and actual
earning-capacity, and therefore between putative and eventual
capitalization of collateral, even independently of the expansion
effected by loan credit.
A period of prosperity is no more a matter of course than a
crisis. It has its beginning in some specific combination of
circumstances. It takes its rise from some traceable favorable
disturbance of the course of business. In such a period the
potent fact which serves as incentive to the acceleration of
business is a rise of prices. This rise of prices presently
becomes general as prosperity progresses and becomes an habitual
fact, but it takes its start from some specific initial
disturbance of prices. That is to say, prices rise first in some
one industry or line of industries.(7*)
By new investments, as well as by extending the operations of
the plants already employed, business men forthwith endeavor to
take advantage of such a rise. The endeavor to market an
increased supply of the things for which there is an enlarged
demand, brings on an increased demand and an advance of prices in
those lines of industry from which the concerns that had the
initial advantage draw their supplies. In part by actual increase
of demand and in part through a lively anticipation of an
advanced demand, aggressive business enterprise extends its
ventures and pushes up prices in remoter lines of industry. This
transmission of the favorable disturbance of business
(substantially a psychological phenomenon) follows very promptly
under modern conditions, so that any differential advantage that
accrues at the outset to the particular line of industry upon
which the initial disturbance falls is presently lost or greatly
lessened. In the meantime extensive contracts for future
performance are entered into in all directions, and this
extensive implication of the various lines of industry serves, of
itself, to maintain the prosperity for the time being. If the
original favorable disturbance of demand and prices, to which the
prosperity owes its rise, falls off to the earlier level of
demand, the era of prosperity has thereby a term set to its run;
although the date of its termination is always at some distance
in the future, beyond the time when the original demand has
ceased to act. The reason for this retardation, whereby the close
of an era of prosperity is always delayed, other things equal,
beyond the lapse of the cause from which it has arisen, is (1)
the habit of buoyancy, or speculative recklessness, which grows
up in any business community under such circumstances, (2) the
continued life of a considerable body of contracts for future
performance, which acts to keep up the demand for such things as
are required in order to fill these contracts and thereby keeps
up prices in so far. In general it may be said that after the
failure of the favorable price disturbance to which it is due, an
era of prosperity will continue for that (indefinite) further
period during which the fringe of outstanding contracts continues
to dominate the business situation. Some further, new contracts
will always continue to be made during this period, and some
unfilled contracts will always be left standing over when the
liquidation sets in; but, broadly speaking, the wind-up comes,
not when this body of outstanding contracts have run out or been
filled, but when the business of filling them and of filling the
orders to which they give rise no longer occupies the attention
of the business community in greater measure than the rest of
current business.
The run of business exigencies on which an era of prosperity
goes forward may be sketched in its general features somewhat as
follows: Increased demand and enhanced prices, with the large
contracts which follow from such a state of the market, increase
the prospective earnings of the several concerns engaged. These
prospective earnings may eventually be realized in full measure,
or they may turn out to have been putative earnings, only. that
is largely a question of how far in the future the liquidation
lies. The business effect of increased prospective earnings,
however, is much the same whether the event proves the
expectation of increased earnings to have been well grounded or
not. The expectation in either case leads the business men to bid
high for equipment and supplies. Thereby the effective (market)
capitalization is increased to answer to the increased
prospective earnings. This recapitalization of industrial
property, on the basis of heightened expectation, increases the
value of this property as collateral. The inflated property
becomes, in effect, collateral even without a formal extension of
credit in the way of loans; because, in effect, the contracts
entered into are a credit extension, and because the property of
the contracting parties is liable to be drawn into liquidation in
case of non-fulfilment of the contracts. But during the free
swing of that buoyant enterprise that characterizes an era of
prosperity contracts are entered into with a somewhat easy
scrutiny of the property values available to secure a contract.
So that as regards this point not only is the capitalization of
the industrial property inflated on the basis of expectation, but
in the making of contracts the margin of security is less closely
looked after than it is in the making of loans on collateral.
There results a discrepancy between the effective capitalization
during prosperity and the capitalization as it stood before the
prosperity set in, and the heightened capitalization becomes the
basis of an extensive ramification of credit in the way of
contracts (orders); at the same time the volume of loan credit,
in set form, is also greatly increased during an era of
prosperity.(8*)
An era of prosperity is an era of rising prices. When prices
cease to rise prosperity is on the wane, although it may not
promptly terminate at that juncture. This follows from the fact
that the putative increase of earnings on which prosperity rests
is in substance an apprehended differential gain in increased
selling price of the output over the expenses of production of
the output. Only so long as the selling price of the output
realizes such a differential gain over the expenses of
production, is the putative increased rate of earnings realized;
and so soon as such a differential advantage ceases, the era of
prosperity enters on its closing phase.
Such a differential advantage arises mainly from two causes:
(1) The lines of industry which are remote, industrially
speaking, from the point of initial disturbance, - from which,
that is to say, the lines of industry first and chiefly affected
by the rise draw supplies of one kind or another, - these remote
lines of industry are less promptly and less acutely affected by
the favorable disturbance of the price level; this retardation of
the disturbance affords the industries nearer the seat of
disturbance a differential advantage, which grows less the
farther removed the given enterprise is from the point of initial
disturbance.(9*) (2) The chief and most secure differential
advantage in the case is that due to the relatively slow advance
in the cost of labor during an era of prosperity. Wages
ordinarily are not advanced at all for a considerable period
after such an era of prosperity has set in; and so long as the
eventual advance of wages does not overtake the advance in prices
(which in the common run of cases it never does in full measure),
so long, of course, a differential gain in the selling price
accrues, other things equal, to virtually all business
enterprises engaged in the industries affected by the prosperity.
There are, further, certain (outlying) lines of industry, as,
e.g., farming, which may not be drawn into the movement in any
appreciable degree, and the price of supplies drawn from these
outlying industries need not rise; particularly they need not
advance in a degree proportionate to the advance in the prices of
the goods into which they enter as an element of their expenses
of production. To an uncertain but commonly appreciable extent
there is also a progressive cheapening of the processes of
production during such an era, and this cheapening, particularly
in so far as it affects the production of the goods contracted
for, as contrasted with the appliances of production, serves also
to maintain the differential advantage between the contracted
sale price and the expenses of production of the goods contracted
for.
In the ordinary course, however, the necessary expenses of
production presently overtake or nearly overtake the prospective
selling price of the output. The differential advantage, on which
business prosperity rests, then fails; the rate of earnings falls
off. the enhanced capitalization based on enhanced putative
earnings proves greater than the earnings realized or in prospect
on the basis of an enhanced scale of expenses of production; the
collateral consequently shrinks to a point where it will not
support the credit extension resting on it in the way of
outstanding contracts and loans; and liquidation ensues, after
the manner frequently set forth by those who have written on
these subjects.(10*)
At some point in the system of investment and business
extension will be found some branches of industry which have
gradually lost what differential advantage they started out with
when they entered on the era of prosperity; and if these are
involved in large contracts and undertakings which are carried
over into the phase of the movement at which this particular
branch of industry has ceased to have a differential advantage in
the price of its output over the cost of its supplies of material
or labor, then what may have been a conservative capitalization
of their holdings at an early phase, while their earning-capacity
rested on a large differential advantage, will become an
excessive capitalization after their earning-capacity has
declined through loss of their differential advantage. Some
branch or branches and some firms or class of firms necessarily
fall into this position in the course of a period of phenomenally
brisk times. A business concern so placed necessarily becomes a
debtor, and its liabilities necessarily become, in some degree,
bad debts. It is forced by circumstances to deliver its output at
prices which preclude its obtaining such a margin as its
extension of business presupposed. That is to say, its
capitalization becomes excessive through shrinkage of its
earning-capacity (as counted in terms of price). A concern of
this class which is a debtor is precluded from meeting its
obligations out of its current earnings; and if, as commonly
happens in an appreciable proportion of cases, its obligations
have already been augmented to the extent which its recent
earning-capacity would warrant, then the concern is insolvent for
the time being. If the claims against it are pressed, it has no
recourse hut liquidation through forced sales or bankruptcy.
Either expedient, if the case is one of considerable magnitude,
is disastrous to the balanced sequence of credit relations in
which the business community is involved. The system of credit
relations prevailing at such a time has grown up on the basis of
an earning-capacity transiently enhanced by a wave of
differential price advantage; and when this wave has passed, even
if it leaves prices higher all around, the differential advantage
of at least most concerns is past. The differential price
advantage has come to the several branches or firms in
succession, and has, in the typical case, successively left each
with an excessive capitalization, and has left many with a body
of liabilities out of proportion to their subsequent
earning-capacity. This situation may, evidently, come about in
this manner, even without lowering the aggregate (pecuniary)
earning-capacity of the business community to the level at which
it stood before the wave of prosperity set in.(11*)
But when such a situation has come, all that is required to
bring on the general catastrophe is that some considerable
creditor find out that the present earning-capacity of his debtor
will probably not warrant the capitalization on which his
collateral is appraised, In self-defence he must decline the
extension of a loan, and forced liquidation must follow. Such a
liquidation involves cutting under the ruling prices of products,
which lessens the profits of competing firms and throws them into
the class of insolvents, and so extends the readjustment of
capitalization.
The point of departure for the ensuing sequence of
liquidation is not infrequently the failure of some banking
house, but when this is the case it is pretty sure to be a bank
whose funds have been "tied up" in "unwise" loans to industrial
enterprises of the class spoken of above.(12*)
The abruptness of the recapitalization and of the
redistribution of ownership involved in a period of liquidation
may be greatly mitigated, and the incidence of the shrinkage of
values may be more equably distributed, by a judicious leniency
on the part of the creditors or by a well-advised and discreetly
weighted extension of credit by the government to certain
sections of the business community. Such measures of alleviation
were had, with happy effect, in the case of a recent stringency
which is sometimes spoken of as an averted crisis. But where the
situation answers the specifications recited above, in respect of
a large and widely prevalent discrepancy between earning-capacity
and capitalization, a drastic readjustment of values is
apparently unavoidable.
The point has already been adverted to once or twice that the
most substantial immediate outcome of such a liquidation as is
involved in a crisis is a redistribution of the ownership of the
property concerned in the liquidation, whereby creditors and
similar claimants gain at the expense of the solvent debtors.
Such being the case, it would logically follow that the large
creditors should see and follow up their advantage by concertedly
pushing the body of debtors to an abrupt liquidation, and so
realizing as large a gain as possible with the least practicable
delay, whenever the situation offers.
Such may be the logic of the circumstances, but such is not
the course practically taken by the large creditors under the
circumstances. For this there is more than one reason. It is not,
apparently, that human kindness overrules the creditors' impulse
to gain at the expense of the debtors. The ever recurring
object-lessons afforded by operations in the stock and money
market enforce the belief that when one business man gets the
advantage of another he will commonly use the advantage without
humanitarian reserve, if only the advantage is offered hIm in
terms which he can comprehend. But short-sightedness and lack of
insight beyond the conventional routine seem to be fairly
universal traits of the class of men who engage in the larger
business activities. So that, while it would be to the
unequivocal advantage of the large creditor, in point of material
gain, to draw in his debtor's property at such a reduced
valuation as comes in a period of abrupt liquidation, yet he does
not ordinarily see the matter in that light; because the
liquidation involves a shrinkage of the money value of the
property concerned, and the business man, creditor or debtor, is
not in the habit of looking beyond the money rating of the
property in question or beyond the most immediate future. The
conventional base line of business traffic, of course, is the
money value, and a recognition of the patent fact that this base
line wavers incontinently, and that it may on occasion shift very
abruptly, apparently exceeds the business man's practical powers
of comprehension. Money value is his habitual bench-mark, and he
holds to the conviction that this bench-mark is stable, in spite
of the facts.(13*)
It is true, cases occur, from time to time, of transactions
of some appreciable magnitude in which some degree of recognition
of this fact is met with. Some large business man may yet rise to
the requisite level of intelligence, and may comprehend and
unreservedly act upon the fact that the money base line of
business traffic at large is thoroughly unstable and may readily
be manipulated, and it will be worth going out of one's way to
see the phenomenal gains and the picturesque accompaniments of
such a man's work. Parenthetically it may be remarked that if
such a degree of insight should become the common property of the
business community, business traffic as now carried on might
conceivably collapse through loss of its base line. What is yet
lacking in order to such a consummation is perhaps nothing more
serious than that business capital be reduced to a somewhat more
thorough state of intangibility than it has yet attained, and
that does not seem a remote contingency.(14*)
There is, however, another and more constraining circumstance
which hinders the large creditors from wilfully pushing the
debtors to a reckoning when things are ripe for liquidation. As
was indicated above, the sequence of credit relations in an era
of prosperity is endlessly ramified through the business
community; whereby it happens that very few creditors are not
also debtors, or stand in such relation to debtors as would
involve them in some loss, even if this loss should not be
commensurate with their eventual gain at the cost of other
debtors. This circumstance by itself has a strong deterrent
effect, and when taken in connection with what was said above of
the habitual inability of the men in business to appreciate the
instability of money values, it is probably sufficient to explain
the apparently shortsighted conduct of those large creditors to
seek to mitigate the severity of liquidation when the liquidation
has come due.
The account here offered of the "method" of crises and eras
of prosperity does not differ greatly from accounts usually met
with, except in explaining these phenomena as primarily phenomena
of business rather than of industry. The disturbances of the
mechanical processes of industry, which are a conspicuous feature
of any period of crisis, follow from the disturbance set up in
the pecuniary traffic instead of leading up to the latter. While
industry and business stand in a relation of mutual cause and
effect, in this as in other cases, the initiative in such a
movement belongs with the business traffic rather than with the
industrial processes.
Industry is controlled by business exigencies and is carried
on for business ends. The effects of a wide disturbance in
business, therefore, reach the industrial processes pretty
directly, and the consequences, in the way of an expansion or
curtailment of industrial activity and an enlarged or shortened
output of product, are, of course, both immediate and important.
As a primary effect, on the industrial side, of an era of
prosperity, the community gains greatly in aggregate material
wealth. The gain in material wealth, of course, is not equably
distributed; most of it goes to the larger business men,
eventually in great part to those who come out of the subsequent
liquidation on the credit side. To some extent this aggregate
material gain is offset by the unavoidable waste incident to the
stagnation that attends upon an era of prosperity. It is further
offset by the fact that good times carry with them an
exceptionally wasteful expenditure in current consumption. Also,
the usual and more effectual impetus to an era of prosperity,
when it is not an inflation of the currency, is some form of
wasteful expenditure, as, e.g., a sustained war demand or the
demand due to the increase of armaments, naval and military, or
again, such an interference with the course of business as is
wrought by a differentially protective tariff. The later history
of America and Germany illustrates both these methods of
procuring an era of prosperity. These methods, it will be
noticed, are, in their primary incidence, of the nature of a
waste of industrial output or energy; but the prosperity achieved
is, none the less, to be recognized as a beneficial outcome in
point of heightened industrial activity as well as in point of
increased comfort for the industrial classes.
To the workmen engaged in industry, particularly, substantial
benefits accrue from an era of prosperity. These benefits come,
not in the way of larger returns for a given amount of work, but
more work, fuller employment, at about the earlier rate of pay.
To the workmen it often means a very substantial gain if they can
get a fuller livelihood by working harder or longer, and an era
of prosperity gives them a chance of this kind. Gradually,
however, as prosperity - that is to say, the advancing price
level rises and spreads, the increased cost of living neutralizes
the gain due to fuller employment, and after the era of
prosperity has been under way for some time the gain in the
amount of work obtainable is likely to be fairly offset by the
increased cost of living. As noted above, much of the business
advantage gained in an era of prosperity is due to the fact that
wages advance more tardily than the prices of goods. An era of
prosperity does not commonly bring an increase of wages until the
era is about to close. The advance of wages in such a case is not
only a symptom indicating. that the season of prosperity is
passing, but it is a business factor which must by its own proper
effect close the season of prosperity as soon as the advance in
wages becomes somewhat general. Increasing wages cut away the
securest ground of that differential price advantage on which an
era of prosperity runs.
Periods of crisis or of prosperity are, after all, relatively
simple phenomena with strongly marked features, and a passable
explanation of them is correspondingly easy. They have also the
ad vantage of having received much attention at the hands of the
students of economic history. On the other hand, protracted
depression, not traceable to widespread hardship or calamity
arising from circumstances outside the range of business
transactions, is a relatively new and untried subject for
economic theory. Newer, more obscure. with less pronounced
features and less definite limits than movements of speculative
advance or speculative crises, this phenomenon has to a less
extent engaged the steady attention of students. An inquiry into
the life history and the causes and effects of depression, from
the point of view of a theory of business, may therefore scarcely
be expected to yield concise or secure conclusions.
Since industry waits upon business, it is a matter of course
that industrial depression is primarily a depression in business.
It is in business that depression is felt, since it is on the
business side of economic activity that the seat of economic
sensibility may be said to lie; it is also in business
(pecuniary) terms that the depression is measured whenever a
measure or estimate of the matter is attempted. In so far as
there is an attendant derangement of the mechanical processes and
of the mechanical articulation of processes in industry, the
derangement follows from the pecuniary exigencies of business.
Depression and industrial stagnation follow only in case the
pecuniary exigencies of the situation are of such a character as
to affect the traffic of the business community in an inhibitory
way. But business is the quest of profits, and an inhibition of
this quest must touch the seat of its vital motives. Industrial
depression means that the business men engaged do not see their
way to derive a satisfactory gain from letting the industrial
process go forward on the lines and in the volume for which the
material equipment of industry is designed. It is not worth their
while, and it might even work them pecuniary harm. Commonly their
apprehension of the discrepancy which forbids an aggressive
pursuit of industrial business is expressed by the phrase
"overproduction." An alternative phrase, intended to cover the
same concept, but less frequently employed, is
"underconsumption."(15*)
The controversial question as to the tenability of any given
"overproduction" doctrine may, for the present purpose, be left
on one side; it lies outside the theory of business and it has no
merits or demerits for the purposes of a theory of business. The
point of interest here is rather the ground of its acceptation
among business men and the meaning which this notion has for
them; that is to say, it is chiefly of interest here to inquire
into the habits of thought which give cogency and effect to the
dogma of "overproduction" as practically held by the body of
business men, - what it practically means, why the dogma is held,
and what is its effect on the course of business enterprise.
"Overproduction," or "underconsumption," as it is met with in
the views of business men, is neither a vacant dogma nor a shifty
apology wherewith to cover their own delinquencies, but a very
concretely real state of affairs. It is a state of affairs that
prevails when business is persistently dull; and the concept
covered by the term comprises the sufficient cause of the
dulness, in the apprehension of the business community, even
though they may not always speak of the difficulty by that name.
It may be worth while, even at the risk of tedium, to point out
that this concept of "overproduction" applies, not to the
material, mechanical bearing of the situation, but to its
pecuniary bearing. The notion is never seriously entertained that
there is or may be an embarrassing excess of goods, or of the
appliances for their production, above what would be of some
human use if the business situation permitted them to be turned
to use.
(1) The supply of consumable goods is, practically, never
greater than the community's capacity for consuming them. An
embarrassing excess in any line is practically a remote
contingency at the most.(16*) There are many eloquent passages in
the economic manuals which may be called in witness of this
truism, where much pains is taken to show that human wants are,
in the nature of the case, indefinitely extensible. Nothing
stands in the way, we are told, but "difficulty of attainment" of
the goods with which to satisfy these wants. (2) In times of
depression, or "hard times," there is, under the modern
industrial system at least, no overproduction in the sense of a
production so large as to overtax the working capacity of the
industrial appliances and processes employed, nor so large, even,
as to overtax the normal powers of the force of workmen or
require them to work overtime and holidays. Quite the contrary.
That sort of thing happens only in brisk times, when there is no
overproduction. Seriously to recite such platitudes as these may
seem like a trifling with the patience of the printer, or it may
be taken for a light-headed excess of "wissenschaftlicher
Methode"; but these two formulations appear to cover all the
conceivable ways in which overproduction may occur, so long as
the term is construed from the point of view of the mechanical
facts of the case. Seen from this side a period of depression is
a period of underproduction; mills tun on half time or none, and
the supply of goods that finds its way into the hands of
consumers is sensibly scant for the demands of comfort.
The difficulty is, of course, a pecuniary one, and the phrase
is used by business men in that pecuniary sense in which it has
an immediate bearing on business. "Excessive competition" is an
alternative phrase. There is an excess of goods, or of the means
of producing them, above what is expedient on pecuniary grounds,
- above what there is an effective demand for at prices that will
repay the cost of production of the goods and leave something
appreciable over as a profit. It is a question of prices and
earnings. The difficulty is that not enough of a product can be
disposed of at fair prices to warrant the running of the mills at
their full capacity, or running them at a rate near enough to
their capacity to yield a fair profit. Or, to turn the
proposition about, as business men are in the habit of doing,
there is more of an output offered than will be carried off at a
fair price, such a price as will afford fair or ordinary profits
on the investment and the running expenses. There is too large a
productive capacity; there are, too many competitive producers
and too much industrial apparatus to supply the market at
reasonable prices. The matter reduces itself to a question of
fair prices and ordinary profits.(17*)
If there is a large volume of outstanding credit obligations,
that will complicate the situation. There is always a
considerable amount of interest bearing securities outstanding,
and the claims of these securities have to be satisfied before
dividends can be paid on stock, or before profits accrue to
industrial ventures which have issued the Securities. These fixed
charges, together with others of a like kind, narrow the margin
from which profits are derived and increase the handicap which a
season of dull times brings to the business men in charge of
industry. At the same time fixed charges preclude shutting down,
except at a sure and considerable loss. The business men involved
are constrained to go on, and in the absence of wide combinations
in industry they are constrained to go on at such competitive
prices as to preclude reasonable profits.
The question of fair prices and reasonable profits has some
reference to current rates of interest. A "fair" rate of profits
is such a rate as bears a reasonable relation to the current rate
of interest, although this relation of profits to interest rates
does not appear to be a strict one. Still, there undoubtedly is
some reference to the current rate of interest as a sort of zero
line to which profits should not decline. New investments are
made on the basis of current rates of interest and with a view to
securing the differential gain promised by the excess of
prospective profits over interest rates.
In a period of depression the aggregate industrial equipment
is, notoriously, not running at its full capacity; there are many
idle and half-idle plants and many idle workmen. The concerns in
question find themselves unable to do a full run of business at
reasonable profits. Still, unless the depression is of
exceptionally short duration, there is always some new investment
going on. More or less of new capital continues to find its way
into industrial business in competition with the concerns that
are already in the field.(18*) In case of a protracted depression
the aggregate of new investments so made may, in the course of
years, amount to a very considerable addition to the industrial
outfit, and the production of the new establishments may very
appreciably increase the aggregate output. Indeed, the output of
the new establishments is a notable factor in swelling the supply
and keeping down prices. But the new investments made during the
depression are profitable, at least at the start. Or even if this
should be questioned when stated in this broad way, it will at
least hold true that they are commonly entered upon with a
well-advised expectation of their being profitable if the
situation does not materially change between the time when the
new venture was entered upon and the time when the new equipment
has got under way. If the interval between the inception of the
new enterprise and its completion is a long one, the situation
may so change in the meantime as to leave it unprofitable even if
it has been conservatively planned. There are also, of course,
fraudulent enterprises which are not expected by their promoters
to pay a profit on the investment; and there are probably, also,
always some ventures entered upon during dull times with a view
to being beforehand in preparation for better times. But after
all has been said in qualification of the main proposition, it
remains true that some new investment is going on with a
well-advised expectation of reasonable profits on the basis of
current costs, prices, and rates of interest.(19*) The rate of
interest in times of depression may be unsatisfactory to lenders;
it may be discouraging by comparison with the customary range of
interest rates during better times. Still, the obstacle to
business is not to be sought in an effectual discouragement of
lenders, for in point of fact money is readily to be had on good
security during any protracted depression.(20*)
There is also the fact that investment is continually going
on, which argues that the difficulty is neither that capital
cannot be found for investment, nor that investment has no
prospect of reasonable profits. Practically, no exceptional
amount of fluent funds is withheld from the market, - except in
time of panic, which is another matter. It may be added that the
rate of interest need not be notably low in time of depression,
just as, on the other hand, a period of business exaltation is
not uniformly accompanied by a notably high rate of interest.
But a low or declining rate of interest is effective in the
way of depressing the business situation, even though a
depression may go on without it. The line of its bearing upon
business depression, or at least one line, is as follows:
Established business concerns (particularly corporations) engaged
in industry have some appreciable fixed (interest) charges to
meet - on leases, mortgages, and interest-bearing securities
(preferred stock and bonds). These outstanding obligations and
securities may have been negotiated, "floated," at an earlier
period of higher interest rates and higher profits, or they may
have been carried over through a period of higher interest rates.
In the former case these interest charges are excessively high as
compared with the present capitalized value of the property on
which they rest, computing the capitalization on the basis of the
present cost of replacing this property and the present interest
charge which this cost of replacement would bear. In the latter
case the original capitalization of the corresponding items of
property will have undergone a practical (effective)
recapitalization at a lower figure to correspond with the higher
rate of interest prevalent during the interval in question; and
in the subsequent period of low interest, the fixed charge on
this recapitalization is excessively high as compared with the
current effective capitalization of the property. The liabilities
are excessive, in respect of their interest charges, as compared
with the present earning-capacity of the property represented by
them.(21*)
What gives effect to this drawback for the business
enterprises which have such fixed interest charges to meet is the
fact that the new investments, and those concerns that have gone
into bankruptcy or receivers' hands, come into competition with
the old. These new or rejuvenated concerns are not committed to a
scale of fixed charges carried over from a higher interest level;
and these are therefore carrying only such interest charges as
the current effective capitalization of their property will
warrant, whether effective capitalization be taken to mean cost
of production of the equipment, earning-capacity of the concern,
or market quotation of its securities. These unincumbered
competitors are presumed to be making reasonable profits at
current prices, and their presence in the competitive market
therefore precludes an advance of prices to such a scale as would
afford a reasonable profit to the other establishments after
paying their interest charges on what is, in effect,
over-capitalized property.
This tentative explanation of depression applies only so far
as the period of depression is a time of relatively low rates of
interest. But depression does not uniformly coincide with low
interest rates; besides which, there are other facts in the case
which limit the applicability of the explanation formulated
above. To explain protracted depression, e.g., this line of
argument would be convincing only on the supposition of a
progressively falling rate of interest, - a condition not
commonly met with in a protracted period of depression.
But this explanation, applicable within a limited range of
the phenomena that make up a period of depression, points the way
to another class of considerations that go far toward explaining
the rest. It appears that the phase of the difficulty covered by
this explanation is traceable to a discrepancy between the
accepted capitalization, the interest charges, and the
earning-capacity. And it appears equally plain that the only
remedy applicable to the case (barring a speculative exaltation
of business) is a recapitalization of the concerns affected on a
lower basis, to fit the lowered cost of production of the
equipment and its lowered earning-capacity. But under existing
conditions of law such a remedy cannot be applied to the interest
bearing securities, - except by process of insolvency, - and it
is very reluctantly applied to other capitalized wealth; besides
which it is, practically, very difficult to effect such an avowed
recapitalization as applied to the stock of incorporated
companies, particularly in the case of those whose stock is
ostensibly the capitalized value of their plant.
Such a readjustment of nominal value to actual value as shown
by the facts of earning-capacity is continually going on, in some
measure; but it does not cover the entire range of facts
involved, and it is nearly always of the nature of a reluctant
concession, following only after the need of it has become
somewhat pressing. It can, therefore, in the common run of cases,
not catch up with the progressive difficulty which it is designed
to meet, in so far as the difficulty is of a progressive
character.
A discrepancy between accepted capitalization and current
earning-capacity, similar to the discrepancy discussed above but
of a progressive character, arises under modern conditions apart
from a fall in the rate of interest. The discrepancy pointed out
and provisionally disposed of above, due to a fall in interest
rates, is a discrepancy between the nominal value (accepted
capitalization) of the older establishments, computed on their
earlier earning-capacity or on the original cost of their
equipment, on the one hand, and their present actual value on the
other hand, computed on their current earning-capacity in
competition with rivals that have the advantage of a lower cost
of equipment, or, in other words, a lower interest charge per
unit of earning-capacity. Under the regime of the later, more
fully developed machine production, a discrepancy having a
similar effect arises out of a persistent divergence between the
past cost of production of a given equipment and the current cost
of a like or equivalent equipment at any subsequent date, -
supposing that there intervenes no inflation of prices and no
extraneous cause making for a speculative advance.(22*)
Suppose prices of finished goods to be stable or to vary by
inconsequential fluctuations, negligible for purposes of the
argument, and suppose the rate of interest to be in a similarly
negligible position. In other words, suppose such a condition as
the business community would recognize as ordinary, normal,
sound, without ground for pronounced hopes or fears. Under modern
circumstances, dominated as the modern situation is by the
machine industry, such a state of affairs is unstable, even apart
from any disturbance of an extraneous kind. It is unstable by
virtue of the forces at work in its own process, and these
forces, on the whole, make for a progressive change in. the
direction of depression.
It has appeared above that the depressing effect which a
relatively low (declining) rate of interest has upon industrial
business is due to its setting up a discrepancy between the
accepted capitalization of older establishments and the cost of
new establishments of an equivalent earning-capacity. Now, under
the circumstances of the more fully developed machine industry,
such as it has stood for a couple of decades past, a similar
discrepancy results from the gradual but uninterrupted
progressive improvements of industrial processes. "The state of
the industrial arts," as the older economists are in the habit of
calling it, is no longer to be conceived as stationary, even for
the time being. No "statical" theory of the industrial arts or of
business prosperity is tenable, even for the purposes of a
"statical" theory of the industrial situation. Progressively
increasing efficiency of the processes in use is a pervading
trait of the industrial situation. No two successive years are
now on the same, or virtually the same, plane in respect of the
efficiency of the industrial arts; indeed, the "period of
production" can no longer safely be construed to begin and end on
the same level in this respect. At the same time the
progressively wider and more close-knit articulation of the
several industries in a comprehensive process is also going
forward, and this also affects all branches of industrial
business in some degree and in the same direction, as will appear
presently.
The items of the equipment (plant, materials, and in a
measure even good-will) in which any industrial enterprise
invests, and by the use of which the business men in industry
turn out their output of vendible goods, are themselves products
of the machine industry. Machine processes, ever increasing in
efficiency, turn out the mechanical appliances and materials with
which the processes are carried on, at an ever decreasing cost;
so that at each successive step the result is a process having a
higher efficiency at a lower cost.(23*) This is now no longer a
sporadic effect of ingenious contrivances having a local and
limited application, to be handled as trade secrets and exploited
as an enduring differential advantage.
The cost of production of "capital goods" is steadily and
progressively lowered, as counted in terms of the processes
involved in their production. In a competitive market this is
reflected, with greater or less promptitude, in the prices of
such capital goods to all buyers. But the buyers whose purposes
this lower scale of prices particularly subserves are chiefly the
new investors who go into business in the way of new industrial
establishments or extensions of the old. Each new venture or
extension goes into the competitive traffic of producing and
selling any line of staple goods with a differential advantage,
as against those that have gone before it, in the way of a lower
scale of costs. A successively smaller aggregate value of new
equipment will turn out a given volume of vendible product. In so
far as there is no collusive control of the output or the prices,
this means that the newcomers will cut under the scale of prices
at which their predecessors have been content to supply the
goods. The run of competitive prices is lowered; which means that
at the new competitive prices, and with their output remaining on
its old footing as regards expenses of production, the older
establishments and processes will no longer yield returns
commensurate with the old accepted capitalization.(24*) From the
inherent character of the machine industry itself, therefore, it
follows that the earning-capacity of any industrial enterprise
enters on a decline from the outset, and that its capitalization,
based on its initial putative earning-capacity, grows
progressively antiquated from the start. The efficiency of the
machine process in the "instrumental industries" sets up a
discrepancy between cost and capitalization. So that a
progressive readjustment of capitalization to correspond with the
lowered earning-capacity is required by the nature of the case It
is also, in the nature of the case, impracticable.
In so far as the process of investment and business
management involves the use of credit, in the way of
interest-bearing securities or loans equivalent to such
securities, this element of credit retards the readjustment by
force of the fixed charges which it involves. This retardation
(aided as it is by the reluctance of business men to lower their
capitalization) is of sufficient effect to hinder
recapitalization, on the whole, from overtaking the progressive
need of it, with the result that a fair or "ordinary" rate of
profits on industrial investments is not permanently attainable
in the field of open competition. In order that the rate of
interest should effectually further business depression in this
way, therefore, it is not necessary that the rate should rise or
fall, or that it should be relatively high or low, or th at it
should be uniform over the field, but only that there should be a
rate of interest in each case, and that there should be some
appreciable volume of credit involved in industrial investments.
Credit is, in fact, a ubiquitous factor in modern industrial
business, and its effects in the way indicated are therefore to
be counted in as a constant force in the situation.
However, even apart from the presence of this ubiquitous
credit element, a similar effect would probably result from the
progressive enhancement of industrial efficiency when this
enhancement proceeds at such a rate as has been the case for some
time past. As has been shown in an earlier chapter, business men
keep account of their wealth, their outgo and their income, in
terms of money value, not in terms of mechanical serviceability
or of consumptive effect. Business traffic and business outcome
are standardized in terms of the money unit, while the industrial
process and its output are standardized in terms of physical
measurements (mechanical efficiency). In the current habits and
conventions of the business community, the unit of money is
accepted and dealt with as a standard measure. The stability of
the standard unit cannot be effectually questioned within the
scope of business traffic. According to the practical metaphysics
of the business community, the money unit is an invariable
magnitude, whatever may be true of it in fact. A man imbued with
these business metaphysics and not given to fine-spun reflection,
as business men commonly are not, is richer or poorer in his own
apprehension, according as his balance sheet shows a greater or
less number of these standard units of value. Investment,
expenses, vendible output, earnings, fixed charges, and
capitalization run in terms of this value unit. A reduction of
earnings or of capitalization, as rated in terms of the value
unit, is felt as an impoverishment. The reduction of
capitalization in these terms is, therefore, a hardship, which is
only reluctantly and tardily submitted to, even if it carries no
hardship in the way of a reduced command over the material means
of production, of life, or of comfort. A business man's rating in
the business community likewise rests on the pecuniary magnitude
of his holdings and his transactions, not on the mechanical
serviceability of his establishment or his output; and this
business rating is a large part of the business man's everyday
ambition. An enhancement of it is a source of secure
gratification and self-respect, and a reduction of it has a very
substantial contrary effect.(25*) A reduction of the pecuniary
showing is submitted to only reluctantly and tardily, after it
has become unavoidable, and only to the least feasible extent.
But under conditions, such as now prevail, which involve the
requirement of a progressive rerating of this kind, this
reluctant concession never overtakes the need of readjustment, -
and the discrepancy between capitalization and earning-capacity
is therefore chronic so long as no extraneous circumstances come
in temporarily to set aside the trend of business affairs in this
respect. It may, therefore, be said, on the basis of this view,
that chronic depression, more or less pronounced, is normal to
business under the fully developed regime of the machine
industry.(26*)
This deplorable trend given to business by the excessive
prevalence and efficiency of the machine industry can, however,
be set aside by several factors more or less extraneous to the
industrial system proper. Even within the mechanical system of
industry there is at least one factor of some consequence that
consistently acts to mitigate the trend indicated, and that may
even put it in abeyance from time to time. As has been pointed
out above, questions of business are fundamentally questions of
price. A decline of prices which widely touches business
interests brings depression. Conversely, an appreciable advance
in prices, from whatever cause, means improvement in business.
Such an advance in prices may come of a speculative movement;
which in turn may arise from a variety of circumstances, for the
most part circumstances extraneous to the industrial process. For
the present, however, the question of a speculative movement is
best left on one side. Another factor touches the case more
intimately. As has more than once been the case, prices may be
advanced through a freer supply of the precious metals, or by an
inflation of the currency, or a more facile use of credit
instruments as a subsidiary currency mechanism. Now, the growing
efficiency of industry has an effect in lowering the (material)
cost of production of the precious metals and so increasing the
ease with which they are supplied, after the same manner as it
affects the supply of goods for industrial or consumptive use.
But the increased supply of the precious metals has, of course,
an effect upon prices contrary to that exerted by the increasing
supply of goods. In so far as this effect is had, it acts to
correct or mitigate the trend of business toward chronic
depression.(27*)
But certain circumstances come in to qualify the salutary
effect of a lowered cost of the precious metals. Improvements in
the industrial processes affect the (industrial) cost of
production of the precious metals in a less degree than the cost
of other goods; at least, such seems to have been the case
recently. But beyond this, and of graver consequence, is a
peculiarity affecting the value of the money metals. The annual
product of the money metals is not annually consumed, nor nearly.
The use of them as money does not consume them except
incidentally and very slowly. The mass of these metals in hand at
any given time is very considerable and is relatively
imperishable, so that the annual accretion is but a small
fraction of the aggregate supply. The lowered cost of the annual
supply has therefore but a relatively slight effect upon the
aggregate value of the available supply.
The case is different as regards the annual output of
vendible products, whether for industrial or consumptive use. In
this case, and particularly as regards this matter of new
Investments and extensions of Industrial equipment, the annual
output counts for by far the greater factor in making the current
value of the available supply, if indeed it is not to be regarded
as substantially the only factor that comes in question here.
Accordingly, it is only under very exceptional circumstances, at
times when the precious metals are supplied with extraordinary
freedom, that the in creased output of these metals can offset
the trend of business toward depression. Ordinarily this factor
can count for no more than a mitigation of the "tendency of
profits to a minimum." And even this mitigating effect, it may be
remarked, appears to be of less radical consequence for the
general situation of business now than it was during the earlier
phases of the machine industry's regime. The most telling effect
of an increased supply of the precious metals seems to be the
incitement which it gives to speculative inflation.(28*)
It will be noted that the explanation here offered of
depression makes it a malady of the affections. The discrepancy
which discourages business men is a discrepancy between that
nominal capitalization which they have set their hearts upon
through habituation in the immediate past and that actual
capitalizable value of their property which its current
earning-capacity will warrant. But where the preconceptions of
the business men engaged have, as commonly happens, in great part
been fixed and legalized in the form of interest-bearing
securities, this malady of the affections becomes extremely
difficult to remedy, even though it be true that these legalized
affections, preconceptions, or what not, centre upon the
metaphysical stability of the money unit.
But while it is true that depression is primarily a business
difficulty and rests on emotional grounds, that does not hinder
its having grave consequences for industry and for the material
welfare of the community outside the range of business interests.
Business enterprise, it is true, proceeds on metaphysical grounds
and is swayed by considerations of nominal wealth rather than by
considerations of material serviceability; but, none the less,
business enterprise and business metaphysics control the course
of industry.
Dull times in business means dull times in industry, of
course. But a caution is necessary on this head. The yearly
output does not usually vary extremely between brisk and dull
times, except as measured in price. As measured in material terms
the discrepancy in the volume of output between brisk and dull
times is much less. The gross output as measured by weight and
tale is less in dull than in brisk times, other things equal; but
the deficiency as measured in these terms is much less than the
price returns would indicate. Indeed, the output as measured by
weight and tale need not average very appreciably less during a
protracted depression than during a preceding period of good
times.(29*) The volume of business as well as the volume of
output (by weight and tale) of industry may increase during a few
years of depression at nearly if not quite as high a rate as
during a corresponding period of good times. A transition from
dull to brisk times, however, commonly if not invariably involves
a rapid increase in values, while a converse transition involves
a corresponding shrinkage of values, though commonly a slower
shrinkage, - except where a crisis intervenes.
The primary hardship of a period of depression is a
persistent lesion of the affections of the business men; the
greatest secondary hardship is what falls upon the workmen, in
the way of partial unemployment and a decline in wages, with
consequent precariousness and reduction of their livelihood.(30*)
For those workmen who continue to find fairly steady employment
during the depression, however, even at reduced wages, the loss
is more apparent than real; since the cheapening of goods offsets
the decline in wages. Indeed, the cheapening of the means of
living is apt to offset the fall in wages fully, for such workmen
as have steady work. So that in the case of the workmen also, as
well as in that of the business men, the distress which dull
times brings is in some part a spiritual, emotional matter.
To the rest of the community, those classes that are outside
of business enterprise and outside of the industrial occupations
proper, that is to say, those (non-industrial) classes who live
on a fixed salary or similar fixed income, dull times are a
thinly disguised blessing. They suffer in their affections from
the reflected emotional detriment of the business community, but
they gain in their ease of livelihood and in their savings by all
the difference between the price scale of brisk and of dull
times. To these classes an era of prosperity brings substantially
nothing but detriment.(31*)
Depression is primarily a malady of the affections of the
business men. That is the seat of the difficulty. The stagnation
of industry and the hardships suffered by the workmen and other
classes are of the nature of symptoms and secondary effects. Any
proposed remedy, therefore, must be of such a nature as to reach
this emotional seat of the trouble and restore the balance
between the nominal value of the business capital engaged and the
earnings of the business; that is to say, a remedy, to be
efficacious, must restore profits to a "reasonable" rate; which
means, practically, that prices must be brought to the level on
which the accepted capitalization has been made. Such a remedy,
to offset the disastrous cheapening of products through
mechanical improvements, has been found in business coalitions
and working arrangements of one kind and another, looking to the
"regulation" of prices and output. Latterly this remedy is
becoming familiar to the business community as well as to
students of the business situation, and its tangible, direct, and
unequivocal efficiency in correcting this main infirmity of
modern business is well recognized. So much so, indeed, that its
urgent advisability has been formulated in the maxim that "Where
combination is possible competition is impossible." What is
required is a business coalition on such a scale as to regulate
the output and eliminate competitive sales and competitive
investment within a field large enough to make up a
self-balanced, passably independent industrial system, - such a
coalition of business enterprises as is loosely called a "trust."
Such a business coalition, if it is comprehensive and closely
controlled, can adjust the output of goods and services to the
market with some nicety, and can maintaIn the balance of the
ruling prices, or the price scale agreed upon, with such effect
that the received capitalization need not become obsolete even in
the face of very radical improvements in the processes of
industry. Its effect, in the case of ideal success, is to
neutralize the cheapening of goods and services effected by
current industrial progress. It offsets industrial improvements
in so far as these improvements affect the cost of goods more
than they affect the value of the money metals. It might seem at
first sight that by thIs inhibitory effect of the trust the
entire advantage derivable from industrial improvements within
the scope of the trust should inure to the gaIn of the business
men in the combination, but such does not appear to be the
practical outcome. The practical outcome appears more nearly to
be that material advantage inures to no one from industrial
improvements under the control of the trust, in so far as the
trust successfully carries its point. This feature of trust
management will be taken up again in a different connection.
In addition to its prime purpose of checking the decline of
earnings on past investments, such a business coalition is also
enabled to distribute any unavoidable effect of the progressively
reduced cost of production of the productive goods employed,
somewhat equably over the entire field of industry comprised in
the coalition, and so obviate the pressure of this untoward
industrial progress falling with exceptional severity at any
given point. Economies effected are at the same time made to
accrue to the collective business organization, showing
themselves in the way of increased dividends and increased
effective (market) capitalization of the coalition's property,
instead of being dissipated in competitive selling, and so going
to the body of consumers or to the industrial system at large.
To return to a point temporarily set aside above. By
supposition, in what has just been said, anything like a
speculative inflation has been excluded from the discussion of
business depression; and necessarily so, since the two do not
come at the same time. But at one point the two show a feature in
common. Under both of these two widely different conditions of
the business situation there is a discrepancy between the
accepted capitalization and the actual earning-capacity.(32*) But
the two differ even at this point in that, in the case of
inflation, the discrepancy is not felt until the climax, when a
widespread realization of the discrepancy brings on an abrupt
readjustment, in the crisis which follows inflation; whereas in a
period of depression the sense of this discrepancy and the
protest against it is the most striking circumstance of the case.
The discrepancy between capitalization and earning-capacity in a
period of speculative movement comes of an inflation of
capitalization; whereas in time of depression the discrepancy is
due to a shrinkage of earning-capacity, - both capitalization and
earning-capacity being, of course, counted in terms of money
values. A speculative movement offsets or checks the trend to
depression whenever it occurs; and for some appreciable time
past, such speculative movements appear to have been the only
force which has from time to time broken the otherwise
uninterrupted course of business depression. Under the regime of
a perfected machine industry and a perfect business organization,
with active competition throughout, it is at least probable that
depression would not be seriously interrupted by any other cause.
But it has been a point of economic dogma in modern times -
not to call it a point of theory, since it is not held on
reasoned grounds - that depression and inflation, followed by
crisis, succeed one another with a rough periodicity,
interminably and in the nature of the case. The periodicity (with
an interval of some ten to twelve years from phase to phase) has
not been established with any cogent show of evidence, except for
the period from 1816 to 1873; and even within that period the
evidence has not been convincing to all students of these
phenomena. A tentative explanation of the periodicity, such as
there may have been within that period, as well as of its absence
before and after the period in question, may be offered on the
basis of the views here set forth. keeping in mind the point that
the disturbance, both in the case of inflation and in that of
depression, is a discrepancy between capitalization and
earning-capacity, and also the manner in which this discrepancy
arises, it may be said that prior to the earlier date mentioned
the modern industrial system was not such a comprehensive and
articulate process that a disturbance in one part or one member
of the system need be transmitted forthwith through the channels
of business to all the rest. A speculative movement need not
spread forthwith throughout the industrial system. The great
episodes of speculation and collapse that occurred during earlier
modem times were not of the nature of speculative inflation
affecting the entire business community occupied with industry.
They are rather of the nature of commercial speculation verging
on gambling.(34*) So also, the crises of that earlier time, when
they were not collapses of gambling ventures, were commonly
produced by some great disaster which brought an absolute
material loss upon the community, such as crop failures,
invasions, or heavy war expenditures. On the other hand, as
regards periods of depression prior to the early years of the
nineteenth century, they were also rare if not unknown, except
when due to failure of resources or the burdens of government.
The conditions out of which depression could come, as a
persistent disturbance of business through a divergence between
the capitalization and the earning-capacity of investments, were
not had. The developed machine system was absent, and without
this the cost of production of productive goods could not be
progressively lowered at a rate large enough to set up and
maintain a persistent divergence between capitalization and
earning-capacity in industrial enterprises.
At some uncertain point in the first half of the nineteenth
century the system of machine industry, and the business system
based upon it, attained such a breadth and consistency that
business disturbances of appreciable magnitude in any part would
affect values throughout the system. It had then grown so large
and was so closely articulated a structure that the relations of
its members to one another and to the system as a whole were of
greater moment for the fortunes of these members and for the
orderly process of the whole than were the relations of the
members to industrial factors lying outside the system of the
machine industry and the business community. Hence industrial
crises in the proper sense of the word seem well at home in this
period. They spread with great force and facility whenever they
came; and they had the true character of business crises, in that
they ran with great severity without involving an appreciable
aggregate loss of material wealth, except in terms of price. They
commonly meant a cancelment of values, without appreciable
aggregate loss of goods. They seem also to have been true to the
staple definition of crises in that they followed upon a period
of speculative inflation in industrial investments.
Chronic depression, however, does not seem to belong, as a
consistent feature of the course of things, in this
nineteenth-century period, prior to the eighties or the middle of
the seventies. The usual course, it is commonly held, was rather:
inflation, crisis, transient depression, gradual advance to
inflation, and so on over again.(35*)
On the view of these phenomena here spoken for, an attempt at
explaining this circuit may be made as follows: A crisis, under
this early nineteenth-century situation, was an abrupt collapse
of capitalized values, in which the capitalization was not only
brought to the level of the earning-capacity which the
investments would have shown in quiet times, but appreciably
below that level. The efficiency and the reach of the machine
industry in the production of productive goods was not then so
great as to lower the cost of their production rapidly enough to
overtake the shrinkage in capitalization and so prevent the
latter from rising again in response to the stimulus of a
relatively high earning-capacity. The shock-effect of the
liquidation passed off before the cheapening of the means of
production had time to catch up with the shrinkage of
capitalization due to the crisis, so that after the shock-effect
had passed there still remained an appreciable
under-capitalization as a sequel of the period of liquidation.
Therefore there did not result a persistent unfavorable
discrepancy between capitalization and earning-capacity, with a
consequent chronic depression. On the other hand, the
earning-capacity of investments was high relatively to their
reduced capitalization after the crisis. Actual earning-capacity
exceeded the nominal earning-capacity of industrial plants by so
appreciable a margin as to encourage a bold competitive advance
and a sanguine financiering on the part of the various business
men, so soon as the shock of the liquidation had passed and
business had again fallen into settled channels. But such a bold
competitive advance means the beginning of an extension of credit
and a speculative movement in industry, such as has been
discussed some pages back in connection with crises. This
movement has a cumulative character, after the manner there
indicated, and its outcome is an inflation of capitalization and
a large extension of credit, which normally ends in a period of
liquidation.
Within the period spoken of (1816-1873) this liquidation is
apparently always brought on by some extraneous disturbance. But
it seems that the theory would require us to say that the
extraneous disturbance requisite to bring such a speculative
movement to a head will be slighter the farther the movement has
gone; so that in the earlier stages of a given period of
inflation a liquidation could be brought on only by some
relatively violent disturbance, whereas at a higher phase of
speculative inflation a relatively slight disturbance would
suffice.
Now, it takes some time for such a speculative movement to
bring on so large a discrepancy between capitalization and
earning-capacity as may not be adjusted by other means than a
widespread and severe liquidation.(36*) Hence a rough periodicity
in the recurrence of these seasons of buoyancy and of collapse in
capitalized values. Other factors, and varying ones, have, no
doubt, been present in each of the historic crises of the
nineteenth century, and these other factors would have to be
taken due account of in any history of crises, and even in any
theory of crises, which aimed at anything like an exhaustive
treatment; but the factors here pointed out seem to be the
characteristic and constant ones in the sequence of crises within
this period, at the same time that they are the factors which are
in a peculiar degree connected with that process of business
management in modern industry which is the objective point of the
present inquiry.
Since the seventies, as an approximate date and as applying
particularly to America and in a less degree to Great Britain,
the course of affairs in business has apparently taken a
permanent change as regards crises and depression. During this
recent period, and with increasing persistency, chronic
depression has been the rule rather than the exception in
business. Seasons of easy times, "ordinary prosperity," during
this period are pretty uniformly traceable to specific causes
extraneous to the process of industrial business proper. In one
case, the early nineties, it seems to have been a peculiar crop
situation, and in the most notable case of a speculative
inflation, the one now (1904) apparently drawing to a close, it
was the Spanish-American War, coupled with the expenditures for
stores, munitions, and services incident to placing the country
on a war footing, that lifted the depression and brought
prosperity to the business community. If the outside stimulus
from which the present prosperity takes its impulse be continued
at an adequate pitch, the season of prosperity may be prolonged;
otherwise there seems little reason to expect any other outcome
than a more or less abrupt and searching liquidation.
What would be an adequate pitch of the stimulus making for
prosperity is, of course, not easy to say, but it is probably
safe to say that in order to keep up the season of prosperity for
a considerable number of years the stimulus would have to be
gradually increased. That is to say in other words, the
absorption of goods and services by extra-industrial
expenditures, expenditures which as seen from the standpoint of
industry are pure waste, would have to go on in an increasing
volume. If the wasteful expenditure slackens, the logical outcome
should be a considerable perturbation of business and industry,
followed by depression; if the waste on war, colonization,
provincial investment, and the like, comes to an abrupt stop, the
logical consequence, in the absence of other counteracting
factors, should be a crisis of some severity. (37*)
It was said above that since the seventies the ordinary
course of affairs in business, when undisturbed by transient
circumstances extraneous to the industrial system proper, has
been chronic depression. The fact of such prevalent depression
will probably not be denied by any student of the situation
during this period, so far as regards America and, in a degree,
England.(38*) For the Continent of Europe this characterization
would have to be materially qualified. But the reply is ready to
han d that governmental interferences with trade have been so
ubiquitous on the Continent, particularly in the German-speaking
communities, that their case is fairly to be thrown out of any
general theory. It may also be questioned whether the industrial
system of Germany, e.g., throughout this period conforms to the
requirements of the theory in respect of the degree of
development of the machine industry which such a state of affairs
supposes.(39*)
The explanation of this persistent business depression, in
those countries where it has prevailed, is, on the view here
spoken for, quite simple. By an uncertain date toward the close
of the seventies the advancing efficiency and articulation of the
processes of the machine industry reached such a pitch that the
cost of production of productive goods has since then
persistently outstripped such readjustment of capitalization as
has from time to time been made. The persistent decline of
profits, due to this relative overproduction of industrial
apparatus, has not permitted a consistent speculative expansion,
of the kind which abounds in the earlier half of the nineteenth
century, to get under way. When a speculative movement has been
set up by extraneous stimuli, during this late period, the
inherent and relatively rapid decline of earning-capacity on the
part of older investments has brought the speculative inflation
to book before it has reached such dimensions as would bring on a
violent crisis. And when a crisis of some appreciable severity
has come and has lowered the capitalization, the persistent
efficiency and facile balance of processes in the modern machine
industry has overtaken the decline in capitalization without
allowing time for recovery and consequent boom. The cheapening of
capital goods has overtaken the lowered capitalization of
investments before the shock-effect of the liquidation has worn
off. Hence depression is normal to the industrial situation under
the consummate regime of the machine, so long as competition is
unchecked and no deus ex machina interposes.(40*)
The persistent defection of reasonable profits calls for a
remedy. The remedy may be sought in one or the other of two
directions: (1) in an increased unproductive consumption of
goods; or (2) in an elimination of that "cutthroat" competition
that keeps profits below the "reasonable" level. If enough of the
work or of the output is turned to wasteful expenditures, so as
to admit of but a relatively slight aggregate saving, as counted
by weight and tale, profitable prices can be maintained on the
old basis of capitalization. If the waste is sufficiently large,
the current investment in additional industrial equipment will
not be sufficient to lower prices appreciably through
competition.(41*)
Wasteful expenditure on a scale adequate to offset the
surplus productivity of modern industry is nearly out of the
question. Private initiative cannot carry the waste of goods and
services to nearly the point required by the business situation.
Private waste is no doubt large, but business principles, leading
to saving and shrewd investment, are too ingrained in the habits
of modern men to admit an effective retardation of the rate of
saving.(42*) Something more to the point can be done, and indeed
is being done, by the civilized governments in the way of
effectual waste. Armaments, public edifices, courtly and
diplomatic establishments, and the like, are almost altogether
wasteful, so far as bears on the present question. They have the
additional advantage that the public securities which represent
this waste serve as attractive investment securities for private
savings, at the same time that, taken in the aggregate, the
savings so invested are purely fictitious savings and therefore
do not act to lower profits or prices. Expenditures met by
taxation are less expedient for this purpose; although indirect
taxes have the peculiar advantage of keeping up the prices of the
goods on which they are imposed, and thereby act directly toward
the desired end. The waste of time and effort that goes into
military service, as well as the employment of the courtly,
diplomatic, and ecclesiastical personnel, counts effectually in
the same direction. But however extraordinary this public waste
of substance latterly has been, it is apparently altogether
inadequate to offset the surplus productivity of the machine
industry, particularly when this productivity is seconded by the
great facility which the modern business organization affords for
the accumulation of savings in relatively few hands. There is
also the drawback that the waste of time involved in military
service reduces the purchasing pow er of the classes that are
drawn into the service, and so reduces the amount of wasteful
consumption which these classes might otherwise accomplish.(43*)
So long as industry remains at its present level of
efficiency, and especially so long as incomes continue to be
distributed somewhat after the present scheme, waste cannot be
expected to overtake production, and can therefore not check the
untoward tendency to depression. But if the balance cannot be
maintained by accelerating wasteful consumption, it may be
maintained by curtailing and regulating the output of goods.
"Cutthroat" competition, that is to say, free competitive
selling, can be done away by "pooling the interests" of the
competitors, so soon as all or an effective majority of the
business concerns which are rivals in the market combine and
place their business management under one directive head. When
this is done, by whatever method, selling of goods or services at
competitively varying prices is replaced by collective selling
("collective bargaining") at prices fixed on the basis of "what
the traffic will bear." That is to say, prices are fixed by
consideration of what scale of prices will bring the largest
aggregate net earnings, due regard being had to the effect of a
lower price in increasing sales as well as to the reduction of
cost through the increase of output. The outcome, as regards the
scale of prices, may easily be a reduction of the price to
consumers; but it may also, and equally readily, be an increase
of the average price. But the prices of the output which is in
this way brought to a monopoly basis are nearly certain to run
more even than prices of the like output while sold competitively
by rival concerns.
What has been said in the last paragraph supposes that the
combination of business enterprises is so comprehensive as to
place the resulting coalition in a position of practical
monopoly. Such a result is not always attained, however,
especially not in the earlier attempts at coalition in any
particular branch of industry; although the endeavor is commonly
related until at last a virtual monopoly is achieved. But even
where no effective monopoly is achieved, a coalition of this kind
has a salutary effect, at least temporarily. In almost all cases
a consolidation of this kind is able to effect considerable
economies in the cost of production, as pointed out in an earlier
chapter, and such economies bring relief through enabling the
combined industrial ventures to earn a reasonable profit at a
lower price for their product than before. They are therefore
able to go on on a scale of prices which was not remunerative
while they stood on their old footing of severalty. But the
relief which comes of such measures, so long as competitive
selling goes on in rivalry with concerns standing outside the
coalition, is only transient. The declining cost of production,
and the consequent competitive investment and extension in the
industry, presently catches up with the gain in economy; the
margin of advantage in the competition is lost, and depression
again overtakes the consolidated enterprises on their new
footing. The remedy again is a wider coalition, making possible
farther economies, and making some approach to a position of
secure monopoly.
It is only on a footing of monopoly that this grinding
depression can be definitively set aside. But the monopoly need
not be absolute in order to afford a somewhat enduring relief.
What is necessary is that the monopoly should comprehend all but
a negligible fraction of the business concerns and the equipment
engaged in the field within which competition has kept profits
below a reasonable level. What is a negligible quantity in such a
case is not to be determined on general considerations, since it
depends in each case on circumstances affecting the particular
industry. But, in a general way, the more nearly complete the
monopoly, the more effectually is it likely to serve its
purpose,(44*)
Such business coalitions have the effect of bringing profits
to a reasonable level, not only by making it possible to regulate
output and prices, but also by the economies which are made
practicable on this footing. Coalitions of a less comprehensive
character, as spoken of above, also effect economies in the cost
of production. But the larger coalitions which bring the business
to a monopoly basis have not only the advantage which comes of
the large-scale organization of the industrial process, but they
also enjoy peculiar advantages in the matter of cost, due to
their monopoly position. These added advantages are more
particularly advantages in buying or bargaining for all goods,
materials, and services required, as well as in selling the
output. So long as the coalitions are not comprehensive enough
effectually to eliminate competition, they are constrained to
both buy and sell in competition with others. But when the
coalition comes effectually to cover its special field of
operation, it is able, not only to fix the prices which it will
accept (on the basis of what the traffic will bear), but also in
a considerable measure to fix the prices or rates which it will
pay for materials, labor, and other services (such as
transportation) on a similar basis, - unless it should
necessarily have to do with another coalition that is in a
similar position of monopoly.
The rule which governs the fixing of rates on this side of
the business dealings of a monopolistic coalition is similar to
that which guides its transactions in the matter of sales. Prices
and rates, as, e.g., for materials and labor, are not depressed
to the lowest possible point, but to the lowest practicable
point, - to the point compatible with the largest net profits.
This may or may not be a point below the rates necessary under a
regime of competitive buying. It may be added that only in rare
cases does a coalition attain so strong a position in respect of
its purchases (of materials or services) as to lift this side of
its business entirely above the reach of competition.(45*)
Wherever this expedient of coalition has been found
practicable, the chronic depression of recent times and the
confusion and uncertainty which goes with a depressed competitive
business situation have been obviated. The great coalitions do
not suffer acutely from the ills of depression, except in cases
where their industrial processes are to a peculiar degree in the
position of intermediaries within the range of the competitive
industries, as is the case, e.g., with most railroads. But even
in such a case the coalition which has a monopoly is more
fortunate as regards the stability of its balance sheet than the
same traffic would be without the advantage of monopoly.
Barring providential intervention, then, the only refuge from
chronic depression, according to the view here set forth, is
thoroughgoing coalition in those lines of business in which
coalition is practicable. But since this would include the
greater part of those lines of industry which are dominated by
the machine process, it seems reasonable to expect that the
remedy should be efficacious. The higher development of the
machine process makes competitive business impracticable, but it
carries a remedy for its own evils in that it makes coalition
practicable. The ulterior effects of thoroughgoing monopoly, as
regards the efficiency of industry, the constancy of employment,
the rates of wages, the prices of goods to consumers, and the
like, are, of course, largely matter of surmise, and cannot be
taken up in this inquiry, the present purpose being merely to
give in outline an economic theory of current business
enterprise.
A further consideration hearing on the later phases of the
business situation may be added. The great coalitions and the
business manoeuvres connected with them have the effect of adding
to the large fortunes of the greater business men; which adds to
the large incomes that cannot be spent in consumptive
expenditures; which accelerates the increase of investments;
which brings competition if there is a chance for it; which tends
to bring on depression, in the manner already indicated. The
great coalitions, therefore, seem to carry the seed of this
malady of competition, and this evil consequence can accordingly
be avoided only on the basis of so comprehensive and rigorous a
coalition of business concerns as shall wholly exclude
competition, even in the face of any conceivable amount of new
capital seeking investment.
What has made chronic depression the normal course of things
in modern industrial business is the higher development of the
machine process, given, of course, the traits of human nature as
it manifests itself in business traffic. The machine process
works this effect by virtue, chiefly if not altogether, of these
two characteristics: (1) a relatively rapid rate of increasing
efficiency; and (2) the close interdependence of the several
lines of industrial activity in a comprehensive system, which is
growing more comprehensive and closeknit as improvement and
specialization of industrial processes go on. The last-named
factor counts for more in proportion as the interdependence grows
closer and more comprehensive. Disturbances are progressively
transmitted with greater facility and effect throughout the
system, and each line of industrial business comes to stand in
relatively intimate relations to an ever increasing range of
other lines with which it carries on a traffic of purchase or
sale. A consequence of this state of things is that any business
coalition, in order effectually to serve its purpose of
maintaining earnings and capitalization, is required to be of
larger scope and closer texture. As the exigencies which enforce
the resort to coalition uninterruptedly gain in scope and
urgency, the "trust" must take the same course of growth to meet
these exigencies; until, with some slight further advance along
the accustomed lines, the trust which shall serve the modern
business situation must comprehend in one close business
coalition virtually the whole field of industry within which the
machine process is the dominant industrial factor.(46*)
To this there is a broad exception, given by the
circumstances of the industrial organization. This organization
rests on the distinction between business management and
ownership. The workmen do not and cannot own or direct the
industrial equipment and processes, so long as ownership prevails
and industry is to be managed on business principles. The labor
supply, or the working population, can therefore not be included
in the ideally complete business coalition suggested above,
however consummate the machine system and the business
organization built upon it may become. So that when the last step
in business coalition has been taken, there remains the
competitive friction between the combined business capital and
the combined workmen.
From the considerations recited above it appears that the
competitive management of industry becomes incompatible with
continued prosperity so soon as the machine process has been
developed to its fuller efficiency. Further technological advance
must act to heighten the impracticability of competitive
business. As it is sometimes expressed, the tendency to
consolidation is irresistible. Modern circumstances do not permit
the competitive management of property invested in industrial
enterprise, much less its management in detail by the individual
owners. In short, the exercise of free contract, and the other
powers inhering in the natural right of ownership, are
incompatible with the modern machine technology. Business
discretion necessary centres in other hands than those of the
general body of owners. In the ideal case, so far as the machine
technology and its business concomitants are consistently carried
through, the general body of owners are necessary reduced to the
practical status of pensioners dependent on the discretion of the
great holders of immaterial wealth; the general body of business
men are similarly, in the ideal outcome, disfranchised in point
of business initiative and reduced to a bureaucratic hierarchy
under the same guidance; and the rest, the populace, is very
difficult to bring into the schedule except as raw material of
industry. What may take place to accentuate or mitigate this
tendency is a question of the drift of sentiment on the matter of
property rights, business obligations, and economic policy. So
far as the economic factors at play in the modern situation shape
this drift of sentiment they do so in large part indirectly,
through the disciplinary effect of new and untried circumstances
of politics and legal relation to which their working gives rise.
NOTES:
1. Such a discussion as Patten's Theory of Prosperity applies to
the regime of "natural economy", and passably also to that of
handicraft and petty trade, but does not seriously touch the
modern situation. The like is true generality for current
discussions of this topic.
2. Wealth of Nations, Introduction.
3. This means, in concrete terms, prior to the regime of the
machine industry. Since the coming in of the machine, modern
business enterprise has taken over the management of industry;
that is to say, industry has come to be managed by the method of
investment for a profit by what is in aim and animus essentially
the commercial method. As has been remarked above, capital has
become vendible in a decisive degree. The material factors
engaged in industry , particularly in the machine industry
proper, are vendible in about the same (perhaps on an average in
a higher) degree as the material items handled by commercial
traffic are vendible. This is true of raw materials, labor power,
and industrial equipment, but it is peculiarly true of the
industrial equipment - the mechanical factors in the stricter
sense. It is in these mechanical appliances primarily, but in the
other factors of the machine industry in only a slightly lower
degree, that the traffic of investment, and of purchase and sale
connected with investment, is particularly active. Within these
wider limits a further limitation may be made. "Vendibility" of
all items involved is, as a broadly general rule, carried to the
highest pitch in those branches of industry that have to do with
the production of "producer's goods." These branches are at the
same time, and partly in consequence of this fact, more widely
and intimately related to other branches of industry than are any
other group of industrial processes that might be named. It seems
to be this extreme prevalence of vendibility, together with this
more far-reaching and more exacting articulation with the
industrial process at large, that chiefly gives substantial
significance to a classification of these lines of industry as
"Produktivmittel-Industrien" by late German writers. There is,
for business purposes, a difference of degree, in both of the
respects named, between this (ill-defined) group of industrial
processes on the one hand, and the contrasted group occupied with
the production of consumption goods on the other hand. The
"productive-goods industries" show the modern industrial and
business traits in an accentuated form and force, and they are,
by consequence, in a strategically primary position in the
business situation.
4. Cf., e.g., A. Spiethoff, Jahrbuch f. Gesetzgebung Verwaltung
u. Volkswirtschaft, vol. XXVI. Heft 2 . "Vorbemerkungen zu einer
Theorie der Uberproducktion." and vol. XXVII, pp. 348-353;
Turgan-Baranowsky, Theorie und Geschicte der Handelskrisen in
England, pp. 16-28; L. Pohle, Periodische Wirschaftskrisen,
especially sec. II, with subjoined notes.
5. This is well exemplified in Tugan-Baranowsky (Handelskrise),
who declares at the outset (p. 17) that money and price are
negligible factors for the purpose in hand. He thereby commits
himself to the position that these crises are phenomena of the
material processes of economic life (production and consumption),
not of business traffic. Hence the ultimate failure of this acute
observer and theoretician to reach a tenable solution to the
question. Substantially the is true of Marx, whom Tugan follows,
though with large reservations. (Cf. Marx, Capital, vol. III, ch.
XV)
6. The "cycle" of exaltation, crisis, and depression has
frequently been describe. Perhaps as effective a description and
analysis as any is that of Tugan-Baranowsky, Handelskrisen, chap.
VIII.
7. Cf., however, Cassel, "Om Kriser och Daliga Tider," Ekonomisk
Tidskrift, vol. vi, no. 2, pp. 69-78.
8. As, e.g., the era of prosperity 1897-1902 took its start from
the demand for supplies caused by the Spanish-American War,
though other favorable circumstances acted to give it volume. Mr
Carver, possibly following suggestions given by Spiethoff's
discussion, has suggested that the lines of business in which the
favorable initial disturbance arises are necessarily those
engaged in the production of "producer's goods"; the reason for
this being that, in the nature of the case, "the value of
producer's goods tends to fluctuate more violently than the value
of consumer's goods," inasmuch as the value of producer's goods
varies somewhat as the magnitude of the margin of profits, while
that of the consumer's goods varies somewhat as the magnitude of
the entire demand on which this margin of profits rests as an
increment. (The value of producer's goods = f(delta), that of
consumer's goods = f(demand + delta).) From the like line of
argument it should follow that the initial break in time of
crisis must come in some line of business occupied with
producer's goods. Cf. Quarterly Journal of Economics, May l903,
pp. 497-500. See also foot-note on p. 181 above.
9. Cf. Sombart, Kapitalismus, vol II, ch. I, on the motive forces
at work in advancing business enterprise.
10. The "intitial disturbance" here spoken of may of course be of
a progressive or recurring character, and so may keep the
differential advantage going in a progressive manner, as, e.g.,
in the case of a progressive demand for supplies due to a
protracted war or to a period of continued preparation for war,
such as has occurred in America during the last few years.
11. There is a point or two of further detail in what may be
called the method of prosperity and crisis, which are best
discussed in connection with the phenomena of depression. These
will, therefore, be taken up presently. The above
characterization of an era of prosperity and the manner of its
exhausting itself will serve as a description of the course which
such an era takes under the regime of the more highly developed
business methods of the high tide of the nineteenth century. For
the earlier, less fully developed, business situation of the
early nineteenth century the corresponding course of events runs
somewhat different, owing, chiefly at least, (1) to a slower rate
of transmission of any price disturbance, and (2) to the greater
range and value of "outlying" industries which are very tardily
if at all drawn into the exuberant movement of prosperity. In
this connection it is worth noting that during this earlier
period of the nineteenth century the production of specifically
productive goods had not been carried to the point afterward
attained, either in the differentiation and specialization of
industries occupied with this class of goods or in the relative
volume of this class of industries.
12. The several phases of this sequence of exaltation and
depression for any given business concern, may be stated as
follows: -
Let ea = earnings; pr = sale price of output; exp = expenses
of production of output; mar = margin of gain on output = pr -
exp; cap = intitial effective capitalization; yp = year's
purchase at (current rates = int) = 1/int, disregarding risk; cr
= normal credit extension on given cap = cap/n = f(cap/int).
Then at the initial phase,
ea = (mar = pr -exp)outp,
cap = ea x yp = ea/int,
cr = cap/n,
At the subsequent phase, of exaltation,
ea' = ea + delta ea = mar' x outp
= [(pr' = pr + delta pr) - exp] outp
=(mar + delta mar) outp > ea,
cap' = ea'/int = (ea + delta ea)/int > cap,
cr' = cap'/n = (cap + delta cap)/n > cr.
At the concluding phase, of depression,
ea'' = ea' - delta ea' = mar'' x outp
= [pr' - (exp' = exp + delta exp)] outp < ea'
cap'' = ca''/int = (ea'- delta ea')/int < cap',
cr'' = cap''/n = (cap' - delta cap')/n < cr'.
For simplicity of statement, in all this no account is taken of
the element of risk, nor of the fluctuations of discount rates or
the variations of volume of output. If these be included in the
calculation as variables, the result is much the same. They are
functions of the variables already included, and their inclusion
would, on the whole, accentuate the oscillations shown by the
computation as it stands.
13. A crisis may take its rise from credit extension in other
than properly industrial business. Such, e.g., was in great
measure the American crisis in l837, when the most obvious and
disastrous inflation was in speculative land values and the
credits based on them. But it is no stretch of the concept to say
that in that case the situation out of which the crisis arose was
an overcapitalization of the land values in question. Capitalized
land is, of course, "capital" for business purposes as truly as
any other body of values that are capitalized and drawn into the
money market.
14. It is, in great part, through or by force of fluctuations of
this base line of money values that large accumulations of wealth
are made. One might almost say that this is the "normal" method
by which saving are made and capitalized in later modern times.
Fluctuations in the stock market, of course, are of this
character, as are commonly also large variations of the course of
prices outside the stock market, as well as fluctuations of the
money market. The great gains of successful promoters of
corporations and the like come in this manner usually. They are
due to enlargement of the money value of a given block of
industrial equipment independently of any change in the physical
character of the equipment which comes near saying that the large
fortunes originate in such changes of the base line, - from which
it follows that the larger accretions to the volume of capital
are of this origin. The large profits are made in the form of
capital, which is acquired by virtue of a price variation. See
foot-note, pp. 168-170.
15. A substantial move in this direction would be that advocated
by Mr F.S. Stetson before the New York Bar Association, and
reiterated before the United States Industrial Commission: "To
permit the formation of a distinct class of business stock
corporations whose capital stock may be issued as representing
proportional parts of the whole capital without any nominal or
money value." The market value of such shares would be the only
value assigned them, and little of a base line in the way of a
legally imputed value would remain. The de jure value would no
longer hinder a free recognition of the facts. - Report of the
Industrial Commission, vol. I. p. 976.
16. Cf. Hobson, Problem of the Unemployed, ch. V., Vialles, La
consommation et les crises economiques, especially "Introduction"
and ch. III.
17. Something that might bear such a construction occurs, e.g.,
locally, when a run of fish exceeds the ability of the workmen to
take care of them. The fatuity of appealing to such an example is
plain.
18. Cf. Smart, Studies in Economics, ch. VII.
19. For the present purpose a concern which passes through a
liquidation and reappears with a rerated and reorganized
capitalization and body of liabilities also has much of the
character of a new investment.
20. Cf. L. Pohle, Bevolkerungsbewegung, Kapitalbildung und
periodische Wirtschaftskrisen, who concludes that depression is
due to a scarcity of capital as compared with population; the
rate of increase of capital is conceived to fall short of the
rate of increase of population, hence periodical depression.
Cf., on the other hand, Macrosty, Trusts and the State, p.
133, who finds, by recourse to the testimony before the Royal
Commission on the Depression of Trade and Industry, that there is
at such times capital constantly seeking investment and entering
into competition with what is already invested. Cf. Final Report
of the Royal Commission on Depression of Trade and Industry
(1886). "The replies received from Chambers of Commerce to the
inquiries we addressed to them confirm the statements made by the
witnesses who appeared before us. Those replies testify to the
general maintenance or increase of the volume of trade,
accompanied in many cases by a shrinkage in its value, and in all
cases by a serious diminution of profit. They also show how
general is the belief in commercial circles that overproduction,
the fall of prices, and more effective foreign competition,
assisted by high tariffs, go far to account for the existing
position of trade and industry in this country." (pp. ix-x). Cf.
also pp. xi-xv of the Report.
21. Cf., e.g., Burton, Crises and Depressions, ch. IV, especially
pp 113-115.
22. More in detail, what happens in connection with
interest-bearing securities carried over an interval of high
interest rates and business activity may be formulated as
follows: When current interest rates advance, securities bearing
a fixed rate (of dividends or interest) decline on the market.
That is to say, the effective capitalized value of the claim to
these fixed rates of income, as shown by the market quotations,
shrinks. At the same time, since the period during which this
readjustment occurs is a period of acceleration in business, the
earning-capacity (actual or putative) of the property on which
these securities rest has increased over what it was at the time
the securities were floated. Hence this property (industrial
equipment) is also recapitalized, in the market quotations, at a
higher value than it had when the securities were floated. The
effective recapitalization carried out by the market quotations
acts, for the present purpose, to the same effect upon the value
of both of the items considered, this effect being to leave a
margin of the property previously covered by the securities
uncovered and available as collateral on which to float a new
extension of credit, in the form of mortgage loan or
interest-bearing security. In the common run of business
procedure this available margin, between the current (higher)
capitalized value of the property (collateral) and the current
(lower) capitalized value of the securities resting upon it is
promptly covered by a fresh credit extension ; whether this
extension takes the set form of loan, bonds, preferred stock, and
the like, or the less patent form of a larger volume of
obligations in the way of contracts and the like, - the result,
as touches the securities and their basis, being that the same
nominal volume of securities with the same aggregate interest
charge rests on a (materially) smaller block of the industrial
equipment after this readjustment of capitalization is had than
it did when the securities were placed. When depression ensues,
and the rate of earnings and interest declines, the effective
capitalization of the securities with a fixed rate of income is
increased (if the securities are felt to be secure) to correspond
with the lower rate of interest; whereas the capitalized value of
the block of industrial equipment on which these securities (plus
whatever may have been added in the interval) rest shrinks to
correspond with the same facts. A discrepancy, such as was
adjusted by a recapitalization during the interval of high rates,
reappears, but in the inverse sense. And this discrepancy cannot
be corrected, since the margin on which the previous adjustment
was made has disappeared, and no corresponding margin on the
other side emerges. Business accounts do not deal in negative
quantities, except under stress of a necessity that violates the
premises on which business accountancy proceeds.
Recurring to the notation employed on page 153, and letting l
= par value of securities with fixed charges, r = rate per annum
of fixed charges, l' = market value (effective capitalization) of
these securities,
cap' = ea(yp = 1/int), l' = lr/int,
but if int becomes int' (= int + delta int), l' becomes
l'' = lr/(int + delta int = int') < l',
cap' at the same time becomes cap'' = (ea + delta ea)/(int +
delta int) = ea'/int';
whereas in a period of falling interest,
int' = int - delta int, and i'' = lr/(int' = (int - delta
int) > l'.
23. Compare Hobson, Problem of the Unemployed, ch. V, and
Tugan-Baranowsky, Handelskrisen, ch. I and VI. In his criticism
(pp. 191-193) Tugan has quite missed the point of Hobson's theory
as well as of his illustration, having apparently not understood
Hobson's exposition, which is, in effect, very similar to his
own. See also Hobson, Modern Capitalism, ch. VII, especially
secs. 8 and 16.
24. The typical form taken by this acceleration in the machine
production of machinery, but in fact it involves the production
of other material factors as well as the mechanical apparatus,
notably the materials used in industry.
25. The established concerns having been capitalized on the basis
of past cost, we can say that in the older establishments, cap -
f(cost), but in the new establishments with an equal earning
capacity, cap1 = f(cost1 = cost - delta cost); hence the rate of
earnings [ = f(ea/cost)] will be progressively higher as cost
decreases:
f(ea/cost) < f(ea/(cost - delta cost)) < f(ea/(cost - 2 delta
cost), etc.
26. Recurring to the notation employed in note 2, page 168, and
letting Um = unit of material efficiency, then a given
established concern, A, with a given equipment Um(cap)a = Ue(cap)
= Um(cap) = Ue(ea/int), presently finds itself in competition
with a younger concern, B, having an equivalent material
equipment = Um(cap)b procured at a lower cost and requiring lower
earnings (=ea') and lower fixed charges.
Um(cap)b = Uc(ea'/int = (ea - delta ea)/int) = Ue(cap' = cap
- delta cap).
But Um(cap)a = Um(cap)b as competitors in the market. Hence, with
the competitive lowering of earnings, and therefore of effective
capitalization, A's account comes to stand:
Um(cap)a = Uc(cap') - Uc(cap - delta cap) < Un(cap).
In effect A is overcapitalized by Uc(cap - cap'). A's nominal
capital, Un(cap)a = Uc(cap' + delta cap), while A's effective
capitalization
Uc(cap')a = Uc(cap - delta cap).
The business man's sensibilities in the case, therefore, suffer a
lesion
= f[Un(ea/int) - Uc((ea - delta ea)/int)],
which is a monotonic function. The discrepancy between Un(cap)z
and Uc(cap') is, in large part, embodied in securities with fixed
charges; which makes a readjustment very difficult even apart
from A's reluctance.
27. With the above analysis may be contrasted Marx's discussion
of the declining rate of profits and the manner in which he
conceives overproduction, speculation, and crises to arise out of
the tendency of profits to a minimum. (Kapital, vol. III, ch. XV)
In the same connection, see Tugan-Baranowsky's criticism of Marx,
Handelskrisen, ch. VII.
28. In point of direct material serviceability, no doubt, a fresh
supply of the precious metals is one of the least useful forms of
wealth to the production of which industrial effort can be
directed, but for the purposes of business prosperity at large it
is probably the most serviceable solution that can be made to the
aggregate wealth. Rapidly increasing efficiency in the production
of other forms of wealth is detrimental to the business
interests, in that it brings depression; but a rapid increase of
the precious metals is the most fortunate material circumstances
for the business interests that industrial activity can bring,
because it puts off depression by keeping up prices.
29. Cf. Smart, Studies in Economics, Essay VI, "Must Prices
Fall?" Distribution of Incomes, bk. II, ch. III.
30. Work goes on during dull times, though at a slackened pace,
and extensions and improvements are continually being made. The
volume of output consequently increases, so that, even if there
has been a setback to production at the beginning of the
depression, the aggregate output presently again reaches the
volume which it had when the dull times set in. It may be added
that the rate of consumption is also appreciably lower during
dull times, particularly in the more wasteful forms of
consumption. This lowered aggregate consumption offsets the
lowered intensity of production during dull times to such an
extent that it is probably safe to say that the net surplus
product, measured by weight and tale, is at least not appreciably
smaller during depression than during prosperity. Cf. Carroll D.
Wright, Testimony in Report of the Industrial Commission, vol.
VII. p. 25.
31. The reduced scale of living of the working population is the
chief factor that counts as an offset against the reduction of
the gross production during dull times, as indicated above.
32. Cf. articles by G. Cassel, "Om Kriser och Daliga Tider," now
running in Ekonomisk Tidskrift (1904, Nos. 1 and 2), for a
parallel discussion of the topics here dealt with. Mr Cassel's
exposition connects more closely with the received notions of
Capital, Production, etc. and goes more into detail at certain
points, particularly on Saving, Investment (Kapitalbildning), and
Pecuniary Expectancy (Vantandet). His exposition is not yet
completed, but so far as may be gathered from what has come to
hand he should reach substantially the same outcome as that given
above.
33. In the case of a speculative inflation,
cap = ea/cost x 1/int < cap' = (ea + delta ea)/cost x 1/int;
in the case of depression,
cap' = ea/(cost x int) > cap'' = (ea - delta ea)/(cost x int)
In the former case the current capitalization during
inflation, being cap', exceeds the bona fide capital value as
proved by events, cap; while in the same of depression the
nominal capital, being cap', exceed the capitalization warranted
by current earning capacity, cap''.
34. So impressive a fact has the gambling character of early
periods of inflation and crises been that it has led economists
to look for gambling as a matter of course in later phenomena
that have been classed as inflation and crises, even when no
gambling element has been obviously present. It has been felt
that gambling must presumptively be present whenever there is
inflation or crises, because the showing of earlier history runs
that way.
35. Cf., e.g., Burton, Crises and Depressions, ch. VIII, for a
succinct account of depressions and crises in the United States
during this period.
36. The speculative movement requires time, because the inflation
is a cumulative one and is carried out unintentionally and in a
sense unconsciously.
37. These extra-industrial expenditures that have brought
prosperity are here spoken of as wasteful, not thereby implying
that they may not be beneficial to the community even in respect
to their effect upon the aggregate income or the aggregate
accumulation of wealth in the community. They are called wasteful
simply because these expenditures directly, in their first
incidence, merely withdraw and dissipate wealth and work from the
industrial process, and unproductively consume the products of
industry. Indirectly they have a beneficial aggregate effect upon
industry by inducing an employment of the fill productive
efficiency of the industrial apparatus; so that in a very short
time, it is at least conceivable, the aggregate net output of the
industrial process may be as large and serviceable as before the
wasteful expenditures were entered upon, even with the
destruction of that portion of the product which goes to maintain
the wasteful expenditures. At the same time, the effect upon
business must be held to be patently favorable. The wasteful
expenditures enhance demand and so increase the vendibility of
the output, - they increase profits and raise capitalization.
They therefore act unequivocally to advance the values of the
business men's holdings and increase their gains, as counted in
business terms. The wasteful expenditure is good for trade. It is
only in the eventual liquidation that a disadvantageous business
consequence comes in view.
It will be seen that on this view of the effect of wasteful
expenditure the position occupied by some early economists, as
Malthus, Lauderdale, Chalmers, and others, as well as by some
later ones, as Robertson, Hobson, is substantially well taken,
although the defence of waste which these economists offer may be
incomplete. Waste seems necessary to keep trade brisk, and
therefore to keep the industrial processes working at their full
capacity. The ulterior reason for this state of the case being
the fact that the decisive ground which determines the margin of
activity in business, and therefore in industry, is the business
men's reluctance to accept a reduction of profits as measured in
terms of price. The opponents of the Malthusian view failed to
appreciate the decisive importance of price, as contrasted with
serviceability, among the motives on which business proceeds.
38. The objection would not come unexpected that this state of
the case is not to be taken as normal, - a point of opinion not
readily to be decided, since it rests on a difference in the
point of view.
39. Cf. Sombart, Kapitalismuc, vol. I, ch. XVIII-XX.
40. Cf. Hobson, Problem of the Unemployed, Appendix to ch. V.
41. Cf. Hobson, Problem of the Unemployed, ch. VI. Mr Hobson does
not use the term "waste" in this connection. Also Vialles,
Consommation, final chapter.
42. "Saving" at the same time takes place automatically in the
current operations of coalition and incorporation, as indicated
above, pp. 166-176.
43. Hobson (Problem of the Unemployed), whose analysis of
overproduction and its relation to depression goes farther than
any other, reviews and criticises (ch. VIII) the palliative
measures that have been advocated. He finds them, all and
several, inadequate and inconsequent, in that they do not touch
the root of the evil - oversaving or "underconsumption." They do
not touch this because they do not mitigate the automatic saving
and investment process that necessarily goes with the possession
of large private incomes. But in point of practical efficiency
his own proposed remedies must also be scheduled under the head
of "palliatives." These proposed remedies are measures looking to
a "Reformed Distribution of Consuming Power" (ch. VI), such as
taxation of "unearned" incomes, higher wages, shorter working
day. The aim is "to increase the proportion of the total wealth
of the community, which falling to them as wages shall be spent
in raising the general standard of working-class consumption."
The contemplated move is manifestly chimerical in any community,
such as the modem industrial communities, where public policy is
with growing singleness of purpose guided by business interests
with a naive view to an increase of profits.
Cf. also Smart, Studies in Economics, Essay VIII, On
"Overproduction"; also Essay IX, "The Socializing of
Consumption," particularly sec. 8, on "The Limits of
Consumption," pp. 293-298.
44. The obvious remark may be added, for completeness of
statement, that the various branches of industry lend themselves
to management by monopoly in extremely varying degrees, some,
e.g., farming, as an extreme instance, not being amenable to this
method of management under existing circumstances; others, again,
as, e.g., retail merchandising, can be managed by this method
only to a very restricted extent; while at the other end of the
scale, in such industries as railroading, monopoly management,
more or less unqualified, is fairly unavoidable.
45. Hitherto probably none of the American coalitions have
succeeded in freeing themselves from the inconveniences of
competitive bidding for labor, and very few have achieved a
purely monopolistic buying, either of materials or of any of the
various kinds of services which they require. With regard to raw
materials alone have some, as, e.g., the Standard Oil Company,
been able to compass an effectual monopoly. Something approaching
this position has been accomplished by a very few other
coalitions, as, e.g., the Sugar Refineries, the Cotton Seed Oil
Company, the United States Steel Corporation, and in a local way
certain coal, railway, lumber, and warehouse companies.
46. It is, e.g., already apparent that the general railway system
of America must presently come under one management, and it must
fall into a coalition with the group of industries that are
occupied with the supply and elaboration of iron, coal, and
lumber.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 8
Business Principles in Law and Politics
Popular welfare is bound up with the conduct of business;
because industry is managed for business ends, and also because
there prevails throughout modern communities a settled habit of
rating the means of livelihood and the amenities of life in
pecuniary terms. But apart from their effect in controlling the
terms of livelihood from day to day, these principles are also in
great measure decisive in the larger affairs of life, both for
the individual in his civil relations and for the community at
large in its political concerns. Modern (civilized) institutions
rest, in great part, on business principles. This is the meaning,
as applied to the modern situation, of the current phrases about
the Economic Interpretation of History, or the Materialistic
Theory of History.
Because of this settled habit of seeing all the conjunctures
of life from the business point of view, in terms of profit and
loss, the management of the affairs of the community at large
falls by common consent into the hands of business men and is
guided by business considerations. Hence modern politics is
business politics, even apart from the sinister application of
the phrase to what is invidiously called corrupt politics. This
is true both of foreign and domestic policy. Legislation, police
surveillance, the administration of justice, the military and
diplomatic service, all are chiefly concerned with business
relations, pecuniary interests, and they have little more than an
incidental bearing on other human interests. All this apparatus
is also charged with the protection of life and personal liberty,
but its work in this bearing has much of a pecuniary color.
Legislation and legal decisions are based on the dogma of
Natural Liberty. This is peculiarly true as regards the
English-speaking peoples, the foundation of whose jurisprudence
is the common law, and it holds true in an especial degree of
America. In other European communities the sway of natural rights
preconceptions is not so unmitigated, but even with them there is
a visibly growing predilection for the natural-rights standpoint
in all matters touching business relations. The dogma of natural
liberty is peculiarly conducive to an expeditious business
traffic and peculiarly consonant with the habits of thought which
necessarily prevail in any business community.
The current body of natural-rights preconceptions antedates
the modern business situation. The scheme of natural rights grew
up and found secure lodgement in the common sense of the
community, as well as with its lawgivers and courts, under the
discipline of the small industry and petty trade ("domestic
industry") whose development culminated in the eighteenth
century.(1*) In industrial matters the efficient and autonomous
factor in the days of the small industry was the individual
workman, his personal force, dexterity, and diligence; similarly
in the petty trade of the precapitalistic English situation the
decisive factor was the discretion and sagacity of the small
merchant and petty employer, who stood in the direct personal
relations with their customers and their employees. In so far as
trade and industry was not restrained by conventional
regulations, statutory or customary, both trade and industry was
in effect an open field of free competition, in which man met man
on a somewhat equable footing. While the competitors were not on
a footing of material equality, the industrial system was
sufficiently loose-jointed, of a sufficiently diffuse growth, to
make competition effective in the absence of mandatory
restrictions. The like will hold of the business organization
associated with the small industry. Both trade and industry were
matters of personal efficiency rather than comprehensively
organized processes of an impersonal character.(2*)
Natural rights, as they found their way into the conceptions
of law and equity, were in effect the assumed equal rights of men
so situated on a plane of at least constructive equality that the
individuals concerned would be left in a position of effectively
free choice if conventional restrictions were done away. The
organization was not, mechanically, a close-knit one, in the
sense that the concatenation of industrial processes or of
business transactions was not rigorous either in point of time
relations or of the quantity and character of the output or the
work. Neither were the place, pace, circumstances, means, or
hours of work closely determined for the workman or his employer
by mechanical circumstances of the industrial process or of the
market. The standardization of life under the old regime was of a
conventional character, not of a mechanical kind such as is
visible in the more recent development. And this conventional
standardization was gradually losing force.
The movement of opinion on natural-rights ground converged to
an insistence on the system of natural liberty, so called. But
this insistence on natural liberty did not contemplate the
abrogation of all conventional prescription. "The simple and
obvious system of natural liberty" meant freedom from restraint
on any other prescriptive ground than that afforded by the rights
of ownership. In its economic bearing the system of natural
liberty meant a system of free pecuniary contract. "Liberty does
not mean license;" which in economic terms would be transcribed.
"The natural freedom of the individual must not traverse the
prescriptive rights of property." Property rights being included
among natural rights, they had the indefeasibility which attaches
to natural rights. Natural liberty prescribes freedom to buy and
sell, limited only by the equal freedom of others to buy and
sell; with the obvious corollary that there must be no
interference with others' buying and selling, except by means of
buying and selling.
This principle of natural (pecuniary) liberty has found its
most unmitigated acceptance in America, and has here taken the
firmest hold on the legal mind. Nowhere else has the sacredness
of pecuniary obligations so permeated the common sense of the
community, and nowhere does pecuniary obligation come so near
being the only form of obligation that has the unqualified
sanction of current common sense. Here, as nowhere else, do
obligations and claims of the most diverse kinds, domestic,
social, and civil, tend to take the pecuniary form and admit of
being fully discharged on a monetary valuation. To a greater
extent than elsewhere public esteem is awarded to artists,
actors, preachers, writers, scientists, officials, in some rough
proportion to the sums paid for their work.
American civil rights have taken an extreme form, with
relatively great stress on the inviolability of pecuniary
relations, due to the peculiar circumstances under which the
American community has grown up. The pioneers, especially in that
North-Atlantic seaboard community that has been chiefly effective
in shaping American traditions, brought with them a somewhat
high-wrought variant of the English preconception in favor of
individual discretion, and this tradition they put in practice
under circumstances peculiarly favorable to a bold development.
They brought little of the remnants of that prescriptive code
that once bound the handicraft system, and the conditions of life
in the colonies did not foster a new growth of conventional
regulations circumscribing private initiative. America is the
native habitat of the self-made man, and the self-made man is a
pecuniary organism.(3*)
Presently, when occasion arose, the metaphysics of natural
liberty, pecuniary and other, was embodied in set form in
constitutional enactments. It is therefore involved in a more
authentic form and with more incisive force in the legal
structure of this community than in that of any other. Freedom of
contract is the fundamental tenet of the legal creed, so to
speak, inviolable and inalienable; and within the province of law
and equity no one has competence to penetrate behind this first
premise or to question the merits of the natural rights
metaphysics on which it rests. The only principle (attested habit
of thought) which may contest its primacy in civil matters is a
vague "general welfare" clause; and even this can effectively
contest its claims only under exceptional circumstances. Under
the application of any general welfare clause the presumption is
and always must be that the principle of free contract be left
intact so far as the circumstances of the case permit. The
citizen may not be deprived of life, liberty, or property without
due process of law, and the due process proceeds on the premise
that property rights are inviolable. In its bearing upon the
economic relations between individuals this comes to mean, in
effect, not only that one individual or group of individuals may
not legally bring any other than pecuniary pressure to bear upon
another individual or group, but also that pecuniary pressure
cannot be barred.
Now, through gradual change of the economic situation, this
conventional principle of unmitigated and inalienable freedom of
contract began to grow obsolete from about the time when it was
fairly installed; obsolescent, of course, not in point of law,
but in point of fact. Since about the time when this new
conventional standardization of the scheme of economic life in
terms of free contract reached its mature development, in the
eighteenth century,(4*) a new standardizing force, that of the
machine process, has invaded the field.(5*) The standardization
and the constraint of the system of machine industry differs from
what went before it in that it has had no conventional
recognition, no metaphysical authentication. It has not become a
legal fact. Therefore it neither need nor can be taken account of
by the legal mind. It is a new fact which fits into the framework
neither of the ancient system of prescriptive usage nor of the
later system of free personal initiative. It does not exist de
jure, but only de facto. Belonging neither to the defunct system
nor to the current legal system, since it neither institutes nor
traverses a "natural right," it is, as within the cognizance of
the law, non-existent. It is, perhaps, actual, with a gross,
material actuality; but it is not real, with a legal,
metaphysically competent reality. Such coercion as it may exert,
or as may be exercised through its means, therefore, is, in point
of legal reality, no coercion.
Where physical impossibility to fulfil the terms of a
contract arises out of the concatenation of industrial processes,
this physical impossibility may be pleaded as invalidating the
terms of the contract. But the pecuniary pressure of price or
subsistence which the sequence and interdependence of industrial
processes may bring to bear has no standing as such in law or
equity; it can reach the cognizance of the law only indirectly,
through gross defection of one of the contracting parties, in
those cases where the pressure is severe enough to result in
insolvency, sickness, or death. The material necessities of a
group of workmen or consumers, enforced by the specialization and
concatenation of industrial processes, is, therefore, not
competent to set aside, or indeed to qualify, the natural freedom
of the owners of these processes to let work go on or not, as the
outlook for profits may decide. Profits is a business
proposition, livelihood is not.(6*)
Under the current de facto standardization of economic life
enforced by the machine industry, it may frequently happen that
an individual or a group, e.g., of workmen, has not a de facto
power of free contract. A given workman's livelihood can perhaps,
practically, be found only on acceptance of one specific contract
offered, perhaps not at all. But the coercion which in this way
bears upon his choice through the standardization of industrial
procedure is neither assault and battery nor breach of contract,
and it is, therefore, not repugnant to the principles of natural
liberty. Through controlling the processes of industry in which
alone, practically, given workmen can find their livelihood, the
owners of these processes may bring pecuniary pressure to bear
upon the choice of the workmen; but since the rights of property
which enforce such pressure are not repugnant to the principles
of natural liberty, neither is such pecuniary pressure repugnant
to the law, the case is therefore outside the scope of the law.
The converse case, where the workmen take similar advantage of
their employers to bring them to terms, is similarly outside the
scope of the common law, - supposing, of course, that there has
in neither case been a surrender of individual liberty, a breach
of contract, theft, a resort to violence, or threats of violence.
So long as there is no overt attempt on life, liberty of the
person, or the liberty to buy and sell, the law cannot intervene,
unless it be in a precautionary way to prevent prospective
violation of personal or property rights.
The "natural," conventional freedom of contract is sacred and
inalienable. De facto freedom of choice is a matter about which
the law and the courts are not competent to inquire. By force of
the concatenation of industrial processes and the dependence of
men's comfort or subsistence upon the orderly working of these
processes, the exercise of the rights of ownership in the
interests of business may traverse the de facto necessities of a
group or class; it may even traverse the needs of the community
at large, as, e.g., in the conceivable case of an advisedly
instituted coal famine; but since these necessities, of comfort
or of livelihood, cannot be formulated in terms of the natural
freedom of contract, they can, in the nature of the case, give
rise to no cognizable grievance and find no legal remedy.
The discrepancy between law and fact in the matter of
industrial freedom has had repeated illustration in the court
decisions on disputes between bodies of workmen and their
employers or owners. These decisions commonly fall out in favor
of the employers or owners; that is to say, they go to uphold
property rights and the rights of free contract. The courts have
been somewhat broadly taken to task by a certain class of
observers for alleged partiality to the owners' side in this
class of litigation. It has also been pointed out by faultfinders
that the higher courts decide, on the whole, more uniformly in
favor of the employer-owner than the lower ones, and especially
more so than the juries in those cases where juries have found
occasion to pass on the law of the case. The like is true as
regards suits for damages arising out of injuries sustained by
workmen, and so involving the question of the employer's
liability. Even a casual scrutiny of the decisions, however, will
show that in most cases the decision of the court, whether on the
merits of the case or on the constitutionality of the legal
provisions involved,(7*) is well grounded on the metaphysical
basis of natural liberty. That is to say in other words, the
decisions will be found on the side of the maintenance of
fundamental law and order, "law and order" having, of course,
reference to the inalienable rights of ownership and contract. As
should fairly be expected, the higher courts, who are presumably
in more intimate touch with the principles of jurisprudence,
being more arduously trained and more thoroughly grounded in the
law at the same time that they have also presumably a larger
endowment of legal acumen, - these higher courts speak more
unequivocally for the metaphysical principles and apply them with
a surer and firmer touch. In the view of these higher adepts of
the law, free contract is so inalienable a natural right of man
that not even a statutory enactment will enable a workman to
forego its exercise and its responsibility. By metaphysical
necessity its exercise attaches to the individual so indefeasibly
that it cannot constitutionally be delegated to collective
action, whether legislative or corporate.(8*) This extreme
consequence of the principle of natural liberty has at times
aroused indignation in the vulgar; but their grasp of legal
principles is at fault. The more closely the logical sequence is
followed up, the more convincingly does the legitimacy of such a
decision stand out.
In comparing the decisions of the higher courts with those of
the lower they contrast most signally with the decisions rendered
by juries in the lower tribunals. While this contrast has a
significance in another connection, it casts no shadow on the
legality of the decisions of the courts of higher instance. The
juries, in great measure, speak for the strained sympathies of
the vulgar, which are a matter somewhat apart from the
foundations of law and order.(9*)
Popular sentiment, then, does not at all uniformly bear out
these decisions of the courts in disputes between property rights
and naked mankind, especially not in the more rigorous
enforcement of the principle of free contract. This discrepancy
serves to show that the vulgar, the laity, from whose numbers the
juries are drawn, have not an adequate sense of the principles
that lie at the root of the law; which may be due in part to
their not realizing how essential a foundation of law, order, and
common welfare these principles of natural liberty are. The
visible disparity in the distribution of property may make those
classes who have little property envious of the wealthy members,
and so make them lose interest in the maintenance of the rights
of property. But apart from this, the discipline of daily life,
from which the common-sense notions of the vulgar are in good
part derived, is no longer in full accord with the natural-rights
conceptions handed down from the eighteenth century. In other
words, the conceptions of natural rights on which the common law
rests embody a technically competent formulation of the
deliverances of that body of common sense which was inculcated by
the discipline of everyday life in the eighteenth century, before
the advent of the current situation; whereas the discipline of
everyday life under the current technological and business
situation inculcates a body of common-sense views somewhat at
variance with the received natural-rights notions.
There is apparently something of a divergence between the
received notions on this head and the deliverances of latter-day
common sense. The divergence is neither well defined nor
consistent. The latter-day attitude toward questions of the kind
involved is vague, chiefly negative or critical, and apparently
fluctuating; but after all there is a somewhat persistent
divergence, which may even be said to have a systematic
character, so far as it goes. It runs in the direction of a
(partial and vacillating) disavowal or distrust of the
metaphysics of free contract, and even of natural liberty
generally. This uncertainty of allegiance to the received
foundations of law and order prevails in unequal degrees among
the various classes of the community, being apparently largest
and most outspoken among the workmen of the industrial towns, and
being, on the whole, less noticeable among the propertied and
professional classes and the rural population. The peculiar class
distribution of this disintegration of received convictions, as
well as its connection with modern industrial conditions, will be
taken up again presently in another connection.
The state, that is to say, the government, was once an
organization for the control of affairs in the interest of
princely or dynastic ends. In internal affairs statecraft was
occupied with questions of the dynastic succession, the endeavors
and intrigues of the political magnates, fiscal administration
directed to finding adequate support for the princely power, and
the like. In external politics the objective end was dynastic
prestige and security, military success, and the like. Such is
still in part the end of political endeavor in those countries,
as, e.g., Germany, Austria, or Italy, where the transition to a
constitutional government has not been completed. But since the
advent of constitutional government and parliamentary
representation, business ends have taken the lead of dynastic
ends in statecraft, very much in the same measure as the
transition to constitutional methods has been effectually carried
through. A constitutional government is a business government. It
is particularly through the business expedient of parliamentary
voting on the budget that any constitutional executive, e.g., is
kept within constitutional bounds; and the budget is voted with a
main view to its expediency for business ends. The expediency of
business enterprise is not questioned, whereas the expediency of
an increase of princely power and dignity, with the incidental
costs, may be questioned.
Modern governmental policies, looking as they do to the
furthering of business interests as their chief care, are of a
"mercantile" complexion. They aim to foster trade, as did the
mercantile policies of the sixteenth and seventeenth centuries,
although since "trade" has come to include much else than foreign
commerce, the modern policies look to business in the more
comprehensive sense which the term now necessarily has. But these
modern mercantile policies, with their tariffs, treaties,
interstate commerce regulations, and maxims prohibiting all
"restraint of trade," are after all not of the same nature as the
mercantile policies of the old French and German statesmen, which
they superficially resemble. The old "mercantile system," as it
prevailed on the Continent of Europe, was conceived in the
interest of the prince, the furthering of commercial advantage
being a means to princely power and dignity. (10*) The modern
mercantilism under constitutional rule, on the other hand, looks
to the prince or to the government as a means to the end of
commercial gain. With the transition to constitutional rule and
methods, the discretion and autonomy in the case has passed from
the hands of the prince into those of the business men, and the
interests of the business men have superseded those of the crown.
Representative government means, chiefly, representation of
business interests. The government commonly works in the interest
of the business men with a fairly consistent singleness of
purpose. And in its solicitude for the business men's interests
it is borne out by current public sentiment, for there is a
naive, unquestioning persuasion abroad among the body of the
people to the effect that, in some occult way, the material
interests of the populace coincide with the pecuniary interests
of those business men who live within the scope of the same set
of governmental contrivances. This persuasion is an article of
popular metaphysics, in that it rests on an uncritically assumed
solidarity of interests, rather than on an insight into the
relation of business enterprise to the material welfare of those
classes who are not primarily business men. This persuasion is
particularly secure among the more conservative portion of the
community, the business men, superior and subordinate, together
with the professional classes, as contrasted with those vulgar
portions of the community who are tainted with socialistic or
anarchistic notions. But since the conservative element comprises
the citizens of substance and weight, and indeed the effective
majority of law-abiding citizens, it follows that, with the
sanction of the great body of the people, even including those
who have no pecuniary interests to serve in the matter,
constitutional government has, in the main, become a department
of the business organization and is guided by the advice of the
business men. The government has, of course, much else to do
besides administering the general affairs of the business
community; but in most of its work, even in what is not
ostensibly directed to business ends, it is under the
surveillance of the business interests. It seldom happens, if at
all, that the government of a civilized nation will persist in a
course of action detrimental or not ostensibly subservient to the
interests of the more conspicuous body of the community's
business men. The degree in which a government fails to adapt its
policy to these business exigencies is the measure of its
senility.
The ground of sentiment on which rests the popular approval
of a government for business ends may be summed up under two
heads : patriotism and property. Both of these terms stand for
institutional facts that have come down out of a past which
differed substantially from the present situation. The substance
of both is of the nature of unreasoning sentiment, in the sense
that both are insisted on as a matter of course, as
self-legitimating grounds of action which, it is felt, not only
give expedient rules of conduct, but admit of no question as to
their ulterior consequences or their value for the life-purposes
of the community. The former of these fundamental institutional
habits of thought (perhaps better, habits of mind) runs back to
the discipline of early barbarism, through the feudal days of
fealty to the earlier days of clan life and clannish animosity.
It has therefore the deep-rooted strength given by an extremely
protracted discipline of predation and servitude. Under modern
conditions it is to be rated as essentially an institutional
survival, so ingrained in the populace as to make any appeal to
it secure of a response irrespective of the material merits of
the contention in whose behalf the appeal is made.(11*)
By force of this happy knack of clannish fancy the common man
is enabled to feel that he has some sort of metaphysical share in
the gains which accrue to the business men who are citizens of
the same "commonwealth"; so that whatever policy furthers the
commercial gains of those business men whose domicile is within
the national boundaries is felt to be beneficial to all the rest
of the population.(12*)
The second institutional support of business politics, viz.
property, is similarly an outgrowth of the discipline of the
past, and similarly, though perhaps in a less degree, out of
touch with the discipline of the more recent cultural situation.
In the form in which it prevails in the current popular animus,
the principle of ownership comes down from the days of handicraft
industry and petty trade, as pointed out above. As it is of less
ancient and less unbroken descent, so it seems also to be a less
secure cultural heritage than the sense of patriotic solidarity.
It says that the ownership of property is the material foundation
of human wellbeing, and that this natural right of ownership is
sacred, after the manner in which individual life, and more
especially national life, is sacred. The habits of life and
thought inculcated by joint work under the manorial system and by
joint rules under the handicraft system have apparently
contributed much to the notion of a solidarity of economic
interests, having given the notion such a degree of consistency
as has enabled it to persist in the face of a visible discrepancy
of interests in later, capitalistic times. Under this current,
business regime, business gains are the basis of individual
wealth, and the (pseudo) notion of joint acquisition has taken
the place of the manorial notion of joint work. The institutional
animus of ownership, as it took shape under the discipline of
early modern handicraft, awards the ownership of property to the
workman who has produced it. By a dialectical conversion of the
terms, this metaphysical dictum is made to fit the circumstances
of later competitive business by construing acquisition of
property to mean production of wealth; so that a business man is
looked upon as the putative producer of whatever wealth he
acquires. By force of this sophistication the acquisition of
property by any person is held to be, not only expedient for the
owner, but meritorious as an action serving the common good.
Failure to bargain shrewdly or to accumulate more goods than one
has produced by the work of one's own hands is looked upon with a
feeling of annoyance, as a neglect, not only of opportunity, but
of duty. The pecuniary conscience commonly does not, of course,
go to quixotic lengths in a public spirited insistence on
everybody's acquiring more than an aliquot part of the aggregate
wealth on hand, but it is felt that he best serves the common
good who, other things equal, diverts the larger share of the
aggregate wealth to his own possession. His acquiring a
defensible title to it makes him the putative producer of it.
The natural-rights basis of ownership is by this paralogism
preserved intact, and the common man is enabled to feel that the
business men in the community add to the aggregate wealth at
least as much as they acquire a title to; and the successful
business men are at least as well persuaded that such is their
relation to the aggregate wealth and to the material well-being
of the community at large. So that both the business men whose
gains are sought to be enhanced by business politics and the
populace by whose means the business gains are secured work
together in good faith towards a well-advised business end, - the
accumulation of wealth in the hands of those men who are skilled
in pecuniary matters.(13*)
The manner in which business interests work out in government
policy may be shown by following up their bearing upon one phase
of this policy. An extreme expression of business politics, and
at the same time a characteristic trait of the higher levels of
national life in Christendom, is the current policy of war and
armaments. Modern business is competitive, emulative, and the
direction of business enterprise is in the hands of men who are
single-minded in their competitive conduct of affairs. They
neither are inclined, nor will business competition permit them,
to neglect or overlook any expedient that may further their own
advantage or hinder the advantage of their rivals. Under the
modern situation, as it has taken shape since the industrial
revolution,(14*) business competition has become international,
covering the range of what is called the world market. In this
international competition the machinery and policy of the state
are in a peculiar degree drawn into the service of the larger
business interests; so that, both in commerce and industrial
enterprise, the business men of one nation are pitted against
those of another and swing the forces of the state, legislative,
diplomatic, and military, against one another in the strategic
game of pecuniary advantage. The business interests domiciled
within the scope of a given government fall into a loose
organization in the form of what might be called a tacit ring or
syndicate, proceeding on a general understanding that they will
stand together as against outside business interests. The nearest
approach to an explicit plan and organization of such a business
ring is the modern political party, with its platform, tacit and
avowed. Parties differ in their detail aims, but those parties
that have more than a transient existence and superficial effect
stand for different lines of business policy, agreeing all the
while in so far that they all aim to further what they each claim
to be the best, largest, most enduring business interests of the
community. The ring(15*) of business interests which secures the
broadest approval from popular sentiment is, under constitutional
methods, put in charge of the government establishment. This
popular approval may be secured on the ground of a sound business
platform or (in part) on some ground extraneous to business
policy proper, such as a wave of national animosity, a popular
candidate, a large grain crop, etc. But the only secure basis of
an enduring party tenure of the government machinery is a
business policy which falls in with the interests or the
prejudices of the effective majority.
In international competition the ultima ratio is, as ever,
warlike force, whether the issue be between princes of the grace
of God or princes of ownership. It is a favorite maxim of modern
politics that trade follows the flag. This is the business man's
valuation of national policy and of the ends of national life. So
stated, the maxim probably inverts the sequence of facts, but it
is none the less a fair expression of the close relation there is
between business endeavor and the modern military policies.
Diplomacy, if it is to be effective for whatever end, must be
backed by a show of force and of a readiness to use it. The
definitive argument of those who speak for armaments (in England
and America) is that the maintenance of business interests
requires the backing of arms. On the Continent of Europe this
argument commonly comes second, while patriotic fancy and
animosity take the first place.
Armaments serve trade not only in the making of general terms
of purchase and sale between the business men of civilized
countries, but they are similarly useful in extending and
maintaining business enterprise and privileges in the outlying
regions of the earth. The advanced nations of Christendom are
proselyters, and there are certain valuable perquisites that come
to the business men of those proselyting nations who advance the
frontiers of the pecuniary culture among the backward
populations. There is commonly a handsome margin of profit in
doing business with these, pecuniarily unregenerate, populations,
particularly when the traffic is adequately backed with force.
But, also commonly, these peoples do not enter willingly into
lasting business relations with civilized mankind. It is
therefore necessary, for the purposes of trade and culture, that
they be firmly held up to such civilized rules of conduct as will
make trade easy and lucrative. To this end armament is
indispensable.
But in the portioning out of the trade perquisites that fall
to the proselyters any business community is in danger of being
overreached by alien civilizing powers. No recourse but force is
finally available in disputes of this kind, in which the aim of
the disputants is to take advantage of one another as far as they
can. A warlike front is therefore necessary, and armaments and
warlike demonstrations have come to be a part of the regular
apparatus of business, so far as business is concerned with the
world market.
In so far as it is guided by the exigencies of trade, the
objective end of warlike endeavor is the peace and security
necessary to an orderly development of business. International
business relations, it is well said, make for peace; in the
sense, of course, that they enforce the pacification of
recalcitrant barbarians and lead to contention between civilized
nations for a revision of the peace terms. When a modern
government goes to war for trade purposes, it does so with a view
to reestablishing peace on terms more lucrative to its business
men.(16*)
The above inquiry into the nature and causes of the wars of
nations has resulted in little else than a recital of
commonplaces; the facts and their connection are matters of
common notoriety, and probably no one would hazard a question of
the sight and obvious inferences drawn in the course of the
recital. The excuse for this discursive review of the motives and
aims of a war policy is that it gives a basis for an outlook on
the present and immediate future of business enterprise.(17*)
The experience of Continental Europe in the matter of
armaments during the last half-century, and of all the greater
nations during the last two decades, argues that when warlike
emulation between states of somewhat comparable force has once
got under way it assumes a cumulative character; so that a scale
of expenditure for armaments which would at the outset have
seemed absurdly impossible comes presently to be accepted as a
matter of course. Hitherto the cumulative augmentation of war
expenditures and of war animus shows no sign of slackening. One
after another, the states that have offered some show of
peaceable inclinations have been drawn into the international
game of competitive armaments, as they have one after another
become ambitious to push the enterprises of their business men in
the international markets. An armament is serviceable only if it
is relatively large; its absolute magnitude is a matter of no
particular consequence for competitive politics. It is its
comparative size that counts. Hence the greater the several
armaments, the greater the political need of greater armaments,
and the prompter the resentment of injuries and the livelier the
felt need of offending and of taking offence. A progressively
larger proportion of the nation's forces are withdrawn from
industry and devoted to warlike ends. In this cumulative
diversion of effort to warlike ends a point is presently reached
beyond which the question of armament is no longer, What amount
of warlike expenditure is needed to extend or maintain business
traffic? but rather, What amount will the nation's resources
bear? But the progression does not stop at that point; witness
the case of Italy, France, and Germany, where the war drain has
visibly impaired the industrial efficiency of the several nations
concerned, but where the burden still goes on growing, with no
stopping-place in sight. England and, more particularly, America
are not so near exhaustion, because they have larger resources to
draw on as well as a culture and a population more efficient for
industrial work. But there is no evident reason why these two
should not likewise enter on a policy of emulative exhaustion,
and so sacrifice their aggregate industrial and business interest
to the furtherance of the "great game."
The question may suggest itself, Why should not the business
community, who have a large discretion in international politics
and whose aggregate gains are cut into by excessive war
expenditures, call a halt when the critical point is reached?
There is more than one reason for their failure to do so. War and
preoccupation with warlike enterprise breed a warlike animus in
the community, as well as a habit of arbitrary, autocratic rule
on the part of those in authority and an unquestioning,
enthusiastic subservience on the part of the subjects. National
animosity and national pride demand more and more of military
standing, at the same time that the growing official class needs
increasing emoluments and a larger field of employment and
display. The cultural effects of the discipline of warfare and
armament are much the same whether it is undertaken for drastic
or for business ends; in either case it takes on a dynastic
complexion and breeds the temperament, ideals, and institutional
habits proper to a drastic system of politics. The farther it
goes the more it comes to make use of business interests as a
means rather than an end, as, e.g., in modern Germany, France,
and Italy, and in the Continental states of the sixteenth and
seventeenth centuries. The crown, court, bureaucracy, military
establishment, and nobility, under whatever designations,
gradually come to their own again in such a situation, and
affairs again come to turn on questions of the maintenance and
dignity of these superior elements of the population.(18*) The
objective end of protracted warlike endeavor necessarily shifts
from business advantage to dynastic ascendancy and courtly honor.
Business interests fall to the position of fiscal ways and means,
and business traffic becomes subservient to higher ends, with a
fair chance of ultimate exhaustion or collapse through the
bankruptcy of the state.
Business enterprise is an individual matter, not a collective
one. So long as the individual business man sees a proximate gain
for himself in meeting the demands for war funds and materials to
maintain the courtly and official establishments that go with
military politics, it is not in the nature of the business man to
draw back. It is always his profits, not his livelihood, that is
involved; the question which touches his profits is the relative
gainfulness of alternative lines of investment open to him. So
long as the pecuniary inducements held out by the state, in
bidding for funds or supplies, overbalance the inducements
offered by alternative lines of employment, the business men will
supply these demands, regardless of what the ulterior substantial
outcome of such a course may be in the end. Funds and business
enterprise are now of so pronounced an international or
cosmopolitan character that any business man may, even without
fully appreciating the fact, lend his aid to the fisc of a
hostile power as readily as to a friendly power or to the home
government; whereby an equable and comprehensive exhaustion of
the several communities involved in the concert of nations is
greatly facilitated. Barring accidents and untoward cultural
agencies from outside of politics, business, or religion, there
is nothing in the logic of the modern situation that should stop
the cumulative war expenditures short of industrial collapse and
consequent national bankruptcy, such as terminated the carnival
of war and politics that ran its course on the Continent in the
sixteenth and seventeenth centuries.(19*)
NOTES:
1. Ashley, Economic History and Theory, bk. II, especially ch.
III.
2. See Chapter IV above.
3. Cf. e.g., Ashley, "The Economic Atmosphere of America" in
Surveys, Historical and Economic, pp. 405 et seq.
4. This date is true for England. For America the discipline
favorable to the growth of the natural-liberty dogma lasted
nearly a century longer. In America the new, modern,
technological and business era can scarcely be said to have set
in in good vigor until the period of the Civil War. Hence, with a
longer and later training, the preconceptions of natural liberty
are fresher and more tenacious in America. For the Continental
peoples the case is different again. With them the modern
technological and business situation is of approximately the same
date as in America, but their training up to the date of the
transition to the modern situation was in a much less degree a
training in individual initiative, free scattered industry, and
petty trade. The Continental peoples for the most part made a
somewhat abrupt transition after the middle of the nineteenth
century from a stale and dilapidated system of guild and
feudalistic prescriptions to the (for them) exotic system of
modern technology and business principles.
5. See Chapter II above and Chapter IX below.
6. Under the system of handicraft and petty trade the converse
was true. Livelihood was the fundamental norm of business
regulations; profits had but a secondary standing, if any.
7. E.g., as to employer's liability for accidents or unsanitary
premises, the safeguarding of machinery, age limit of labourers
or hour limit of working time, etc.
8. E.g. where a workman's accepting employment on machinery which
is not safeguarded as the law requires is construed as an
exercise of the indefeasible right of free contract on his part,
which thereby exempts the employer from liability for eventual
accidents.
In point of legal principle the reluctance to allow or
recognize limited liability in joint stock companies, in the
English practice prior to the Companies Acts, was of much the
same nature as the current reluctance to allow an alienation or
abridgment of a workman's individual reSpOnsibility for the terms
of his employment and the consequences following from it. It was
felt that a pecuniary liability was a personal matter, of which
the person was not competent to divest himself under that system
of mutual rights and duties in which the members of the community
were bound together. Impersonal, collective, and limited
liability won its way, as against the system of natural liberty,
in this field by sheer force of business expediency. In a
conflict of principles between the main proposition and one of
its corollaries, the corollary won because the facts had outgrown
the primary implication of the main proposition.
9. The common law is of course a formulation of the deliverances
of common sense on the points which it touches. But common law,
as well as common sense, being a formulation of habits of
thought, is necessarily an outgrowth of past rather than of
present circumstances, - in this case the circumstances of the
eighteenth century, whereas the sympathies of the vulgar, as they
appear in jury decisions, are largely the outcome of those modern
experiences that are at increasing variance with the foundations
of the common law.
It may be remarked by the way that, while the charge of
partiality or corruption, often heard as against these higher
tribunals, may in a few scattering instances be founded, that is
after all not much to the point as regards practical
consequences. The greater number of the courts, indeed virtually
the entire judiciary, are no doubt above substantial suspicion in
the premises. And after all, if they were not incorruptible, - if
the common run of the tribunals were corruptly working in the
interest of the employers or owners, - that need not seriously
affect the outcome as regards the general tenor of the decisions
handed down. If they are corrupt or biassed, they will decide in
favor of the owners, who can afford to pay, and they will be
under the necessity of finding plausible reasons in law for so
doing. Such reason can be found only in the metaphysical natural
rights basis of the law; and if it can be found by the help of
such legal ratiocination, then it is a valid ground of decision,
that being the peculiar merit of metaphysical grounds of
decision. On the other hand, if the court is a "learned, upright
judge," he will look for the grounds of decision in the same
place and find them in the same shape. Necessarily so, since the
point in dispute is almost invariably a question of the legal
rights of property as against the material requirements of
comfort or of livelihood; and the rights of property are the
foundation of modern law and order, while the requirements of
comfort or livelihood passed out of the scope of the law on the
abrogation of the outworn system of mandatory prescriptions
governing industrial and trade relations in early modern times.
Since the disputes in question rarely if ever arise out of a
breach of contract on the part of the employer-owner, the
decision can ordinarily, in the nature of the case, not go
against him, inasmuch as the foundation of economic law and order
is the freedom and inviolability of pecuniary contracts. It
should, in fact, be nearly a matter of indifference to the
"popular" side of this class of litigation whether the courts are
corrupt or not. The question has little else than a speculative
interest. In the nature of the case the owner alone has,
ordinarily, any standing in court. All of which argues that there
are probably very few courts that are in any degree corrupt or
biassed, so far as touches litigation of this class. Efforts to
corrupt them would be a work of supererogation, besides being
immoral.
10. This is not true in nearly the same degree for the mercantile
policies of England, even in early modern times. In English
policy, under the inchoate constitutional system of the
mercantilist era, the ulterior (avowed) end is always the
(business) advantage of the "commonwealth." The prince comes in
rather as second than as first claimant on the solicitude of the
mercantilist statesman.
11. The line of descent of the preconception of patriotism or
chauvinism, as it finds expression in this lively sense of
pecuniary solidarity, may be outlined as follows: Under the clan
(gentile or tribal) system out of which the West-European peoples
passed into the regime of feudal Christendom, a given group stood
together in a union of offence and defence, warlike and economic,
on the basis of a putative blood relationship. When the manor or
the (essentially servile) mark came to replace the clan group as
the economic and civil unit, the bond of putative blood
relationship persisted in a slightly modified form and force, the
incidence of the sense of solidarity, the "consciousness of
kind," then shifting to the new group unit, with allegiance
centring on the feudal head of the group, instead of, as
formerly, on the senior line of putative descent. When the state
came forward in medieval and early modern times and took over the
powers and prerogatives of the head of the manor or the feudal
lord, it took over also the incidence of this sense of
allegiance, and the sense of solidarity came to cover the larger
group of the nation which had succeeded to the autonomy of the
manor. Where the line of institutional descent runs through the
industrial town, with guild, handicraft, and local government,
the transient features of the growth are superficially different
but in effect much the same. The discipline of warfare, which
kept up the practice of joint action and had the appearance of
joint enterprise, served to keep the sense of patriotic
solidarity firm and vigorous and enabled it to cover other
interests as well as the princely enterprise of warfare and
state-making. Wherever unbroken peace prevailed for an
appreciable period, so as to affect the growth of traditions, the
sense of national solidarity showed symptoms of slackening. For
purposes of economic solidarity the commonwealth is conceived
after the manner of an overgrown manor. It figures as such, e.g.,
in English mercantilist writings of the sixteenth to the
eighteenth century, as well as in the patriotic trade politics of
the present.
12. In passing it may be remarked that the fact of this sense of
solidarity being an anachronism must not be taken as implying
anything for or against the substantial merits of such a frame of
mind.
13. The two complementary sentiments-patriotism and pecuniary
solidarity - are found in unequal measure among the several
nations of Christendom. The disparity in this respect corresponds
roughly with a disparity in past national experience. The
Continental peoples, e.g., have, on the whole, a readier and
fuller, more unequivocal, patriotic conviction, as they have also
had a longer, more severe, and later discipline in the fealty
that goes with a system of dynastic warfare and graded servitude;
whereas the English-speaking peoples are animated with a more
secure conviction that money value is the chief end of serious
endeavor and that business solvency is the final attribute of
manhood. But in either case the outcome is the primacy of
business in the counsels of nations, and its empire is none the
less secure for its resting more on one or the other of these two
supports.
14. For England the last half of the eighteenth century, for
Continental Europe and America the last half of the nineteenth.
In colonial commerce the date for both England and the Continent
is much earlier.
15. "Ring" is here used as a designation of this loose
organization of business interests for the guidance of policy,
without implying criticism of the ring or of its aims and
methods.
16. Armaments and large military and naval establishments have
also a secondary attraction, of a more intimate kind, for
enterprising business men, in that they afford opportunities for
transactions of a peculiarly lucrative character. One of the
parties (the government official) concerned in such transactions
has less than the usual incentive to drive a close bargain. His
own private gain and loss is not immediately involved, so that he
is less given to petty huckstering and close surveillance of the
execution of the contracts made. What adds force to this
consideration is the fact that military and naval establishments
habitually are what the vulgar would call corrupt. The pecuniary
interest of the officials does not coincide with that of the
establishment There is an appreciable "margin of error" which a
sagacious business man may turn to account.
The great business interests are the more inclined to look
kindly on an extension of warlike enterprise and armaments, since
the pecuniary advantages inure to them, while the pecuniary
burden falls chiefly on the rest of the community. It is, to say
the least, highly improbable that the business gains which accrue
from a well-conducted foreign policy ever, in modern times, equal
the cost at which they are secured; but that consideration
scarcely enters, since the costs are not paid out of business
gains, but out of the industry of the rest of the people. The
people, however, are animated with an uncritical persuasion that
they have some sort of a residuary share in these gains, and that
this residuary share in some manner exceeds the whole of the
gains secured.
17. See Chapter X. above.
18. Cf. Hobson, Imperialism, pt. I, ch. VII, pt. II, ch. I, and
VII.
19. On the relation of business to warlike expenditure in the
sixteenth and seventeenth centuries, cf., Ehrenberg, Zeitalter
der Fugger.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 9
The Cultural Incidence of the Machine Process
So far as regards the non-mechanical factors of culture, such
as religion, politics, and even business enterprise, the present
is in a very large degree comparable with the scheme of things
that prevailed on the Continent of Europe in the seventeenth
century. And so far as the working of these cultural factors is
undisturbed by forces that were not present in the older days,
they should logically again work out in such a situation as came
to prevail in Central Europe in the course of the eighteenth
century. The modern situation, of course, is drawn on a larger
scale; but that is due to the intrusion of a new technology, a
different "state of the industrial arts," and not to a
substantially altered range of religious, political, or business
conceptions. The pitch of squalor that characterized vulgar life
in the busier Continental countries at the close of the great era
of politics could probably not be reached again, but that again,
is due, not to these spiritual factors of cultural growth, but to
the altered state of the industrial arts. The factor in the
modern situation that is alien to the ancient regime is the
machine technology, with its many and wide ramifications.
Business conceptions and business methods were present in
vigorous growth in Central Europe in the sixteenth and
seventeenth centuries, as they had been in South Europe from a
slightly earlier date; although the large sweep of business
enterprise is not had until a later date, being conditioned by
the machine technology. Business methods and the apparatus of
business traffic develop very promptly whenever and wherever the
situation calls for them; such is the teaching of economic
history.(1*) There is nothing recondite about them, little that
has to be acquired by a protracted, cumulative experience running
over many generations, such as is involved in technological
development. This business development in earlier modern times,
together with the accumulations of funded wealth that came of
this business enterprise, ran their course to a finish in
Continental Europe, leaving no basis for a new start. The new
start from which the current situation takes its rise, in Europe
and elsewhere, was given to the Continental peoples by the
English, ready-made, in the so-called Industrial Revolution. The
natural-rights metaphysics, to which the eventual breakdown of
the old Continental system owed its specific character, came also
from the English.(2*)
In point of blood and cultural descent the population of
Great Britain did not differ materially from their neighbors
across the Channel or across the North Sea.(3*) But from the
beginning of the modern cultural era Great Britain stood outside
of the general European situation, by force of its physical
isolation. So that during the modern era, down to the close of
the eighteenth century, the British community was in the position
of an interested third party rather than a participant in the
political concert of Europe. The era of "statemaking," so called,
is an era in which England interferes, but is, on the whole, not
greatly interfered with, so far as her own home affairs are
concerned. England, and presently Great Britain, being reduced to
law and order under one crown and living in a condition of
isolation and (relatively) of internal peace, the cultural growth
of that country took a relatively peaceable direction. The
dominant note of everyday life was industry and trade, not
dynastic politics and war. This national experience gave as its
outcome constitutional government and the modern industrial
technology, together with the animus and the point of view of the
modern materialistic science. The point of departure for the more
recent, current situation, therefore, is a twofold one: (1) the
British peaceable variant of the Western culture has contributed
constitutional methods and natural rights, together with the
machine technology brought in under the head of the "industrial
revolution"; and (2) there are the patriotic ideals and
animosities left as a residue of the warlike political traffic in
Continental Europe.
Since the new departure, made on the basis of natural rights
and modern industrial and scientific methods, the complex of
nations and of international relations is a single, not a twofold
one. The stage over which affairs, political, industrial and
cultural, run their course is no longer Continental or British,
but cosmopolitan, comprising all civilized communities and all
civilized interests. So that there is not now, as there was in
the sixteenth and seventeenth centuries, an isolation hospital
for technology, science, and civil rights, set apart from the
general current of cultural development. Whatever the forces at
work in the modern situation may eventually bring to pass,
therefore, the outcome must touch all communities in the same way
and in approximately the same degree. If the outcome is dynastic
politics and armament again played to a finish in popular
squalor, aristocratic virtues, and universal bankruptcy, there
will be no peaceable community of matter-of-fact mechanics and
shopkeepers left in reserve from which to make a new cultural and
industrial start. The modern technology has, in a manner, cut
away the ground out of which it first grew and from which it
gathered force to reshape the course of history. It has made it
impossible for any community to stand peaceably outside of the
great complex of nations.
But within the comprehensive situation of to-day there is
this new factor, the machine process. In an earlier chapter (II)
the technological character of this machine process has been set
forth at some length. The machine process pervades the modern
life and dominates it in a mechanical sense. Its dominance is
seen in the enforcement of precise mechanical measurements and
adjustment and the reduction of all manner of things, purposes
and acts, necessities, conveniences, and amenities of life, to
standard units. The bearing of this sweeping mechanical
standardization upon business traffic is a large part of the
subject-matter of the foregoing chapters. The point of immediate
interest here is the further bearing of the machine process upon
the growth of culture, - the disciplinary effect which this
movement for standardization and mechanical equivalence has upon
the human material.
This discipline falls more immediately on the workmen engaged
in the mechanical industries, and only less immediately on the
rest of the community which lives in contact with this sweeping
machine process. Wherever the machine process extends, it sets
the pace for the workmen, great and small. The pace is set, not
wholly by the particular processes in the details of which the
given workman is immediately engaged, but in some degree by the
more comprehensive process at large into which the given detail
process fits. It is no longer simply that the individual workman
makes use of one or more mechanical contrivances for effecting
certain results. Such used to be his office in the earlier phases
of the use of machines, and the work which he now has in hand
still has much of that character. But such a characterization of
the workman's part in industry misses the peculiarly modern
feature of the case. He now does this work as a factor involved
in a mechanical process whose movement controls his motions. It
remains true, of course, as it always has been true, that he is
the intelligent agent concerned in the process, while the
machine, furnace, roadway, or retort are inanimate structures
devised by man and subject to the workman's supervision. But the
process comprises him and his intelligent motions, and it is by
virtue of his necessarily taking an intelligent part in what is
going forward that the mechanical process has its chief effect
upon him. The process standardizes his supervision and guidance
of the machine. Mechanically speaking, the machine is not his to
do with it as his fancy may suggest. His place is to take thought
of the machine and its work in terms given him by the process
that is going forward. His thinking in the premises is reduced to
standard units of gauge and grade. If he fails of the precise
measure, by more or less, the exigencies of the process check the
aberration and drive home the absolute need of conformity.
There results a standardization of the workman's intellectual
life in terms of mechanical process, which is more unmitigated
and precise the more comprehensive and consummate the industrial
process in which he plays a part. This must not be taken to mean
that such work need lower the degree of intelligence of the
workman. No doubt the contrary is nearer the truth. He is a more
efficient workman the more intelligent he is, and the discipline
of the machine process ordinarily increases his efficiency even
for work in a different line from that by which the discipline is
given. But the intelligence required and inculcated in the
machine industry is of a peculiar character. The machine process
is a severe and insistent disciplinarian in point of
intelligence. It requires close and unremitting thought, but it
is thought which runs in standard terms of quantitative
precision. Broadly, other intelligence on the part of the workman
is useless; or it is even worse than useless, for a habit of
thinking in other than quantitative terms blurs the workman's
quantitative apprehension of the facts with which he has to
do.(4*)
In so far as he is a rightly gifted and fully disciplined
workman, the final term of his habitual thinking is mechanical
efficiency, understanding "mechanical" in the sense in which it
is used above. But mechanical efficiency is a matter of precisely
adjusted cause and effect. What the discipline of the machine
industry inculcates, therefore, in the habits of life and of
thought of the workman, is regularity of sequence and mechanical
precision; and the intellectual outcome is an habitual resort to
terms of measurable cause and effect, together with a relative
neglect and disparagement of such exercise of the intellectual
faculties as does not run on these lines.
Of course, in no case and with no class does the discipline
of the machine process mould the habits of life and of thought
fully into its own image. There is present in the human nature of
all classes too large a residue of the propensities and aptitudes
carried over from the past and working to a different result. The
machine's regime has been of too short duration, strict as its
discipline may be, and the body of inherited traits and
traditions is too comprehensive and consistent to admit of
anything more than a remote approach to such a consummation.
The machine process compels a more or less unremitting
attention to phenomena of an impersonal character and to
sequences and correlations not dependent for their force upon
human predilection nor created by habit and custom. The machine
throws out anthropomorphic habits of thought. It compels the
adaptation of the workman to his work, rather than the adaptation
of the work to the workman. The machine technology rests on a
knowledge of impersonal, material cause and effect, not on the
dexterity, diligence, or personal force of the workman, still
less on the habits and propensities of the workman's superiors.
Within the range of this machine-guided work, and within the
range of modern life so far as it is guided by the machine
process, the course of things is given mechanically,
impersonally, and the resultant discipline is a discipline in the
handling of impersonal facts for mechanical effect. It inculcates
thinking in terms of opaque, impersonal cause and effect, to the
neglect of those norms of validity that rest on usage and on the
conventional standards handed down by usage. Usage counts for
little in shaping the processes of work of this kind or in
shaping the modes of thought induced by work of this kind.
The machine process gives no insight into questions of good
and evil, merit and demerit, except in point of material
causation, nor into the foundations or the constraining force of
law and order, except such mechanically enforced law and order as
may be stated in terms of pressure, temperature, velocity,
tensile strength, etc.(5*) The machine technology takes no
cognizance of conventionally established rules of precedence; it
knows neither manners nor breeding and can make no use of any of
the attributes of worth. Its scheme of knowledge and of inference
is based on the laws of material causation, not on those of
immemorial custom, authenticity, or authoritative enactment. Its
metaphysical basis is the law of cause and effect, which in the
thinking of its adepts has displaced even the law of sufficient
reason.(6*)
The range of conventional truths, or of institutional
legacies, which it traverses is very comprehensive, being,
indeed, all-inclusive. It is but little more in accord with the
newer, eighteenth century conventional truths of natural rights,
natural liberty, natural law, or natural religion, than with the
older norms of the true, the beautiful, and the good which these
displaced. Anthropomorphism, under whatever disguise, is of no
use and of no force here.
The discipline exercised by the mechanical occupations, in so
far as it is in question here, is a discipline of the habits of
thought. It is, therefore, as processes of thought, methods of
apperception, and sequences of reasoning, that these occupations
are of interest for the present purpose; it is as such that they
have whatever cultural value belongs to them. They have such a
value, therefore, somewhat in proportion as they tax the mental
faculties of those employed; and the largest effects are to be
looked for among those industrial classes who are required to
comprehend and guide the processes, rather than among those who
serve merely as mechanical auxiliaries of the machine process.
Not that the latter are exempt from the machine's discipline, but
it falls upon them blindly and enforces an uncritical acceptance
of opaque results, rather than a theoretical insight into the
causal sequences which make up the machine process. The higher
degree of training in such matter-of-fact habits of thought is
accordingly to be looked for among the higher ranks of skied
mechanics, and perhaps still more decisively among those who
stand in an engineering or supervisory relation to the processes.
It counts more forcibly and farthest among those who are required
to exercise what may be called a mechanical discretion in the
guidance of the industrial processes, who, as one might say, are
required to administer the laws of causal sequence that run
through material phenomena, who therefore must learn to think in
the terms in which the machine processes work.(7*) The
metaphysical ground, the assumptions, on which such thinking
proceeds must be such as will hold good for the sequence of
material phenomena; that is to say, it is the metaphysical
assumptions of modern material science, - the law of cause and
effect, cumulative causation, conservation of energy, persistence
of quantity, or whatever phrase be chosen to cover the concept.
The men occupied with the modern material sciences are,
accordingly, for the purpose in hand, in somewhat the same case
as the higher ranks of those employed in mechanical industry.(8*)
Leaving aside the archaic vocations of war, politics,
fashion, and religion, the employments in which men are engaged
may be distinguished as pecuniary or business employments on the
one hand, and industrial or mechanical employments on the other
hand.(9*) In earlier times, and indeed until an uncertain point
in the nineteenth century, such a distinction between employments
would not to any great extent have coincided with a difference
between occupations. But gradually, as time has passed and
production for a market has come to be the rule in industry,
there has Supervened a differentiation of occupations, or a
division of labor, whereby one class of men have taken over the
work of purchase and sale and of husbanding a store of
accumulated values. Concomitantly, of course, the rest, who may,
for lack of means or of pecuniary aptitude, have been less well
fitted for pecuniary pursuits, have been relieved of the cares of
business and have with increasing specialization given their
attention to the mechanical processes involved in this production
for a market. In this way the distinction between pecuniary and
industrial activities or employments has come to coincide more
and more nearly with a difference between occupations. Not that
the specialization has even yet gone so far as to exempt any
class from all pecuniary care;(10*) for even those whose daily
occupation is mechanical work still habitually bargain with their
employers for their wages and with others for their supplies. So
that none of the active classes in modern life is fully exempt
from pecuniary work.
But the need of attention to pecuniary matters is less and
less exacting, even in the matter of wages and supplies. The
scale of wages, for instance, is, for the body of workmen, and
also for what may be called the engineering force, becoming more
and more a matter of routine, thereby lessening at least the
constancy with which occasions for detail bargaining in this
respect recur. So also as regards the purchase of consumable
goods. In the cities and industrial towns, particularly, the
supplying of the means of subsistence has, in great part, become
a matter of routine. Retail prices are in an increasing degree
fixed by the seller, and in great measure fixed in an impersonal
way. This occurs in a particularly evident and instructive way in
the practice of the department stores, where the seller fixes the
price, and comes in contact with the buyer only through the
intervention of a salesman who has no discretion as to the terms
of sale. The change that has taken place and that is still going
on in this respect is sufficiently striking on comparison with
the past in any industrial community, or with the present in any
of those communities which we are in the habit of calling
"industrially backward."
Conversely, as regards the men in the pecuniary occupations,
the business men. Their exemption from taking thought of
mechanical facts and processes is likewise only relative. Even
those business men whose business is in a peculiar degree remote
from the handling of tools or goods, and from the oversight of
mechanical processes, as, for example, bankers, lawyers, brokers,
and the like, have still, at the best, to take some cognizance of
the mechanical apparatus of everyday life; they are at least
compelled to take some thought of what may be called the
mechanics of consumption. Whereas those business men whose
business is more immediately concerned with industry commonly
have some knowledge and take some thought of the processes of
industry; to some appreciable extent they habitually think in
mechanical terms. Their cogitations may habitually run to
pecuniary conclusions, and the test to which the force and
validity of their reasoning is brought may habitually be the
pecuniary outcome; the beginning and end of their more serious
thinking is of a pecuniary kind, but it always takes in some
general features of the mechanical process along the way. Their
exemption from mechanical thinking, from thinking in terms of
cause and effect, is, therefore, materially qualified.
But after all qualifications have been made, the fact still
is apparent that the everyday life of those classes which are
engaged in business differs materially in the respect cited from
the life of the classes engaged in industry proper. There is an
appreciable and widening difference between the habits of life of
the two classes; and this carries with it a widening difference
in the discipline to which the two classes are subjected. It
induces a difference in the habits of thought and the habitual
grounds and methods of reasoning resorted to by each class. There
results a difference in the point of view, in the facts dwelt
upon, in the methods of argument, in the grounds of validity
appealed to; and this difference gains in magnitude and
consistency as the differentiation of occupations goes on. So
that the two classes come to have an increasing difficulty in
understanding one another and appreciating one another' s
convictions, ideals, capacities, and shortcomings.
The ultimate ground of validity for the thinking of the
business classes is the natural-rights ground of property, - a
conventional, anthropomorphic fact having an institutional
validity, rather than a matter-of-fact validity such as can be
formulated in terms of material cause and effect; while the
classes engaged in the machine industry are habitually occupied
with matters of causal sequence, which do not lend themselves to
statement in anthropomorphic terms of natural rights and which
afford no guidance in questions of institutional right and wrong,
or of conventional reason and consequence. Arguments which
proceed on material cause and effect cannot be met with arguments
from conventional precedent or dialectically sufficient reason,
and conversely.
The thinking required by the pecuniary occupations proceeds
on grounds of conventionality, whereas that involved in the
industrial occupations runs, in the main, on grounds of
mechanical sequence or causation, to the neglect of
conventionality. The institution (habit of thought) of ownership
or property is a conventional fact; and the logic of pecuniary
thinking- that is to say, of thinking on matters of ownership -
is a working out of the implications of this postulate, this
concept of ownership or property. The characteristic habits of
thought given by such work are habits of recourse to conventional
grounds of finality or validity, to anthropomorphism, to
explanations of phenomena in terms of human relation, discretion,
authenticity, and choice. The final ground of certainty in
inquiries on this natural-rights plane is always a ground of
authenticity, of precedent, or accepted decision. The argument is
an argument de jure, not de facto, and the training given lends
facility and certainty in the pursuit of de jure distinctions and
generalizations, rather than in the pursuit or the assimilation
of a de facto knowledge of impersonal phenomena. The end of such
reasoning is the interpretation of new facts in terms of
accredited precedents, rather than a revision of the knowledge
drawn from past experience in the matter-of-fact light of new
phenomena. The endeavor is to make facts conform to law, not to
make the law or general rule conform to facts. The bent so given
favors the acceptance of the general, abstract, custom-made rule
as something real with a reality superior to the reality of
impersonal, non-conventional facts. Such training gives reach and
subtlety in metaphysical argument and in what is known as the
"practical" management of affairs; it gives executive or
administrative efficiency, so-called, as distinguished from
mechanical work. "Practical" efficiency means the ability to turn
facts to account for the purposes of the accepted conventions, to
give a large effect to the situation in terms of the pecuniary
conventions in force.(11*)
The spiritual attitude given by this training in reasoning de
jure, from pecuniary premises to pecuniary conclusions, is
necessarily conservative. This species of reasoning assumes the
validity of the conventionally established postulates, and is
consequently unable to take a sceptical attitude toward these
postulates or toward the institutions in which these postulates
are embodied. It may lead to scepticism touching other, older,
institutions that are at variance with its own (natural-rights)
postulates, but its scepticism cannot touch the natural-rights
ground on which it rests its own case. In the same manner, of
course, the thinking which runs in material causal sequence
cannot take a sceptical attitude toward its fundamental
postulate, the law of cause and effect; but since reasoning on
this materialistic basis does not visibly go to uphold the
received institutions, the attitude given by the discipline of
the machine technology cannot, for the present, be called a
conservative attitude.
The business classes are conservative, on the whole, but such
a conservative bent is, of course, not peculiar to them. These
occupations are not the only ones whose reasoning prevailingly
moves on a conventional plane. Indeed, the intellectual activity
of other classes, such as soldiers, politicians, the clergy, and
men of fashion, moves on a plane of still older conventions; so
that if the training given by business employments is to be
characterized as conservative, that given by these other, more
archaic employments should be called reactionary.(12*) Extreme
conventionalization means extreme conservatism. Conservatism
means the maintenance of conventions already in force. On this
head, therefore, the discipline of modern business life may be
said simply to retain something of the complexion which marks the
life of the higher barbarian culture, at the same time that it
has not retained the disciplinary force of the barbarian culture
in so high a state of preservation as some of the other
occupations just named.
The discipline of the modern industrial employments is
relatively free from the bias of conventionality, but the
difference between the mechanical and the business occupations in
this respect is a difference of degree. It is not simply that
conventional standards of certainty fall into abeyance for lack
of exercise, among the industrial classes. The positive
discipline exercised by their work in good part runs counter to
the habit of thinking in conventional, anthropomorphic terms,
whether the conventionality is that of natural rights or any
other. And in respect of this positive training away from
conventional norms, there is a large divergence between the
several lines of industrial employment. In proportion as a given
line of employment has more of the character of a machine process
and less of the character of handicraft, the matter-of-fact
training which it gives is more pronounced. In a sense more
intimate than the inventors of the phrase seem to have
appreciated, the machine has become the master of the man who
works with it and an arbiter in the cultural fortunes of the
community into whose life it has entered.
The intellectual and spiritual training of the machine in
modern life, therefore, is very far-reaching. It leaves but a
small proportion of the community untouched; but while its
constraint is ramified throughout the body of the population, and
constrains virtually all classes at some points in their daily
life, it falls with the most direct, intimate, and unmitigated
impact upon the skilled mechanical classes, for these have no
respite from its mastery, whether they are at work or at play.
The ubiquitous presence of the machine, with its spiritual
concomitant - workday ideals and scepticism of what is only
conventionally valid is the unequivocal mark of the Western
culture of to-day as contrasted with the culture of other times
and places. It pervades all classes and strata in a varying
degree, but on an average in a greater degree than at any time in
the past, and most potently in the advanced industrial
communities and in the classes immediately in contact with the
mechanical occupations.(13*) As the comprehensive mechanical
organization of the material side of life has gone on, a
heightening of this cultural effect throughout the community has
also supervened, and with a farther and faster movement in the
same direction a farther accentuation of this "modern" complexion
of culture is fairly to be looked for, unless some remedy be
found. And as the concomitant differentiation and specialization
of occupations goes on, a still more unmitigated discipline falls
upon ever widening classes of the population, resulting in an
ever weakening sense of conviction, allegiance, or piety toward
the received institutions.
It is a matter of common notoriety that the modern industrial
populations are improvident in a high degree and are apparently
incapable of taking care of the pecuniary details of their own
life. This applies, not only to factory hands, but also to the
general class of highly skilled mechanics, inventors,
technological experts. The rule does not hold in any hard and
fast way, but it holds with such generality as may fairly be
looked for. The present factory population may be compared in
this respect with the class of handicraftsmen whom they have
displaced, as also with the farming population of the present
time, especially the class of small proprietary farmers. The
failure of the modern industrial classes on this head is not due
to scantier opportunities for saving, whether they are compared
with the earlier handicraftsmen or with the modern farmer or
peasant; nor is it due to a lack of general intelligence, for a
comparison in point of intelligence falls out in favor of the
modern industrial workmen. This improvidence is commonly
discussed in terms of deprecation, and there is much preaching of
thrift and steady habits. But the preaching has no appreciable
effect. The trouble seems to be of the nature of habit rather
than of reasoned conviction. Other causes may partially explain
this improvidence, but the inquiry is at least pertinent how far
the absence of property and thrift among them may be traceable to
the relative absence of pecuniary training and to the presence of
a discipline which is at variance with habits of thrift.
Mere exemption from pecuniary training is not competent alone
to explain the patent thriftlessness of modern workmen; the more
so since this exemption is but partial and relative. Also, the
thriftless classes commonly have an envious appreciation of
pecuniary advantages. It is rather the composite effect of
exemption from pecuniary training and certain positive
requirements of modern life. Among these positive requirements is
what has been called the canon of conspicuous waste. Under modern
conditions a free expenditure in consumable goods is a condition
requisite to good repute.(14*) This conduces to immediate
consumption rather than to saving. What is perhaps still more
decisive against thrift on the part of workmen is the fact that
the modern large organization of industry requires a high degree
of mobility on the part of employees. It requires, in fact, that
the labor force and the labor units be mobile, interchangeable,
distributable, after the same impersonal fashion as the
mechanical contrivances engaged are movable and distributable.
The working population is required to be standardized, movable,
and interchangeable in much the same impersonal manner as the raw
or halfwrought materials of industry. From which it follows that
the modern workman cannot advantageously own a home. By force of
this latter feature of the case he is discouraged from investing
his savings in real property, or, indeed, in any of the
impediments of living. And the savings-bank account, it may be
added, offers no adequate substitute, as an incentive to thrift,
in the place of such property as a dwelling-place, which is
tangibly and usefully under the owner's hand and persistently
requires maintenance and improvement.
The conditions of life imposed upon the working population by
the machine industry discourage thrift. But after allowance has
been made for this almost physical restraint upon the aquisition
of property by the working classes, something is apparently left
over, to be ascribed to the moral effect of the machine
technology. The industrial classes appear to be losing the
instinct of individual ownership. The acquisition of property is
ceasing to appeal to them as a natural, self-evident source of
comfort and strength. The natural right of property no longer
means so much to them as it once did.
A like weakening of the natural-rights animus is visible at
another point in the current frame of mind of these classes. The
growth of trade-unionism and of what is called the trade-union
spirit is a concomitant of industry organized after the manner of
a machine process. Historically this growth begins, virtually,
with the industrial revolution, coming in sporadically, loosely,
tentatively, with no precise assignable date, very much as the
revolution does. England is the land of its genesis, its "area of
characterization," and the place where it has reached its fullest
degree of specification and its largest force; just as England is
the country in which the modern machine industry took its rise
and in which it has had the longest and most consistent life and
growth. In this matter other countries are followers of the
British lead and apparently borrowers of British precedents and
working concepts. Still, the history of the trade-union movement
in other countries seems to say that the working classes
elsewhere have not advisedly borrowed ideals and methods of
organization from their British congeners so much as they have
been pushed into the same general attitude and line of conduct by
the same general line of exigencies and experiences.
Particularly, experience seems to say that it is not feasible to
introduce the trade-union spirit or the trade-union rules into
any community until the machine industry has had time extensively
to standardize the scheme of work and of life for the working
classes on mechanical lines. Workmen do not take to full-blown
trade-union ideals abruptly on the introduction of those modern
business methods which make trade-union action advisable for the
working class. A certain interval elapses between the time when
business conditions first make trade-union action feasible, as a
business proposition, and the time when the body of workmen are
ready to act in the spirit of trade-unionism and along the lines
which the union animus presently accepts as normal for men in the
mechanically organized industries. An interval of discipline in
the ways of the mechanically standardized industry, more or less
protracted and severe, seems necessary to bring such a proportion
of the workmen into line as will give a consensus of sentiment
and opinion favorable to trade-union action.
The pervading characteristic of the trade-union animus is the
denial of the received natural-rights dogmas wherever the
mechanical standardization of modern industry traverses the
working of these received natural rights. Recent court decisions
in America, as well as decisions in analogous cases in England at
that earlier period when the British development was at about the
same stage of maturity as the current American situation, testify
unequivocally that the common run of trade-union action is at
variance with the natural-rights foundation of the common law.
Trade-unionism denies individual freedom of contract to the
workman, as well as free discretion to the employer to carry on
his business as may suit his own ends. Many pious phrases have
been invented to disguise this iconoclastic trend of trade-union
aims and endeavors; but the courts, standing on a secure and
familiar natural-rights footing, have commonly made short work of
the shifty sophistications which trade-union advocates have
offered for their consideration. They have struck at the root of
the matter in declaring trade-union regulations inimical to the
natural rights of workman and employer alike, in that they hamper
individual liberty and act in restraint of trade. The
regulations, therefore, violate that system of law and order
which rests on natural rights, although they may be enforced by
that de facto law and order which is embodied in the mechanical
standardization of the industrial processes.
Trade-unionism is an outgrowth of relatively late industrial
conditions and has come on gradually as an adaptation of old
methods and working arrangements carried over from the days of
handicraft and petty trade. It is a movement to adapt, construe,
recast, earlier working arrangements with as little lesion to
received preconceptions as the new exigencies and the habits of
thought bred by them will permit. It is, on its face, an endeavor
of compromise between received notions of what "naturally" ought
to be in matters of industrial business, on the one hand, and
what the new exigencies of industry demand and what the new
animus of the workman will tolerate, on the other hand.
Trade-unionism is therefore to be taken as a somewhat mitigated
expression of what the mechanical standardization of industry
inculcates. Hitherto the movement has shown a fairly
uninterrupted growth, not only in the numbers of its membership,
but in the range and scope of its aims as well; and hitherto it
has reached no halting-place in its tentative, shifty, but ever
widening crusade of iconoclasm against the received body of
natural rights. The latest, maturest expressions of
trade-unionism are, on the whole, the most extreme, in so far as
they are directed against the natural rights of property and
pecuniary contract.
The nature of the compromise offered by trade-unionism is
shown by a schedule of its demands: collective bargaining for
wages and employment; arbitration of differences between owners
and workmen; standard rates of wages; normal working day, with
penalized regulation of hours for men, women, and children;
penalized regulation of sanitary and safety appliances; mutual
insurance of workmen, to cover accident, disability, and
unemployment. In all of this the aim of unionism seldom goes the
length of overtly disputing the merits of any given article of
natural-rights dogma. It only endeavors to cut into these
articles, in point of fact, at points where the dogmas patently
traverse the conditions of life imposed on the workmen by the
modern industrial system or where they traverse the consensus of
sentiment that is coming to prevail among these workmen.
When unionism takes an attitude of overt hostility to the
natural-rights institutions of property and free contract, it
ceases to be unionism simply and passes over into something else,
which may be called socialism for want of a better term. Such an
extreme iconoclastic position, which would overtly assert the
mechanical standardization of industry as against the common-law
standardization of business, seems to be the logical outcome to
which the trade-union animus tends, and to which some approach
has latterly been made by more than one trade-unionist body, but
which is, on the whole, yet in the future, if, indeed, it is to
be reached at all. On the whole, the later expressions go farther
in this direction than the earlier; and the animus of the
leaders, as well as of the more wide-awake body of unionist
workmen, appears to go farther than their official utterances.
A detail of trade-union history may be cited in illustration
of their attitude toward the natural-rights principles that
underlie modern business relations. As is well known,
trade-unions have somewhat consistently avoided pecuniary
responsibility for the actions of their members or officials.
They avoid incorporation. Practically an employer has had no
recourse in case he suffers from a failure on the part of his
union workmen to live up to the terms of an agreement made with
the union. In English practice this exemption from pecuniary
responsibility has acquired much of the force of law, and indeed
was supposed to have gained the countenance of statutory
enactment, until, within the past few months, the so-called Taff
Vale decision of the House of Lords reversed the views which had
come to prevail on this head. This decision, by the most
conservative tribunal of the British nation, is too recent to
permit its consequences for trade-unionism to be appreciated. But
it seems fair to expect that the question which the decision
brings home to the unions will be, How is this court-made
pecuniary responsibility to be evaded? not, How is it to be lived
up to? Patently,(15*) the decision is unexceptionable under
common law rules; but, also patently,(16*) it broadly traverses
trade-union practice and is wholly alien to the attitude of the
trade-unionists.(17*)
The animus shown by the trade-unionists in this shirking of
pecuniary responsibility is characteristic of their attitude
toward common law rules. The unions and their methods of work are
essentially extra-legal. It is only reluctantly, as defendants if
at all, that unions are accustomed to appear in court. When they
make a move for statutory enactment, as for the enforcement of a
normal day or of sanitary and safeguarding regulations, it is
prevailingly to criminal law that they turn.
To all this it might, of course, be said that the workmen who
make up the trade-union element take the course indicated simply
because their selfish interest urges them to this course; that
their common necessities and common weakness constrains them to
stand together and to act collectively in dealing with their
employers; while the fact that their demands have no standing in
court constrains them to seek their ends by extra-legal means of
coercion. But this objection is little else than another way of
saying that the exigencies forced upon the workmen by the
mechanically standardized industrial system are extra-legal
exigencies - exigencies which do not run in business terms and
therefore are not amenable to the natural-rights principles of
property and contract that underlie business relations; that they
can therefore not be met on common law ground; and that they
therefore compel the workmen to see them from another point of
view and seek to dispose of them by an appeal to other principles
than those afforded by the common law standpoint. That is to say,
in other words, these exigencies which compel the trade-unionists
to take thought of their case in other terms than those afforded
by existing legal institutions are the means whereby the
discipline of the machine industry is enforced and made effective
for recasting the habits of thought of the workmen. The harsh
discipline of these exigencies of livelihood drives home the new
point of view and holds the workmen consistently to it. But that
is not all that the mechanical standardization of industry does
in the case; it also furnishes the new terms in which the revised
scheme of economic life takes form. The revision of the scheme
aimed at by trade-union action runs, not in terms of natural
liberty, individual property rights, individual discretion, but
in terms of standardized livelihood and mechanical necessity, -
it is formulated, not in terms of business expediency, but in
terms of industrial, technological standard units and standard
relations.
The above presentation of the case of trade-unionism is of
course somewhat schematic, as such a meagre, incidental
discussion necessarily must be. It takes account only of those
features of trade-unionism which characteristically mark it off
from that business scheme of things with which it Comes in
conflict. There are, of course, many survivals, pecuniary and
others, in the current body of trade-union demands, and much of
the trade-union argument is carried on in business terms. The
crudities and iniquities of the trade-union campaign are
sufficiently many and notorious to require no rehearsal here.
These crudities and iniquities commonly bulk large in the eyes of
critics who pass an opinion on trade-unionism from the
natural-rights point of view; and, indeed, they may deserve all
the disparaging attention that is given them. Trade-unionism does
not fit into the natural-rights scheme of right and honest
living; but therein, in great part, lies its cultural
significance. It is of the essence of the case that the new aims,
ideals, and expedients do not fit into the received institutional
structure; and that the classes who move in trade-unions are,
however crudely and blindly, endeavoring, under the compulsion of
the machine process, to construct an institutional scheme on the
lines imposed by the new exigencies given by the machine process.
The point primarily had in view in entering on this
characterization of trade-unionism was that under the discipline
of the mechanically standardized industry certain natural rights,
particularly, those of property and free contract, are in a
degree falling into abeyance among those classes who are most
immediately subjected to this discipline. It may be added that
other classes also, to an uncertain extent, sympathize with the
trade-unionists and are affected with a similar (mild and
equivocal) distrust of the principles of natural liberty. When
distrust of business principles rises to such a pitch as to
become intolerant of all pecuniary institutions, and leads to a
demand for the abrogation of property rights rather than a
limitation of them, it is spoken of as "socialism" or
"anarchism." This socialistic disaffection is widespread among
the advanced industrial peoples. No other cultural phenomenon is
so threatening to the received economic and political structure;
none is so unprecedented or so perplexing for practical men of
affairs to deal with. The immediate point of danger in the
socialistic disaffection is a growing disloyalty to the
natural-rights institution of property, but this is backed by a
similar failure of regard for other articles of the institutional
furniture handed down from the past. The classes affected with
socialistic vagaries protest against the existing economic
organization, but they are not necessarily averse to a somewhat
rigorous economic organization on new lines of their own
choosing. They demand an Organization on industrial as contrasted
with business lines. Their sense of economic solidarity does not
seem to be defective, indeed it seems to many of their critics to
be unnecessarily pronounced; but it runs on lines of industrial
coherence and mechanical constraint, not on lines given by
pecuniary conjunctures and conventional principles of economic
right and wrong.
There is little agreement among socialists as to a programme
for the future. Their constructive proposals are ill-defined and
inconsistent and almost entirely negative. The negative character
of the socialistic propaganda has been made a point of
disparagement by its critics, perhaps justly. But their
predilection for shifty iconoclasm, as well as the vagueness and
inconsistency of their constructive proposals, are in the present
connection to be taken as evidence that the attitude of the
socialists cannot be expressed in positive terms given by the
institutions at present in force. It may also be evidence of the
untenability of the socialistic ideals; but the merits of the
socialist contentions do not concern the present inquiry. The
question here is as to the nature and causes of the socialist
disaffection; it does not concern the profounder and more
delicate point, as to the validity of the socialist contentions.
Current socialism is an animus of dissent from received
traditions. The degree and the direction of this dissent varies
greatly, but it is, within the socialist scheme of thought,
agreed that the institutional forms of the past are unfit for the
work of the future.(18*)
The socialistic disaffection has been set down to envy, class
hatred, discontent with their own lot by comparison with that of
others, and to a mistaken view of their own interests. This
criticism may be well enough as far as it goes, but it does not
touch socialism in those respects in which it differs from other
movements into which this range of motives enters; that is to
say, it touches, not the specific traits of socialism, but the
common features of popular discontent. History shows many such
movements of discontent, pushed on by real or fancied privation
and iniquity; and past experience recorded in history should lead
us to expect that, under the guidance of such motives and such
reasoning as is currently imputed to the socialists by their
conservative critics, the malcontents would demand a
redistribution of property, a reorganization of ownership on such
new lines as would favor the discontented classes. But such is
not the trend of socialistic thinking. It looks to the
disappearance of property rights rather than their
redistribution. The entire range of doctrines covered by the
theory of distribution in the received economics is essentially
(and characteristically) neglected by the modern socialist
speculations.(19*)
The perplexity of those who protest against a supposedly
imminent socialistic subversion of property rights is of a
twofold kind: (1) The absence of proprietary rights is
incomprehensible, and a living together in society without
defined ownership of the means of living is held to be
impracticable; ownership of goods, in the apprehension of the
conservative critics, is involved in the presence of goods. (2)
Ownership of the means of living is an inalienable right of man,
ethically inevitable; the cancelment of property rights is felt
to violate a fundamental principle of morals. All this, of
course, proceeds on the assumption that the institution of
ownership cannot be abrogated, as being an elemental function of
human nature and an integral factor in the order of things in
which human life belongs.
To the modern socialist all this is coming to be less and
less convincing. In this respect there is a fairly well marked
progressive change in the attitude of the professed socialists.
Their position is progressively less capable of being formulated
as a business proposition; their demands are progressively more
difficult to state in the form of a pecuniary claim. The claim to
the full product of labor, which once filled a large place in
socialistic clamors and had a great carrying force during the
earlier three-quarters of the nineteenth century, has gradually
fallen into abeyance, both with the agitators and the adherents
of the propaganda, during the last generation. To-day this claim
is an afterthought in the advocate's presentation of socialism,
more frequently than it is a point of departure for the argument,
and it is made more of by the proselytes, who have carried the
metaphysics of it over from the current common sense of the
business community, than by the socialists of confirmed standing.
The claim to the full product is an article of natural-rights
dogma, and as such it is a reminiscence of the institutional
situation from which socialism departs, rather than a feature of
the prospective situation to which socialistic sentiment looks.
The like obsolescence of the sense of equity in ownership is
visible in the attitude taken by strikers in the large,
mechanically organized industries, outside of the ranks of avowed
socialism. These strikers are less and less deterred by
considerations of vested rights, property rights, owner's
interests, and the like. The principle that a man may do what he
will with his own is losing its binding force with large classes
in the community, apparently because the spiritual ground on
which rests the notion of "his own" is being cut away by the
latter-day experience of these classes. Abridgment of proprietary
discretion, confiscation of proprietary rights, is growing
gradually less repugnant to the industrial populace; and the
question of indemnity for eventual loss is more and more falling
into neglect. With the socialistic element the question is not,
what shall be done in the way of readjustment of property claims,
but what is to be done to abolish them.(20*)
The question of equity or inequity in the distribution of
wealth presumes the validity of ownership rights on some basis or
other, or at least it presumes the validity of some basis on
which the claims of ownership may be discussed. Ownership is the
major premise of any argument as to the equity of distribution,
and it is this major premise that is being forgotten by the
classes among whom socialistic sentiment is gaining. Equity in
this connection seems not to belong in the repertory of socialist
concepts. It is at this point - the point of a common ground of
argument- that the discrepancy occurs which stands in the way,
not only of an eventual agreement between the socialists and
their conservative critics, but even of their meeting one
another's reasoning with any substantial effect. In the equipment
of common-sense ideas on the basis of which the conservatives
reason on this matter, there is included the conventional article
of ownership, as a prime fact; in the common-sense basis of
socialistic thinking this conventional premise has no secure
place. There is, therefore, a discrepancy in respect of the
metaphysics underlying the knowledge and reasoning of the two
parties to the controversy, and the outlook for a common
understanding is accordingly vain. No substantial agreement upon
a point of knowledge or conviction is possible between persons
who proceed from disparate preconceptions.
Still the conservative reformers and the iconoclasts have a
good deal in common. The prevalent habit of mind of both classes
is a hybrid product of conventional principles and matter-of-fact
insight. But these two contrasted grounds of opinion and
aspiration are present in unequal degrees in the two contrasted
classes; in the conservatives the conventional grounds of
finality dominate and bear down the matter-of-fact knowledge of
things, while the converse is true of the iconoclasts. Contrasted
with earlier times and other cultural regions the consensus, the
general drift, of the modern Western culture as a whole is of an
iconoclastic character; while the class contrast here in question
lies only within the range of this Western cultural consensus. As
one or the other of the two contrasted proclivities - recourse to
conventional precedents and recourse to matter-of-fact insight -
gains and overbalances the other, the general cultural movement
will drift toward a more conservative (archaic), conventional
position or toward a more iconoclastic, materialistic position.
During modern times the cultural drift has set in the latter
direction. With due but not large exceptions, the effective body
of the modern population has been growing more matter-of-fact in
their thinking, less romantic, less idealistic in their
aspirations, less bound by metaphysical considerations in their
view of human relations, less mannerly, less devout.
The discrepancy between the conservatives and the iconoclasts
need not be taken to mean that the two contrasted classes are
moving in opposite directions, nor even in widely divergent
directions. Neither class can properly be said to be
reactionary.(21*) Taken generally, both wings have been moving in
the direction of a more impersonal, more matter-of-fact, less
conventional point of view. In this composite cultural growth the
matter-of-fact habit of mind has on the whole been gaining at the
expense of the conventional, and the conventional premises that
have been retained have also come to bear more of a
matter-of-fact character, - as, e.g., in the supersession of
feudalistic or theocratic principles of law by natural rights. So
that the position for which the effective body of conservatives
now stand is not in substance a very archaic one. It is a more
matter-of-fact position, less closely bound by authentic
conventions, than the position effectively occupied by the
iconoclastic wing a hundred years ago.
Throughout the mod ern cultural complex there is a somewhat
variable, scattering shifting of ground to a more matter-of-fact
basis. The direction of spiritual growth or change is much the
same throughout the general body of the population; but the rate
of change, the rate at which matter-of-fact ideals are
superseding ideals of conventional authenticity, is not the same
for all classes. Hence the class discrepancy here spoken of. The
coefficient of change is so much larger in the vulgar, industrial
classes as progressively to widen the cultural interval between
them and the conservatives in the respect which is here in
question. And the resulting discrepancy of institutional aims and
ideals may have none the less serious consequences for being due
to a differential rate of movement rather than to a divergent
cultural trend.
In this differential rate of movement the departure from the
ancient landmarks has now gone so far (or is reaching such a
point) among the socialistic vulgar as to place their th inking
substantially on a plane of material matter of fact, particularly
as regards economic institutions. Whereas in the conservative
classes the change is not yet large enough to take them off the
plane of received conventional truth, particularly as regards
economic institutions and such social questions as are of an
economic complexion. In the case of the former this change in
habit of mind has been so considerable as, in effect, to
constitute a change in kind; crude matter of fact has come to be
the dominant note of their attitude, and conventional
authenticity has been relegated to a subsidiary place; that is to
say, the change is of a revolutionary character. In the case of
the conservative classes, so far as touches the institutional
notions here under inquiry, the corresponding change has not yet
gone so far as to amount to a change in kind; it is not of a
revolutionary nature. The views current among the respectable
classes on these matters still, in effect, run on the ancient
levels on which were built up the pecuniary institutions about
which the controversy circles. For the present there need be no
apprehension that the more respectable classes will reach a
mature revolutionary frame of mind. The discipline of their daily
life does not, on the whole, favor such a result.
This, in substance, is also the view taken by the socialistic
revolutionaries, particularly by those that are of Marxian
antecedents. It is a point of conviction with them, though not
wholly of reasoned conviction, that the socialistic movement is,
in the nature of the case, a proletarian movement, in which the
respectable, that is to say the pecuniarily competent, classes
can have no organic part even if they try. It is held, in effect,
that the well-to-do are, by force of their economic
circumstances, incapable of assimilating the socialist ideas. The
argument here set forth may serve to enforce this view, but with
a difference. Instead of contrasting the well-to-do with the
indigent, the line of demarcation between those available for the
socialist propaganda and those not so available is rather to be
drawn between the classes employed in the industrial and those
employed in the pecuniary occupations. It is a question not so
much of possessions as of employments; not of relative wealth,
but of work. It is a question of work because it is a question of
habits of thought, and work shapes the habits of thought. The
socialists themselves construe the distinction to be a
distinction in respect of habits of thought; and habits of
thought are made by habits of life rather than by a legal
relation to accumulated goods. This legal relation may count
materially in shaping the animus of the several economic classes;
but it appears not to be competent of itself to explain the
limitations observable in the spread of socialistic sentiment.
The socialistic disaffection shows a curious tendency to
overrun certain classes and to miss certain others. The men in
the skilled mechanical trades are peculiarly liable to it, while
at the extreme of immunity is probably the profession of the law.
Bankers and other like classes of business men, together with
clergymen and politicians, are also to be held free of serious
aspersion; similarly, the great body of the rural population are
immune, including the population of the country towns, and in an
eminent degree the small farmers of the remoter country
districts;(22*) so also the delinquent classes of the cities and
the populace of half-civilized and barbarous countries. The body
of unskilled laborers, especially those not associated with the
men in the skilled mechanical trades, are not seriously affected.
The centres of socialistic disaffection are the more important
industrial towns, and the effective nucleus of the socialistic
malcontents is made up of the more intelligent body of workmen in
the highly organized and specialized industries. Not that
socialism does not spread in virulent form outside this narrow
range, but at a farther remove from the centre of dispersion it
appears rather sporadically and uncertainly, while within this
field it is fairly endemic. As regards the educated classes,
socialistic views are particularly likely to crop out among the
men in the material sciences.
The advocates of the new creed have made little headway among
the rural classes of Europe, whether peasant farmers or farm
laborers. The rural proletariat has hitherto proved virtually
impermeable.(23*) The discipline of their daily life leaves their
spirit undisturbed on the plane of conventionality and
anthropomorphism, and the changes to which they aspire lie within
the scope of the conventionalities which have grown out of these
circumstances of their life and which express the habit of mind
enforced by these circumstances.
Without claiming that this explanation is competent to cover
the case of socialism in all its bearings, it may be pointed out
that this socialistic bias has effectively spread among the
people only within the last quarter of a century, which is also
approximately the period since which the machine process and the
mechanical standardization of industry has reached its fuller
development, both as regards the extent of its field and as
regards the extent of its technological requirements; that it is
found in vigorous growth only in those communities and
particularly among those classes whose life is closely regulated
by the machine technology; and that the discipline of this
machine technology is peculiarly designed to inculcate such
iconoclastic habits of thought as come to a head in the
socialistic bias. Socialism, in so far as the term means the
subversion of the economic foundations of modern culture, occurs
only sporadically and dubiously outside the limits, in time and
space, of the discipline of the machine technology. While among
those classes whose everyday life schools them to do their
habitual serious thinking in terms of material cause and effect,
the preconceptions of ownership are apparently becoming
obsolescent through disuse and through supersession by other
methods of apprehending things.(24*)
But the machine technology not only trains the work men into
materialistic iconoclasm, it has also a selective effect. Persons
endowed with propensities and aptitudes of a materialistic,
matter-of-fact kind are drafted into the mechanical employments,
and such are also peculiarly available socialistic material.
Aptitude for the matter-of-fact work of the machine technology
means, in a general way, ineptitude for an uncritical acceptance
of institutional truths, It is probable, therefore, that the
apparent facility with which the mechanical employments (and the
material sciences) induce a socialistic or iconoclastic bent is
to be set down in part to the fact that the human material in
these employments is picked material, peculiarly amenable to this
discipline. There is a sifting of the working classes, whereby
the socialistic and mechanically capable are roughly segregated
out from the rest and subjected to the iconoclastic discipline of
the mechanical employments and matter-of-fact thinking; while the
residue, which is on the whole made up of the persons that are
relatively least capable of revolutionary socialism, is at the
same time less exposed to the discipline that might fit them for
the socialistic movement. This sifting is, of course, a rough
one, and leaves many exceptions both ways.
In the light of this consideration, then, it is to be noted:
(1) that the dominance of the machine process in modern industry
is not so potent a factor for the inculcation of socialistic
notions - it does not so irresistibly shape men's habit of mind
in the socialistic sense - as the first survey of the facts would
suggest; and (2) that the differentiation of occupations involved
in modern industrial methods selectively bunches the socialistic
elements together, and so heightens their sense of class
solidarity and acts to accentuate their bias, gives consistency
to their ideals, and induces that boldness of conviction and
action which is to be had only in a compact body of men.
But in either case, whether the visible outcome is chiefly
due to their selective or to their disciplinary effect, the
bearing of the industrial occupations upon the growth of
socialism seems equally close and undeniable. The two modes of
influence seem to converge to the outcome indicated above, and
for the purpose of the present inquiry a detailed tracing out of
the two strands of sequence in the case neither can nor need be
undertaken.(25*)
With such generality as commonly holds in statements of this
kind, it may be said that the modern socialistic disaffection is
loosely bound up with the machine industry - spreading where this
industry spreads and flourishing where this industry gives the
dominant note of life. The correlation between the two phenomena
is of such a kind as to leave no doubt that they are causally
connected; which means either that the machine industry, directly
or indirectly, gives rise to socialism, or that the two are
expressions of the same complex of causes. The former statement
probably expresses the truth of the case in great part, but the
latter need not therefore be false. Wherever and in so far as the
increase and diffusion of knowledge has made the machine process
and the mechanical technology the tone-giving factor in men's
scheme of thought, there modern socialistic iconoclasm follows by
easy consequence.
The socialistic bias primarily touches economic institutions
proper. But that is not the whole of it. When the term is used
without modifying phrase it carries a certain implication
touching other than primarily economic matters. The political
bias of this unmitigated socialism is always radically
democratic, to the extent that these socialists are in a high
degree intolerant of any monarchical, aristocratic, or other
prescriptive government. The state is doomed in the socialistic
view.(26*) The socialist antagonism to the state takes various
forms and goes to varying degrees of intemperance, but it is
consistently negative. Except in their destructively hostile
attitude to existing political organizations, the socialists have
nothing consistent to offer on the head of political
institutions, less, indeed, latterly than in the earlier days of
the propaganda. There seems to be a growing shiftlessness of
opinion on this head; one gets the impression that the sense of
the socialist malcontents, as near as it may be permissible to
use that word in this connection, is that the community can best
get along without political institutions.
There is a like departure from the ancient norms touching
domestic relations. This is not confined to those portions of the
community that avowedly affect socialistic views, although it
has, on the whole, gone farthest among the classes among whom the
socialistic views prevail. There is a visible weakening of the
family ties, a disintegration of the conventions of household
life, throughout large classes. The defection is even felt, by
sensitive and solicitous persons, to be of such grave proportions
as to threaten the foundations of domestic life and morality.
This disintegration of the family ties shows itself most
alarmingly among the socialistic classes, with whom it all wears
such an air of unconcern as argues that in this respect they are
incorrigible. To these the conventional form of the household has
in good part ceased to appeal as something sacred. It is no
longer one of their secure spiritual assets.
What appears to be in jeopardy, should this socialistic
defection gain ground, is the headship of the male in the
household economy. The family, as it has come down from the
medieval past, under the shelter of the church, is of a
patriarchal constitution, at least in theory. The man has been
vested with discretionary control in domestic affairs. In the
earlier days his discretion was very direct and full, comprising
corporal coercion. Utterly, after and so far as mastery and
servitude have passed off the field and natural rights have come
to rule, this direct coercive control has been superseded by a
pecuniary discretion; so that the male head of the household is
alone competent to exercise a proprietary control of household
affairs. This latter-day conventional headship of the man is now
in its turn beginning to lose the respect of a good share of the
populace. The disintegration of the patriarchal tradition has
gone farthest among those industrial classes who are at the same
time inclined to socialistic views.
At this point in the institutional structure, as well as at
other points where the industrial classes are giving evidence of
a loss of spiritual ground, there is little indication of a
constructive movement toward any specific arrangement to take the
place of the institution whose existence is threatened. There is
a loosening of the bonds, a weakening of conviction as to the
full truth and beauty of the received domestic institutions,
without much of a consensus as to what is to be done about it, if
anything. In this, as at other junctures of a similar kind, the
mechanically employed classes, trained to matter-of-fact habits
of thought, show a notable lack of spontaneity in the
construction of new myths or conventions as well as in the
reconstruction of the old.
All this disintegration of the spiritual foundations of our
domestic institutions spreads with the most telling effect,
because most heedlessly, among the population of the industrial
towns. But it spreads also outside the limits of the industrial
classes; for the habits of life and of thought inculcated by the
machine technology are not limited to them, even if these classes
are the ones who suffer most and most severely from the machine
discipline. The disintegration shows itself, in varying degree,
in all modern industrial communities, and it is visible somewhat
in proportion as the community is modem and industrial. The
machine is a leveller, a vulgarizer, whose end seems to be the
extirpation of all that is respectable, noble, and dignified in
human intercourse and ideals.
What happens within the narrow range of the institutions of
domestic life repeats itself in substance in the larger field of
national life and ideals. Fealty to a superior installed by law
or custom suffers under the discipline of a life which, as
regards its most formative exigencies, is not guided by
conventional grounds of validity. And the transmuted form of
fealty called patriotism is in much the same insecure case. The
new ground of class solidarity and antagonism, for which these
extreme spokesmen of the industrial regime stand, is neither
ecclesiastic, dynastic, territorial, nor linguistic; it is
industrial and materialistic. But in their attitude of
heedlessness toward the dynastic and national conventions the
socialists are merely the extreme exponents of the spirit of the
age in the modern industrial communities.
So, again, as regards the religious life. Men trained by the
mechanical occupations to materialistic, industrial habits of
thought are beset with a growing inability to appreciate, or even
to apprehend, the meaning of religious appeals that proceed on
the old-fashioned grounds of metaphysical validity. The
consolations of a personal relation (of subservience) to a
supernatural master do not appeal to men whose habit of life is
shaped by a familiarity with the relations of impersonal cause
and effect, rather than by relations of personal dominance and
fealty. It does not come as a matter of course for such men to
give the catechism's answer to the question, What is the chief
end of man? Nor do they instinctively feel themselves to be
sinners by virtue of a congenital, hereditary taint or obliquity.
Indeed, they can only with great difficulty be seriously
persuaded that they are sinners at all. They are in danger of
losing the point of view of sin. The relation of status or fealty
involved in the concept of sin is becoming alien to their habit
of mind. They are therefore slow to realize that their past life
has violated such a relation of fealty, on the one hand, and that
it is of vital consequence to reestablish such a relation of
status by a work of salvation or redemption. The kindly
ministrations of the church and the clergy grate on the
sensibilities of men so trained, as being so much ado about
nothing. The machine, their master, is no respecter of persons
and knows neither morality nor dignity nor prescriptive right,
divine or human; its teaching is training them into insensibility
of the whole range of concepts on which these ministrations
proceed.(27*)
Not alone in the direction of growth given to vulgar
sentiment and to the vulgar insight into facts is the
matter-of-fact discipline of the machine technology apparent, but
also in the scope and method of that scientific knowledge that
has had the vogue since the advent of the machine industry.
Scientific inquiry is directed to a different end and carried out
under the guidance of a different range of principles or
preconceptions in the modern industrial communities than in
earlier days or in cultural centres lying outside the machine's
dominion. Modern science is single-minded in its pursuit of
impersonal relations of causal sequence in the phenomena with
which it is occupied.
The line of descent of this matter-of-fact modern science is
essentially British, as is that of the machine technology and of
the characteristically modern civil and political institutions.
It is true, beginnings of the modern scientific movement were
made in Italy in the days of the Renaissance, and Central Europe
had its share in the enlightenment; but these early modern
risings of the scientific spirit presently ran into the sand,
when war, politics, and religion reasserted their sway in the
south of Europe. Similar tentative stirrings of matter-of-fact
thought were had in Spain and France before and during the early
phases of the state-making era; but here, again, war and politics
rendered these onsets nearly nugatory, so that the intellectual
output was more speculation than science. In the Low Countries
something similar holds true, with a larger qualification. The
British community made a later and slower start, coming out of
barbarism at a later date and with a heavier handicap of physical
obstructions. But being, relatively, sheltered from war and
politics, the British were able to take up the fund of scientific
gains made by the South-European men of workday insight, to turn
it to account and to carry it over the era of state-making and so
prepare the way for the modern scientific, technological era.
Of course, nothing but the most meagre and sketchiest outline
of this matter is practicable in this place, and even that only
in its relation to the machine industry during the past one
hundred years or so. What is said above of the British lead in
modern science may perhaps be questioned, and it is not necessary
for the present purpose to insist on its truth; but so much seems
beyond hazard as that the lead in the material sciences lay with
the British through the early machine age, and that the
provenance of this modern scientific research to-day does not
extend, in any pronounced degree, beyond those communities that
lie within the area of the modern machine industry.
In time and space the prevalence of the modern materialistic
science is roughly extensive with that of the machine process. It
is, no doubt, related to it both as cause and as effect; but that
its relation to modern industry is more that of effect than cause
seems at least broadly suggested by the decay which presently
overtook scientific research, e.g., in the south of Europe when
those peoples turned their attention from material to spiritual
and political affairs.(28*)
What is of immediate interest is the change that has come
over the scope and method of scientific research since the
dominance of the machine process, in comparison with what
preceded the coming of the machine age. The beginnings of modern
science are older than the industrial revolution; the principles
of scientific research (causal explanation and exact measurement)
antedate the regime of the machine process. But a change has
taken place in the postulates and animus of scientific research
since modern science first began, and this change in the
postulates of scientific knowledge is related to the growth of
the machine technology.
It is unnecessary here to hark back to that scholastic
science or philosophy that served as an intellectual expression
of the ecclesiastical and political culture of the Middle Ages.
Its character, as compared with later science, is sufficiently
notorious. By the change from scholastic knowledge to modern
science, to the extent to which the change was carried through,
the principle (habit of mind) of adequate cause was substituted
for that of sufficient reason. The law of causation as it is
found at work, in the maturer science of the eighteenth and early
nineteenth centuries, comprises two distinguishable postulates:
(1) equality (quantitative equivalence) of cause and effect; and
(2) similarity (qualitative equivalence) of cause and effect. The
former may, without forcing it, be referred to commercial
accountancy as its analogue in practical life and as the probable
cultural ground out of which the habit of insisting on an
inviolable quantitative equivalence gathered consistency. The
ascendancy of the latter seems in a similar manner to be
referable to the prevalence of handicraft as its cultural ground.
Stated negatively, it asserts that nothing appears in the effect
but what was contained in the cause, in a manner which suggests
the rule that nothing appears in the product of handicraft but
what was present in the skill of the artificer. "Natural causes,"
which are made much of in this middle period of modern science,
are conceived to work according to certain "natural laws." These
natural laws, laws of the "normal course" of things, are felt to
tend to a rational end and to have something of a coercive force.
So that Nature makes no mistakes, Nature does nothing in vain,
Nature takes the most economical course to its end, Nature makes
no jumps, etc. Under this law of natural causation every effect
must have a cause which resembles it in the particular respect
which claims the inquirer's attention. Among other consequences
of this view it follows that, since the details as well as the
whole of the material universe are construed to show adaptation
to a preconceived end, this "natural order" of things must be the
outcome of preexistent design residing in the "first cause,"
which is postulated by virtue of this imputed design and is
designated the "Great Artificer." There is an element of conation
in this original modern postulate of cause and effect. The shadow
of the artificer, with his intelligence and manual skill, is
forever in the background of the concepts of natural law. The
"cause" dealt with in a given case is not thought of as an
effect; and the effect is treated as a finality, not as a phase
of a complex sequence of causation. When such a sequence is under
inquiry; as in the earlier, pre-Darwinian theories of evolution,
it is not handled as a cumulative sequence whose character may
blindly change from better to worse, or conversely, at any point;
but rather as an unfolding of a certain prime cause in which is
contained, implicitly, all that presently appears in explicit
form.
In the conception of the causal relation as it may be seen at
work a hundred years ago, cause and effect are felt to stand over
against one another, so that the cause controls, determines the
effect by transmitting its own character to it. The cause is the
producer, the effect the product. Relatively little emphasis or
interest falls upon the process out of which the product emerges;
the interest being centred upon the latter and its relation to
the efficient cause out of which it has come. The theories
constructed under the guidance of this conception are
generalizations as to an equivalence between the producing cause
and the effect-product. The cause "makes" the effect, in much the
same sense as the craftsman is apprehended to make the article on
which he is engaged. There is a felt distinction between the
cause and the environing circumstances, much as there is between
the workman on the one hand and his tools and materials on the
other hand. The intervening process is simply the manner of
functioning of the efficient cause, much as the workman's work is
the functioning of the workman in the interval between the
inception and the completion of the product. The effect is
subsequent to the cause, as the workman's product is subsequent
to and consequent upon his putting forth his productive
efficiency. It is a relation of before and after, in which the
process comes in for attention as covering and accounting for the
time interval which, in analogy with workmanlike endeavor, is
required for the functioning of the efficient cause.(29*)
But as time passes and habituation to the exigencies of the
machine technology gains in range and consistency, the
quasi-personal, handicraft conception of causation decays, -
first and most notably in those material, inorganic sciences that
stand in the closest relation to the mechanical technology, but
presently also in the organic sciences, and even in the moral
sciences. The machine technology is a mechanical or material
process, and requires the attention to be centred upon this
process and the exigencies of the process. In such a process no
one factor stands out as unequivocally the efficient cause in the
case, whose personal character, so to speak, is transfused into
the product, and to whose workings the rest of the complex of
causes are related only as subsidiary or conditioning
circumstances. To the technologist the process comes necessarily
to count, not simply as the interval of functioning of an initial
efficient cause, but as the substantial fact that engages his
attention. He learns to think in terms of the process, rather
than in terms of a productive cause and a product between which
the process intervenes in such a manner as to afford a transition
from one to the other. The process is always complex; always a
delicately balanced interplay of forces that work blindly,
insensibly, heedlessly; in which any appreciable deviation may
forthwith count in a cumulative manner, the further consequences
of which stand in no organic relation to the purpose for which
the process has been set going. The prime efficient cause falls,
relatively, into the background and yields precedence to the
process as the point of technological interest.
This machine technology, with its accompanying discipline in
mechanical adaptations and object-lessons, came on gradually and
rose to a dominating place in the cultural environment during the
closing years of the eighteenth and the course of the nineteenth
century; and as fast as men learned to think in terms of
technological process, they went on at an. accelerated pace in
the further invention of mechanical processes, so that from that
time the progress of inventions has been of a cumulative
character and has cumulatively heightened the disciplinary force
of the machine process. This early technological advance, of
course, took place in the British community, where the machine
process first gained headway and where the discipline of a
prevalent machine industry inculcated thinking in terms of the
machine process. So also it was in the British community that
modern science fell into the lines marked out by technological
thinking and began to formulate its theories in terms of process
rather than in terms of prime causes and the like. While
something of this kind is noticeable relatively early in some of
the inorganic sciences, as, e.g., Geology, the striking and
decisive move in this direction was taken toward the middle of
the century by Darwin and his contemporaries.(30*) Without much
preliminary exposition and without feeing himself to be out of
touch with his contemporaries, Darwin set to work to explain
species in terms of the process out of which they have arisen,
rather than out of the prime cause to which the distinction
between them may be due.(31*) Denying nothing as to the
substantial services of the Great Artificer in the development of
species, he simply and naively left Him out of the scheme,
because, as being a personal factor, He could not be stated and
handled in terms of process. So Darwin offered a tentative
account of the descent of man, without recourse to divine or
human directive endeavor and without inquiry as to whence man
ultimately came and why, or as to what fortune would ultimately
overtake him. His inquiry characteristically confines itself to
the process of cumulative change. His results, as well as his
specific determination of the factors at work in this process of
cumulative change, have been questioned; perhaps they are open to
all the criticisms levelled against them as well as to a few more
not yet thought of; but the scope and method given to scientific
inquiry by Darwin and the generation whose spokesman he is has
substantially not been questioned, except by that diminishing
contingent of the faithful who by force of special training or by
native gift are not amenable to the discipline of the machine
process. The characteristically modern science does not inquire
about prime causes, design in nature, desirability of effects,
ultimate results, or eschatological consequences.
Of the two postulates of earlier modern science, - the
quantitative equivalence and the qualitative equivalence of cause
and effect, - the former has come practically to signify the
balanced articulation of the process of cumulative change; the
endeavor of the Positivists to erect this canon of quantitative
equivalence into the sole canon of scientific truth, and so to
reduce scientific theory to a system of accountancy, having
failed. The latter thesis, that like causes produce like effects,
or that the effect is, in some sense, of the same character as
the cause, has fallen into decay as holding true only in such
tenuously general terms as to leave it without particular force.
The scientists are learning more and more consistently to think
in the opaque, impersonal terms of strains, mechanical
structures, displacement, and the like; terms which are
convertible into the working drawings and specifications of the
mechanical engineer.
The older preconceptions are, of course, not wholly
eliminated from the intellectual apparatus of scientific research
and generalization. The cultural situation whose discipline gives
the outcome is made up of inherited traditional notions at least
as much as of the notions brought in by the machine process. Even
among the scientific adepts there has been no complete break with
the past; necessarily not, since they are, after all, creatures
of their own generation. Many of them, but more especially those
who are engaged in upholding the authentic results of scientific
research, are somewhat prone to make much of the definitive
results achieved, rather than of the process of research in which
these results are provisional appliances of work. And many of
these, together. with the great part of those well-meaning
persons who exploit the sciences for purposes of edification,
such as clergymen and naturalistic myth-makers, still personify
the process of cause and effect and find in it a well-advised
meliorative trend. But that work of research which effectually
extends the borders of scientific knowledge is nearly all done
under the guidance of highly impersonal, mechanical, morally and
aesthetically colorless conceptions of causal sequence. And this
scientific work is carried out only in those communities which
are in due contact with the modern mechanically organized
industrial system, - only under the shadow of the machine
technology.
In the nature of the case the cultural growth dominated by
the machine industry is of a sceptical, matter-of-fact
complexion, materialistic, unmoral, unpatriotic, undevout. The
growth of habits of thought, in the industrial regions and
centres particularly, runs in this direction; but hitherto there
has enough of the ancient norms of Western Christendom remained
intact to make a very respectable protest against that
deterioration of the cultural tissues which the ferment of the
machine industry unremittingly pushes on. The machine discipline.
however, touches wider and wider circles of the population, and
touches them in an increasingly intimate and coercive manner. In
the nature of the case, therefore, the resistance opposed to this
cultural trend given by the machine discipline on grounds of
received conventions weakens with the passage of time. The spread
of materialistic, matter-of-fact preconceptions takes place at a
cumulatively accelerating rate, except in so far as some other
cultural factor, alien to the machine discipline, comes in to
inhibit its spread and keep its disintegrating influence within
bounds.
NOTES:
1. The perfected system of business principles rests on the
historical basis of free institutions, and so presumes a
protracted historical growth of these institutions; but a highly
efficient, though less perfect, business system was worked out in
a relatively short time by the South and Central European peoples
in early modern times on the basis of a less consummate system of
rights. - Cf. Ehrenberg, Zeitalter der Fugger; Sombart,
Kapitalismus, vol. II. ch. VIII, XIV, XV.
2. See Chapter IV, above.
3. Cf. Keane, Man, Past and Present, ch. XIV; W.Z. Ripley, Races
of Europe; Lapouge, L'Aryen; Montelius, Les temps prehistoriques
en Bubde, etc.; Andreas Hansen, Menneskesloegtens Aelde.
4. If, e.g., he takes to myth making and personifies the machine
or the process and imputes and benevolence to the mechanical
applications, after the manner of current nursery tales and
pulpit oratory, he is sure to go wrong.
5. Such expressions as "good and ill," "merit and demerit," "law
and order," when applied to technological facts or to the outcome
of material seience, are evidently only metaphorical expressions,
borrowed from older usage and serviceable only as figures of
speech.
6. Tarde, Psychologic Economique, vol. I. pp. 122-131, offers a
characterization of the psychology of modern work, contrasting,
among other things, the work of the machine workman with that of
the handicraftsman in respect of its psychological requirements
and effects. It may be taken as a temperate formulation of the
cent commonplaces on this topic, and seems to be fairly wide of
the mark.
7. For something more than a hundred years past this change in
the habits of thought of the workman has been commonly spoken of
as a deterioration or numbing of his intelligence. But that seems
too sweeping a characterization of the change brought on by
habituation to machine work. It is safe to say that such
habituation brings a change in the workman's habits of thought, -
in the direction, method, and content of his thinking, -
heightening his intelligence for some purposes and lowering it
for certain others. No doubt, on the whole, the machine's
discipline lowers the intelligence of the workman for such
purposes as were rated high as marks of intelligence before the
coming of the machine, but it appears likewise to heighten his
intelligence for such purposes as have been brought to the front
by the machine. If he is by nature scantily endowed with the
aptitudes that would make him think effectively in terms of the
machine process, if he has intellectual capacity for other things
and not for this, then the mining of the machine may fairly be
said to lower his intelligence, since it hiders the full
development of the only capacities of which he is possessed. The
resulting difference in intellectual training is a difference in
kind and direction, not necessarily in degree. Cf. Schmoller,
Grundriss der Volkswirtschaftslehre, vol. I. secs. 85-86, 132;
Hobson, Evolution of Modern Capitalism, ch. IX. secs. 4 and 5;
Cooke Taylor, Modern Factory System, pp. 434-435; Sidney and
Beatrice Webb, Industrial Democrocy, e.g. pp. 327 et seq.; K. Th.
Reinhold, Arbeit und Werkzeug, ch. X. (particularly pp. 190-198)
and ch. XI (particularly pp. 221-240).
8. Cf. J.C. Sutherland, "The Engineering Mind" Popular Science
Monthly, January 1903, pp. 254-256.
9. Cf. "Industrial and Pecuniary Employments" especially pp.
198-218.
10. As G.F. Steffen has described it: "Those who hire out their
labor power or their capital or their land to the entrepreneurs
are as a rule not absolutely passive as seen from the point of
view of business enterprise. They are not simply inanimate
implements in the hands of the entrepreneurs. They are,
enterprising implements, (foretagaade verktyg) who surrender
their undertaking functions only to the extent designated in the
contract with the entrepreneur." - Ekonomisk Tidskrift, vol. V.
p. 256.
11. Cf., on the other hand, Reinhold, Arbeit und Werkzeug, ch.
XII and XIV, where double dealing is confused with workmanship,
very much after the manner familiar to readers of expositions of
the "wages of superintendence," but more broadly and ingeniously
than usual.
12. Individual exceptions are, of course, to be found in all
classes, but there is, after all, a more or less consistent,
prevalent class attitude. As is well known, clergymen, lawyers,
soldiers, civil servants, and the like, are popularly held to be
of a conservative, if not reactionary temper. This vulgar
apprehension may be faulty in detail, and especially it may be
too sweeping in its generalizations; but there are, after all,
few persons not belonging to these classes who will not
immediately recognize that this vulgar appraisement of them rests
on substantial grounds, even though the appraisement may need
qualification. So, also, a conservative animus is seen to pervade
all classes more generally in earlier times or on more archaic
levels of culture than our own. At the same time, in those early
days and in the more archaic cultural regions, the structure of
conventionally accepted truths and the body of accredited
spiritual or extra-material facts are more comprehensive and
rigid, and the thinking on all topics is more consistently held
to tests of authenticity as contrasted with tests of sense
perception. On the whole, the number and variety of things that
are fundamentally and eternally true and good increase as one
goes outward from the modern West-European cultural centres into
the earlier barbarian past or into the remoter barbarian present.
13. See Chapter II above.
14. Cf. Theory of the Leisure Class, especially ch. IV and V.
15. As, e.g., Mr W.G.S. Adams cogently points out in a recent
number of the Journal of Political Ecomnomy (December 1902).
16. As Mr. Webb shows (Industrial Democracy, 1902, pp.
xxivxxxvi).
17. The historical explanation of this House of Lords reversal of
trade-union practice is probably to be found in the conservative,
or rather reactionary, trend given to British sentiment by the
imperialist policy of the last two or three decades, accentuated
by the experiences of the Boer War. The Boer War seems to mark a
turning-point in the growth of sentiment and institutions. Since
the seventies the imperialist interest, that is to say, the
dynastic interest, has been coming into the foreground among the
interests that engage the attention of the British community. It
seems now to have definitively gained the first place, and may be
expected in the immediate future to dominate British policy both
at home and abroad. Concomitantly, it may be remarked, the
British community has been slowing down, if not losing ground, in
industrial animus, technological efficiency, and scientific
spirit. Cf. Hobson, Imperialism, part II ch. I and III.
18. All this applies to anarchism as well as to socialism;
similarly to several minor categories of dissentients. In their
negative proposals the socialists and anarchists are fairly
agreed. It is in the metaphysical postulates of their protest and
in their constructive aims that they part company. Of the two,
the socialists are more widely out of touch with the established
order. They are also more hopelessly negative and destructive in
their ideals, as seen from the standpoint of the established
order. This applies to the later socialists rather than to the
earlier, and it applies, of course, only to the lower-class,
"democratic" socialists, not to the so-called state and Christian
socialists.
Anarchism proceeds on natural-rights ground, and is
accordingly in touch with the postulates of the existing property
arrangements to that extent. It is a more unmitigated working out
of the same postulates. It is a system of "natural liberty"
unqualified to the extent even of not admitting prescriptive
ownership. Its basis is a (divinely instituted) order of nature,
the keynote of which is an inalienable freedom and equality of
the individual, quite in the eighteenth-century spirit. It is in
this sense an offshoot of the Romantic school of thought.
Anarchism is a de jure seheme, which takes no account of
mechanical exigencies but rests its case altogether on
anthropomorphic postulates of natural rights. It is, from the
natural-rights standpoint, substantially sound, though
senselessly extreme.
What may be called the normal socialism, socialism of the
later, more dangerous, and more perplexing, kind, does not build
on the received metaphysical basis of the "natural order." It
demands a reconstruction of the social fabric, but it does not
know on what lines the reconstruction is to be carried out. The
natural rights of the individual are not accepted as the standard
(except by certain large bodies of neophytes, especially rural
American, who are carrying under socialist mottoes the burden of
animosities and preconceptions that once made populism), but
nothing definite is put in the place of this outworn standard.
The socialists of the line, in so far as there is any consensus
among them, profess that the mechanical exigencies of the
industrial system must decide what the social structure is to be,
but beyond this vague generality they have little to offer. And
this mechanical standardization can manifestly afford no basis
for legislation on civil rights. Indeed, it is difficult to see
how any seheme of civil rights, much or little, can find a place
in a sociallstic reorganization.
19. The "scientific socialism" of Marx and Engels as promulgated
during the third quarter of the nineteenth century was not of
this negative character. It was a product of Hegelianism blended
with the conceptions of natural rights, its chief count being the
"claim to the full product of labor." This socialism never made
serious inroads among the working classes outside of Germany -
the home of Hegelianism. Even in that country the most vigorous
growth of socialistic sentiment came after Hegelianism had begun
to yield to Darwinian methods of thought, and this later growth
has been progressively less Marxian and less positive. Marxism is
now little more than a pro forma confession of faith. Avowed
socialism is practically taking on the character described above,
except so far as it has grown opportunist and has sought
affiliation with the liberal democratic movement and the
reformers.
20. Where members of the well-to-do classes avow socialistic
sentiments and ideals it commonly turns out to be a merely
humanitarian aspiration for a more "equitable" redistribution of
wealth, a readjustment of the seheme of ownership with some
improved safeguarding of the "reasonable" property claims of all
members of the community. What "socialist" reform commonly means
to this contingent of well-to-do irregulars is some seheme of
equal rights of ownership for all. Whereas to socialists of the
line equal rights of ownership is as idle a proposition as an
equal right of citizens to sell their votes. Instead of a reform
of ownership the socialists contemplate the traceless
disappearance of ownership.
21. Unless it be in the latest extremes of conservatism, such as
is shown in the recent of dynastic politics in Germany, Tory
policy in England, and predatory political ideals in America.
22. Socialistic notions are apprently making some inroads among
the rural population of the American prairie region, where a
mechanically organized and standardized method of farming
prevails, with a large use of mechanical appliances.
23. So striking has been the failure of the German socialists,
for instance, in their attempts upon the integrity of the farming
community, that they have latterly changed their tactics, and
instead of attempting to convert the peasants to a full
socialistic programme, they have turned to measures of
compromise, in which the characteristic and revolutionary
features of the socialistic programme are softened beyond
recognition, if not suppressed. The habits of life, and therefore
the habits of thought, of the peasant farmers move on the ancient
leveis of handicraft, pecuniary management, personal consequence,
and preseriptive custom.
24. If this account of the class limitation of the socialist bias
is accepted, it has an immediate bearing upon a question which is
latterly engaging the attention of the advocates of socialism.
The question is as to the part played by propertyless office
employees and by the business men whom the modern consolidations
of business reduce to the position of salaried managers and
superintendents. With a faith prompted by their own hopes rather
than by observed facts or by the logic of events, the spokesmen
for socialism are strongly inclined to claim this "business
proletariat" as a contingent which the course of economic
development is bound to throw into the socialist camp. The facts
do not in any appreciable degree countenance such an expectation.
The unpropertied classes employed in business do not take to
socialistic vagaries with such alacrity as should inspire a
confident hope in the advocates of socialism or a serious
apprehension in those who stand for law and order. Tbis
pecuniarily disfranchised business population, in its revulsion
against unassimilated facts, turns rather to some excursion into
pragmatic romance, such as Social Settlements, Prohibition, Clean
Politics, Single Tax, Arts and Crafts, Neighborhood Guilds,
Institutional Church, Christian Science, New Thought, or some
such cultural thimblerig. The work of the captain of industry in
curtailing the range of individual discretion in business and in
reducing the lesser undertakers to the rank of clerks and
subalterns need not be looked upon as unavoidably furthering the
spread of the socialistic bias, except in so far as the change
results in throwing the men affected by it out of the pecuniary
or business occupations and subjecting them to the discipline of
the mechanical industry. At the most, apparently, the change from
an independent to a dependent business life serves to weaken the
men's interest in the question of property; it does not appear
that it throws them into an attitude of substantial distrust or
iconoclasm. Their interest in this particular institution
slackens through the loss of that emulative motive on which
pecuniary endeavor proceeds, but their faith in its intrinsic
fitness is not thereby shaken, nor are they thrown into the tanks
of the chronic dissentients. The training given by their life
continues prevailingly to run on conventional grounds; that is to
say, on grounds of legal relation, solvency, and the like.
Accountants and office employees are nearly as couservative as
clergymen and lawyers, and their being so is apparently due to
the fact that their experience runs on much the same ground of
conventional finality.
25. Connected with this apparent selective action which the modem
specialization of occupations exerts, there is a further, and at
first sight more singular, point of disparity between the
socialists and the conservatives; and this difference has also a
curious correlation with the distribution of the machine
industry. In a degree, - slight and uncertain, perhaps, but
searcely to be mistaken, - the socialists and the conservatives
are apparently of different racial antecedents. It has been seen
above that the propaganda is most vital and widespread in the
industrial towns, as contrasted with the agricultural country.
But if the researches of such students as Ammon, Ripley, Lapouge,
Closson, and others that might be named, are taken at their face
value, it appears that the towns differ perceptibly from the open
country in point of race; and that the migration from the country
into the industrial towns has a selective effect of such a kind
that a larger proportion of one racial stock than of another
resorts to the towns. The towns, in those countries where data
are available, show a larger admixture of the dolicho-blond stock
than the open country. This seems to argue that the dolicho-blond
stock, or the racial mixture of the towns in which there is a
relatively large admixture of the dolicho-blond, is perceptibly
more efficient in the machine industries, more readily inclined
to think in materialistic terms, more given to radical
innovation, less bound by convention and prescription. This
generalization is strengthened by the fact that the more
dolicho-blond regions are also, on the whole, more socialistic
than those in which this element is less in evidence. At the same
time they are industrially in advance of the latter in the matter
of machine industry; and they are also Protestant (irreligious)
rather than Catholic.
26. This, of course, does not hold for the inoffensive
pseudo-socialistic diversions set afoot by various well-meaning
politicians and clergmen, known by various qualifying
designations, such as "State," "Christian," "Catholic," etc., and
desired to act as correctives of the socialistic distemper.
27. The cultural era of Natural Rights, Natural Liberty, and
Natural Religion reduced God to the rank of a "Great Artificer,"
and the machine technology is, in turn, relegating Him to that
fringe of minor employments and those outlying industrial regions
to which the handicraftsmen have been retired.
28. There is a similar suggestion in the relative (slight but
perceptible) decline of scientific animus in England since the
English community has turned its attention and aspirations to
imperialistic feats of prowess more than to industrial matters.
29. Compare, however, Sombart, Kapitalismus, especially vol. I.
ch. VIII and XV. Sombart finds the modern seientific concept of
cause and effect to be essentially an outcome of the discipline
of accountancy enforced by business traffic. So that he makes
business enterprise rather than mechanical industry accountable
for the rise of modern science and for the matter-of-fact
character which distinguishes this science. In this view there
is, no doubt, a large and valuable element of truth. To the end
of a mathematical formulation of causal phenomena as well as a
tenacious grasp of the principle of quantitative equivalence, the
accountancy enfoxed by the petty trade of early modern times, as
well as by commercial traffic proper, appears to have given the
most effective training. In so far as this element of
quantitative equivalence, simply, has dominated the growth of
science, it has given, as its most perfect product, Positivism.
Positivism flourished at its best and freest in France, where the
modern economic culture was commercial rather than mechanical.
And when the machine discipline seriously invaded France,
Positivism languished and died. But modern seience is not a
calculus simply. It deals not with calculations of quantitative
equivalence only, but with efficient causes, active relations,
creative foxes. The concept of efficient cause is not a
derivative of accountancy, nor is it formed in the image of
accountancy. But this generic concept of efficient cause, the
kinetic concept, antedates Positivism and has outlived it. In its
earlier (eighteenth-century) phase this concept shows close
relationship with the notion of workmanship, in its later
(nineteenth-century) use it has much in common with the notion of
mechanical efficiency.
30. Darwin, of course, does not stand alone. He is the great
exponent of a mass movement which involves a shifting of the
point of view and of the point of interest in seientific research
and speculation.
31. This is the substance of Darwin's advance over Lamarck, for
instance.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 10
The Natural Decay of Business Enterprise
Broadly, the machine discipline acts to disintegrate the
institutional heritage, of all degrees of antiquity and
authenticity - whether it be the institutions that embody the
principles of natural liberty or those that comprise the residue
of more archaic principles of conduct still current in civilized
life. It thereby cuts away that ground of law and order on which
business enterprise is founded. The further cultural bearing of
this disintegration of the received order is no doubt
sufficiently serious and far-reaching, but it does not directly
concern the present inquiry. It comes in question here only in so
far as such a deterioration of the general cultural tissues
involves a setback to the continued vigor of business enterprise.
But the future of business enterprise is bound up with the future
of civilization, since the cultural scheme is, after all, a
single one, comprising many interlocking elements, no one of
which can be greatly disturbed without disturbing the working of
all the rest.
In its bearing on the question in hand, the "social problem"
at large presents this singular situation. The growth of business
enterprise rests on the machine technology as its material
foundation. The machine industry is indispensable to it; it
cannot get along without the machine process, But the discipline
of the machine process cuts away the spiritual, institutional
foundations of business enterprise; the machine industry is
incompatible with its continued growth; it cannot, in the long
run, get along with the machine process. In their struggle
against the cultural effects of the machine process, therefore,
business principles cannot win in the long run; since an
effectual mutilation or inhibition of the machine system would
gradually push business enterprise to the wall; whereas with a
free growth of the machine system business principles would
presently fall into abeyance.
The institutional basis of business enterprise the system of
natural rights - appears to be a peculiarly instable affair.
There is no way of retaining it under changing circumstances, and
there is no way of returning to it after circumstances have
changed. It is a hybrid growth, a blend of personal freedom and
equality on the one hand and of prescriptive rights on the other
hand. The institutions and points of law under the natural-rights
scheme appear to be of an essentially provisional character.
There is relatively great flexibility and possibility of growth
and change; natural rights are singularly insecure under any
change of circumstances. The maxim is well approved that eternal
vigilance is the price of (natural) liberty. When, as now, this
system is endangered by socialistic or anarchistic disaffection
there is no recourse that will carry the institutional apparatus
back to a secure natural-rights basis. The system of natural
liberty was the product of a peaceful regime of handicraft and
petty trade; but continued peace and industry presently carried
the cultural growth beyond the phase of natural rights by giving
rise to the machine process and the large business; and these are
breaking down the structure of natural rights by making these
rights nugatory on the one hand and by cutting away the spiritual
foundations of them on the other hand. Natural rights being a
by-product of peaceful industry, they cannot be reinstated by a
recourse to warlike habits and a coercive government, since
warlike habits and coercion are alien to the natural-rights
spirit. Nor can they be reinstated by a recourse to settled peace
and freedom, since an era of settled peace and freedom would push
on the dominance of the machine process and the large business,
which break down the system of natural liberty.
When the question is cast up as to what will come of this
conflict of institutional forces - called the Social Problem - it
is commonly made a question of remedies: What can be done to save
civilized mankind from the vulgarization and disintegration
wrought by the machine industry?
Now, business enterprise and the machine process are the two
prime movers in modern culture; and the only recourse that holds
a promise of being effective, therefore, is a recourse to the
workings of business traffic. And this is a question, not of what
is conceivably, ideally, idyllically possible for the business
community to do if they will take thought and act advisedly and
concertedly toward a chosen cultural outcome, but of what is the
probable cultural outcome to be achieved through business traffic
carried on for business ends, not for cultural ends. It is a
question not of what ought to be done, but of what is to take
place.
Persons who are solicitous for the cultural future commonly
turn to speculative advice as to what ought to be done toward
holding fast that which is good in the cultural heritage, and
what ought further to be done to increase the talent that has
been intrusted to this generation. The practical remedy offered
is commonly some proposal for palliative measures, some appeal to
philanthropic, aesthetic, or religious sentiment, some endeavor
to conjure with the name of one or another of the epiphenomena of
modern culture. Something must be done, it is conceived, and this
something takes the shape of charity organizations, clubs and
societies for social "purity", for amusement, education, and
manual training of the indigent classes, for colonization of the
poor, for popularization of churches, for clean politics, for
cultural missionary work by social settlements, and the like.
These remedial measures whereby it is proposed to save or to
rehabilitate certain praiseworthy but obsolescent habits of life
and of thought are, all and several, beside the point so far as
touches the question in hand. Not that it is hereby intended to
cast a slur on these meritorious endeavors to save mankind by
treating symptoms. The symptoms treated are no doubt evil, as
they are said to be; or if they are not evil, the merits of that
particular question do not concern the present inquiry. The
endeavors in question are beside the point in that they do not
fall into the shape of a business proposition. They are, on the
whole, not so profitable a line of investment as certain other
ventures that are open to modern enterprise. Hence, if they
traverse the course of business enterprise and of industrial
exigencies, they are nugatory, being in the same class with the
labor of Sisyphus; whereas if they coincide in effect with the
line along which business and industrial exigencies move, they
are a work of supererogation, except so far as they may be
conceived to accelerate a change that is already under way.
Nothing can deflect the sweep of business enterprise, unless it
be an outgrowth of this enterprise itself or of the industrial
means by which business enterprise works.
Nothing can serve as a corrective of the cultural trend given
by the machine discipline except what can be put in the form of a
business proposition. The question of neutralizing the untoward
effects of the machine discipline resolves itself into a question
as to the cultural work and consequences of business enterprise,
and of the cultural value of business principles in so far as
they guide such human endeavor as lies outside the range of
business enterprise proper. It is not a question of what ought to
be done, but of what is the course laid out by business
principles; the discretion rests with the business men, not with
the moralists, and the business men's discretion is bounded by
the exigencies of business enterprise. Even the business men
cannot allow themselves to play fast and loose with business
principles in response to a call from humanitarian motives. The
question, therefore, remains, on the whole, a question of what
the business men may be expected to do for cultural growth on the
motive of profits.
Something they are doing, as others are, from motives of
benevolence, with a well-advised endeavor to maintain the
cultural gains of the past and to make the way of life smoother
for mankind in the future. But the more secure and substantial
results to be looked for in this direction are those that follow
incidentally, as byproducts of business enterprise, because these
are not dependent on the vagaries of personal preference, tastes,
and prejudices, but rest on a broad institutional basis.
The effects of business enterprise upon the habits and temper
of the people, and so upon institutional growth, are chiefly of
the nature of sequelae, It has already been noted that the
discipline of business employments is of a conservative nature,
tending to sustain the conventions that rest on natural-rights
dogma, because these employments train the men engaged in them to
think in terms of natural rights. It is unnecessary to return to
this topic here, except to notice that, in its severer, more
unmitigated form, this discipline in pecuniary habits of thought
falls on a gradually lessening proportion of the population. The
absolute number of business men, counting principals and
subordinates, is, of course, not decreasing, The number of men in
business pursuits, in proportion to the population, is also
apparently not decreasing; but within the business employments a
larger proportion are occupied with office routine, and so are
withdrawn from the more effectual training given by business
management proper. If such a decrease occurs in any country, it
is almost certainly not to be found in any other country than
America.
This business discipline is somewhat closely limited both in
scope and range. (1) It acts to conserve, or to rehabilitate, a
certain restricted line of institutional habits of thought, viz.
those preconceptions of natural rights which have to do with
property. What it conserves, therefore, is the bourgeois virtues
of solvency, thrift, and dissimulation. The nobler and more
spectacular aristocratic virtues, with their correlative
institutional furniture, are not in any sensible degree fortified
by the habits of business life. Business life does not further
the growth of manner and breeding, pride of Caste, punctilios of
"honor," or even religious fervor. (2) The salutary discipline of
business life touches the bulk of the population, the working
classes, in a progressively less intimate and less exacting
manner. It can, therefore, not serve to correct or even greatly
to mitigate the matter-of-fact bias given these classes by the
discipline of the machine process.
As a direct disciplinary factor the machine process holds
over the business employments, in that it touches larger classes
of the community and inculcates its characteristic habits of
thought more unremittingly, And any return to more archaic
methods of industry, such as is sometimes advocated on artistic
grounds, seems hopeless, since business interests do not
countenance a discontinuance of machine methods, The machine
methods that are corrupting the hearts and manners of the workmen
are profitable to the business men, and that fact seems to be
decisive on the point. A direct, advised return to handicraft, or
any similar discontinuance of the machine industry, is out of the
question; although something in the way of a partial return to
more primitive methods of industry need not be impracticable as a
remote and indirect consequence of the working of business
enterprise.
The indirect or incidental cultural bearing of business
principles and business practice is wide-reaching and forceful.
Business principles have a peculiar hold upon the affections of
the people as something intrinsically right and good. They are
therefore drawn on for guidance and conviction even in concerns
that are not conceived to be primarily business concerns. So,
e.g., they have permeated the educational system, thoroughly and
intimately. Their presence, as an element of common sense, in the
counsels of the "educators" shows itself in a naive insistence on
the "practical" whenever the scheme of instruction is under
advisement. "Practical" means useful for private gain. Any new
departure in public instruction, whether in the public schools or
in private endowed establishments, is scrutinized with this test
in mind; which results in a progressive, though not wholly
consistent, narrowing of instruction to such learning as is
designed to give a ready application of results rather than a
systematic organization of knowledge. The primary test is
usefulness for getting an income. The secondary test, practically
applied where latitude is allowed in the way of "culture"
studies, is the aptness of the instruction in question to fit the
learners for spending income in a decorous manner. Hence
quasi-scholarly accomplishments. Much of the current controversy
as to the inclusion or exclusion of one thing and another from
the current curriculum of secondary and higher schools might be
reduced to terms of one or the other of these two purposes
without doing violence to the arguments put forth and with a
great gain in conciseness and lucidity.
There is also a large resort to business methods in the
conduct of the schools; with the result that a system of
scholastic accountancy is enforced both as regards the work of
the teachers and the progress of the pupils; whence follows a
mechanical routine, with mechanical tests of competency in all
directions. This lowers the value of the instruction for purposes
of intellectual initiative and a reasoned grasp of the
subject-matter. This class of erudition is rather a hindrance
than a help to habits of thinking. It conduces to conviction
rather than to inquiry, and is therefore a conservative factor.
In the endowed schools there is, moreover, an increasing
introduction of business men and business methods into the
personnel and the administrative work. This is necessarily so
since these schools are competitors for students and endowments.
The policy of these schools necessarily takes on some thing of
the complexion of competitive business; which throws the emphasis
on those features of school life that will best attract students
and donors. The features which count most directly in these
directions are not the same as would count most effectively
toward the avowed ends of these schools. The standards which it
is found Operative to live up to are not the highest standards of
scholarly work. Courtesy as well as expediency inclines these
schools to cultivate such appearances and such opinions as may be
expected to find favor with men of wealth. These men of wealth
are business men, for the most part elderly men, who are, as is
well known, prevailingly of a conservative temper in all cultural
matters, and more especially as touches those institutions that
bear on business affairs.
A more far-reaching department of the educational system,
though not technically rated as such, is the periodical press,
both newspapers and magazines. This is a field of business
enterprise, and business principles may be expected to work more
consistently and to a more unqualified result in this field than
in the school system, where these principles come in
incidentally.
The current periodical press, whether ephemeral or other, is
a vehicle for advertisements. This is its raison d'etre, as a
business proposition, and this decides the lines of its
management without material qualification. Exceptions to the rule
are official and minor propagandist periodicals, and, in an
uncertain measure, scientific journals. The profits of
publication come from the sale of advertising space. The direct
returns from sales and subscriptions are now a matter of wholly
secondary consequence. Publishers of periodicals, of all grades
of transiency, aim to make their product as salable as may he, in
order to pass their advertising pages under the eyes of as many
readers as may be. The larger the circulation the greater, other
things equal, the market value of the advertising space. The
highest product of this development is the class of American
newspapers called "independent." These in particular - and they
are followed at no great interval by the rest edit all items of
news, comment, or gossip with a view to what the news ought to be
and what opinions ought to be expressed on passing events.(1*)
The first duty of an editor is to gauge the sentiments of his
readers, and then tell them what they like to believe. By this
means he maintains or increases the circulation. His second duty
is to see that nothing is said in the news items or editorials
which may discountenance any claims or announcements made by his
advertisers, discredit their standing or good faith, or expose
any weakness or deception in any business venture that is or may
become a valuable advertiser. By this means he increases the
advertising value of his circulation.(2*) The net result is that
both the news columns and the editorial columns are commonly
meretricious in a high degree.
Systematic insincerity on the part of the ostensible
purveyors of information and leaders of opinion may be deplored
by persons who stickle for truth and pin their hopes of social
salvation on the spread of accurate information. But the ulterior
cultural effect of the insincerity which is in this way required
by the business situation may, of course, as well be salutary as
the reverse. Indeed, the effect is quite as likely to be
salutary, if "salutary" be taken to mean favorable to the
maintenance of the established order, since the insincerity is
guided by a wish to avoid any lesion of the received
preconceptions and prejudices. The insincerity of the newspapers
and magazines seems, on the whole, to be of a conservative trend.
The periodical press is not only a purveyor of news,
opinions, and admonitions; it also supplies the greater part of
the literature currently read. And in this part of its work the
same underlying business principles are in force. The endeavor is
to increase the circulation at any cost that will result in an
increased net return from the sale of the advertising space. The
literary output of the magazines is of use for carrying the
advertising pages, and as a matter of business, as seen from the
standpoint of the business man's interest, that is its only use.
The standards of excellence that govern this periodical
literature seem fairly to be formulated as follows: (1) In each
given case it must conform to the tastes and the most ready
comprehension of the social strata which the particular
periodical is designed to reach; (2) it should conduce to a
quickened interest in the various lines of services and
commodities offered in the advertising pages, and should direct
the attention of readers along such lines of investment and
expenditure as may benefit the large advertisers particularly. At
least it must in no way hamper the purposes of the advertisers.
Nothing should go in a popular magazine which would cast a
sinister shadow over any form of business venture that advertises
or might be induced to advertise.(3*)
Taken in the aggregate, the literary output is desired to
meet the tastes of that large body of people who are in the habit
of buying freely. The successful magazine writers are those who
follow the taste of the class to whom they speak, in any
aberration (fad, mannerism, or misapprehension) and in any
shortcoming of insight or force which may beset that class. They
must also conform to the fancies and prejudices of this class as
regards the ideals - artistic, moral, religious, or social - for
which they speak. The class to which the successful periodicals
turn, and which gives tone to periodical literature, is that
great body of people who are in moderately easy circumstances.
Culturally this means the respectable middle class (largely the
dependent business class) of various shades of conservatism,
affectation, and snobbery. (4*)
On the whole, the literature provided in this way and to this
end seems to run on a line of slightly more pronounced
conservatism and affectation than the average sentiment of the
readers appealed to. This is true for the following reason.
Readers who are less conservative and less patient of
affectations, snobbery, and illiberality than the average are in
the position of doubters and dissentients. They are less
confident in their convictions of what is right and good in all
matters, and are also not unwilling to make condescending
allowances for those who are less "advanced," and who must be
humored since they know no better; whereas those who rest
undoubting in the more conservative views and a more intolerant
affectation of gentility are readier, because more naive, in
their rejection of whatever does not fully conform to their
habits of thought.
So it comes about that the periodical literature is, on the
whole, somewhat more scrupulously devout in tone, somewhat more
given to laud and dilate upon the traffic of the upper leisure
class and to carry on the discussion in the terms and tone
imputed to that class, somewhat more prone to speak deprecatingly
of the vulgar innovations of modern culture, than the average of
the readers to whom it is addressed. The trend of its teaching,
therefore, is, on the whole, conservative and conciliatory. It is
also under the necessity of adapting itself to a moderately low
average of intelligence and information; since on this head,
again, it is those who possess intelligence and information that
are readiest to make allowances; they are, indeed, mildly
flattered to do so, besides being the only ones who can. It is a
prime requisite to conciliate a large body of readers.
This latter characteristic is particularly evident in the
didactic portion of the periodical literature. This didactic
literature, running on discussions of a quasi-artistic and
quasi-scientific character, is, by force of the business
exigencies of the case, de signed to favor the sensibilities of
the weaker among its readers by adroitly suggesting that the
readers are already possessed of the substance of what purports
to be taught and need only be fortified with certain general
results. There follows a great spread of quasi-technical terms
and fanciful conceits. The sophisticated animal stories and the
half-mythical narratives of industrial processes which now have
the vogue illustrate the results achieved in this direction.
The literary output issued under the surveillance of the
advertising office is excellent in workmanship and deficient in
intelligence and substantial originality. What is encouraged and
cultivated is adroitness of style and a piquant presentation of
commonplaces. Harmlessness, not to say pointlessness, and an
edifying, gossipy optimism are the substantial characteristics,
which persist through all ephemeral mutations of style, manner,
and subject-matter.
Business enterprise, therefore, it is believed, gives a
salutary bent to periodical literature. It conduces mildly to the
maintenance of archaic ideals and philistine affectations, and
inculcates the crasser forms of patriotic, sportsmanlike, and
spendthrift aspirations.
The largest and most promising factor of cultural discipline
- most promising as a corrective of iconoclastic vagaries - over
which business principles rule is national politics. The purposes
and the material effects of business politics have already been
spoken of above, but in the present connection their incidental,
disciplinary effects are no less important. Business interests
urge an aggressive national policy and business men direct it.
Such a policy is warlike as well as patriotic. The direct
cultural value of a warlike business policy is unequivocal. It
makes for a conservative animus on the part of the populace.
During war time, and within the military organization at all
times, under martial law, civil rights are in abeyance; and the
more warfare and armament the more abeyance. Military training is
a training in ceremonial precedence, arbitrary command, and
unquestioning obedience. A military organization is essentially a
servile organization. Insubordination is the deadly sin. The more
consistent and the more comprehensive this military training, the
more effectually will the members of the community be trained
into habits of subordination and away from that growing
propensity to make light of personal authority that is the chief
infirmity of democracy. This applies first and most decidedly, of
course, to the soldiery, but it applies only in a less degree to
the rest of the population. They learn to think in warlike terms
of rank, authority, and subordination, and so grow progressively
more patient of encroachments upon their civil rights. Witness
the change that has latterly been going on in the temper of the
German people.(5*)
The modern warlike policies are entered upon for the sake of
peace, with a view to the orderly pursuit of business. In their
initial motive they differ from the warlike dynastic politics of
the sixteenth, seventeenth, and eighteenth centuries. But the
disciplinary effects of warlike pursuits and of warlike
preoccupations are much the same what ever may be their initial
motive or ulterior aim. The end sought in the one case was
warlike mastery and high repute in the matter of ceremonial
precedence; in the other, the modern case, it is pecuniary
mastery and high repute in the matter of commercial solvency. But
in both cases alike the pomp and circumstance of war and
armaments, and the sensational appeals to patriotic pride and
animosity made by victories, defeats, or comparisons of military
and naval strength, act to rehabilitate lost ideals and weakened
convictions of the chauvinistic or dynastic order. At the same
stroke they direct the popular interest to other, nobler,
institutionally less hazardous matters than the unequal
distribution of wealth or of creature comforts. Warlike and
patriotic preoccupations fortify the barbarian virtues of
subordination and prescriptive authority. Habituation to a
warlike, predatory scheme of life is the strongest disciplinary
factor that can be brought to counteract the vulgarization of
modern life wrought by peaceful industry and the machine process,
and to rehabilitate the decaying sense of status and differential
dignity. Warfare, with the stress on subordination and mastery
and the insistence on gradations of dignity and honor incident to
a militant organization, has always proved an effective school in
barbarian methods of thought.
In this direction, evidently, lies the hope of a corrective
for "social unrest" and similar disorders of civilized life.
There can, indeed, be no serious question but that a consistent
return to the ancient virtues of allegiance, piety, servility,
graded dignity, class prerogative, and prescriptive authority
would greatly conduce to popular content and to the facie
management of affairs. Such is the promise held out by a
strenuous national policy.
The reversional trend given by warlike experience and warlike
preoccupations, it is plain, does not set backward to the regime
of natural liberty. Modern business principles and the modern
scheme of civil rights and constitutional government rest on
natural-rights ground. But the system of natural rights is a
halfway house. The warlike culture takes back to a more archaic
situation that preceded the scheme of natural rights, viz. the
system of absolute government, dynastic politics, devolution of
rights and honors, ecclesiastical authority, and popular
submission and squalor. It makes not for a reinstatement of the
Natural Rights of Man but for a reversion to the Grace of God.
The barbarian virtues of fealty and patriotism run on
national or dynastic exploit and aggrandizement, and these
archaic virtues are not dead. In those modern communities whose
hearts beat with the pulsations of the world-market they find
expression in an enthusiasm for the commercial aggrandizement of
the nation's business men, But when once the policy of warlike
enterprise has been entered upon for business ends, these loyal
affections gradually shift from the business interests to the
warlike and dynastic interests, as witness the history of
imperialism in Germany and England. The eventual outcome should
be a rehabilitation of the ancient patriotic animosity and
dynastic loyalty, to the relative neglect of business interests.
This may easily be carried so far as to sacrifice the profits of
the business men to the exigencies of the higher politics.(6*)
The disciplinary effect of war and armaments and imperialist
politics is complicated with a selective effect. War not only
affords a salutary training, but it also acts to eliminate
certain elements of the population. The work of campaigning and
military tenure, such as is carried on by England, America, or
the other civilizing powers, lies, in large part, in the low
latitudes, where the European races do not find a favorable
habitat. The low latitudes are particularly unwholesome for that
dolicho-blond racial stock that seems to be the chief bearer of
the machine industry. It results that the viability and the
natural increase of the soldiery is perceptibly lowered. The
service in the low latitudes, as contrasted with Europe, for
instance, is an extrahazardous occupation. The death rate,
indeed, exceeds the birth rate. But in the more advanced
industrial communities, of which the English and American are
typical, the service is a volunteer service; which means that
those who go to the wars seek this employment by their own
choice. That is to say, the human material so drawn off is
automatically selected on the basis of a peculiar spiritual
fitness for this predatory employment; they are, on the whole, of
a more malevolent and vagabond temper, have more of the ancient
barbarian animus, than those who are left at home to carry on the
work of the home community and propagate the home population. And
since the troops and ships are officered by the younger sons of
the conservative leisure class and by the buccaneering scions of
the class of professional politicians, a natural election of the
same character takes effect also as regards the officers. There
results a gradual selective elimination of that old-fashioned
element of the population that is by temperament best suited for
the old-fashioned institutional system of status and servile
organization.(7*)
This selective elimination of conservative elements would in
the long run leave each succeeding generation of the community
less predatory and less emulative in temper, less well endowed
for carrying on its life under the servile institutions proper to
a militant regime. But, for the present and the nearer future,
there can be little doubt but that this selective shaping of the
community's animus is greatly outweighed by the contrary trend
given by the discipline of warlike preoccupations. What helps to
keep the balance in favor of the reversional trend is the
cultural leaven carried back into the home community by the
veterans. These presumptive past masters in the archaic virtues
keep themselves well in the public eye and serve as exemplars to
the impressionable members of the community, particularly to the
less mature.(8*)
The net outcome of the latter-day return to warlike
enterprise is, no doubt, securely to be rated as fostering a
reversion to national ideals of servile status and to
institutions of a despotic character. On the whole and for the
present, it makes for conservatism, ultimately for reversion.
The quest of profits leads to a predatory national policy.
The resulting large fortunes call for a massive government
apparatus to secure the accumulations, on the one hand, and for
large and conspicuous opportunities to spend the resulting
income, on the other hand; which means a militant, coercive home
administration and something in the way of an imperial court life
a dynastic fountain of honor and a courtly bureau of ceremonial
amenities. Such an ideal is not simply a moralist's day-dream; it
is a sound business proposition, in that it lies on the line of
policy along which the business interests are moving in their own
behalf. If national (that is to say dynastic) ambitions and
warlike aims, achievements, spectacles, and discipline be given a
large place in the community's life, together with the
concomitant coercive police surveillance, then there is a fair
hope that the disintegrating trend of the machine discipline may
be corrected. The regime of status, fealty, prerogative, and
arbitrary command would guide the institutional growth back into
the archaic conventional ways and give the cultural structure
something of that secure dignity and stability which it had
before the times, not only of socialistic vapors, but of natural
rights as well. Then, too, the rest of the spiritual furniture of
the ancient regime shall presumably he reinstated; materialistic
scepticism may yield the ground to a romantic philosophy, and the
populace and the scientists alike may regain something of that
devoutness and faith in preternatural agencies which they have
recently been losing. As the discipline of prowess again comes to
its own, conviction and contentment with whatever is authentic
may return to distracted Christendom, and may once more give
something of a sacramental serenity to men's outlook on the
present and the future.
But authenticity and sacramental dignity belong neither with
the machine technology, nor with modern science, nor with
business traffic. In so far as the aggressive politics and the
aristocratic ideals currently furthered by the business community
are worked out freely, their logical outcome is an abatement of
those cultural features that distinguish modem times from what
went before, including a decline of business enterprise
itself.(9*)
How imminent such a consummation is to be accounted is a
question of how far the unbusinesslike and unscientific
discipline brought in by aggressive politics may be expected to
prevail over the discipline of the machine industry. It is
difficult to believe that the machine technology and the pursuit
of the material sciences will be definitively superseded, for the
reason, among others, that any community which loses these
elements of its culture thereby loses that brute material force
that gives it strength against its rivals. And it is equally
difficult to imagine how any one of the communities of
Christendom can avoid entering the funnel of business and
dynastic politics, and so running through the process whereby the
materialistic animus is eliminated. Which of the two antagonistic
factors may prove the stronger in the long run is something of a
blind guess; but the calculable future seems to belong to the one
or the other. It seems possible to say this much, that the full
dominion of business enterprise is necessarily a transitory
dominion. It stands to lose in the end whether the one or the
other of the two divergent cultural tendencies wins, because it
is incompatible with the ascendancy of either.
NOTES:
1. "Ought", is of course here used to denote business expediency,
not moral restraint.
2. As a side line, which affords play for the staff's creative
talent, whatever is exceptionally sensational at the same time
that it is harmless to the advertisers' interests should, in
newspaper slang be "played up".
3. Business enterprises that are not notable advertisers may be
roundly eken to task, as, e.g., the Standard Oil Company or the
American Sugar Refining Company; and, indeed, it may be shrewd
management to abuse these concerns, since such abuse redounds to
the periodical's reputation for popular sympathy and
independence.
4. "Snobbery" is here used without disrespect, as a convenient
term to denote the element of strain involved in the quest of
gentility on the Part of persons whose accustomed social sending
is less high or less authentic than their aspirations.
5. Cf., e.g., Maurice Lair, l'Imperialism allemand, especially
ch. II and III. The like change of sentiment is visible in the
British community. Cf. Hobson, Imperialism, especially pt II, ch.
I and III.
6. Cf., e.g., Hobson, Imperialism, p. II, chap. VII.
7. The selective effect of warfare, both ancient and modern, has
been discussed by various writers. Protracted wars Or a warlike
policy always have some such effect, no doubt, and in old times
this has shown itself to be a serious cultural factor. It is
commonly regarded that the selection results in an elimination of
the "best" human material. Perhaps the most cogent spokesman for
this view is D.S. Jordan, The Blood of the Nation. The "best" in
this case must be taken to mean the best for the prupose, not
necessarily for other purposes. In such a case as the Chinese or
the Jewish peoples, e.g., a very long-continued, though not in
both cases a close, selective elimination of the peace-dturbing
elements has left a residue that is highly efficient ("good") in
certain directions, but not good war material. The case of the
North-European peoples, however, in the present juncture is
somewhat different from these. Racially, the most efficient war
material among them seems to be those elements that contain an
appreciable admixture of the dolicho-blond stock. These elements
at the same time are apparently, on the whole, also the ones most
generally endowed with industrial initiative and a large,
aptitude for the machine technology and scientific research.
Selective elinination by war and military tenure in the case of
these peoples should, therefore, apparently lower both their
fighting capacity and their industrial and intellectual capacity;
so that, by force of this double and cumulative effect, the
resulting national decline should in their case be comprehensive
and relatively precipitate.
8. With the complement of archaic virtues that invests these
adepts there is also associated a fair complement of those more
elemental vices that are growing obsolete in the peaceable
civilized communities. Such debaucheries, extravagances of
cruelty, and general superfluity of naughtiness as are nameless
or impossible in civil life are blameless matters of course in
the service. In the nature of the case they are inseparable from
the service. The service commonly leaves the veterans physical,
intellectual, and moral invalids (as witness the records of the
Pension Office). But these less handsome concomitants of the
service should scarcely be made a point of reproach to those
brave men whose devotion to the flag and the business interests
has led them by the paths of disease and depravity. Nor are the
accumulated vices to be lightly condemned, since their weight
also falls on the conservative side; being archaic and
authenticated, their cultural bearing is, on the whole, salutary.
9. See Chapter VIII, pp. 347-350.
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