Part III

PART III THE CREATION OF THE COMMUNITY OF ACQUISITION AND THE FORMATION OF INCOME A. Weber, Ueber den Standort der Indtustrien, 2nd ed., 1922; Sombart, Das moderne Kapitalismus, 1902; Schumpeter, Das Grundprinzip der Verteilungs lehre, 1923; Wicksteed, The Ooordtination of the Laws of Distribution, 1894; Sux, Die Verkehrsmittel in Volks-und Staatswirtsohaft, 1918-22; Davenport, Eoonomics of Enterprise, 1913; Marshall, Industry and Trade, 2nd ed., 1919; Mitchell, Business Oycles, 1913; Pigou, Economics of Welfare, 1920; Veblen, Theory of the Leisure Glass, 1918; Diehl, Die L(3!hre von der Production, 1924; Mayer, Wesen des Einkommens, 1887; Schiiflle, Theorie der ausschlieszenden Ab satzverhiUtnis'se, 1867; Schumpeter, Das Rentenprinzip in der Verteilwngslehre, J. F. G. V., 1907; Naumann, Stiidtische (Jru,ndrente, Z. F. V., 1909; Wieser, Theorie des sUidt. Grundrente,1909; Oppenheimer, Wert und Kapitalprofit, 2nd ed., 1922; Budge, Der ](apitalprofit, 1920; Mataja, Unternehmergewinn, 1884; Brentano, Das. Arbeit'sverhiiltnis gemiisz dem heutigen Recht, 1877; and, Die Lehre von dem Lohnsteigerungen, J. f. N., 1871; Taussig, Wages and Oapital, 1896; Herkner, Arbeiterfrage, 7th ed., 1921; Zwiedineck, Lohntheorie und Lohn poUtik, 1900; Bernhard, Arbeit, E. d. V.; Schuller, Die Nachfrage nach Arbeit skriiften, Archiv, 1911; Pesl, Mindeslohn, 1914; Verrijn Stuart, Die Grundlagen der Lohnbestimmung, Z,. F. Volksw., 1922.

§ 60. THE DIVISION' OF LABOR Horizontal and vertical divisioo of labo~The articulation of labon-Funda m,entals ,a,na latos. of the articulation of labor. The most striking feature of the entire structure of the economic community of acquisition is the division of labor which is more con spicuous than the community of acquisition itself and was therefore observed at an earlier date. Only subsequently was it realized that the observed division of labor is the expression of an extensive com munity which unites all those who take part in labor. The division of labor was peculiarly in accord with the ideals of the classical masters; it harmonizes with their theory of labor and with their individualism, both of which place the individual workers in the foreground of theoretical inquiry. From his point of view, Adam Smith could not have found a more suitable introduction to his work on the Wealth of Nations than his remarks concerning the extraordinary effects of 309 310 SOCIAL ECONOMICS the division of labor, which, he says, has contributed more than any thing else to increase its productivity.l He explains these effects from the example of a small Scotch pin fac tory which he had visited. We shall briefly reproduce this illustration which has become famous in the history of our literature. We call at tention to it not merely because of the clearness and pregnancy with which it presents the problem to the reader but even more because it shows unmistakably the limits that confine the classical view of the subject. In this pin factory ten workers were employed; there were approximately eighteen operations required to get the pins· ready for packing and shipping. These started with the drawing out and smoothing of the wire. The eighteen processes were divided among the men. Owing to the' ingenious distribution of their labors they were able to turn out 48,000 pins daily, an average of 4800 pins per man. Adam Smith believes that if one of the men had been working alone he could not have turned out more than twenty pins at best, and perhaps only a single pin. He thus calculcates that the division of labor in this case has increased productivity at least 240 fold, pos sibly even 4800 fold.

The illustration is too narrow in that it does not show the large share in augmenting the yield that is attributable to a division of capital goods and the soil; and in that it shows only the favorable effects of the increase of the yield without even alluding to the. numerous and grave disadvantages which may appear a.s a consequence of the division of labor. In both these respects the development of the classi cal doctrine has supplemented the statement of its founder. But as regards a third consideration, it has never advanced beyond the limits set in this illustration. The ten workmen to whom Adam Smith re fers perform coordinate operations and his example illustrates that type of differentiation which in our "theory of economic society" we designated as.horizontal articulation. Actually there is also a vertical stratification in the division of labor. It gives rise to relations of superiority and subordination such as we witness in the case of the entrepreneur and the body of wage earners.

It is quite clear that the classical doctrine did not fail to observe this important relationship; it fully appreciated the heavy pressure with which this condition bore down upon the mass of laborers. Adam Smith was· particularly aware of it and pursued the concept of free dom not only theoretically but with a fully sympathetic penetration. Still he and his school neglected to refer their observations on the 1 Inquiry into The Wealth of Nations, vol. I, chap. 1.

THE 0 R Y OF SO CIAL E,C'ON OMlY 311 wage relationship back to the division of labor. From the very be ginning the two dimensions of the division of labor should have been distinguished in order to show how it divides the acquisitive commu nity not only into 'a lateral framework of trades, enterprises and operations but also into a vertical relationship of power and de pendency. The structure of the economic whole is seen first from a deceptive angle if the two functions of articulation and stratification in the division of labor are confused. For the present we shall refer exclusively to the articulation of labor. Of its stratification we shall speak later when we come to dis cuss the stratification of wealth. We may pass over the details of the manifold forms of the organiza tion' of labor. They are of little importance in the erection of' the acquisitive community. It will answer every purpose if we describe the phenomenon as a. whole; this can be done in a few words. The domestic production ofa closed economy is so organized as to pro vide for the total needs of the household. But in so far as the division of labor extends, every individual confines himself to the preparation of a narrow group or single variety of products or other natural values. He may even confine himself' to the performance of a re stricted group of functions that are required along with others for the preparation of a product. In a well organized national economy the labors of individuals supplement one another so that, according to the standard of existing means, the entire needs of the people are provided for. How does this enormous process of the organization of work develop 1 Why is it that men, workers generally, divide and apportion labor among themselves 1 To what extent does this division proceed? Who directs the process? These are the questions which we must answer.

Adam Smith explains the division of labor or, as we shall call it, the articulation of labor from its effect of increasing yield. This he explains, for one thing, by the saving of time achieved by the in dividual worker who confines himself to a certain number of repetitive performances, with a resulting increase in skill acquired by persistent practice. However he has shown that at anyone time definite limits to the articulation of labor are set by the extent of the market. In a limited market with a moderate demand such as occurs even today in the more remote sections of a country, the producer will not find a sufficient number of purchasers for articles of anyone kind. In or der to prosper he must therefore turn out a larger variety of articles. On the other hand, in the much frequented market of a large city, or in an industry which supplies a nation or the world, it will be possible 812 SOCIAL ECONOMICS to carry the articulation of labor to much greater lengths, provided the increased quantities may be remuneratively sold.

The propelling force in this social process is the expectation of ob taining yields and an increased income by more advanced methods in the articulation of labor. This furnishes to the individuals united in commerce both the motive and standard for the movement. The explanation offered by Adam Smith has been most carefully supplemented by his disciples until everything that may be stated re garding the articulation of labor from the standpoint of the indi vidual has been gathered into their records. The entire doctrine has long been the common property of science. It may be. indorsed without reserve provided the process is confined to the forceful and leading personalities who succeed in aptly adjusting their actions to the requirements of their' well-considered advantage. This limitation is assumed by the individualist doctrine to be implicit in the process. We may be sure that the great mass of humanity actually decides here as elsewhere aecording to the cooperative economic principle; in the articulation of labor the average man will go just so far as others went before him or as his fellows do every day.

All that can be said from the point of view of the individual is by no means equivalent to the last word of science on the articulation of labor: its foundations, its effects, its limits. The individual is invariably dropped into the midst of the his torically formed process of the division of labor. His observation and reflection are turned to but one problem: whether, and to what ex tent, it is advisable to advance beyond the degree of division hitherto practiced. It is neither his intention nor within his power to look back upon the whole process and survey the sum of its effects. This must be done by theoretical inquiry. It has not been done by the in dividualistic school. The latter, clinging to considerations of the market, attends' merely to the monetary form of the process; but back of the money form hovers the natural form whose description is one of the missions of theory. The articulation of labor is not merely a phenomenon of the money economy. Smith's ten Scotch workers would have apportioned their performances among themselves in exactly the same manner had they worked, not for the market, but as cooperators in a socialist state.

In every economy bent upon a larger yield, no matter what the juridi cal organization, the articulation of labor is indispensable. Even a Crusoe in his individual economy would provide for an ample articula tion as soon as his means allowed him to supply his needs more abundantly. For his various activities he would make a definite THE 0 R Y 0 F SOC I ALE CO NOM Y 313 division of time, an adjustment of the hours which he would devote to each type of performance. Assuming that he reached a stage where he could make pins, he also would be able to divide his labors in this process. Like the Scotch craftsmen, he would draw the wire of a length to produce a number of pins and he would lump the individual manipulations to be performed in succession. With some little prac tice he might be able to turn out not one pin daily but possibly more than the twenty pins which A.dam Smith expected of the single iso lated worker who had no idea of the advantage to be derived from the articulation of labor.

In order to gain a view of those conditions of the articulation of labor which are apt to elude individual observation, we must first recognize that the prerequisite to this partitioning of labor is its variety. Wholly simple labor cannot. be apportioned among persons because technically it is not divisible. So long as mankind knew no other method of acquiring goods than hunting, men had to be hunters in order to live. In order that the articulation of labor might be initiated and continued, it was necessary that the diverse methods of productive work afforded by agriculture and the trades be discovered and that sufficient quantities of the various types of agricultural and industrial capital goods be. produced. The forces which here guided mankind are not only personal but social impulses. A small tribe of hunters might well confine itself to the simple indivisible labor of hunting whereby to provide, pre cariously and scantily, the needs of its members. But by their natures men are fitted to respond to an increasing number of needs. These they presently discover as civilization progresses. More still, the ever increasing numbers of the population to be provided for urge an im provement in the arts and an increase in the instruments of labor.

But how is this goal to be attained other than by penetrating deeper and deeper into the more remote orders of the economic elements, harboring in their hidden recesses the most bountiful treasures of life Y If we would bring these to light, we must apply the enormous forces of united effort by the masses before which the power of the indi vidual, in the apt comparison of Karl Marx (Capital, vol. I, sec. 1, ch. II), is as the offensive or defensive power of the single warrior against a host. To be brief, we must apply the community of production of mankind. The articulation of labor is the personal expression of thi! social community,£ormed long ago, carried along through the ages by historical powers and progressively developed. Into this exist ant whole the individual is set as a coordinate unit. In so far as he is bound to rely upon his labor for self-preservation, he must somehow 314 SOC I ALE C ON 0 M I C S form a link in the chain of the· general community of labor. Positive law may guarantee to the worker a certain limited freedom of choice in directing his demands and supply; but it can never liberate· him from the necessity of demanding and of offering a supply, if he would live. Thus he must· submit to the general conditions of the market.

We do not mean to deny that personal advantage is the main incentive leading men to an articulation of labor,· but it··must be added that they no more have complete freedom of choice in this respect than they do in their economy generally. Though they feel personally free, their freedom here as elsewhere is under the regis of social powers. The methods by which individuals seek their personal ad vantage are socially indicated;· workers turn from old overcrowded trades where adequate inducements are no longer offered to new comers, to lines indicated by the tendencies of the time. Developing past experiences, zealously testing every new opening, the leaders advance step by step. The masses follow as the success or failure of their teachers encourages or disheartens the crowd. The entire de velopment rests upon the basis of tradition and forms a continuous development. The scope of the activities of. the average worker is the personal exponent of the degree of energy attained by the social community of acquisition. The greater this energy, the narrower is his field. If it were possible to imagine that the infinite field of the world's activ ity were served by as homogeneously organized a group of all workers as is a close network of railroads by its employees, and that this group we're aided by the uniformly organized apparatus of the world's capital, then the· average breadth of the field might possibly be as narrow, compared with that of today, as the latter is in comparison with that of the Middle Ages.

The dependence on the market establishes in monetary form the limits to the articulation of .labor . This can be traced back to the dependence of the· natural field of an individual's labor on the social community of acquisition. The ultimate basis for the articulation of labor is in the superior energy of this social community. The limit of its extension is always indicated by the point where this superiorit;y ends. § 61. THE LOCALIZATION OF INDUSTRY Town and Oowntry-The· naturaZ historical form, of economic acquisition. The division of town and country is an historical result of the articulation of labor. Although in periods of insecurity the peasantry THE 0 R Y 0 F SOC I ALE CO NOM Y 315 may jointly set up their abodes behind protective walls, agricultural labor is, in the nature of things, spread over the soil. But nascent trades and industries early located the seats of their activities in the towns. Here, too, the leading motive may have been protection against hostile powers which was needed in turbulent times even more urgently by industrial wealth than by the humble farmer. The re quirements of the great men of the church and state may have offered another reason. But in the last instance the scales were turned by considerations of remuneration. A highly articulated trade seeking correspondingly large yields breaks through the framework of domes tic and village economy. Less dependent on the soil, it endeavors to secure the utmost concentration. One craftsman needs another in order to obtain the wherewithal to practice his trade; one and aU they need the merchant and trader who facilitates· their intercourse with foreign places. Then the fact that they are thus brought to gether in one place creates for the artisan as well as .for the mer chant a local market of mutual exchange. The proverbial "golden soil" tilled by the craftsman of the Middle Ages made these men mutually receptive customers for each other's handiwork. But in the cities they also.found the demand of the great men of the state and of the liberal professions. These conditions would have held even had the urban centers not been naturally the most convenient rend cheapest market for the surrounding country. Finally, the concen tration of nascent industries in definite· localities led to the organiza tion of guilds, which opened the way to a far-seeing and comprehen sive ·policy for the protection of mutual interests, while the various governments were induced in their economic administration to tak9 an active interest in these matters.

The segregation of town and country is the fundamental manifes tation of the economic localization of industry. It marks on the economic map the more densely populated points of urban acquisi tion. Succeeding stages of development have brought out more clearly the images of town and country. Agriculture extends from the earliest settlements step by step over the entire area of a country which is fitted for cultivation, and little by little there arise about the urban centers those zones of agricultural activity which Thiinen in the Isolated State has described in so mas terly a fashion. Thiinen sought to ascertain arithmetically the de pendence of industries on the costs of transportation which must be incurred to bring agricultural products to the town. To do this, he applies the instrument of idealization in a most far-reaching manner. He assumes a single urban market about which the natural 316 SOCIAL ECONOMICS conditions of cultivation and transportation are identical in all direc tions. Thus he obtains an entirely regular configuration·· of zones of dairying, farming, forestry and other branches of agriculture. These are distributed in rings around the town. We know that the actual outline of this distribution is irregular because of the varying distri bution of the natural factors of soil and routes of transportation.

What we find are not rings, but variously designed zones in which the forms of cultivation are adapted to the urban market. Inter spersed with these are zones whose produce is destined for the foreign market, with here and there others which are to provide for the domes tic wants of the farmer. The extraordinary technical development of the last· century has also largely affected the growth of cities. So marked has this been, that in many cities the population has increased even more than in the rural districts. Only such cities as offer no opportunities for modern business life drop behind. On the other hand, the surpi us rural population congregates in those cities whose industrial progress offers new opportunities to the leaders and the masses in their struggle for existence. The· advantages of local concentration are no less attractive under modern conditions for the trades and industries than they were earlier. To be sure, the security of life and liberty and the protection of his property are now guaranteed to every man anywhere in the country. But over and above these immunities, the more impor tant cities have become the centers of modern transportation; they have gained importance as the seats of numerous public offices; the organ ization of credit is there represented; and there, the most reliable in formation of the business world may be most quickly obtained. The exchanges have long been established in the largest cities. The' cities are the principal destinations towards which flock travelling for eigners. Hence they also supply the market for these visitors. ;M:ore-.

over, every large city is of itself an important local consuming center and labor market which attracts· new dwellers from the country. As a rule all other cities are eclipsed in size and importance by the polit ical capital of the country, which unless special conditions prevent, is also the intellectual, social and commercial center of the .land as well as the pivotal point of all traffic facilities. Plainly in the case of the capital, the formative influence of historical power is to he seen; the supremacy is not so much 'an economic and geographical one, as it is one dictated by historical traditions. The capital has· received a preeminence through state institutions of every description and through the habits of life inculcated in the mass of the people. These assure it a further: and continued distinction so long as new developTHE 0 R Y 0 F S OC I ALE CON 0 M Y 317, ments do not overcome it by elsewhere giving rise to the growth of superior historical forces.

Modern industry has also made its way far out into the open coun try wherever the resources of the soil in raw materials or of auxiliary materials, or willing· and cheap labor offer inducements to its loca tion. The routes of transportation, railroads or rivers and other waterways, also frequently determine the choice of industrial loca tion. Especially those districts are much sought after where large deposits of coal or great water power are at hand for the liberation of the enormous energies which must be harnessed for modern in' dustry. These remarks show only in the most general outline the picture of the distribution of productive enterprise. Yet they are sufficiently precise to permit the theoretically significant conclusion that in local izing the centers of production and acquisition the community of exchange is guided by those economico-geographic conditions which are given by natural position and historical development. The aims of private interest, seeking the greatest remuneration, and social in terest, desiring the highest natural yield, converge here, in so far as the demands of the wealthier strata do not deflect private interest to an undue extension of the local zones devoted to the production of comforts and luxuries.

Historical pO'wer is conservative and favors the older industrial centers. It shows its preference for these, while other conditions are equal; but it is not sufficiently strong to prevent the rise of new his torical institutions when new technical processes utilize new natural conditions. The historically acquired power of the old centers of acquisition in a unified natural economy gives an effective aid to the general development. As a result the natural sources of national wealth in their local distribution will always be exploited in a degree corresponding to the stage of development generally attained. § 62. THE ECONOMIC STRATIFICATION OF SOCIErry Stratification in antiquity and the Middle Ages~In modern times and the capitalistic age-D'ownward stratification in the trades-The modern proletanat of the workers-Da.ngers of. proletarization in the country. The structure of the acquisitive community and the formation of income are always determined by the stratification of the people.

At every stage of civilization and in any given period, despite indi vidual diversities, there is a certain typical social stratification to 318 SOCIAL ECONOMICS. which the general order is· adjusted. The classical theory has taken the typical condition, as it existed for the civilized nations of their own period, as the foundation for its investigations of acquisition and in come. Without establishing theoretically the concept of stratification the theorists of the period were· none the less too strongly under the in fluence of the conditions which surrounded them, not to give theoreti cal expression to the facts of stratification. For instance, they could never have described the formation of income without recognizing the· existence of a class of laborers wholly without wealth and ob taining its income solely in the form of wages.. Similarly the theoreti cal investigations of today reflect the important displacements which social stratification has undergone since the period of the classical masters. We shall take a step in advance; we shall expressly distin guish the vertical and horizontal articulations of labor, as set forth in our precis of social theory, in order to discriminate accurately between the effects of the two types of social order. As in the case of all other assumptions, we must be clearly aware of those we make in regard to stratification. Thus weare compelled to give a description of the prevailing typical stratification, which we shall wor.k out in such de tail as our investigation requires.

In the world of antiquity. and of the Middle Ages the governing strata of priests and warriors, great men of the church and state, were raised to their eminence by the· power of leadership. This they· had won in the process of the formation of states and in the cultural evo lution :Which invariabl~ accompanied this process. The cultural growth, starting from the religious, created sciences and arts and, with these, the industrial or practical arts. The governing strata profited by their spiritual and secular power in order to secure for themselves the greatest economic power as well. Thus they became the· great owners of land, holding multitudes of slaves and servitors. in subjection. The effects of the positions of power, which were seized by the great lords of the Middle Ages in Europe, may be felt to this very day. To be sure, serfdom and vassalage have been done away with every where, but in many of the old countries the intellectual standard of the peasantry is perceptibly a survival of earlier conditions. Na tional economic legislation cannot but take into consideration these shadows of the past. The after-effects are still more important in those districts in which the lords succeeded by forcible ejection or by enforced surrender in seizing the peasant property completely. In such districts we now find a proletariat of possessors or of tenants with inferior titles and of agricultural day laborers.

THE 0 R Y 0 F SOC I A L .E CON 0 M Y 319 We may be quite sure that in antiquity as well as during the Middle Ages the economic process played its part in the social stratification. For example, during the period of the Roman world economy the power of economic leadership was sufficiently great to elevate its possessors to the highest strata. .At the height of its prosperity the peasantry was sustained by its economic efficiency. It dropped be hind only when it had. to seek the protection of the great men of the church and state because its own forces were no longer .able to resist aggression in the. never-ending turmoil and the perils of warlike dep redations; At the same time in such a period its cultural develop nlent was not yet such as to enable it to take an active part in matters of civil administration and judicial procedure. On the other hand a new social class, the hitherto unknown industrial bourgeoisie, was rising in importance in the towns of the Middle Ages. It owed its importance to its economic achievements. Beside it, the liberal pro fessions were coming forward soon to become the leaders of a modern intellectual trend among laymen. They were advanced to more ex altedpositions in the social scale. Then appeared individuals, first singly but presently in increasing numbers, who as the economic leaders of huge enterprises amassed large capital wealth, especially in the form of money capital. In their industries the journeyman system of the Middle Ages ,vas transformed into an amalgamation of proletarian wage-laborers. From this class but few distinguished by their talents or favored by fortune ever rose to economic indepen dence. The greater number of· them, losing the opportunity of ever becoming masters in their trade, were doomed for all time to content themselves with the position of dependent laborers.

Thus a process of transition grew irresistibly. It was pregnant with the development of the modern era. It was not complete until the close of the eighteenth century. or the first half of the nineteenth. In middle and eastern Europe, it. was not until the second half of the nineteenth century that the transition had progressed sufficiently to exhibit the full type of the modern capitalistic stratification of society. The modern social stratification has by no means wholly eliminated the earlier historical institutions but it has thoroughly displaced them. Under modern conditions one fact is of the utmost theoretical impor tance: the present economic stratification is controlled almost exclu sively by forces that take their rise in the heart of the economy itself. The conditions of acquisition -have developed in such a way that a class of capitalistic entrepreneurs and moneyed capitalists can now form. This class, with others, rises to the highest stratum, while the middle class of the industrial bourgeoisie is broken up to no small 320 S OC I ALE C 0 NO M I C' S degree. In the competitive conflict with larger enterprises many of moderate or small size succumb; their small owners lose economic independence and are forced down into the proletarian strata of which they' form the upper layer as skilled workmen. This movement is in some ways akin to the ejection or removal of the peasantry. But it is essentially different in that it has not been effected forcibly by the abuse of power but by legal means, by decisions obtained in the market in harmony with' the law of prices with the assent and active participation of the' social demand. We shall, unless the term be deemed too bold, speak of this displacement as the downward shift of the industrial middle classes.

Another downward displacement of this sort with an even more decisive effect took place among the workers in the large industries. This was once more accomplished by legal means and in harmony with the law of prices. The large industries, owing to the enormous sales of their .products, were in a position to increase the division of labor to a degree which had before been unknown in the trades. They could reduce the labor to the simplest performances for whose exe cution the worker no longer required previous training in an estab lished trade. Then, since these simple operations had to be performed on an exceedingly large scale, multitudes of workers could be engaged whose service was confined to these simplest of manipulations and in extreme cases exhausted itself in the continued mechanical repetition of these few excessively ~imple acts. Thus the composition of the body of industrial workers has become a different one. The skilled workers have been supplemented by large numbers of untrained opera tors taken from the lowest strata of the population; and side by side with the male workers, large numbers of women, girls and children have been employed. Wherever a rural proletariat was within easy access, it served to recruit the ranks of unskilled industrial workers.

,Moreover the surplus population which increased enormously under the influence of the industrial development was absorbed to a large extent by the industrial demand for labor. As a consequence of all these circumstances, the number of workers without pecuniary re sources has increased greatly both absolutely and relatively. Within this class, again, the numbers of unskilled workers of the lowest strata have increased. Undeniably, the body of trained workers, especially after it had become organized, was in a position to increase its income materially and improve its social position. For it a general upward trend was possible so that the upper groups frequently rose even above the lower strata of the middle class. But this did not equalize the THE 0 R Y 0 F SOC I A L .E C ,0 NOM Y 321 effects on the composition of the population which were brought about by the continued downward shift of the strata of unskilled laborers.

In view of these facts our problem is a twofold one. In the first place the assumptions of our investigation must be sufficiently broad. In the second place we must inquire how the development of acquisi tion and the formation of' income is influenced by the fact that there is a capitalistic upper class and a lower stratum, itself subdivided, composed of multitudes of workers deprived of all pecuniary means. In carrying out this investigation we shall have to take into considera tion the relations of power and lack of power in these lower and higher strata. Moreover we shall have to show how the continued increase of acquisition and income further influences the stratification; how power and powerlessness are additionally increased. :i Large industries have by no means entirely crushed the industrial middle classes. There are still numerous industrial enterprises for which wholesale production is not remunerative and to which neither the technique nor the organization of the large industries are as yet suited. But the position of even such of these trades as have been preserved is frequently unsatisfactory. Among them are many establishments which are unremunerative. Some which are exposed to the competition of large manufacturers are severely handicapped.

Still others' suffer from an internal competition which they themselves set up and which is intensified by the disturbance of the smaller indus tries by capitalistic development. It can be readily seen that along with the master craftsmen their assistants are as severely if not more severely injured. In agriculture so far, large scale production has not demonstrated its practical superiority. Where the peasantry has maintained itself against the ejections of landlords, it is today scarcely subject to any downward shift because of the com petition of the large landowner. In other respects, too, the conditions of European agriculture are uninviting to the capitalistic spirit of enterprise. Opportunities are lacking for the realization of large capitalistic profits while generally agricultural methods as such are only to the slightest extent forma tive of capital. In other ways, capitalistic development endangers the ownership of land and especially the middle classes and the peasantry. These. classes are frequently still in a state of transition from the natural to the monetary economy. As a consequence they have a large need of capital in order to equip themselves on a money-economic basis. Moreover as their need of capital is increased by the growing intensity of methods, these peasants are apt to be financially distressed even where the difficult task of organizing peasant credit has been accomplished.

Incoincidence with a failure of harvest and unfavorable market conditions these credit obligations may become a matter of grave peril to them. In such times 322 S oeI ALE C ON 0 M !,e s the peasant holdings are apt to fall into the hands of the moneyed capitalist. It is under conditions like these that money usury in rural districts is a serious menace. 1 A further consequence of the capitalistic development is to be found in the fact that the increased industrial wages raise the wages which must be paid in rural districts and, thus promote the scarcity ·of hired help which so greatly em barrasses the farmers. Less conspicuous, but in its lasting effect more serious, is another danger which constantly, .shows itself where the natural economy is gradually being eliminated.' So long as the peasant's natural economy still strongly reinforces his position, the prices which he recovers from his products db not make allowance for his own costs of subsistence; in other words, the full costs of production are not covered. In order, on passing to the complete monetary economy, to remain· ona r.emunerative basis, he must sell at greatly increased prices. But even when .. he obtains ,payment at higher prices. for the foodstuffs that are urgently demanded by the recently added urban population he is not sure of recovering his cost without lOBS. He may be the loser by find ing himself compelled to resort for his' personal consumption to foodstuffs of inferior nutritive qualities. In many localities the generation now growing up is no longer being fed so as to keep its members in fit condition for the exhaust ing work to which they are bred.

Relieved of the strain of local feuds and the devastation of wars, of the visitations of famines and plagues, the peasantry in the capitalistic era finds itself threatened by evils far more disastrous on the whole, though less harassing to the individual, than all past tribulations. When thousands upon thousands were swept away by sword and pestilence, the. natural fecundity of the survivors brought new life again into. the desolated homesteads. The succeeding genera tions stood as before with the sturdy characteristics of a rural race. In the capitalistic age, the life of the peasant is more secure in many respects, but in large districts the permanent condition of peasant husbandry, the vigor and health of the peasant, are exposed to grave risk and to the serious' menace that in his habits of life and his natural aptitudes, the peasant will be carried down into proletarian degradation.

§ 63. THE ENTERPRISE The entrepreneu11--The owner's enterprise-Oapitalistic enterprise-Oollective (official'S') enterprise, 8tock companies, associations for enterprise--The modern concept of the entrepreneur-The development of the large enterprise. The social acquisitive community, technically articulated, geographi cally localized and under the influence of tradition, has been organ ized into numerous individual establishments for concrete economic problems. These individual plants are the cells out of which has 1 Trans. note: It is of interest to note that if the farmers' condition is suf ficiently bad, the lender has no chance to resort to usury. In the drastic post war readjustment in the United States, more than 50 per cent of the interest due on. mortgages held by insurance companies on Montana farms was overdue. Foreclosure was of no avail for no insurance company wanted to hold a plow and surely no one else did.

THEORY OF SOCIAL ECONOMY 323 grown the acquisitive community. The organization of the latter determines the character of the entire structure. The most simple organization conceivable is that of the individual establishment which in the beginnings of trade was widely dissemi nated. But no sooner are men confronted by tasks of somewhat greater magnitude, than communities of operation have to be organ ized where a number of persons provided with the necessary tools are set to work under single direction. The family, governed by its head, is the most obvious and natural form of organization. Increas ing acquisitions lead to ever more widely ramified communities of operation. According to that general law of society by which the multitude becomes capable of action only through leadership, every large com munity of operation demands a leader who binds it into an active unit. In the course of historical development many forms of qualifi cation for leadership have existed in the communities of acquisi tion. In times when personal slavery exists, the most oppressive type of economic leadership is found; the leader of a slave-gang is its master in the most rigorous sense of the .term. Under a milder law the owner or proprietor· takes the place of the overlord. These terms suggest rights in material productive goods. The name of master las used in the gilds implies a mastery of the trade by means of which the proprietor of a shop became the teacher of his fellow workers. The modern development has given rise to the entrepreneur of the money economy, who invests capital in order to realize a monetary profit.

, Theory is concerned almost exclusively with the enterpris.e 2 as the free form of organization of the community of acquisition in the money economy. It habitually looks upon the older types of individ ual establishments 3 that are still functioning in both city and country, as less developed forms of undertaking which it can· well afford to neglect in its investigations. We too shall neglect all forms but the enterprise; but we shall do so fully conscious of the fact that this is merely a resort to idealization and simplification and that the conclu sions which we reach are applicable to the other forms only when our assumptions have been revamped to fit the particular condition of facts. The institution of enterprise is the organ of the modern economic stratification of which we have just spoken. In its simple forms it in1 Trans. note: In the German the distinction of names is clearer than in Eng lish. The master of slaves is der Herr)· the master craftsman < is der Metister.

2 Unternehmung. 3 Sonderbetriebe.

324 SOCIAL ECONOMICS vests the entrepreneur merely with personal superiority; later, when large enterprises develop, it gives him a degree of power that finally swells to capitalistic supremacy. The purest type of his class is the individual entrepreneur, or as we may briefly call him, the entrepreneur. He is the director by legal right and at the same time by virtue of his active participation in the economic management of his enterprise. He is a leader In his own right. lIe is the legal representative of the operation, the owner 0'£ the material productive goods, creditor for all accounts. receivable and debtor for all accounts payable. As a lessor or lessee he is obli gated or privileged. He is the employer under all contracts for work and labor. He is the owner of all products and disposes of them. For his account the products are disposed of and the proceeds collected; on the other hand, all payments are a charge on his personal account. But he is not merely the legal head; he is also at all times the economic leader. His legal power of disposition reaches its full significance in securing to him complete freedom of economic manage ment. His economic leadership commences with the establishment of the enterprise; he .supplies not· only the necessary capital but origi nates the idea, elaborates and puts into operation the plan, and en gages collaborators. When the enterprise is established, he becomes its manager technically as well as commercially.

Among the numerous qualities which he requires in order to do justice to his task, there is one which is most important. It is the one which provides his very name; he must be enterprising; he must possess the quick perception that seizes new turns in current transac tions as his affairs develop; he must possess the independent force fulness. to regulate his. business according to his views. There is also the requirement that he must have the courage to accept the risks which are connected with every. capital investment. This is especially true with one who' enters a new and untried field. But not mere boldness of action, much less the fascination of gambling prompts his enterprising spirit; the impulse which drives him forward is the joyful power to create. The uncertainty of future events must be accepted by every econ omy not excepting the simplest natural one. It must be assumed from the moment that the worker begins to provide conscientiously for needs beyond those of the moment. .At this point every human enter prise must stake material goods or personal efforts. For those under takings which are articulated with the money economy, the risk is increased; all chances are staked on the one card of the selected spe cialty of production, the adopted calling of a lifetime. But the risk THE 0 R Y 0 F SOC I A L .E C ·0 NOM Y 325 of the entrepreneur is even greater than any of these; the success of an entire community of operation is in his charge. Still the element of· possible disaster should not be too strongly insisted upon in the ease of the entrepreneur. By far the larger number of business ven tures which are entered upon offers fair prospects of success; the number of those which miscarry is, after all, smaller. Moreover it should not be overlooked that there are always other persons who are also ~ubject to the hazards of the enterprise. Thus there are the creditors and, above all, the workers, Under some circumstances the latter are the first to be affected by failure. Even before the entre preneur feels the effects of disaster they are injured by the dismissals to which the entrepreneur resorts when unfavorable business condi tions force curtailment upon him.

The individual enterprise is adapted to a certain degree of expan sion. It may develop until a point is reached at which a directing 1 entrepreneur is needed to achieve successful results. On the other hand, the extent may not be greater than permits the entrepreneur still to imbue the entire operation with the spirit and will of his owner ship. Most nearly akin to the individual enterprise is that conducted by a partnership or some other small association of persons where several men share the task of the entrepreneur. Whenever full confidence and a friendly understanding exist between these parties and their abilities mutually supplement each other, the alliance is advantageous in that they are better able to do justice to the exigencies of a large business than can a single individual unless he be possessed of peculiar personal powers and material resources. Such an association of per sons is able to exercise leadership with the perfect efficiency of the owner. Together with the individual enterprise, we shall speak of it as the owner's enterprise, wishing to indicate that in these cases the entrepreneurs fulfill the tasks of their station as their own agents.

The owner's enterprise is indissolubly bound to the persons of the entrepreneurs; regular vicarious action of any kind whatever for long periods of time, by guardians, officials or the like, is excluded. The owner's enterprise on a large scale is the original form of capi talistic enterprise. The large capital which it amasses enriches the one owner or possibly the small group, and makes them large owners of capital or capitalists. Numerous other forms of large enterprise have sprung up by the 1 Trans. note: ein fuhrender Unternehmer: i. e., an entrepreneur with large qualities of leadership.

:326 SOCIAL ECONOMICS side of the large owner's undertaking. They are intended to com pete with it and are calculated to turn to account the advantage of large scale operation for wider circles. As undertakings of large capital they are capital enterprises but they are not capitalistic. Among them are state enterprises and those of self administrative bodies, whose gains are for the people generally. Again, we find among them .cooperrative organizations with an open membership which. enables' the middle and laboring classes to become interested. These carry out either the purely cooperative idea or combine it with that of the stock company. Among them should be mentioned mutual ,companies and savings banks conducted 'by philanthropic ·societies. ,All these forms may be designated by·general name, collective enter prises, for they unite a large number of persons who share responsibil ities and interests. In its legal form, the stock company is alsoto be classed with these organizations as it unites a large number of associ ates. The collective enterprise is managed by installed leaders, i. e., elected or appointed officials. It may therefore also be called an offi cials' enterprise in clear distinction from the' owner's enterprise.

We thus find on the one side the leader by individual proprietary right who therefore has· unrestricted power of disposition. On the other hand is the appointed responsible ,leader bound by the terms of his mandate and answerable to his principal. These arethe two great ,types of leadership. They are the result of historical development in the state as well as society. Both are designed' to provide for the masses the faculty of action which they can never attain for them selves. Looking not at the legal form but at actual conditions, we shall recognize in the stock company the transition from owner's to officials' enterprise. It combines the two types of leadership; the large stock ,holders are· installed in· their leading positions' by election and are' in ,part entrepreneur-owners,· in part officials. We find similar condi tionsin the kartel and trust where forceful leaders find the opportu nity to act as representatives of the modern economy without becoming such by any full-fledged personal right. Through these agents the large enterprise associations become main organs of capitalism in the same manner as do stock companies through their founders and the large stockholders.

The capitalistic owner '8 enterprise, the collective enterprise pure and simple, the stock company which is a mixed form half way be tween the two, as well as the great enterprise-association, has each its peculiar function in the complete structure of' enterprise. The owner's undertaking possesses the initiative. It ferrets out new pos...

THE 0 R YO, F S' 0 C I ALE, C ON 0 M Y 327 sibilities and forms of acquisition; it brings new men into prominence by competitive selection. The capitalistic owner's enterprise is in every instance the primary form· out of which investment banks fash ion stock companies. Only certain establishments are so large that the resources of an owner's enterprise would be inadequate for them from the very beginning and· are therefore destined in the first in stance to take the form of stock companies. The .great associations of enterprises gather up owner's enterprises and stock companies so as to produce the most powerful effect. The· pure form of collective enterprise is the la.st to appear. It does not begin to spread until by means of the experience of other organizations the rules of· business management have·been settled and ample security for the public funds or the investments of the masses, has· been obtained. It is possible that in the near future a new alinement will be brought about, that the increasing capitalistic domination of private enterprises will in duce the state· and the public, even more than it has so far, to meet them in competition by collective .enterprises. For the supremacy of capitalistic power has induced the counter-movement of socialism, which plans to profit by the concentration of the capitalistic enter prises in order to· establish the entire acquisitive . economy of the people for all time on a collectivist basis.

In capitalistic enterprise the great personalities of entrepreneurs have risen· to their full stature: bold technical innovators, organizers with a keen knowledge of human nature, far-sighted bankers, reck less speculators, the, world-conquering directors of the trusts. How ever, considering all the effects of mammoth enterprise, it is safe to say that it has encroached upon .the influence of the entrepreneur and that it is destined to do so still further as the field of such enterprise is extended. Even in the capitalistic owner .'8 enterprise the entre preneur can no longer do full justice to· the tasks of an owner ; he must entrust important functions to subordinates. While he may direct and· supervise them, he can never infuse them with his own initiative. In the collective or officials' enterprises the entrepreneur is in no sense a fully empowered manager; the legal ownership and the duly appointed management .are wholly distinct. Again, the legal ownership is vested in so many persons, such a trifling and in direct responsibility is· apportioned to anyone of them, that they can scarcely feel themselves to be real workers in the undertaking. The small stockholders and even those with larger holdings look upon their enterprise almost as strangers expecting to collect an annuity. Their attitude is somewhat like that of creditors. An even wider gap separates the interest of the citizen from state or city enterprises, 828 SOCIAL ECONOMICS which still are matters of public interest. When it comes to the duly appointed managers, officials of. all degrees of importance, they are so restricted by their responsibility to others and their own binding norms of action, their powers of leadership are divided among so many underlings that they lose a large .part of· their directing force fulness. The ostensible leaders are fundamentally dependent upon the manner in which subordinates execute their orders. The orders are thus shaped in the inception by the expectations raised by previous experience of the manner of execution. Frequently in enterprises that have assumed large dimensions there is no entrepreneur proper; there may be.not one man actively employed who possesses and demon stratesa spirit of enterprise. The exceptions to this. statement are only those stock companies and associations in whose struggles and achievements the personal force of great leaders has maintained· itself.

In beginning this discussion we pictured the entrepreneur of the normal owner's enterprise. This figure is no longer a replica of the present dominant type. A definition that covers all modern concepts of the entrepreneur must be the result of the mere probing of the legal c,oncept. The requirement of economic management is no longer fulfilled in aU cases. Today the enterprise is a voluntary community of commercial operation in the money economy subject to one entre preneur. It may be a unified group of such operations. The entre preneur is any legal owner of an enterprise. He may be an indi vidual person or "he" may be the large group who comprise the artificial person and public cooperation. whose organization is so com plicated that the forces of personal efficacy are largely dissolved in the deadening formalities required to obtain a valid resolution. At all times there have been isolated commercial enterprises of large size, but modern development has vastly multiplied their number and extent. The impetus has been supplied by the growth of the markets. This in turn is a consequence of increasing domestic population and colonial expansion. That this impetus should so markedly have affected ind;ustrial conditions while those of agriculture were little changed is explained by the original contrast of the two types of activity. The extent of agriculture is limited by the soil a.nd fUlly as much by the succession of the seasons. On the other hand the trades may be quartered in more restricted areas, where the process of industrial production may be better controlled by human art and thus rendered susceptible to both temporal and local concentration. The technical. possibility of concentration was invoked as soon as the expanded markets offered an opportunity to dispose of large quantities of products. Technical concepts that had no practical application in the era of narrow markets but were only idle playthings, now suddenly took on an im mediate usefulness and loomed large with undreamt of values. The increased sales yielded interest on the investment in large plants and promised large profits in addition. Thus large-scale enterprise won over the entire field where THE 0 R Y 0 F SOC I A L .E, C ·0 NOM Y 329 power-driven and labor-saving 1 machinery and other extensive. plants could be used. Factories, mines, railroads and steamships came under· its dominion.

Large-scale operation forced its way. also into many branches of industry that were not open to the machine and vast fixed capital but had to depend as before on human skill and diligence as the essential factors of production. The ready made clothing trade isa most apt illustration. Under the influence of enlarged markets it became possible to split up the traditional process, which had been adapted to the local custom-trade, into a number of the simplest operations. Thus an 'articulation of work was achieved by which. particular training became unnecessary and almost primitive manipulations might be· performed by girls or other cheap help. The remainder of workman-like operations which could not be further divided were then put in the hands of well paid, or better paid, opera tors.. Only a few of these were now required. The conduct of the business, especially the salesmanship, remained in the hands of the entrepreneur. A well organized enterprise of this sort easily expelled the old-style tailoring trade.

It lowered the cost of production and controlled the market which was im mediately satisfied by an abundant supply of ready-made garments of every des.cription. It was not even necessary for the success of the business to provide a common working place for all its workers. Many of the operations did not need to be done on the premises; a single shelter was only required for the final opera tions and for. the business offices. Large-scale operation reached itsfuUest development in· the associated under takirigs comprising the kartels and trusts, which we discussed at length in an earlier connection. Kartels aim in the first place at a monopoly of the market. In addition trusts turn to account in a most promising manner wide fields of activity that modern technical and .organizing invention have laid open to large scale operation. Their final goal is the enjoyment of the extraordinary produc tional and marketing advantages of the self-contained enterprise.

The modern giant-enterprise stands unique not only in the tremendous extent of its operations but also In the multiplicity of related branches which it in tegrates under one management. In discussing trusts we went into sufficient de tail on this point. It is customary to speak of these comprehensive organiza tions, through whose activities is sought control of all phases of the. productive and commercial process, as unit industries; 2 it might be more appropriate to refer to them as unit enterprises. Their tendency is in marked contrast to the specialization of enterprise, which was still the order of the day a generation ago. The explanation of the change is probably to be found in the rise of the enormous power of modern money-capital which has been amassed and is held in fabulous amounts by the large banks. This power gives a guarantee, such as never existed before, of an unprecedented control of the productive and marketing processes. It enables one industrial group to attempt the unparalleled task of absorbing every opportunity for profit that the gigantic markets of our age offer.

The technical articulation of labor is by no means neglected in the vast unit in dustries; in them it can be pushed further than it has been heretofore. The. colossal bank is not to· be separated from the modern development of large-scale industry. The great growth of the natural form of capital demands and caters to an equally large growth of the monetary form. Never has money 1 Kraftmaschinen, Arbeitsmaschinen. 2 Gesamtbetrieben.

830 SOCIAL ECONOMICS capital been so enabled to thrive upon its rapid transmutability as in our time with the incessantly repeated new accumulations. of capital goods. It is offered especially enticing opportunities in the underwriting of new enterprises and in speculation on. the stock exchange. A common feature of both is the con tinuous turnover. The professional promoter seeks his profit in the disposal of enterprises which he has organized; they interest him only until he has turned their management over into other hands. The speculator seeks his profit in the purchase and sale of securities and commodities originating in some outside enterprise in whose existence he is not otherwise interested. In their worst degeneration, promotion and speculation on the Exchange drift into the char acter of parasitic enterprise which clings to other branches of acquisition in order to exhaust their substance.

§ 64. SOCIAL ECONOMY AND SOCIAL INCOME The unity of the 80cial eoonomy-Yielcl and inoome-Distribution of inoome Wealth, 800ial wealth. The appraisals of all enterprises are in terms of economic exchange value. They are all members of the community of exchange, which is an institution of exchange and expands with the full development of the monetary and credit systems into the community of payment. Owing to the fact that all enterprises are adjusted for exchange, they actually enter into a close community while still preserving legal independence. They thus form a productive and acquisitive body in which labor is divided and articulated. The organization of this body is also determined by the. social stratification. The localization Qf its activities is fixed by the existing economic conditions. Thus arises the economic community .of production and acquisition, the highest institution of the intercourse of exchange.

The economic community, as established in the full breadth of its operations by exchange, is spoken of in economic theory as the econ omy. From a legal point of view the social economy is the sum of the private economies bound together by trade; from the economic point of view it forms a unit through its ubiquitous relationships. We ad mit it is not the ultimate community of effort that is the dream of socialism. Neither is it the unified social institution that we assumed at the beginning of our analysis of the theory of the simple economy. Far more important, it is the economy of the people as handed down by historical tradition. History does not warrant the assumption that a people for economic purposes will subordinate itself to the manage ment of a single organization. Such an assumption may not be ad mitted by empirical theory in which only actual typical conditions should be described. It may only be resorted to in the manner in THE 0 RY 0 F SOC I ALE CON 0 M Y 831 which we used it in our theory of the simple economy: as an idealiz ing assumption that should lay the foundations for an investigation of actual conditions.

No sooner are the people organized as the state, than the latter be comes part of the historical setting of the people. The state has had an exceedingly important part in shaping the historical institution of the economy, both in earlier times and at present through its protec tive and promotional activity. But there is a wide difference of opin ion as to the manner in which this share is to be correctly appraised. We shall not be able to form an adequate judgment of this until after we have analyzed the process of the formation of income when it is not affected by the intervention of the state. Therefore it seems best for the present to eliminate the agency of the state entirely, and to look upon the economy as we have defined it, solely as a voluntary, social institution arising in exchan,ge. In so doing we must not re· gard the participating individuals as actuated solely by personal egoism; they are also prompted by a social egoism and are generally subject to social powers. This we have already explicitly demon strated in an earlier connection.

In the regular course of affairs the net yield of natural material and personal values gained in the economic process or acquisition supplies the means to cover the needs of the people. This yield is subject to fluctuations and economies may therefore be compelled at times to fall back upon their reserves in order to satisfy requirements. None the less, in so far as the sources operate permanently from which this flow springs, it may be regarded as regular. Thus this net yield is·to be distinguished from the irregular receipts arising from a direct increase of possessions or from their appreciation in 'Value. By this regularity it meets the periodical recurrence of needs, for which every economy must provide. In every systematic economy the primary duty of securing an adequate yield to meet the regular needs is recognized. Moreover, an economy that would advance in prosperity must see to it that the yield is sufficient, over and above the requirements of its households, to permit the setting aside of savings that may be turned to the formation of capital.

In so far as this net yield is referred to the personal economies among which it is distributed, it is· spoken of as the social income. Legally it is to be defined as the sum of the individual incomes gained in the social economy. However, economically it is a unit because it is formed in the unified process of the social economy. Thus its name is appropriate, as is that of the social economy to the system whence the social income arose. But to properly estimate the effects of this 332 SOCIAL ECONOMICS income we must be informed how it is distributed to the broad strata of the private economies. Its sum total does not instruct us intelli:' gibly on this point; as a whole the social income may increase and yet the effect of its employment may diminish, when the distribution becomes unfavorable and the large mass of smaller incomes is curtailed for the benefit of higher strata. Looking at the economy as a ,vhole, it is evident in the nature of things that yield and income coincide. In this respect the social economy is' in exactly the same position as the economy of a Crusoe or any other simple economy. However, this relation does not neces sarily hold for the individual household within the social economy.

It is conceivable that an income might be allowed to persons who are iIi no way productive fellow-workers in the social economic process of acquisition. Again, the participating parties might be allotted an income by a standard' different from that of their participation. Such wonld be the case, for example, under a legal code like the one de manded by the socialist party who .would distribute the national in come according to a, standard of "rational requirements." Quite in the spirit of the simple economy the established legal order links together yield and income. 'Except 'in instances of gift or charitable donation, persons to acquire incomes must somehow' take part in the acquisitive. process, in the formation of yield, by means of labor per formed or the possession of personal wealth. The personal income is the sum of the yields which flow into an individual' economy~ Its amount is measured by the yields or part of a yield that is attributed to anyone on account of his participation.

The grave significance of the established legal order is that it gives juridical recognition to the traditional stratification of property. Ac quired property confers a well-founded right in acquisition. Those who possess largewealth are in a position to gain large incomes with out labor. The man withoutmea:Q.8,with only his labor" to fall back upon, is unfavorably situated from the start. His position is still more difficult when he is not a member of the educated classes and therefore is able to offer only his physicallahor. At this point in the investigation we 'must content ourselves merely to indicate these conditions, for the present refraining from any interpretation of their significance. The immediate problem before us is simply to examine the formation of income according to the course of events under the existing legal order. We already have within reach for this investigation a series of fundamental theoretical considerations. As the income is derived from' yields, the rules, 'of the attribution of yields with which we · THE 0 R Y 0 F SOC I A L ,E C '0 NOM Y 333 became familiar in the theory of the simple economy are controlling upon the formation of income. Furthermore as income is gained in a price form in the money economy, the general laws of the formation of prices, as set forth in our general theory of prices, are also decisive.

On the one hand the theory of income is a continuation of the doctrine of attribution when this has been adjusted to the monetary formation of yields; on the other hand it is the sequel of the doctrine of prices when the latter has been adjusted to the special market indices ob taining in the existing acquisitive process and under the prevailing stratification of the large yield-producing factors. The principal di,stribution of income, to which our investigations must conform, coincides with the division of the sources of yields. Wealth and labor, or rather the union of the two, being the sources of yields, we shall distinguish pure income from possessions, pure labor income that in the widest sense is called wage-income, and the mixed entrepreneur-income that is obtained from the union of possessions and labor. Pure income derived from ownership, income without labor as it is also called, may be either ground-rent or interest on capital. The income from wealth and entrepreneur-income are known as funded income since both rest upon a basis of possession. Wage income is not funded. In our analysis we shall 'still further subdivide these principal divisions of income in order to regard also the typical stratifications of income distribution. In the case of entrepreneur's income we shall consider more especially the capitalistic formation of income. In wage-income the broad strata of the liberal professions, skilled and unskilled labor must be distinguished. Whenever it is necessary for theoretical purposes, we shall also accord a place in our assumptions to conditions of power and weakness which are typical of modern stratification.

In this analysis we have followed the universal practice in our use of the term; possessions. Its meaning has been. transferred from the relations of the simple economy. Under the conditions of developed exchange-economy it loses part of its original connotation, for, as we showed in its proper connection, pr~perty is distinguished from possessions owing to the appearance of .credit transactions. Possessions embrace the entire holdings of material goods to the extent to which these are considered permanent in opposition to yield' or income. They there fore embrace not merely industrial real estate and capital possessions, but. also permanent household possessions. Beside these possessions of material goods, legal demands on other persons also figure as property. These are known as credits, while obligations of indebtedness mU$tbe deducted as debits. The prop erty or net worth is determined as the remaining monetary sum when credits and debits are ba.lanced against each other according to their exchange value.

It only remains to be added that not. only rights of demand ,but other rights as.

834 SOCIAL ECONOMICS well, for example a copyright or under certain circumstances actual relations, say Hgood will," may be reckoned as property as long as they promise future yields or money returns and may be controlled to some extent or transferred by their o'Yner. The national wealth is the aggregate of the individual properties of any people. Demands and obligations within the national jurisdiction cancel each other. Thus the social wealth of an economy, conceived as isolated from others, coincides with the possessions of material goods. Its statistical inventory is most simply taken by listing its existing material goods. When it comes to a national economy as related to the commerce of the world, the demands against foreign countries or their nationals must be added to the inventory; obligations .toward them must be deducted. § 65. AGRICULTURAL RENT Natu,ral and contractual rim-t of lands-.--The general QCcurtretnce of differe:ntiaJ, rent-Rioardo's theory of rent and the umonopoly of tke soil."

The agricultural rent of land is that portion of the agricultural yield which is attributed to the soil as such. Those qualities which are exhausted by cult~vation are not part of the land as such. Its permanent cultivation involves replenishing this transitory constitu ency, and the share of the yield which is attributed to the latter is interest on capital. Only the inexhaustible elements of the soil may be credited with ground rent. Ground rent is drawn either as natural or contractual rent. The owner of land who cultivates it himself obtains a natural rent in the excess of the net money yield over the interest on his invested capital. In this case we assume the customary methods of cultivation and disre gard the increased entrepreneur-income which may be realized from superior husbandry. The lessor of agricultural land draws a con tractual rent as the excess of the rental over the interest on the capital goods leased at the same time. Of these two forms of rent, the natural one is the original. From this form the contractual variety has been derived. When it comes to theory, the explanation of the natural rent of land is the first and most important problem.

In the theory of land and also in that of attribution we have so fer prepared the explanation of the natural rent of land that we may con fine ourselves here to a few summarizing statements. In the theory of land the existence of· various classes of land was noted: i. e., classes of land that vary in fertility, in proximity to the market and in qualities of the soil. The better grades yield the larger net gain from the given market prices of the crops, for the reason that their costs of cultivation are less. The theory of land has further THEORY OF SOCIAL ,E:CONOMY 335 shown that the better grades of land are taken under cultivation be fore the poorer ones, also·that in the expansion the classes last taken into use have not entered the economic quantitative relation and that besides these there remain unused reserves still to be disposed of. Assuming these conditions to· be the general rule, we recall that it was seen in the theory of attribution that the class last brought under cultivation, the marginal land as we may call it, being free, cannot pay rent. Following the law of highest costs, the price of the crops is determined by the costs of cultivation on the marginal grade. The excess that remains in the case of the better classes of land is at tributed, according to the law of specific attribution, to the factor of the soil. This excess yield is the rent of land.

Finally, the theory of attribution has demonstrated that as the in tensity of culivation increases, the rent rises which tenants may ex p~ct to pay for land. Cultivation is most intensive on those parcels of land with the highest fertility and lowest costs of transportation. In these cases the ground rent rises to the height of an "intensity rent. " 1 Under such conditions rent is a differential which does not enter into the price of products; the marginal classes of land and soil qual ities are worked free without paying rent. However, as soon as the demand increases and forces the marginal grades into the economic quantitative relation, a price must be allowed which leaves an excess, a rent, for those classes as well. Nevertheless, so long as there still remain reserves of uncultivated land, the increasing demand resulting in an extensi.on of cultivation and its greater intensity will always bring it about that hitherto unused grades are taken under cultiva tion. These once more are free and used without paying rent. The prices of· products are therefore stabilized at the costs of cultivating these lands.

Ground-rents are lowered by improvements in agricultural methods or in the means of transportation as also by the settlement of new tracts of high grade land. This result is explained by the fact that it becomes feasible to discontinue the cultivation of the poorest lands. The margin of cultivation is then formed by bette'r classes which produce their yield with a smaller outlay of money. Lower prices for the crops will result and the differential in costs that for merly benefited the higher grades of land will be reduced. So far this retarding effect of improvements in methods has always been overtaken in the long run by increase in population. Histori cally, therefore, the general tendency has been toward an increase in ground-rent. lIntensitatsrente.

336 S OCIA,L E CON 0 M I'C S Contractual rent oscillates about the norm of ,the natural rent. The fluctions are dependent upon the proportions existing between the supply and the demand for farm properties. When the supply preponderates, the owners of estates will have to make concessions to prospective tenants; the rents will not reach the full amount as certained by adding natural rent and interest on the capital. Con... versely, rents will'rise when the demand exceeds the supply. It frequently happens that small tenants anxious to turn their abilities to account, and impelled by competition, agree to excessive rents which curtail the yield of their labor. In countries where large landed properties prevail, the condition of the small tenant-farmers lacking capital and exploited by oppressive rents, may become a very wretched one. The ground rent which we have hitherto described may be called quantity-rent. From this is to be distinguished the quality-rent that attaches to such parcels of land as offer the advantage of yielding for an equivalent expenditure,. crops of better quality or those for which a higher price may be obtained.

In the case of mines and all kindred industries in which accumula tions of natural wealth are being removed or exhausted, the annual amortization of the existing stores of. ore, .coal and so forth is part of the costs of operation. In so far as such an establishment is worked under more favorable conditions and therefore at less expense than the marginal operations of its type it is entitled to a differential rent, which, precisely like the rent of land, follows the laws of highest cost and specific attribution. Similarly, for all enterprises of whatever description which operate under more advantageous conditions than the marginal plant 1 with a consequent saving of cost, there is a differ ential rent, the so-called industrial rent. It is also proper to speak in the· case of personal services of a rent of efficiency and talent, a preferential rent due to individuals whose performance exceeds the marginal one.

Our exposition agrees in its main results with the prevailing doctrine estab lished by Ricardo and elaborated by Thiinen. Of all the, doctrines of Ricardo, only the theory of ground-rent has survived to our day. Here there was a task to be performed which offered Ricardo a' signal opportunity of displaying his truest scientific vision. Though obviously his acum'en is much broader, it is fundamentally that of a man, of business who has received his training in the broadly instructive school of practical affairs. ,Ricardo does not attempt to simplify in the manner of scientific isolation and idealization. He simplifies like 1 Trans. note: The phrase "than the marginal plant" does, not occur in the German which is written with an undefined comparative.

THE 0 R Y 0 F SOC I A'L E, C '0 NOM Y 337 a man of affairs who eliminates whatever effects are small enough to remain concealed in his general results. Without paying any. attention whatever to the significance of the intimate associ~tion of ideas, this businesslike manner of observation has disqualified him for working out, his serviceable theory of value and of price; for the explanation of agriculture rent, it was precisely what he needed. It may easily be explained how the most favorably located and conditioned parcels of land resulting in a saving of costs, yield to the owner a surplus from the price of the products. This explanation may be made even though in giving it we are· unable to say· what the costs are which are saved, or what the components of the price are which is obtained for the crops. To do this, however, requires a broad outlook which grasps in its survey the vast stratifications of the masses. In this sense Ricardo explained the rent of land; he showed that the highest values of the produce from the best situated grades of land exceed the general average although he was unable to explain con clusively how this general average is determined.

The peculiar shortcomings of Ricardo's method of scientific thought may also be explained in his theory of rent. While he plainly recognizes the gradations of rent as conditioned by the variations in the saving of costs, he finds no ex planation for the manner in which the movement takes place from the stabilized condition of one gradation to that of the next. The most serious defect of his theory of rent is to be found in the fact that he does not grasp the nature of the economic quantitative relation. Therefore he fails to see this relationship in the case of capital and labor and exaggerates it in the case of 'the best lands, de claring them to be a "monopoly." He has permitted his opinions to be too greatly shaped by conditions in England, where land is in the hands of comparatively few owners and where the owners of the great estates collect their rents most frequently in the form of a contractual rent on leaseholds. In the economic and social. organization of England the rent of land is the most odious part of the national income. It is an income obtained without labor by a privileged minor ity at the expense of all other classes of society. If the full amount of it is not unearned, at least those increments are which arise without the slightest con tributing effort on the part of the owner merely from the increased demand of a constantly growing population. That income is wholly unearned which is ob tained through the exploitation of the contractual renter by encroaching upon the yields of his labor. But even in these cases, a monopoly in the true sense of the word does not exist in land; absolutely and relatively the number of farms is exceedingly large in proportion to the needs.. So far as free grades of land are still available as is the general rule, the economic quantitative relation is even less pronounced than in the case of capital goods or of labor ; only the parcels of land in the best locations occupy a highly favored. specific position in the market.

In all countries where ownership of the land is more equally distributed, and the greater portion of the land is held by peasant owners, no question of an exploiting monopoly arises. The ground-rent obtained by the owner farming his own land is the result of labor and is well earned. Even when it is attributed to the land as such, the full yield of the soil can only be gained if the owner uses his best efforts. The owner would be greatly disappointed in his well-founded expectations if he failed to obtain the usual rent from his land, the rent which he anticipated and which is an important constituent of his income. Even the "intensity-rent" which may arise when the demand increases must be gained 338 SOCIAL ECONOMIC'S. by serious effort. The estimation of the proper degree of intensity of cultivation is one of the most intricate problems; its correct solution has every claim on the undivided interest of the owner. As the yield increases, as the agricultural population grows and as the average acreage of the farms decreases, the most reasonable method of socially meting out the ground-rent which could be con ceived within the constitution of private economies may he said to have been reached.

§ 66. RENT OF URBAN LANDS Urban rents and the Ricardian theory-Advantageous locations for dwellings and business premises--Urban intensity-rent-The tenement house-Urban rents as unearned. income. The rent of urban land is obtained as a contractual rent where dwellings or business premises are leased. It is the remainder of the net yield realized by renting real property after deducting interest on the capital employed. It is the amount attributable to the land as such. The rent of urban land or, as we may call it more briefly, urban rent, is analogous to the rent of agricultural land. Like the latter it is locally confined, a differential rent based upon the perma nent advantages of favored parcels of land, a specific yield or surplus over and above costs obeying the law of specific attribution. None the less, urban rent demands an explanation of· its own. In the case of agricultural rent the prices obtained for the products are uniform but the costs vary on different grades of land. In the case of urban rent, on the other hand, the prices which are paid for rent vary while the building costs are the same everywhere. The advan tages which certain sites offer are not economies in building costs.

To some extent they do result in savings of time and money costs to the tenant which he would otherwise have to incur in traversing the distance to the center of the town. But this does not account for the origin of urban rent. Such savings are too trifling to establish the standard of urban rents. The fares on urban rapid transit facilities which would in the main be the determining cost in the presupposition involved in the above statement show but few and minor gradations while the variations in urban rents are both numerous and exceedingly disparate. In the heart of the city itself, where differences in the cost of transportation disappear altogether, extraordinary variations in rent may be observed between the locations having the heaviest traffic and those which are less frequented though in the immediate neighborhood of the former. Ricardo and the older theorists generally have neglected the theory of urban rent. Such a theory seemed ·less important in their day THE 0 R Y 0 F SOC I A L .E CO NOM Y 339 than one of agricultural rent. Moreover the classical theory of prices lacked the key for an explanation of this sort. As a matter of prin ciple it looked to the costs and these, as regards urban rent, decide nothing. On the other hand, the function of demand in establishing prices was neglected by Ricardo and his disciples, and it is the de mand above all else which determines urban rents. Owing to the enormous growth of cities since Ricardo '8 time, urban rent has out stripped agricultural rent in importance. Modern theory may not neglect their explanation.

In order to explain urban rents, their formation must first be ex plained. The market of urban land may be broken down into a large number of local markets in which advantages of location are the dis tinguishing characteristic. We shall arrange these partial markets in an order that allows us to consider the poorest locations first, then to proceed to the better ones and to those of unsurpassable advantages. In the least desirable districts, if we assume a free market, the rentals are known to leave no remainder of urban rent; they are just high enough to repay the costs of maintenance. Should an· increas ing demand make higher prices possible, then the supply will always bring about an equalization. The costs of maintenance are composed of current expenses for taxes, management, repairs, amortization of the building capital, as well as the provision for customary interest on the capital still outstanding from the costs of construction. The so-called building capital is composed of the sums necessary to cover the costs of construction. These include carrying charges until the house is occupied, payment ·in full to the entrepreneur and the pur chase price for the building lot. Speculative influences left aside, this purchase price in the least desirable districts which we are now con sidering will exceed but little the agricultural land values to be com puted by the capitalization of the agricultural rent of the land. To this extent agricultural rent forms an element in the determination of urban rent. This is one of the rare cases where real estate loses its specific character and operates as a cost means.

In the more favorably located sections, rentals are paid which ex ceed costs. The classes of tenants who wish to be admitted to the pref erable locations must, in the spirit of the fundamental law of price formation outbid correspondingly the competing strata less able to pay. They do so by allowing an excess over and above the maximum offer of the latter. The amount of this allowance is determined by the marginal bid within the paying ability of the marginal tenants. These tenants are those within this class of the lowest standing and financial power; but who are admitted of necessity in order that the 340 SOCIAL ECONOMICS entire supply of the particular market may be absorbed by the de;.. mand. The higher we mount in the series of partial markets, the higher will be the excess charge to be added to the regular rental. The group desiring to secure the very best locations must allow some thing more than the excess already paid by the lower strata in their locations.

Urban rent is that part of the rental which is paid as a premium for the advantages of the better location. The concept is simple, as simple as that agricultural rent has its origin in the saving of costs due to superior grades of soil. Just as this latter conclusion is ample to support the entire theory of agricultural rent, so the former is all that is needed as a foundation. for the entire theory of urban rent. In order to complete our theory of urban rents, we have now only to show the actual development of advantages of location in regard to city real estate. This development will be most apparent if, by means of, idealizing simplification, we picture the city as laid out in strictly concentric areas with its most desirable locations for occupancy at the center, let us say around the principal square. All other settlements will then be arranged in circular form about this primary ring down to the poorest quarters in the outskirts of the town adjoining the fields of its suburbs. The cities of the Middle ,Ages often closely approached this idealized plan. In each of the, rings surrounding the heart of the city, the different parties compete with one another grade by grade.

The poorest group of tenants, the one paying the lowest prices, will be forced to the extreme periphery. The, second group, but little better situated than the former, will cling to the next area, being un able to satisfy the prices demanqed in the third ring, which are slightly in excess of those in the second. ,Through continued conflict or price competition, step by step and grade by grade, with a continued outbidding by competing groups, as many different levels of rent are established as advantages of location are distinguished by the tenants. Urban rent is the most significant concrete expression of the law of the stratification of prices that could be adduced. ,If we pass from this ideal view to the diverse relations of real life we shall have to distinguish residential and business districts. In the large, modern cities the location of dwellings has broken through the older concentric arrangement that may frequently still be traced. Not only the most indigent groups, but large numbers of the well-to-do and wealthy seek homes on the borders or even beyond the borders of the closely packed masses· of houses and at a distance from the large cities. Here one finds distinct communities, some large and THE 0 R Y 0 F SOC I AL .E C ,0 NOM Y 341 some small; some which themselves have a town-like development.

These areas we may speak of as zones of the "ultra-periphery." The configuration of the modern city has become highly irregular. Cen tral location is still counted as an advantage but beside it others are finding recognition such as healthfulness, beauty and restful quiet. In part these are even more highly prized than the first. Especial stress is laid on the restriction of a neighborhood to members of one's own stratum. A fashionable section should not be contaminated by proletarian intrusion. Owing to the fact that the concentric form of cities has been broken down, their further growth has been pro moted in a manner that seeks to reduce expenses. New buildings are erected where open space invites settlements and there is no need of clearing the land by demolishing older structures. The space for superior residential purposes, however, having been greatly extended, the increase of rentals and of urban rent is moderate. Nevertheless, the .system of gradual outbidding among tenants is by. no means ob literated. Now, as heretofore, residential districts are classified by the advantages which they offer. The wealthy invariably show an inclina tion to occupy the best locations which are always more limited than the less advantageous ones. The sections where "one may decently live" will always be available in smaller amounts if for no other reason than that" one" would always make his home where others of the "best families" are already known to live.

The market of business rentals is much more restricted than the residential one. .As far as is possible, the wholesale trade concen trates at a center in a conveniently situated spot. Important public offices, popular institutions and points of interest 1 are also centrally located where the means of communication converge from all direc tions. .As far as local trade is concerned, those locations and streets must be considered which are the most populous thoroughfares ': the heart of the city into which' all radial means of access pour their traffic and finally the great radial avenues themselves. The increased ren .. talspaid for central locations by business tenants crush the residential demand. But aside from this fact, there is a sharp conflict of com petitive demands for the most advantageous locations that arises within the business demand itself. Theoretically it is of special importance that the increased busi ness profits which may be realized in the favored locations increase the funds from which the excess rents are paid; while in residential dis tricts these amounts are:fixed by the incomes of the tenants. We have 1 Sehenswiirdigkeiten.

342 SOCIAL ECONOMICS. here the characteristic in which urban rents are most nearly akin to agricultural rent. Like the cultivation of fertile land, business con ducted on the best located premises offers the advantage of large sales at the established market price. The profitableness of the enterprise therefore increases. Assuming an industry is bound to a particular spot to effect its sales, the entire surplus there realized would, like the surplus yield of the fertile field, be attributed to the land as such. It would then lie within the power of the owner of the building to appropriate to his own use the entire profits of the business by de mands of increasing rentals. The enterprise would then, as the say ing goes, "work for the landlord." As a rule this is not the case. The tenants have a choice' of more than one parcel out of a number that are available in a definite local market. The rents in this partial market are determined by the marginal offer that is permissible for the least remunerative est.ablishments which must. still be admitted to rent all of the premises in this particular market. For all other estab lishments earning larger profits the business man retains out of the increased earnings, a surplus that is not consumed by rent. This surplus accrues to the entrepreneurs whose business, owing to its specifi'c character, succeeds most thoroughly in profiting by the ad..

vantageous location. In these cases, the landlord must content him self with the marginal profit of the specific partial market. As the city grows, the simple rent of the location becomes an in tensity rent. The buildings are erected closer together, of greater height and of more costly materials in order to benefit to the full from the advantage of location. There is a horizontal, vertical and qualita tive intensity. The last meets the desires of the strata best able to pay, and is indulged in to attract them as tenants because they are ex pected to make the highest excess offers. The horizontal intensity represents a striving by the addition of buildings to utilize the largest possible percentage of space in any given area. The vertical intensity piles floor upon floor in its skyscraping efforts. In so far as the most wealthy stratum cannot be depended upon to fill the closely built and· tall rear houses, thus shut off from light and air, these are fitted for tenants of smaller means who are brought in to maximize the gross rents collected. In order to increase the total yield through these strata, it is important that building operations proceed with a reduced qualitative intensity with the utmost possible saving of ex pense. In the vertical utilization of space it is especially note-worthy that within certain limits every additional floor is built at less ex pense, as the divisor is increased by which is apportioned the cost of construction for foundations and roof. Notwithstanding all economies, THEORY OF SOCIAL E.C·ONO,MY 343 a limit must finally be reached at which building more compactly and at greater height ceases to be profitable. Up to this limit a law of diminishing returns operates for accommodations added laterally and vertically, which is in some ways akin to the law of diminishing returns for agricultural land. The elevator has raised the limit for the upward construction of buildings, as may be plainly seen in the American skyscraper. Ultimately the building codes may, from considerations of public health, place more rigorous restrictions upon the congestion and height of building operations than does the per sonal interest of the speculative builder.

The growth of a city increases rents in residential as well as business sections, because for both classes of property the stratification in creases, and with it the appraisal of differential advantages of location becomes sharper. The number of locations that are distinguished in creases and with it grows not only the number of those offering prem iums but also the amount of the premium that may be obtained in the most advantageous locations. The most effective means of depressing rents is the multiplication and improvement of urban transportation facilities, for these greatly enlarge the available sections. Our present theoretical inquiry cannot consider to what extent it would be possible favorably to affect building operations and rentals by administrative measures, by an adjustment of building codes and by an organization of credit facilities. It is charged with even greater insistence that a monopoly exists in the case of urban land than in that of agricultural land. But even the most pronounced specific market position, conferred by locations of Unsurpassed advantages, does not convey a monopolistic position. In those markets with less evident ad vantages, parcels of land, dwellings and business properties are available in large number both absolutely and relatively. Unless obstructions are purposely in troduced, such properties are capable of considerable multiplication at the ex pense of arable land. To what extent an artificial monopoly may be created, possibly by the agency of speculators buying up building lots, must be decided by an investigation of individual cases. The great increase of prices to which such lots have been subject in every rapidly growing city, offers welcome op portunity to speculation; but enormous capital would be required to gather in under the monopolistic control of an individual or pool the total plottage in the circumference of· any large city. Even this would not cope with the situation, for to be fully effective, the monopoly would also have to control all older build ings permitting of reconstruction. Wherever speculators step in without reach ing some agreement, such as is the case with pools or trusts, they invariably create competition among themselves.

To explain the quick increase of urban rents in rapidly growing cities, an in crease which is extremely burdensome to the population, it is not at all necessary to assume a monopoly. The determining factors are found in the inrush of 344 SOC I AL E CON 0 M I C S tenants who outbid each other in their desire to live in close proximity to each other because they wish to trade together, make gains together and enjoy city comforts. The supply of the buiiding entrepreneur responds to the demand. It carries out the exactions of these tenants or would-be tenants in furnishing available space. According to ·these dictates, it builds more luxuriously, more compactly and higher. The tenement house need not,as has often been con tended, represent the result of a "prohibition of building," a rule imposed by those with a monopolistic power over free building lands. It may also be ex.plained as the structural form of the intensity rent towards which the demand moves in densely populated areas in the premiums which it offers for the privilege of living close together . Just so the skyscraper is the structural form of intensity rents in the business world.

In a similar manner, one may expl~in the surprising phenomenon of the tenement house in the outskh.,ts of the rapidly growing city without jumping to violent conclusions like those ofa capitalistic injunction against building. In a city of slow growth, the intensive structure of a tenement house in the out skirts would not be remunerative. Builders have to be satisfied to utilize the land by erecting scattered and low buildings. It is otherwise in a quickly grow ing city. There, men will reason, extensive construction in the outskirts of densely populated sections will not be profitable, because in a short time the smaller buildings erected at so late a day, will have to be torn down. These will go to make room for tenement houses as soon as the demand of the largely increased population makes the latter profitable. The anticipated urgent de.; mand of the future exerts its influence in advance, making it appear profitable, notwithstanding the immediate loss of interest, to reserve building lots for the huge tenement house that is coming. A broadly conceived urban housing policy 'might possibly discover different means of satisfying the requirements of the population. But for private enterprise, where freedom of movement is not lacking, the method here indicated may be the shortest and easiest way that could be suggested by business calculations.

To explain this matter fully, a further short remark might be of service. We have spoken of urban rent as a differential rent. We have explained it by the excess payments or premiums which are paid for the better locations. Con sistently with this explanation, the' poorest location would be rent-free. Truly enough,' the rentals would cover its agricultural rent,' but they would leave no surplus for urban rent. Inthe face of this statement it is no contradiction if we find in the outskirts the tenement house, the structural embodiment of in tensity rent. These outskirts are the extreme border of the compact nucleus of the city, but before we reach them we must traverse a fairly wide zone of urban settlement in the "ultra-periphery." If the tenement house on the rim of the city yields to its owner an intensity rent, this is altogether in keeping with its location. It already possesses the one great advantage of location, direct con nection with theheart of the city.

The influence of speculation would never have been so greatly overrated as it is, .had the nature of the outlay incurred by the 'speculator in purchasing plottage been fully understood. This expenditure is not one of the initial costs of acquisi tion which determine ultimate prices. It can figure only in the entrepreneur's own costs which, as we know, cannot settle the final price. Merely because the speculator has paid a relatively high price for his land, he is not enabled to force higher bids from the demand. It is preCisely the reverse that· is true: the THEORY OF SOCIAL ECONOMY 345 ultimate offer by the demand is the standard for the price which the speculator would have been justified in paying for the lots. The land is the specific factor in the building enterprise. The share of the yield attributable to it and its capital value are ascertained by specific attribution. This yield is the balance remaining after the costs, properly speaking, have been deducted. On the books of the speculator, where the enterprise results unfavorably, the loss must first be charged against the acquisition-value of the lots.

The assault on urban rent as the creature of monopoly and speculation is for the purpose of making it appear as a gain not earned by labor. No such exaggerated assumptions are necessary to reach this conclusion. Our premises are far more convincing if we start with the recognition of the fact that urban rent is the result of progressive outbidding on the side of the demand. The share of labor, especially that of the entrepreneur, in bringing about urban rent is indeed slight. Only once during the life of a building is the labor of an entrepreneur required. rrhat is during its erection, which term includes any major reconstruction or alteration. The task of the entrepreneur in building operations, however, is very important. It is above all especially important to decide correctly upon the degree of intensity to be observed in construction. For the many decades which follow, a simple routine of administration is all that is required. This a paid official can attend to as well as, perhaps better than the owner himself. For this additional span of the life of the buildings, urban rent is gained without labor. .All increments which accrue during thi.s period are unexpected and unearned. This is the significant difference between urban and agricultural rent. The latter in the majority of cases is a rent earned by the owner's personal labor. There can be no objection from the point of view of the economic theory of urban rent to those proposals of taxation which purpose to appropriate the increments of urban rent for public use. No more can objection be raised to the seizure of the land itself by the cities. However, methods must be' formed of protecting the architectural development of cities against bureaucratic regimentation.

The many and serious evils of urban housing: extortion in building operations and for dwellings, the wretchedness of housing facilities in proletarian sections, cannot be entered into in this theoretical inquiry. § 67. PRODUCTIVE INTEREST N atwral prod,u,ctive interest-ProdJuctive loan interest-Loan interest and money capital-The "abstinence" of the capitalist. In the money economy productive interest may be drawn as natural or as contractual interest. As in the case of agricultural rent, so here the uatural form is the original one. From it the contractual one is derived. This natural interest is that share of the yield which the producer attributes to the capital employed. We have explained the law of its formation in detail in the theory of the simple economy. It is unnecessary to add to our earlier remarks. Unless additions to the productive capital are accompanied by advances in the technical 346 SOCIAL ECONOMICS arts, they reduce the productive interest since they decrease the mar ginal· contribution of capital. Improvements in technique at first in crease this interest; but at the same time they foreshadow its reduc tion at a later day since, by increasing the yield, they enlarge the fund from which capital savings can be made.

Contractual productive interest, productive loan-interest, is drawn from money capital lent out for productive use. In deriving the law of its formation, we shall assume that no loans for other than pro ductive purposes are made: 1. e., that this is the only form of loan interest. For brevity's sake we shall call it simply loan-interest while we adhere to this assumption. As· a further simplification we shall disregard the mediation of banks which bring together the supply of and demand for capital and whose compensation is stipulated to be a share of the interest. We shall assume that the entire supply and demand are able to meet directly and that the interest agreed to by the demand reaches the supply without deductions. We shall also assume the participation or all three groups whom we distinguished in our exposition of the formation of capital in the money economy: the moneyed capitalists, entrepreneurs producing capital goods and those using them. Finally, we shall assume an undisturbed course of events.

Under these conditions the supply of loan capital comes from the moneyed capitalists. For every sum of money which they advance, the natural guarantee is deposited with the entrepreneurs who are form ing capital goods and who have produced more than they themselves can use. They must therefore sell this surplus product.. The demand comes from entrepreneurs using capital goods in their operations in larger quantities than are met by their own capital reserves. The basis of the interest which these men offer to pay is the marginal con tribution of the capital or the productive interest which they antici pate. In an orderly market competition will bring about a rate of in terest which reaches, but does not exceed, this marginal contribution. Moreover, the entrepreneurs always enjoy the advantage from the use of the capital of extending their operations and of increasing their entrepreneur-incomes from other sources. When because of improve ments the marginal yield of capital rises, the loan-interest rate will also rise. Those entrepreneurs, who under these conditions cannot obtain a correspondingly higher yield from their capital, will not be successful in their applications to the loan market. They will be out bid and excluded by others. To make possible the provision of loan capital for uses with smaller marginal yields, new savings must first be made from the increased yields.

THE 0 R Y 0 F SOC I ALE, CON 0 M Y 347 In the business world these relations frequently are subject to a different interpretation. Men claim that the quantity of money available in the national economy is of itself the determining factor. Surely, they say, the" price of money" depends on the "abundance" or "scarcity" of money. Moreover they contend that every financial stringency arises from the fact that they "are short of money" and they can think of no better relief than that more money should circulate in the country. This line of reasoning arises from a mis conception that is current in speech, the interpretation of the money form of capital baldly as capital. In truth, like any other· partial capital, money capital is only capital when functioning as part of the total capital of the country. In order thus to function, it must he backed by the natural form, its constant concomitant. The mere in crease of the physical supply of money carries advantage only to the individual entrepreneur by adding to his share of the natural wealth of the country. For the national economy as a whole, it is of no advantage; the increase of the volume of money is off-set by the de crease of its value when the national wealth of the country remains the same.

The businessman's point of view has a certain justification only in times of crisis in the money market. During financial crises, the supply of money capital is suddenly and sharply reduced while the demand increases. Liquid capital is held back as much as possible by its owners; many payments which would have been made in the market cannot be effected because sales cease. On the other hand, the demand is extensive, as many obligations fall due from the period of intense business activity which preceded the crisis. This demand is most urgent; capital is needed in order that obligations may be promptly met and solvency maintained. Under such difficulties a much higher value is placed on the right to dispose of capital than at other times when it is demanded for investment in new enterprises. In such a period money capital is looked upon as a prerequisite to the preservation of business standing and even to the existence of the business itself; there is a willingness to pay a rate of interest that exceeds the contribution of the capital and to curtail entrepreneur incomes or the substance of the capital itself. It will, indeed, scarcely be possible to relieve the tension except by multiplying the media of payment. Those entrepreneurs whose accounts show them to be sol vent but who lack the means of immediate payment, must have credits extended to them. The credits must continue until the condition of the market has become sufficiently stabilized to allow the values pre pared by these men to be disposed of, or until their debtors, from 348 SOCIAL ECONOMIC'S whom. collections are expected, have themselves succeeded in making sales and effecting a collection. During periods of extreme tension, the .substitutional service of the means of credit payment may be somewhat extended. Ordinarily, they are only issued after natural values,which are to provide the customary security, have been sold to solvent buyers. Now they may be issued against values not yet sold, although naturally there may be some risk of default in the security if the market should not be receptive for the values actually prepared.

So far we have assumed a capital market which is an ideal unit. The assumption, however, is never realized. The market is split up into a number of separate markets between which an equalizing process operates through more or less· obstructed channels. We shall have to keep in touch with actual conditions, at least so far as to distin guish with decreasing abstraction, the two partial markets for com mercialloans and investment. In the commercial section of the money market, short term transactions involving liquid working capital are considered by both the supply and the demand. In the investment market, longer. periods, even permanent investments, are expected. In the money market a period of intense business activity and cor respondingly active demand alternates in the course of a year with a period of quiescent business and less active demand. Allied to this, there is a corresponding movement on the part of the supply. Dur ing the first period, the business community holds back its own means; during the second, unemployed capital is held in readiness for short loans. Thus within the year the commercial rate of interest is sub ject to relatively wide fluctuations. These variations would be even broader if it were not possible to resort to the elasticity of payment by means of credit.

During the entire .course of economic development the trend of the rate of productive interest is downward. Despite all technical progress, the increase of capital reduces its marginal yield. Just as agricultural rent is gained by laboring and is therefore earned, so natural productive interest is earned by active effort. It is· a problem apart from our present study whether an economic order apart from the existing one would or would not make. possible an. increase of the earned yield of capital and its more appropriate distribution. This question arises especially in the case of the socialistic economy. Precisely as urban rent accrues to the lessor, so loan-interest does to the moneyed capitalist irrespective of any exertion on his part. Is loan-interest for this reason unmerited? The question leads us to the doctrine of the "abstinence" of the capitalist. This theory attempts to prove that although the capitalist does not earn the interest by his labor, he obtains it for sound economic reasons.

THE 0 R Y 0 F SOC I A L .E CO NOM Y 349 When he collects funds it is always altogether within his choice to consume these in the satisfaction of his personal needs. When he does not do so, he re ceives in the interest on his money a fit reward for his abstinence from personal consumption. The name of this doctrine must in the first place be regarded with disfavor. The term "abstinence" applies properly only to the saving of capital by those persons of small and moderate incomes. These individuals actually do have to curtail their enjoyments in order to save. When applied to the conditions of the upper and highest strata, abstinence is a misnomer. These classes of society are abundantly provided with means to meet all current expenses. In their cir cumstances saving is facilitated and assures an increased income for the future as well, but it may hardly be regarded as a sacrifice. We much prefer to have recourse to a different name and to speak of a willingness to dedicate capital which the capitalist is bound to practice. He must maintain this willingness not only for his own desires but equally because of a wish to cater to the immediate needs of other persons. This willingness must extend not only over the period of the actual formation of the capital but must continue throughout the entire period during which the existing capital is to be preserved.

Furthermore it should be clearly understood that "abstinence" alone is in sufficient to explain productive interest. The "abstinence" of the moneyed capitalist would be wholly unproductive, were not the natural capital, which is the source of loan-interest, created by the effective activity of the producer. "AbstinenC'e" or, to use the term we prefer, the willingness to dedicate capital which the moneyedcapitaJist must exhibit has a more restricted effect. It aids in forming and preserving the money form which supplements the natural form in a monetary· economic order. Against the doctrine of abstinence, Lasalle has directed the entire acumen of his criticism. However, his sarcasm is justified only in so far as· the theory is applied to the wealthy classes who make no sacrifice of personal consumption, and to the natural form of capital goods which cannot he personally consumed. While the. willingness to dedicate capital cannot be ascribed to the great moneyed capitalists as their especial merit, it cannot be dispensed with in the given economic order. It is true that should they all by common assent at the same time proceed to call in their outstanding loans in order to sq:uander their wealth in lavish and increased outlay, they would be unable to carry out their intentions to the letter. Their holdings could not be turned into cash on short notice nor could the demanded consumption goods be made ready at once. But such action would precipitate an economic crisis that would shake the whole productive edifice of the country. In the long run it would also endanger the existence of more durable natural investment-goods for whose care the indispens able working capital could no longer be secured. Productive loan interest and the yield of productive capital are so intimately con350 SOCIAL ECONOMIC'S nected in our economic organization that the one can never be obtained without the other.

The willingness to set aside capital arises from a desire to equalize as far as possible the means which provide for the present and the future, or else to better the future provisioning as circumstances' al low. Even in the case of persons of small incomes this tendency is emphatically induced in order to protect oneself and family from hazards of unusual needs or of disturbances in the conditions of acquisition. It may be observed that the inclination to save is stronger among that part of the working population that is above the subsistence level than it is in the lower reaches and even the higher strata of the middle classes; whose income is exhausted by the expenses that are indispensable to their manner of living and who may also be protected to a greater extent against fortuitous events by the institu tions of their. social station. The readiness to dedicate capital is especially marked when the current income is increased but the ex ternal conditions of life are not raised to higher standards and sub jected to the demands of a more exalted social position. Individuals, raised to frugal habits and with little imagination to kindle their desires, are more favorably inclined to saving than others. But the one most predisposed is the miser, inured to the lure of extravagance and inclined to gloat over the charms of swelling revenues.

As needs increase or the accustomed incomes dwindle the willing ness to capital dedication is impaired. Under the worst conditions the withdrawal of savings effected in more prosperous times has to be determined upon. In the case of individuals who plan to invest capital savings in their own enterprises the resolve to save is re:i)n ,forced by the prospect of entrepreneur's profits and wages in addition to interest. When the rate of interest is. lowered owing to the continuous in crease of capital, the willingness to practice savings is weakened. Some of the intensity of the desire, which a higher rate could have aroused, is lost. This is true, however, only in the case of individuals whose income has been increased and who are participating in the increase of capital. Those for whom the lower rate has brought about a loss are more inclined to save to make up the shortage in their revenues.

§ 68'. CONSUMPTIVE INTEREST Interest on urban mortgage loans. Consumptive interest is only drawn as a result or contract. The use of the credited sum of money does not enable the debtor to obtain THE 0 R Y 0 F SOC I A L, .E CON 0 M Y 351 a yield from which to pay interest, much less to repay the principal. Both of these must be met from other income of the debtor. The principal itself is· consumed in the current expenses of the household. When an economy is properly managed, the motive to incur con sumptive indebtedness is found in a desire to equalize present and future satisfactions. When increased receipts may be expected in the future, when immediately larger expenses must be met or when both contingencies occur simultaneously, consumptive indebtedness is permit,ted, nay, even called for. It would be uneconomic to disallow important satisfactions which might be enjoyed by anticipating re ceipts through a recourse to credit. This statement assumes that the receipts would otherwise be later dedicated to less important satisfac tions. Thus consumptive indebtedness may be justifiable for per sonal education or training, the raising of children and similar ex penditures of providing in advance for the future, none of which properly fall within the province of the acquisitive economy.

But in numerous economies consumptive indebtedness proceeds from that undervaluation of future desires which is characteristic of weak management. Here we should explain that by weak economies we mean generally those of small incomes. However, the term also in cludes those that are not managed with strong forethought and are slavishly subject to the passion of the mOlnent. Such consumptive in debtedness adds to the gratifications of the present at the expense of those of the future. In the case of distress loans such a course of action on the part of the debtor is excusable, possibly justifiable and unavoidable. He may have no other choice than to provide momen tarily for the preservation of his existence and the immediate pressing need, leaving all else to the future. On the other hand the debtor who owes his position to recklessness or lack of thrift acts uneconomically; most uneconomically, of course, if he drifts thus to complete economic ruin. He places the desire of the moment above the needs of the .

future for no better reason than its present· appeal. He atones folr ihoughtless gratifications and passing allurements by enduring priva tions and social ostracism. The debts of the state and the debts of other public bodies are, for the greater part, incurred for consumptive purposes or, to speak more accurately, for purposes of public administration. They are. incurred to cover current expenses which the public bodies have to defray for purposes of the protection or education of the people: for carrying on wars, for preparing and maintaining military outfits, for maintain ing schools and the like. As in the private economy, so in that of the community, consumptive indebtedness may be justified by the circum352 SOCIAL ECONOMICS stances, nay, even demanded; but it must be burdensome and perilous, where it is decided upon as a result of short-sighted undervaluation of the demands of the future, as the outgrowth of an insatiate desire for power, of unbounded ambition or party passion.

In all cases of consumptive indebtedness, justified or unjustified, the debtor finds in his divergent appraisal of the present and future effects of commodities, the inducement for the payment of an interest which he agrees to discharge over and above the principal sum of money borrowed. As regards the private as well as the public emergency-loan, the disposal of an immediate pressing need is justly more highly estimated than the care for a less urgent need to be experienced later. From expenditures devoted to the advancement of personal or social position, increased future effects are expected, which induce parties to look upon the payment of a premium as justified. The reckless or unthrifty debtor places present desires, considered less important by the dispassionate observer, above future ones, which should be more highly appraised. Passion clouds the understanding; but in so far as men yield, it is an impelling motive for the payment of a penalty in the way of interest.

In all these cases, the difference of present and future appraisals offers an exact standard for the amount of the premium, or excess pay ment, which the debtor is willing to offer when the need is greatest .. In the market, where supply and demand come together, the offer of the marginal debtor .determines the rate, i. e., the lowest bid of those applicants for credit who must still be admitted in order that the entire capital in the market may be absorbed. The coincidence of productive and consumptive demand offers no difficulty to the theoretical solution of the problem. If we regard the market as a closed unit, the marginal offer at the time is always de cisive. As far as the moneyed capitalist is concerned, it is a matter of indifference to him what use is made of the sum lent, provided only that the payment of interest and principal are assured. It may often be that he knows absolutely nothing of the use to which the money is to be put. Private capital forms a unit; its unity binds together the supply and creates a tendency to a single rate of interest.

This faet does not do away with the contrast in the natural forms of guarantee for the two types of loan. The social effects of purely private capital that is consumptively lent and is secured exclusively by natural consumption goods, are radically different from those of productively loaned money-capital, whose increase is accompanied by a growth of the· possessions of natural productive goods in the national economy. Loans for consumption must always unduly hamper the THE 0 R Y 0 F SOC I A L .E CON 0 M Y 353 formation of national capital when they extend present consumption beyond the margin that an equalizing foresight would allow. As re gards the debtors there arises the added burden of an increase in the rate of interest. It is not our purpose to inquire in this connection whether a homo geneous capital market actually forms or whether in its place separate markets arise between which the rate of interest is not wholly equalized. We have already explained in its proper place the fact that the cases of the weakest debtors, exposed to usurious exploitation, detach themselves from the well regulated capital market and give rise to the prices of usury.

The interest on· capital to be obtained by renting or leasing urban dwellings is a natural interest to be explained from the cost-law. AS for any other use, private capital can be obtained for building purposes only when the customary interest on the principal is added to the costs and is repaid from the yield. If it were not paid, the de mand for dwellings would be met by an insufficient supply. Presently the tenants would be forced to pay permanently higher rentals that would yield the appropriate interest to the entrepreneur or the owner of the house. In the long run the extent to which capital is set aside for urban building tends to balance with the dedications of productive capital and consumptive loans. . The loan-interest on urban mortgages rests on the basis of this natural interest. Our discussion of the "abstinence" of the capitalist in connection with productive interest applies also to consumptive interest and to the interest which is drawn from urban building capital and mortgages.

§ 69. ENTREPRENEUR INCOME AND PROFITS The specific form of entrepreneur income--The specific nature of entrepreneuf'i profits-Oapitalistic entrepreneur profits. Entrepreneur income is that part of the yield of an enterprise that falls to the share of the entrepreneur. In order to determine its amount, there must be deducted from the gross yield of the enterprise all costs of materials for production, all shares that are paid out in any form to other parties to the operation including wages of em ployees and the costs of their insurance, rentals and the expenses of hiring the use of outsiders' material values, and interest on bor rowed capital. The entrepreneur frequently keeps hig account of 354 SOCIAL ECONOMIC'S net yield so as to allow by previous deduction for all these shares. In this event, if we disregard taxes and other public dues, we may say that entrepreneur income and net 'yield are coincident.

The entrepreneur's income is composed of a series of items of vary ing origin: entrepreneur's wages, interest and profits. The wages of management are that part of the net yield against which is charged his labor performed as entrepreneur. If in addition he performs other executive work, such as an employee might at times discharge, the amount that is due for such service should be deducted before de... termining the net yield. Entrepreneur '8 interest is the interest on that part of the entire invested plant capital of which the entre preneur is the owner, or more briefly on the entrepreneur capital. Customarily the rent on personally owned land is included in thi!.s interest. Entrepreneur's profits is the balance of the entrepreneur income after deducting the first two items. The theoretical problem on which our attention is centered is the entrepreneur's profit. This is the particular part of the entre preneur's income against which the objections are most Iorcible. It is the part which he claims as entrepreneur even when wage, interest and rent are drawn by other parties. Even a socialist would hardly object to wages of management, though he might depart from current views by drawing. the lines more narrowly as to the work of conduct ing operations and appraising its value at a lower figure. F'or ae curate calculation entrepreneur's wage and interest are part of his operating costs. He should constantly see to it that his own labors are as remuneratively employed in the enterprise as though employed in the service of another for the same purpose, or, in the case of his capital, as though it were lent to others in consideration of the payment of interest.

There is little in substance that must be added to these remarks on wages of management and entrepreneur's interest. However, we still must give attention to the form in which they are drawn. In all other cases wages and interest are a matter of agreement in exchange .. Only the entrepreneur draws these not by way of exchange but in their "natural" form. Hence through this form the entrepreneur's '\\J?age and interest are combined with profits to constitute the whole of the entrepreneur's income, which is the only income drawn in the money economy without exchange. This does not mean that his income is cut loose from the market and its laws. Quite the reverse is true, for it is set in the midst of the network of economic relationships. While it is never directly agreed upon as a price to be paid, it is the final result of the entire comput1a}THE 0 R Y 0 F SOC I A L ,E C ,0 NOM Y 355 tion of price in these transactions. It is from the entrepreneurs that the entire supply of products and other prepared natural values arises.

They also constitute the entire demand for means of acquisition. Their income is the excess that remains when the total proceeds realized by the supply are determined and the gross costs to which this acquisitive demand has agreed are deducted. In the final analysis the formation of the entrepreneur income is dependent on the relation ship between this total supply and acquisitive demand. The more persons who seize the opportunities for enterprise at anyone time, the more meager will be the entrepreneur's income. The fewer their number, the more advantageous will be the position of the entre preneur, for there will be a better selection of the more favonable openings promising the largest profits with the lowest costs of acquisi tion. Entrepreneur income is drawn in the form of a specific attribution. It is the amount left over after deducting the shares of the yield at tributable to other participating factors. But in this respect also our conclusions must not be too far-reaching. This specific attribution follows in the first place from the legal position of the. entrepreneur; it is an expression of the fact that every enterprise is undertaken for the account of its legal owner. From an economic point of view by no means the entire entrepreneur income, that is computed as a re mainder, is of a strictly specific nature. Entrepreneur interest like any other has a cost character. So in the majority of cases have wages of management. In principle, only entrepreneur profits have a specific character. We may thus call these profits the specific yield of the position of entrepreneur. All too often, however, this is no such profit.

The attempt has been made to base the entrepreneur's profit on the particular risk to which he is exposed by virtue of the fact that thle enterprise is carried on for his account. It is claimed that he would never expose himself to the possibility of loss had he not reason to expect profits from the venture. If this is true, should not enterprises involving the greatest risks entitle the men who pursue them to the largest profits? Would we not have to expect that in the sum of all cases, profits and losses would balance? The position of the entrepreneur derives its specific character from the fact that it demands the combination of a service of management in the nature of labor with the possession of a certain amount of capital. The latter may be either property, or, owing to the ability to obtain credit, a power over the disposition of capital. Selection is considerably restricted; many individuals who may be qualified to 356 SOCIAL ECONOMICS direct work, refrain from seeking entrepreneur employment because they lack capital; many who have capital refrain because they lack personal qualifications.N evertheless, there remains an abundant number of candidates for the enterprises to be undertaken, persons able to comply with both conditions, except in a comparatively limited number of cases. For these the selection is still further narrowed either because especially rare services are imperative or a specific command of capital is needed, specific in its unique character or else in its magnitude. Only in these cases does an enterprise acquire a specific nature that establishes the basis for the entrepreneur's profit.

For the larger number of small and medium-sized trades, the fa vorable market position which they formerly enjoyed has long since passed away. They are today, with scarcely an exception, all in a sorry plight. They yield not only no profit, but often no more than a scanty wage. The skill. which they require has become the common property of great numbers. They no longer offer a problem of eco nomic leadership. Their relationships have become altogether typi cal, while essentially· new methods of prosecuting them can no longer be introduced. Agricultural pursuits in the majority of cases have never, either under peasant management or on the large scale of modern methods, offered prospects of entrepreneur's profits. The large scale industrial enterprise has always been the source of enor mous entrepreneur's profits. During our capitalistic period it has become so to an even greater extent.

When we look back upon the road which industrial development has travelled from its beginnings down to the present powerful forms, we can well understand why what we have witnessed has happened. In its journey hitherto, the extraordinary advances in the technical arts and in methods of organization have opened to modern industry wider and wider fields of production and trade and have unlocked the gateways of constantly expanding markets. Thus there have been created numerous new opportunities for labor. These have imparted an impetus to the increase of population and thus have contributed not a little to the enlargement of the markets. Despite the reverses which, here as elsewhere, were bound to occur, increasing oppor tunity was assured through the broadening markets. Larger quanti ties of commodities could be disposed of at prices which had origi nally been computed in anticipation of much smaller sales. The advances in technique and organization at the same time secured diminishing costs over a long period of years, even though in the end the larger demand for materials necessarily resulted in a rise of cost prices. The condition of the labor market was especially favorable THE 0 R Y 0 F SOC I A L .E CON 0 M Y 357 to these industries for a long time. To this market they attracted the new and at first seemingly inexhaustible supply of untrained men, women and children. These people who hitherto had not been in dustrially employed could be secured for very low pay. At the same time extensive discharges of old trained workers assisted in depressing wages.

The striking successes achieved by large-scale capitalistic enter prise in its rise have not been due to its large capital alone. Indeed the capital was not primarily responsible for the development; rather the capital was built up from profits. Originally the main force, ,vhich secured a preferred market position of specific character for capitalistic enterprise, was the impulse of its superior leadership. The pioneers who opened the new paths had to be men of unusual ability and training, combining technical knowledge and capacity with market experience and organizing power. In addition they required the audacity of the innovator, a quality that often coarsened in the severity of the fight. In all industrial countries many of the great industrial magnates rose from small beginnings, a fact which demon strates above all else the importance of personality in the position of the capitalistic entrepreneur.

'This statement holds good only for the initial rise. In later periods when the opportunities for capitalistic enterprise have been dis covered and seized upon to a great extent, the established enterprise provided with a large capital obtains a supremacy against which the gifts of the new-comer cannot easily prevail. Then too the problems of leadership are simpler. Actions are taken according to rules which experience has already established with tolerable definiteness. There has also arisen a new class, a well-trained personnel; schooled in the new methods, they are ready to aid the entrepreneur in his prob lems of leadership ata wage-rate by no means exorbitant. In the end the prospects of profit for even the older established enterprises will become less favorable. The organization of the workers and their compulsory insurance has even now increased the costs of opera tion in many localities. The abundance of accumulated capital will ultimately assert itself by crowding all opportunities for business enterprise; the increased competition will force upward the prices of cost-goods.

For the present at any rate this has not yet become the general con dition of large-scale capitalistic enterprise. The giant enterprise and the great combines of businesses have introduced a new type which is only now developing. In its turn it lends new significance to the genius of leadership. In the present generation also there are in35,g SOCIAL ECONOMICS dustrialists whose names are known the world over and who started as workingmen to end as multimillionaires. The enormous capital invested in the .American trusts and the property of large numbers of individual owners, is confided to the superior management of a small group. The talent of economic leadership has never before had the opportunity of displaying itself on so broad a base of capital. Never before has the general yield been so great on which to reckon the share attributable to leadership. .As these leaders are also in a posi tion to draw revenues as promoters, their profits are realized not only in the yields but in the capital. itself. Only for the coming gen erations of trust leaders will the chances of profit be less favorable, owing to the vast wealth now accumulating.

Enterprises, operating under particularly favorable conditions, add to the entrepreneur's profit an industrial rent that follows the same law as the agri cultural rent of better grades of land. With the exception of the remarks in the last paragraphs regarding com bines of enterprises, this exposition has presupposed the owner's enterprise. When it comes to the collective enterprise, conditions are in many respects different. The wages of management are apportioned among officials; in the case of the mixed forms of the stock-company and combine these wages are very large for the highest managers. .They are lower in the pure form of officials' enterprise, because the most forceful leaders naturally prefer to connect them selves with the former class. Nothing inures to the legal owners in these cases except entrepreneur's interest and profit. The prospects of profit are, however, materially diminished. In the case of stock-companies and combines this is because of the intervention of the promoters which we shall presently discuss in more detail. In the case of the officials' enterprise the main factor is that, as the most recent form of enterprise, it made its appearance only in a period of waning entrepreneur's profits and must cling to the narrower and safer ground of approved technical and commercial experience, which is taken for granted under the management of officials. When such concerns take over existing owner's enterprises or stock-companies, they are charged from the start with interest on the purchase price, in which the full specific entre preneur's profit of the preceding owner has been capitalized. Especially the state and city, because of their governmental trusteeship, are bound to exercise greater leniency as employers; they are also more inclined to. yield to ex pressions of public opinion. In general they are likely to be less _vigorous in defending the interests of the entrepreneur.

§ 70. PROMOTER'S ENTERPRISE AND PROFITS Management atlJd the masses in the stock-company and in the officials' enterprise . .A partnership is formed by the same individuals who will carryon the business. In the. case of the. stock-company, as a general ru~e, THE 0 R Y 0 F SOC I A LIE, C ,0 NOM Y 35,9 the promoters promptly retire from the enterprise and make room Ior the stockholders who come in subsequently. For this very reason they are called promoters, their participa~ion being confined to the act of promoting the business. Only in the case of smaller, local stock-companies is a form of organization adhered to, the so-called successive founding, in which promoters do not take any a~tive part. In these cases conferences and action leading to incorporation are taken by the individuals who are themselves to be permanently con nected with the company. Of course among these men there will be some who are prominent as leaders, who make the first proposal and who lead the discussion in conferences. But these "leaders," pro ponents as they are called, differ from promoters, properly speaking, in that they wish to remain active members of the companies they form. In the case of all large stock-companies the so-called" simul taneous promotion" has become customary which takes' its name from the fact that the founders come before the public with the enterprise completely constituted in one act by the publication of the charter 1 to give it its legal basis and by paying the capital into the treasury 2 to establish it economically. The term," simultaneous promotion, "

does not, accurately portray the nature of the formalities observed. Under this procedure, as is also the case in successive foundation, lengthy conferences and consultations between promoters have oc curred. Moreover, although the association is truly formed when an"" nounced, the business of promotion is not yet completed. The first act, the foundation, has to he followed in due course by a second, the sale of securities. The stock is placed on the market in order for the promoters to realize their profits. Even on this flotation the stock does not always reach its ultimate destination, the investing public. It is frequently first taken up by speculators on the Exchang'e who hope at an opportune moment to turn it over to the ultimate pur chasers at aprofit. But with the emission of securities the promoters have cOlnpleted their work; the profits which may later be realized by speculators are speculative profits which, though akin to the pro moters' profit, are to be distinguished from the latter in kind.

The promoters 'profit is computed as the remainder after all costs 1 Veroffentlichung des Statuts. 2 Trans. note: It must be borne in mind that the corporation is a legal as well as an economic creature. Under the more advanced European laws the process of formation differs from American practice. The Grunder, founder, is not iden tical with the American promoter although the more familiar term is generally used in the translation. One of the striking differences is in the clause noted.

360 SOCIAL ECONOMIC'S of promotion are deducted from the proceeds of the sale. In the m'any instances where the founders have created an enterprise. whose net yield exceeded the retqrn which the public expected for its capital subscription, this promoters' profit has been realiz.ed without injury to the public. As a rule the return will exceed somewhat that of good securities paying at a fixed rate of interest; since the number of individuals who invest in industrial stocks is somewhat smaller than that of those seeking fixed investments, a special inducement is re quired to secure the necessary number of subscriptions. It is difficult to understand why the promoters, if indeed they have succeeded in obtaining a· still higher rate of return, should not retain for them selves the added value thus created. They fulfill the justifiable ex pectations of the subscribers if they quote a rate of emission that is based on a capital value derived from the rate of interest at which the subscribers perform their calculations. Whenever this capital value leaves a surplus over and above the costs of promotion, this surplus is due to the. promoters according to the rules of specific at tribution of yield.

Promoter '8 profits are a particular kind of entrepreneur's profit. They are the reward for" undertaking the enterprise. ' '1 These prof its collect in advance on a capitalization of the profits of the enter prise. The rare opportunity that inheres in the promoter's position to realize entrepreneur's profits from increases of property value is sedulously sought. It is easy to understand how at times it is shame lessly abused, calculated as it is to give to those who would employ their economic superiority unfairly a ready means of robbing others on a large scale and, as one might say, at a single stroke. The mal feasance of exploiting promoters deserves the most severe criticism because of the pernicious effects which accompany it. So long as there are stock-companies the system, as such, of found ing industrial enterprises is scarcely to be dispensed with. While the form of association with which it deals cannot be spared, it must be tolerated. The widely scattered multitude of those who wish to subscribe at the time of emission are individuals of the most diverse callings and stations in life. Not infrequently they live in countries thousands of miles apart. Many of them are wholly unqualified for the conduct of acquisitive enterprise generally and the majority have no call whatever for the management of the particular enterprise involved. Counsel and resolution among them cannot be thought of.

1 Fur die "Unternehmung der Unternehmungen."

THE 0 R Y 0 F SOC I A L .E CON 0 M Y 361 In order to make their decisions they must be·faced with an enterprise which is ready for action. Yet the enormous sums of capital absorbed by stock-companies cannot be r~ised except by the cooperation of the public at large. The process of promotion systematizes the act of foundation by the best informed experts of the market. At this time it appears to be indispensable to the enlistment of publie subseription for any definite enterprise. The social theorist sees in the process of founding stock-companies a special case of that leadership in general which is a prerequisite whenever large masses of human beings are to be enabled to act. The initiative of the promoter and the subsequent subscription of the stockholders are a typical example of the relations of the leader and multitude. The success that is achieved in bringing about an ac quisitive increase of invested capital is attributed to the promoters.

Malignant, unearned promoter's profits: are evidence of the power of leadership pitched against the weakness of a public, devoid of judg ment, that blindly allows itself to be led. In the days of liberalism this relationship had not been understood in the legislation regarding stock companies. Their formation was regarded as little different from the establishment of partnerships. ,The one like the other is executed as a private contract of association. But the same legal form of contract covers two essentially different phenomena. In a partnership only a few individuals associate themselves. They actually meet as free agents. Each one is brought in for a well known purpose, is perfectly aware of his individual interests and is able to protect these. In a stock-company a large number of persons have to become associated. By virtue of their very number they are unfitted for unrestricted. deliberation and the adoption of resolutions. In the same manner they are unqualified to execute of their own initiative the in troductory steps in the formation of the association. They are wholly de pendent on the enterprise of the promoters and must thus be satisfied if the latter convert to their own use the increment of the entrepreneur's profits that has been created by their initiative. The stockholders, who without the aid of the leaders would never have been stockholders, must content themselves from the beginning with a modest entrepreneur's profit that still gives them some what more than the customary rate of interest with which they would other wise have had to content themselves in another investment. The improvement that modern legislation has worked in stock-companies arises from the recog nltion of the superior power of the promoter. The contract of association is no longer treated as a mere contract but as a mass phenomenon producing, in the form of a private contract, social powers of leadership and creating oppor tunities of the gravest abuse. This recognition results in placing this mass phenomenonunder legal control.

The business of promotion has passed in the present day mainly into the hands of large banks. These alone have at their disposal the abundance of money capital that is indispensable to form stock-companies on the large scale 362 SOCIAL ECONOMIC'S required at present. The. administration of this business by the large banks is an important element of added security. On the other hand it involves a monopolistic or monopoloid relation as soon as the large banks by express or tacit agreement come to an understanding of their market territories. When the opportunities of promotion are so extensive that even the enormous capital of the large banks is fully employed, such an understanding may be. easily reached. Carried on with proper caution, the business of promoting enter prises is a source of generous profits to the promoting bank if it is in a position by further promotion to compound the entrepreneur's profit which it realizes from the property-gains in the founded enterprises. Even under such conditions, however, mammoth capital is not the single decisive factor. The genius of the leader will always have its share. The conduct of the bllsinessof pro motion demands, a high degree of intelligence and business ability which are paid for in the exceedingly liberal compensations appropriated by the large ,banks for the services of their managers. But another fact is still more im portant. We have already explained that the promotions of stock-companies under present conditions for the most part are not the foundations of new enterprises. They rest upon a substratum of successfully conducted owners' enterprises which the promoting bank acquires and enlarges. The· success ful entrepreneur-owners who sell their establishments to the promoting bank are fundamentally the founders of the stock company. To the business ability of these men is due the most important achievement in the whole development and the share of the promoter's profits justly inures to them.

The incongruity that exists from the start between the legal position of the stockholders and their task as entrepreneur makes itself felt throughout the life of the corporation. The mass of the stockholders remains at all times unfitted for the management of the business. It never performs the services of entrepreneur and must perforce, therefore, be content when it is barred from drawing the higher entrepreneur's profits. Even the restricted entre preneur function delegated by the established corporation law to the general meeting is scarcely exercised by the mass of stockholders. If they are to be induced to assert their rights in opposition to the directors, a special agitation among the stockholders is. always required. This in itself must be set on foot by the leaders of the opposition. At the general meeting the large stock holders are in power. Above all else they control the elections and set up the board of directors and other organs of the company. They are the leaders of the corporation and through them the mass of the stockholders becomes capable of action. As a natural consequence their services must be rewarded at a correspondingly high rate. The stock of companies which promise especially large profits are little by little bought up by capitalists qualified to estimate cor rectly the economic situation. Stocks which are most attractive to speculation are accordingly eagerly purchased. 'fhey may at tiines become the objects of fierce struggles between the great market controlling capital powers who acquire them in the pursuit of far-reaching schemes, possibly for purposes of reorgani zation. Stocks which offer possibilities of rising quotations rarely remain in the hands of small capitalists. Men must become entrepreneurs either in a good sense or a bad one if they would draw the higher entrepreneur profits.

In the case of purely collective enterprises, the great undertakings backed by the capital of cities, states and nations, legal status and economic position are more nearly in harmony. The capitalists from whose wealth the funds are THEORY OF SOCIAL .E,CONOMY 363 derived lend their capital as creditors in consideration of the payment of a fixed rate of interest and without assuming any of the duties of the entre~ preneur. The economic management of the enterprise as well as its establish ment is entrusted to trained officials held to strict performance of their duties and receiving a fixed though not an excessive compensation. The entrepreneur's profits become a public revenue. Nevertheless it remains true, as has previously been explained, that the purely officials' enterprise loses much of the freedom of action 'found in the stock-company and is thus confined to a narrower field of usefulness and smaller prospects of profit.

§ 71. SPECULATION ON THE EXCHANGE AND THE PROFITS OF SPECULATION Oreative s'peculation and price-speculation-Pools. Speculation in the narrower sense, on the exchanges or in prices, takes advantage of the constant fluctuations of the price of commodi ties dealt in on the exchanges or in the great real-estate markets. The speculator endeavors to foresee the future price. He buys whenever he anticipates a rise in order later to sell at a profit. He sells when ever he expects a decline in order to buy later and thus realize a gain. For his operations he selects large markets because in those he is confident of always being able to effect his purchases and sales. On the stock-and produce-exchanges he finds the conditions that make possible his operations. Also the real-estate markets of a large city offer opportunities of price-speculation. The productive trades are enemies of the speculator. They accuse him of seeking to enrich himself without labor from the values which they have created by hard work. By them his occupation is re garded as that of a man playing a game or laying a wager and as unproductive as either. They mean by this that the gains of a specu lator can never be effected except at the expense of someone else who is bound to lose whatever the speculator gains, and who, but for the intervention of.the speculator, would have lost nothing. They are opposed to those features of the exchanges which facilitate specu lation by the settlement of operations in the most convenient manner, i. e., by doing away with the actual transfer of goods or stocks and substituting a balancing of demands and counter-demands which requires· actual payments only for the differences in the account.

These charges are by no means invalidated when the producers are told that they too are only attracted to their calling by the desire for gain, and that their profits as well are only functions of the dif ferences existing between sales-prices and the prices of acquisition.

364 SOC I ALE CO NOM. I C S In a moral· appraisal of the two activities, account must necessarily be taken of the differenc~s which exist. The energies of the specu lator are focussed exclusively on the final act of the acquisitive process through which the profit is realized. In his case the passion for profits'is continually aroused without being tempered by any reaction. In the case of the producer, the entire prolonged labor of the acquisi tive process must first be performed in order to mature the fruits of his efforts. This process calls forth the highest powers of men and strengthens their better natures. Superficially the merchant is approximately ina class with the speculator but he also realizes his gains from purchase and sale only by laborious efforts. He must discover the goods w~ich he presently purchases at the source of pro duction. He must take possession of them, provide for their trans portation, their storage and safe-keeping, sort them, find purchasers and deliver the merchandise. All this he must do with the utmost attention to an economical use of capital and labor. In a similar manner, the merchant dealing in securities and capital mediates be tween the supply and the demand. In contrast to these men, the speculator builds his nest in a completed market. It is never his in tention to contribute anything by way of improving relations between the supply and the demand. His highest goal is reached when he can gather in his profit. He triumphs without taking pains to find goods, assume their possession or deliver them to others. His entire effort is directed to the simple goal of the most proximate gain. Al though as a matter of legal interpretation, his actions cannot be con strued as gambling, none the less the one passion which prompts them is that of the gambler.

The activity of the promoters of industrial enterprises is also fre quently spoken of as speculation but it is far more nearly akin to that of the productive trades. His efforts are creative. Indeed he selects as his field of action, precisely that section of the acquisitive process in which creative power is .most needed. The interests of the ideal founder turn to new ideas: to the plan, the organization, the' first experiments. Once these have been accomplished, the work started upon its course and its progress assured, the attention of the pro moter turns to other problems. His speculation is a creative specula tion, or as might possibly be said with better propriety, it is specula tive creation. It is concerned with those first stages in which creative effort is still shot through with speculation, and is only preparing to enter upon its course of regular execution. The speculation of promoters and that on the exchanges neverthe less have many features in common. In the first place, there is an THE 0 R YO F SOCIAL ,E C ·ON 0 M Y 865 external contact. The promoters by virtue of their issuance of se curities, turn straightway to the Exchange. Here speculators are frequently the first purchasers of newly emitted papers. More often than not the promoter counts upon their cooperation, through which he gains financial support. But the two types of speculation are in timately connected in the development of their business. It is the peculiar trait of both classes, that they specialize in the smallest pos sible portion of the entire acquisitive process. The promoter takes for his part the introductory act of the establishment of the enter prise. The speculator on the Exchange selects the final act, the sales which are to be effected. A further characteristic that is peculiar to both is that' they pursue their businesses under a constant change of objective. They seek to isolate the precise situation in which the value-forming idea may materialize or where values that have been economically created may be realized. Thus they are not per manently attached to one repetitive process of enterprise but take hold now here, now there, as opportunities offer and promise the largest apparent profit. Both groups of men fully utilize the mobility of money-capital. Their commitments in the form of natural values are for the shortest possible period; from these they return again and again to the liquid monetary form. Speculation on the exchanges makes the more advantageous use of the monetary form. The period of enterprise, during which the transfers yielding value are com pleted, is shorter. This sort of speculation may pileup its business transactions in more rapid succession. When fortune smiles, its profits may be reaped in a few days. The speculations of the pro moter as a rule must be adjusted to a period of years.

Because of the short enterprise-period covered by.price-speculation the impression is created that this type of speculation lies wholly outside the acquisitive process. However, this is not the case and therefore the denunciations of the productive trades are not altogether well founded. The defendants of speculation quite correctly insist that by its agency one of the most important services to enterprise is achieved. The speculator devotes his entire acumen and often ex traordinary effort to the calculation of the prices of goods sold on the exchanges. In many instances he corrects and refines the calcu lations of the producer and the merchant. At the same time he aids commerce by his own capital and that which is placed at his disposal by credit transactions. These funds he employs to absorb the values flowing towards the exchanges. The accurate, determination of prices is a matter of great economic interest. It cannot·be denied, therefore, that the speculator, when he contributes to this accurate determina366 SOC I ALE C ON 0 M I C S tion, renders a distinct economic service. He devotes his talents to a specialized entrepreneur's activity; the gains of legitimate specula tion are true entrepreneur's profits.

The opponents of speculation do not admit the truth of the assertion that speculation aids in making the formation of prices more precise. On the con trary they contend that it falsifies prices because in its supply and demand it does not set out from the actual figures of supply and demand but from fictitious quantities. Its protagonists reply that in the long run no speculative position can prevail against the actual condition of the market, that speculation can only be successful when the conditions of the market are precisely fore seen that will obtain under the future supply and demand. The theorist should persist less in this case than in any other in clinging to idealizing assumptions. These he cannot dispense with in pursuing his initial and most general inquiries, but speculation should be grasped as it truly appears. It should be appraised in accordance with the manifested natures of the persons participating Rnd with the actual distribution of power.

The passionate craving for quick riches lies at the root of speculation. This is dangerous even for. the professional speculator who after all succeeds in controlling it more or less by his market experience. It may be ruinous to the many from the general public who follow in the· wake of trained specu lators, impelled by the irresistible fascination of participation in the tremen dous fluctuations of values which do occur in theeco·nomies of nations and the world and by which so many large fortunes have been started. Promotional activity has its origin in the same root. But in so far as it has been passed on to the custody of large banks it has been held to safer limits. Their permanent interests call for guarantees to preserve their business reputation and to retain a favorable attitude ·of the market towards new foundations of industrial companies. Price-speculation as such is bound by no such enduring interests. It is true that the professional speculator feels the necessity of maintaining his reputation on the Exchange, but he. and the speculating pUblic have no permanent interest in the objects of speculation. His interest is confined to one problem: did he or did he not, for the brief period to which his speculation is adjusted, appraise correctly the condition of prices that was about to prevail according to the circumstances of the individual case and also to the general tenor of the market. .F'rom this manner of thought arise during periods of generally in creasing business pr'osperity and persistent increases of values the speculative errors that end ill disastrous crises. Prices are forced to higher and higher levels so long as there is the chance of .finding further buyers. I t makes no 'difference that experienced speculators themselves realize that the pyramided structure of high prices cannot possibly be much longer maintained. In due time-and in saying this the defenders· of speculation are correct----every such artificial structure must collapse. The facts of supply and demand finally as sert themselves. But ill the meantime the periods of universal frenzy are sufficiently prolonged to inflict enormous damage.

The distribution of power between speculators on the one side and, pro ducers and the public proper on the other, is on the whole more favorable to the first group. The professional speculator is .superior to the public in THEORY OF SOCIAL .E.C·ONOMY 367 his market experience. More frequently than not he has the advantage over the producer in that the weapon which he wields, money~capital, may be made more rapidly to serve his speculative intentions than the fixed, natural capital of the producer. Again it is sufficient if the speculator can make his supe riority felt during a brief period that enables hiin to influence the formation of prices by an adroit use of the speculative forms of business. When professional speculators of equal power confront each other, speculation will perform its economic service more effectively. But even in these circles the power of large capital makes itself felt. Under certain circumstances an individual speculator or an allied group may subject the market in certain articles and for a definite time to their power. On all the large exchanges from time to time such combinations of speculators, the so-called pools, are formed with the intention of creating such a power over one or other business territory. They are akin to the kartels in that they strive to gain a monopolistic power. They differ from the latter in that they have no other purpose than the control of prices. Pools are especially made use of to control the market when production is' too extensive to allow of any but indirect means of influencing the market, as, for example, is the case with agricultural staples. Pools are among the most reprehensible abuses of speculation. Their profits have nothing of .the character of entrepreneur's profits. They are unearned, call for no services of leadership and are extorted merely by the application of superior external means of force.

§ 72. THE THEORY OF WAGES The subsistence wage-The productivity wage-Wage-tendency to equilibriwm~· the isohv'pses, of the labor-market-The wages-fund. The wage of labor is the price paid for free, independent labor, for the labor of the worker, legally free but employed in the service of another. Entrepreneur's wages are not wages, properly speaking; the term is derived from the fact that the entrepreneur computes the amount due to his own labor by the standard ,of the wage paid for the similar services of another. We shall examine the theory of the wages of labor primarily under the assumption of a well-regulated, ideal market, permitting all parties to protect fully their economic advantage, while all disturbing influences are eliminated. The existence of stratification we shall allow to influence our assumption only in so far as it may be the ob jective basis of the labor relation. We thus assume the existence of a class of society without financial resources, that offers its labor in order to gain an income. We also assume a demand from a class so situated as to employ workers and pay them a wage; but we shall disregard for the present altogether the attendant, subjective in fluences of power and weakness, 368 SOCIAL ECONOMICS We shall examine the theory of the 'wages of labor subject to the assumptions of the theory of utility which, as we know, is valid for the developed national economy. By way of introduction we shall only briefly sketch the theory of wages that may be deduced for those primitive conditions, as to which the theory of labor correctly assumes that labor does not yet occupy the quantitative relation. But, even so, labor under primitive conditions is always too imperfectly de veloped to be pronouncedly stratified; common labor is the whole of labor. We shall disregard the fact that the freedom of the laborer, which we have assumed, is scarcely to be reconciled with the actual conditions of primitive society. The mass of the indigent population, depending solely upon their active forces for subsistence, is likely to be too weak for the safeguarding of their individual freedom; a market of free labor is not likely to exist. Free laborers, wishing to enter the service of others, will be extremely oppressed by the com petition of slave-labor-if it may be called competition. But even disregarding this last condition, the fact that labor has not yet en tered the economic quantitative relation, that the supply is therefore greater than the demand, will lead to the deplorable consequence that the wage does not find its standard in utility, for, where the assump tion applies, the marginal utility is zero. Neither can the supply ex pect to be rewarded in accordance with the risks and efforts of its performance. This is the standard, as we have seen in the theory of the simple economy, by which the laborer 'himself appraises his per formance, while an abundance of strength remains to him. The em ployer does not fee~ called upon to accept the personal appraisal of the worker and to attempt computations based upon such factors as efforts and risks. He is in a position to dictate his terms, and the supply has no choice but to agree with these terms. Competition will compel the workers to accept efforts and risks as they come, merely to gain their subsistence. The wage will be simply preservative. It will amount to the minimum which the employer must allow in order to maintain the laborer in the condition of strength and well-being that is required for his task. Quite often the lowest minimum of existence will not be exceeded. In more highly developed social con ditions, the number of domestic servants is reduced. This is a symp tom of the increased demand for acquisitive workers. In a similar manner a characteristic of primitive and' barbarous times is the great number of subordinate servants who find placement at the courts of the powerful, often for a mere preservative wage. The excess supply of workers has to fall back on the callings of war or make new settle

ments within the borders of the state or in foreign countries. Where THEORY OF SOCIAL E,C,ONOMIY 369 these employments also fail them, there is nothing left but robbery, begging and unparalleled misery. The theory of wages, applicable to the developed national economy in which all kinds of labor have entered the economic quantitative relation, may be briefly explained on the basis of the general theory of prices. The relation is plain as regards personal services, beginning with menial domestic services and ascending to the highest services of the liberalpro£essions in the state and society. All these directly serve the needs of the private or public economy just like consumption goods; like these, they are of the first "order." They are economic means of the nearest order, and like consumption-goods are therefore subject to the fundamental law of price-formation. However, serv ices are part of the personal life. .As such, they are not subject to the cost-law as are consumption goods. Hence the fundamental law of price-formation applies to them, without being more definitely deter mined by the cost-law. The offer of the marginal demand, determined by marginal utility and ability to pay, decide's the rate of wage.

This wage is also subject to the law of stratification. The general law of price has heen sufficiently explained to allow us also to deduce the 'law of wages for acquisitive labor. Acquisitive labor renders its services in conjunction with material productive means to produce goods that it does not consume directly. The de mand for it does not come directly from the consumer but from entre preneurs who prepare values for consumption. Its wages are based on the productive marginal contribution of labor as measured by the laws of attribution. It is then a yield-wage determined by that share of the yield which is attributed to labor. Inasmuch as the mass of workers, unskilled, skilled and even educated labor, possesses' a cost character, the law of common attribution is applicable to most cases. The advantage of a specific attribution accrues only for a compara tively few services that require the highest qualifications.

The marginal contribution as computed for the lowest strata, of workers, even in those national economies that have reached the high est present development, is meagre. It barely covers or only slightly exceeds a minimum of subsistence wage. In certain respects these groups are worse off than in earlier periods. Their situation has im proved in so far as their supply finds a regular demand, owing to which they enter the economic quantitative relation. But the de mands made upon them are greater than ever. In order to obtain a subsistence wage they must assume larger burdens of service under the most objectionable conditions. The entrepreneur tries to make 370 SOCIAL ECONOMICS the labor fit his calculations and to raise the hours of labor. If owing to any sort of change the marginal productivity drops below the subsistence wage, the labor-conditions of the. workers involved will be disturbed; their supply no longer meets an effective demand. Unless they can find employnlent in other enterprises, they will be thrown into the same channels to which the superfluous labor in primitive times was directed.

The law of population always exerts its most oppressive influence on the lowest strata of the workers. The· entire excess of the popula tion that is ejected from the lower groups of the moneyed class and from the higher groups of ,vorkers because it can no longer find cus tomary employment, increases the supply at the bottom. This is in addition to the increase that takes place by the direct growth of popu lation in the lowest classes. In the development of the law of wages we have not approached the problem of the relationship of the numerous partial markets which exist for the individual types and strata of labor. In this connection are we concerned with inde pendent markets or only with one. large market whose subdivisions are in the last analysis subject to the law of the unity of price? It is customary to speak of an equalizing tendency in wages which, if it were fully effective, would' have to ,be considered an expression of the law of the single price. On the other hand we hear of obstructions to this tendency which counteract the law when they are sufficiently broad in their operation. To clearly understand the answe~ to the question it is necessary to distinguish between the horizontal articulation of the branches and the vertical stratification of labor. An enumeration of the details of this articulation and stratification would serve no useful theoretical purpose. It will answer every purpose to maintain the distinctions already enumerated: between personal service and acquisitive labor; the strata of edu cated professional work, skilled labor and common labor; and finally between the work of men, women and children.

There is an effective tendency to equalization only between groups of the same level, between the isohypsemetric 1. districts in stratified labor as we might call them. The mass of common laborers is. unable to turn at short notice to the nlarket of skilled labor. It cannot even overcome the obstacles of the required ap prenticeship and the attendant cost of learning a trade. The same remark applies to the skilled worker seeking higher levels. Indeed., as we ascend in the economic scale, this condition applies to all individuals who may aspire to still higher callings in which personal qualification is indispensable. Also along the isohypses there ate effective obstructions. To apply himself to a different trade of the same level the skilled worker must again incur 1 Trans. note: At the risk of being ridiculous, the translator ventures to insert an English definition. Isohypsemetric districts are areas at an equal height above sea-level. An isohyps is the line connecting such districts. In several standard dictionaries the translator found no clue to the word. It is used 80 frequently in Wieser that a synonym seems out of place.

THEORY OF SOCIAL ECON OM'¥ 371 the expense of an apprenticeship. This is a difficult barrier to pass; only the rising generation has the possibility of overcoming the obstacle. Unless other obstructions interpose themselves, children will be deterred from entering the overcrowded branches of labor and will train for the best-paid ones. Thus they initiate an equalization of wages between isohypsemetric markets. F'rom the lower levels to the higher-ones, even in the rising generation, no such equalization takes place; or, if it does, it is only in a restricted degree. Generally only highly gifted individuals under especially favoring circumstances find their way to higher levels. If an extensive upward move ment is to be achieved, there must needs be taking place propitious economic and social changes on a large scale. The theoretical expression for these facts is that, there is not a single labor market; there are a large number of distinct, stratified, partial markets of labor between which the tendency to equalization is almost inoperative. For the higher strata there are a number of only loosely connected markets for various branches of labor between which it operates with reduced force and speed.

The amount of the wages is accordingly variously articulated and stratified. The supply of workers is attracted not merely by the amount of the wage. The conditions of work and living always exert their influence as well. Those posi tions that are regarded as preeminently distinctive or as more promising than others, are preferred even at a lower wage than could be obtained elsewhere. Conversely it is said that jobs involving unusual exertion and danger or those looked upon as degrading, are much less sought after, and that higher wages have .to be offered for these in order to attract a sufficiently large supply. This last contention, however, is not confirmed by experience, as Mill ascertained when he laid down the proposition that the most onerous, dangerous and re pulsive operations are the lowest paid. Such employment is shunned by all who have the choice of other opportunities. It is left to those who have no other chance of employment and must therefore consent to the lower wage as well.

The multitude of those who are forced down to the lowest strata and must accept the most crushing conditions, is everywhere and at all times too large. The costs of the worker's subsistence do not exert the equalizing effect on wages that we have observed between the cost of production of commodities and their prices. One of the most serious errors of the labor-theory was to transfer the law of costs from. products to human labor. It is an entirely different re lationship when higher wages and abundant subsistence attract a supply of labor and, encouraging marriage, lead to a higher birth-rate. This stratification of wages that has just been described, is a consequence of the stratification of the labor markets. It has nothing in common with the stratification of prices set forth in the general theory of prices. The latter follows from gradations in the consumers' ability to pay. This is not a factor that generally makes itself felt as regard the wages of labor. High priced lux uries, for example, do not indicate that all workers employed in their production have been paid high wages. Only those few groups of workers who possess the advantage of a specific position in industries of this sort, will be able by virtue of specific attribution to command a higher wage. The others, whose work is clothed with a cost-character, are paid the marginal wage of their partial markets. Thus, for example, common laborers in diamond mines re ceive the common-wage rate of all other industries.

A certain proportion of the entrepreneur's capital, the so-called wages-fund, 372 SOCIAL ECONOMICS is directly assigned to the payment of wages. However, it would be a mistake .to believe that this fund of itself determines the rate of wages. Its amount is always determined in accord with the total amount of the entrepreneur's capital, the conditions of labor and the state of the technical arts. When wages are low because of a large labor supply, entrepreneurs will find it to their advantage to increase the ,amount of the wages-fund. They will use a relatively large amount of cheap human labor. In this case a relatively small amount of capital will be used per man. With a smaller supply and higher rates of wages, they will be induced to use larger amounts of capital, to save labor-costs. A grow.th of capital wealth would increase the marginal productivity of labor as it offers the opportunity for a more intensive use of capital; but this con clusion presupposes that the quality of labor is not reduced. As a matter of fact the quality is much reduced as the growth of capital wealth facilitates the development of large industries" although these require higher qualifications of some of their workers.

The capital of an enterprise and the wages-fund are variable quantities. They grow with the expansion of production. In tij.e active economic movement that has heretofore characterized rising capitalism, they grew rapidly. Never theless for short periods of time they both show a certain inflexibility. There is some delay before entrepreneurs can follow up the contingencies of the period and of the labor market by technical changes of their large fixed plants. Because of the magnitude of their technical plants, entrepreneurs can only determine their demands for labor on a large scale. Thus the erection, of a smelting furnace leads to the immediate employment of a large number of new workers. On the other hand the restricted operation characteristic of periods of depression often affects a large number of men at once. § 73. THE FORMATION OF WAGES IN THE MODE,RN LABOR-MARKE,T The wage of unorganized workers--Subsistence income-Maintenance and in come suitable. to social position-The wage 0/ organized womerB--Olass con sciousness of labor organi~ation8~Law of combinations.

The idealizing assumptions, with the aid of which we deduce the theory of wages, have never been realized in the past, nor are they in the present labor market. They are the instruments of investigation which serve as a starting point for an empirical theory. With de creasing' abstraction' such a theory wiU'replace them in due course by assumptions adjusted to the typical indices of supply and demand in the modern labor market. The latter has reached its large dimen sions by the spread of large scale capitalistic industries, but it is not confined to the workers in these enterprises. It embraces all the remaining industrial and agricultural laborers in a further series of partial markets. The market conditions are essentially different for organized and unorganized labor and the resulting formation of wages differs ac cordingly.

THEORY OF SOCIAL ECONOMY 373 In the unorganized labor market, the individual worker is left wholly to· his own resources. He is left without other support than that derived from his immediate surroundings. Custom' is the de cisive influence. Among the lower strata of the working-class, families live from hand to mouth. The wage income is used up as soon as it is received. Frequently, also, it is consumed in advance by means of consumptive credit. These families have no reserves, no savings. They possess scarcely more than the most wretched house hold goods, and these are often sacrificed in a final attempt to meet 'dire needs. Because the penniless worker cannot make use of his labor power by himself his need for employment is all the more urgent. Lacking, as he is, in the complementary means, his forces have .no utility value for him. He is thus wholly dependent on the appraisal of the demand. Moreover, the supply is under the pressure of strong competition because of its great numbers. The markets themselves extend over wide areas. Conditions and prospects are such that it is far beyond the ability of an individual worker to view and appraise them correctly. Under these· conditions, competition is readily transformed into overcompetition. When it comes to the worst, the weakest group is willing to agree toa subsistence wage that covers the most immediate needs of· the day. After the fashion of weak economies, they appraise these with the recognized under estimation of future needs.

The provident worker, in estimating his minimum of subsistence, should always add to his immediate needs the minimum requirements to make provision for periods of illness, convalescence after accidents in the course of employment, invalidity, old age and the care of widow and orphans. He should also make further allowance for periods of unemployment and loss of wages by strikes. These provisions should be effected by insurance premiums or by direct reservations from in come. Such a minimum· income may be designated as a maintenance income. The subsistence wage, computed to the needs of the day, 'which the poorest strata agree to accept under the pressure of over competition, does not by any means yield a maintenance income. At best it is computed only with an allowance to cover those portions of the year during which seasonal workers cannot find useful employ ment. With this exception it yields to the workers a meagre living only for the time that they are usefully employed in their full strength and willingness. At the end of this period they are thrown back into privations of the worst kind with no recourse except to public charity or the poor law.

The higher the worker's position in the· social scale, the more favor374 SOCIAL ECONOMICS able are his chances in the unorganized labor market as well. The smaller number of applicants, their better knowledge of the market and their stronger economic backing assert themselves. Inasmuch as all these circumstances have been effective for some time, often for long periods, the market is governed by a tradition that is favorable to the worker. The supply is habituated to a customary wage which offers the usual maintenance considered suitable to the worker's sta tion. He will therefore not be readily persuaded to accept a lower wage. The higher a man's position in the social scale, the more· ef fective will be his inclination so to compute the maintenance wage as to secure an income wholly suited to his station. He will attempt to make this wage large enough to m·aintain his position when he is no longer able to work and to allow a tolerable provision for the satisfac tion of the demands of his widow and the bringing up of his children, both of these in ways suited to their station in life.

Whether the supply will be able to uphold the traditional standard in the long run naturally depends upon the condition of the market. The customary maintenance suited to a particular station in life in dicates at all times only the proximate starting point· of the supply price. It does not indicate either the obtainable maximum or an inviolable minimum. Like anyone else, workers. also endeavor to profit by the opportunities to improve their position. They raise their demands when the prospects seem favorable. On the other hand, they must submit to the exigencies of the market situation whenever their market yield drops below the customary standard. At all times marginal productivity conclusively determines the maximum of an acquisitive age. The after-effects which make themselves in regard to marriages and birth-rates, whenever the wage rises above the custom ary maintainance or drops below it, become effective only for the supply of the next generation of wages. Through the latter, these ef fects modify the future productive. For the given market they are of no importance whatever.

In the demand index of the entrepreneurs, the described indica tions of economic weakness are absent. But beside this exception there is another decisive consideration: the entrepreneurs are either regular ly organized as were the guilds in the Middle Ages, or they are so closely allied by actual conditions that they may be considered to constitute a sort of natural organization. It is obvious how great an advantage the manufacturers ina given district, because of their small number and their close personal relations, have over the multi .. tudes of the workers. A mutual understanding among the former may easily be brought about so that they will not "spoil prices" for THE 0 R Y 0 F SOC I A L .E CO NOM 11' 375 each other nor "make men fastidious by raising wages.' , Each one of them sees at once the disadvantage to himself that lies in an attempt to increase his own force by attracting workers from other establish ments by an increase of wages. Such an increase could never be with held long from his regular employees.

When the entrepreneurs ina locality are in agreement with each other, their situation is nearly equivalent to a demand monopoly. They are able to apply considerable pressure to unorganized workers who are too weak economically to· take advantage of conditions which may possibly be more favorable in some other market. Undersuch circumstances wages may be maintained which do not reach the standard which would be established theoretically. These wages may either still be adjusted to subsistence under conditions in which higher acquisitive wages might be allowed, or it may be merely that the wage does not reach the marginal productivity which the entrepreneurs have determined by attribution. In order to break up the understanding between entrepreneurs, and to create in the labor market that actual competition on the part of the demand which we found in the deduction of the general law of prices to be the effective force of price formation, an active expansion of business will be required. . Just as the rival demand of consumers runs up the prices for goods which may be of no value to the pro ducers themselves, so the rival demands of entrepreneurs will in crease the scale of wages although the services which are being offered may be of no value to the workers themselves, and although their economic weakness may prevent the workers from determining an appropriate wage. An entrepreneur who faces the risk of losing his trained workers to another paying higher wages, must decide to in crease the wages which he offers as much as the attributed marginal production may allow. Such competition may become effective even for unskilled workers. This is plainly shown in the case of increased wages by which industry is attracting agricultural laborers. Once such competition has been effectively aroused, the fundamental law of price formation obtains even in the unorganized labor market; a conflict necessarily ensues which calls for a decision as to who is to be admitted to the process of acquisition, and who excluded. The wage will be fixed at a point determined by the appraisal of the marginal demand.

What influence does the organizationof the workers have on the formation of wages 7 In answering this question let us assume that the entrepreneurs also are organized. Let us neglect for the time being all the effects produced by the organization in the regulation of 376 SOCIAL E CO· NOM. I CS other working conditions. It is beyond the scope of our present in quiry to seek an answer· to the further' question whether organization may not possibly enable the workers to· employ the influence of their mass so as to acquire increased social power or even to gain social supremacy. In the wage conflict,. only such organizations are influential as com bine all or nearly all the supply of labor in a definite partial market, i~ e., such as result in the. combination of all or nearly all the workers in a particular industry. The combination must not be threatened by competition on the part of workers who have not joined it. If this is not the case the union is unable to employ successfully its most im portantweapon, the. strike. .A strike on the part of a smaller group would be ineffective beyond depriving the strikers of their incomes without materially affecting the entrepreneurs. Only a cessation of work by all the workers, or at any rate by far the larger number of them in a partial market-the strike, properly speaking-results in forcing the entrepreneurs to discontinue operations in their plants.

In its external appearance the ..union is a monopoly by the elimina tion of competition that differs in no way from a kartel or trust that unites in an artificial body all the entrepreneurs of the branch affected. But in their effects there are radical differences between an organiza tion of workers and a supply-combine that faces the consumers monopolistically. The kartel is opposed to unorganized consumers; the union is pitted against entrepreneurs who are themselves monopo listically organized as regards the demand for labor. The workers' organization· cannot expand production; it cannot divide the market and classify consumers. It must adjust itself to the conditions of production, and these conditions are created by the entrepreneurs. Finally, whereas the kartel controls the whole of production, the union controls only a single one of the contributing productive factors~ By withholding its cooperation, labor may of course render production impossible, as. it throws the complementary factors out of action. It thus seriously injures consumers and entrepreneurs. But the weapon which strikes .this blow is two-edged; it descends upon the workers themselves at thesame time. It is not merely that the strike suspends the workers' pay and cannot therefore be maintained for any length of time. The .. entrepreneurs may succeed in forcing up the marginal utility by a restrictive monopoly policy. But this tool is denied to the workers; they are subject to the constant necessity of placing the entire supply in the .union. They may be able to shift small parts of the supply from ov~rcrowded positions to others less congested, but they cannot reduce the aggregate of the supply. Neither can they THEORY OF SO CI ALECON 0 MY 377 successfully carry through a. policy of reducing the hours of labor below the standard of the most efficient working-period; if they at· tempted to do so, the only effect would be to reduce the marginal pro ductivity, which forms the basis for the computation of wages.

The hope of the workers is that the injury whieh they inflict on the entrepreneurs by the cessation of work,may be seriously felt. There fore, so far as the determination of the period for action lies within their voluntary control, they select times when the entrepreneurs are heavily involved by the conditions of the market· or by contractual engagements, and when they themselves are as well supplied through the collection of strike-funds as is possible. The entrepreneurs, on their part, have to. allow not only for the im mediate injury inflicted by a shut-down; they must also consider the permanent loss occasioned by granting increased wages. Consider able as the transient injury may be to their interests, the permanent injury is far more serious if they agree towages which cannot be recovered from the marginal productivity of labor. In the long run they would have to retire from enterprises that did not yield the entrepreneur's wage and interest on· capital that might be obtained elsewhere.

Thus the most a well organized body of workers can obtain by the strike is that the full marginal productivity of labor be paid out in the wage. This is the productivity of the marginal workers, the last men whom the entrepreneurs have to employ to absorb the entire supply in the organization. In the rare cases where a particular branch of industry is so favorably situated· that even the enterprises working at least advantage yield an entrepreneur's profit, a body of men,work ing exclusively for this industry and thus. enjoying a specific position in the market, may even succeed by a successful strike in obtaining a portion of the entrepreneur's profit itself. This is due to the body of workers by virtue of specific attribution. This conclusion coincides with the proposition set out in the theory of the simple economy, that value and attribution receive their stand ard, not from the injury that follows the loss of an economic good or complementary factor, but from the increase of utility that is estab lished in the economy. Jt is also confirmed by experience. Generally strikes are successful when they coincide with periods of rising busi ness activity in which the capacities of entrepreneurs are increased.

They fail most frequently when they are begun in periods of business depression with a view to protecting the established wage-rates against reduction. When a union enforces a wage-rate·. that allows the full marginal 378 S OC I AL E C ON 0 M I C S productivity, it has won a considerable success for its members. It counteracts the unhealthy consequences of the overcompetition of un organized workers on wages, as well as defeating agreements between entrepreneurs to control wages. The' union compels the entrepreneurs to agree to the price, that would be e,stablished by an effective com petition of demand. It forces an agreement to this price without de lay as soon as the changed market conditions allow it. It does this, although even an effective demand-competition acts slowly when it relies solely on the mechanism of the unsatisfied demand. When the general price-level rises and the established money-wage or nominal wage may be exchanged for a smaller quantity or goods, i. e., when the real wages fall, when at the same time the entrepreneurs sell their goods for more money, even without an agreement between entre preneurs it will require a long period before the monetary wage is raised to cover the full marginal productivity of labor.

The unions, originally designed for conflict and strife, would render their members the highest possible'service, if by a judicious use of their power they should become the agents for an amicable determina tion of the wages that are economically demanded. It must be ad mitted that such a goal can be attained only when the marginal pro ductivity of labor yields an income adequate to maintenance. The collective agreements and wage-contracts concluded by labor organiza tions with 'associations of entrepreneurs for all their members, i. e., for all workers and employers ill the particular market, still breathe the animus of the conflict that gave them birth. The union offers no prospect of higher wages for those strata of workers whose marginal productivity covers merely a subsistence income or a wage that maintains life from day to day. For such men the advantages of organization lie in directions which we have not yet made the subject of inquiry.

Many wage:.workers Ilre not effectively organized, nor do they possess even the capacity for effective organization. To be effective a union must first have able leaders who st~nd out from the masses. Then" too, the multitude must be conscious of a common interest and must be endowed with the faculty of subordination. Groups of workers whose pay falls below certain limits can not establish reserves. Those widely scattered have no communication. Agri cultural laborers, women and unskilled industrial laborers, not to mention working children, do not readily form effective organizations. 8killed industrial workers, especially, those in the best paid groups who, by virtue of their position, are protected against equalization movements from below, form the core of organized labor. They have achieved unparalleled successes. They are able to wring wage increases even from the monopoly profits of kartels and trusts al though they themselves are not clothed with monopolistic power.

THE 0 R Y 0 F SOC I ALE CON 0 M Y 379 Labor unions are institutions of class ~onsciousness. They further individual interest as these are interpreted by the majority of the members of a class; the personal interest of the more enlightened, better situated minority may not infrequently suffer under the rule of the mass. The more capable, intelligent, better trained workers do not find the organizations to their advantage when the standard of average performance falls much short of their individual achievements. In the long run this may injure the interest even of the class, as men may find that the ambition to accomplish more than their fellows is paralyzed and as the educational force of the outstanding example ceases to impress them. The men best qualified for their technical tasks by natural talents, who would under different conditions have become anonymous leaders, by their example teaching a higher workmanship, are forced into obscurity by other leaders. The latter possess the talent of organization, of public speak ing, of handling men, and of appearing before the crowd, and are able to carry the masses along no matter how grave the misgivings of their followers as the firm ground seems to crumble beneath their feet.

The liberal school regards coalitions as restraints upon personal liberty, operating on the side of the workers through the strike, and on that of the entrepreneurs through the lockout. It looks upon the collective agreement and wage-contract in the same light. During the liberal period, the legislation on combinations did away with ancient prohibitions that could no longer be sus tained; but, following the point of view outlined above, it restrained the freedom of combination by not making such contracts legally binding. In other words legal proceedings cannot be instituted to enforce the performance of such a contract. But whoever heard of a resolution to strike being defeated by the reflection that its contravention is not an actionable wrong? Or when did such a consideration ever make the conduct of a strike less forceful? The resolution of a combination of the masses is not a contract in the sense of private law. Even more than the agreement between the stockholders of a corporation, it is a crowd phenomenon. Fundamentally its power lies in the social forces inherent in an organization of the masses, that seeks the recognition of neither judge nor jury. To this extent, then, legislation dealing with combinations has failed.

The freedom of personal contract, however, is not that supreme blessing that the liberal school sought to portray. With the existing weak position of the laboring class, class consciousness resting upon cooperative solidarity is to be appraised at a higher value than individual liberty based on personal egoism. Only the former is strong enough to present to good effect the egoism of the masses. Thrown upon their own resources, the individual interests of the masses are nearly powerless. In view of the helplessness of the weak individual, the slogan of the liberal school, "Laissez-faire, laissez-passer," becomes almost a mockery. Those who trUly wish freedom must not begrudge it to the class, though they may be fully aware that in its class egoism it is inclined to en croach on the individual interests of some of its members tOQ freely. This recognition of the class DluSt also be accorded even though it is further recog nized that the spirit of the class is that of the conflict which it must wage and that it has not yet learned to fit itself into the general interests of society.

Despite all these considerations, the current law of combinations is appropri ate to present conditions.. The union has come to be a weapon of social conflict.

380 SOCIAL ECONOMICS It arose in response to a need to bring order to the market. Too often it brings chaos out of order and plunges the market into danger. While these con ditions prevail the labor organization must stand or fall by its OWll social power; the vindication of the general law cannot as yet be called to its aid. § 74. YIELD-WAGE AND THE VALUE OF LABOR The exchange 'Value' of labor and' the errors in its computati~The life values of the wo~ker-The will to work. The source of power enj'oyedby large-scale capitalistic enterprise is found in the supremacy which it possesses in the formation of ex change values. In the· open conflict it ousts weaker competitors be cause it is able to turn out more and perhaps better products at less expense and to bring them into the market at lower prices. It creates itself a large part of the demand which will be required to withdraw from the market the. increased supply which it produces.· In so far as the capitalistic' entrepreneur spends more from his large income for household expenses, it has the effect . of" making money change hands. ' , These men induce a correspondingly large supply of high priced goods. In turning these out many workers. gain a living. To the extent to which, entrepreneurs make capital savings from their income, as they must do on a large scale in order· to remain on top and to preserve their competitive power', they add places for workers in their own enterprises. The increase' in the demand for workers which has been opened up by large-scale industries is so extensive that it is scarcely satisfied by the entire growth of population and by the women and children and the reserves of unskilled workers from the country whom they call to their benches. The reserves from the masses' in eastern Europe have to' be drawn upon. The mass-values which the great industries turn out and the multitudes of. human be. ings whom they employ, are to a large extent mutually conditioned.

A large proportion of their products are mass~values, goods produced in quantities' for the masses. The purchasers' for such consumption goods are largely the employees. To the extent that this is the case this production is itself the basis for the higher exchange-value of the labor employed. One can understand the feeling of pride. that so many an entre preneur experiences, in that he has become the organizer of labor and has given to thousands a means of providing for their families. Not only the entrepreneurs but society as a whole indulged throughout the first period of the industrial age in the illusion that they were on THEORY OFSOCIAL.E,CONOMY 381 the way to such all-embracing and astounding progress as had never before been witnessed lin the history of human achievement. Science itself agreed; it also was deceived by constantly advancing exchange values and population~. At last the truth had to be realized. The contrasts of capitalistic affluence and proletari~n misery became too glaring. Ohservers eouid no longer conceal from themselves the fact that an error lay hidden in the constantly growing .figures by which exchange-values were com puted. Let us assume that .existing conditions. become ever more acute until ultimately society is split into two groups: a very small number' of individuals of unmeasured wealth and a multitude in abject poverty. It would then be obvious, despite all the enticing demonstrations of calculations of exchange value, that social economy had wholly lost its ~ignificance. This most extreme condition has not. yet been even approximated in any part of the ·world. Every where there may still! be found strong middle classes fundamentally sound and striving to! raise themselves to higher levels. At the same time, their marginal members must .. struggle to avoid defeat and still others vanish out of sight into lower strata. On all· sides one may also see the upper groups of workers tending higher and coalescing with the lower levels of the middle class; everywhere large masses of the IO'wer strata of th.e working population still preserve their social power. In an places !there are high lights in the picture of the··social economy. But despite these assurances, no one may deny a dis~ crepancy between the actual social conditions and the ever ascending mathematical expression of exchange-values.

An accurate examination will show that in the capitalistic computa tion or exchange-value a number of sources of error are operative. Most of all they concer~ wage-labor. The most obvious. of these is one that relates to a different problem. Whenever inequalities in the distribution of income become excessive, disparities in the stratification of prices likewise become much too great and the prices can no longer be socially justified. A computation of ;' exchange-value based on these prices is not equitably defensible. The excess of enjoyments that is accessible to the rich man destroys not only his capacity for pleasure but also his ability to work. There is a limit beyond which an increase of yield no longer encounters a health ful need, and beyond which, therefore, an increase in goods 1 ceases to be an increment in value. The capitalistic .. upper class of today reaches this limit much more quickly than did the nobility of earlier 1 Werten.

882 SOCIAL ECONOMICS warlike periods. To maintain their dominant position in the state, the latter had to preserve the virtues of heroic manhood above all else. The computation of exchange value is again misleading in several respects for that group of "rorkers whose yield-wage furnishes only a scanty subsistence wage. The same indifference to the future which induces the masses of laborers of the lower strata to content them selves with a wage that covers only immediate needs, tempts them also to assume obligations which, in the long .run, they are not able to fulfill. They are dazzled by the numerical expression of the money wage offered them; it is above anything to which they have been ac-. customed. The laborers attracted from agriculture to industry, re ceived their previous wage largely in the natural form; only a trifling percentage was paid in money., Therefore when they are promised a wage, not only computed entirely in money' but also above their former rates, they .lack the experience to recognize into what sums of practical values they can actually transform it. Children and young workers who are drawn to the factories, receive wages at an age at which they had formerly never dreamed of being able to earn any thing more than a nominal one. Similarly the services of women, whom the factory now attracts, were hitherto ill-paid if they were remunerated at all.

These individuals now make no allowance for the fact that their new employments impose duties upon them to an extent and under conditions which make incomparably greater demands upon their forces than their earlier occupations. These were occasional, varied and perhaps only now and then really exacting services which they had been called upon to perform at home or upon the farm. Their environment, though it may have been primitive, was simple and' healthful. At first such people are probably comparatively immune to the inroads which the unaccustomed work makes upon their health. In the freshness of their youthful power they know little of the dangers and suffering in store for them. They are lavish of their excess vitality. Possibly the first generation, still embued with the strength of the soil from which it has sprung, may withstand in comparative ruggedness the debased conditions of life to which it is physically and morally chained by the narrow confines of the city and of the industry. This is not true of the ~hildren growing up in this environment and without the protection of the moral powers which even among simple and crude associations are active, wher ever fixed relations of life have evolved historically. Side by side with the children, the remaining groups with the least power of re· THE 0 R Y 0 F SOC I A L .E CON 0 M Y 383 sistance are exposed to the gravest danger. Of these groups, the 'women are most important. The effects upon them radiate to the family which is estranged from mother and daughter because of their acquisitive labor.

In this connection we need not conceive of the worst possible case in which the power of labor is completely mechanized because the worker harnessed to the machinery of the establishment is restricted to the narrowest possible motions and is doomed to an eternal stultify ing repetition of an identical performance. Also in the majority of the other cases as well, the sum of the pure life-values accruing to the lower strata of workers, is curtailed ina most revolting manner. Only too often, unless there is timely help, the danger of over-fatigue threatens the victims. When the process of degeneration ;has lasted too long, its damage can never· be repaired. All sources of persona[ power are then forever exhausted among the down-trodden groups. Never again will they give forth services of higher exchange value. The moral values that economic' labor requires for its guidance are deadened. So, too, social groups that have been made completely proletarian can never contribute to the cultural values of society.

Culturally, they become destructive. All through the Middle Ages and down to the beginnings of modern times, our ancestors were threatened with barbarian aggression. Modern civilization has grown so strong that it no longer fears this invasion, but the people tremble with fear lest there spring from its midst a new barbarism which may some day overpower them. The stratum of workers of whom we have just spoken, includes for the most part unskilled laborers. But even the lower groups of trained operators are not wholly secure from. the dangers of over exertion and inner degradation. More important still for the skilled workers, and especially for their higher levels, is another effect which, as an incident of the capitalistic relation of employment, detracts value. The ,vill to work is impaired. This also is one of the moral values which are decisive in the success of labor. For unskilled workers it is of less importance if there be no real inner impulse to labor. To master the monotonous performances which these workers have to carryon in industry, sufficient incentive proceeds from the will to live and the pangs of hunger. The land owner comes to feel the evil effects of drudgery more quickly than such men, as he strives to direct the manifold operations of agriculture. The effect is most striking. in the case of the highest groups of skilled industrial wage workers. The labor to be performed by these men is of a similar character to that of the artisan; not infrequently it demands a skill 384 SOCIAL ECONOM,ICS and mental agility that exceeds the latter. For operations of this sort, the worker 's delight in his task is not a matter of indifference.

The large industrialist; unlike the master craftsman, no longer takes a personal' part in the details of execution. This is by no means because the manner of their execution is no longer of equal im portance, due to the great size of the enterprise. It is because the number of activities combined in these large industries, has increased so enormously that the' entrepreneur must confine his personal at tention to the most vital tasks of ,superintendence. All other duties he must delegate, to other men, necessarily assuming that they will apply all the interest of an owner. ,The wage contract into which he enters with these men is, in point of fact if not of law, always a partnership agreement. They are subordinate partners. Their func tions, however, are of such vast importance that' the unstinted devo tionof a partner should never be lacking in their services. When the entrepreneur speaks of them as his fellow workers, as he is apt to do on occasions when exalted sentiment suggests the right word at the right moment, he gives suitable expression to the relation' of these men to himself and his plans. The materials and tools that the entre preneur uses allow their full useful' content to be extracted. They need not offer living' cooperation; they are material aids to produc tion. But those human beings who are called on for any' higher service must give more. If they are to surrender that which is best and which is demanded of them by the fundamental social' relation ship, they must give their good will.

The will to work arises in part from motor-stimuli inciting toac tion. Men are pleasurably conscious of this stimulus in the joy of work. In part the will arises from anticipation of the success which it is hoped will attend the effort, i. e., from the desire of achievement. The joy of labor may continue even when the effort is wage-labor, only care must be exercised that the motor stimulation is not exhausted by fatigue. The .joy' of achievement cannot be maintained except when the relation of employment is so regulated that the worker secures the full reward of his labor. The classical doctrine fully recognized this in the case of the services of independent business men. Its decisive argument for the freedom of acquisition was that freedom induces the utmost tension of the 'will to wo'rk, since it is liberty that promises the' maximum reward. Does not this argument apply to 'any service tor a wage that re ,quires a true will to work? ,The contracts into which the large entre preneur enters with his higher employees are drawn in this spirit.

They are 'binding for considerable periods of time. As a rule the THE 0 R Y 0 F SOC I A L .E CON 0 M Y 385 relationship of employment is even assumed to be a permanent one. Articles are inserted to provide for the future of these employees and, in a measure, for that of their families. Now and then shares in the net earnings are expressly granted to them; or they may feel reason ably certain that such shares will in some measure be ·credited to them.. In any event their compensations are settled at such sub stantial figures that their interest is felt to harmonize with that of their employer. In the case of wage-labor proper, different methods have been re sorted to. Wage. systems have been devised such as piece-work, contract-work and bonuses, which are intended to adjust the wage as accurately as may be practicable to the individual's effort. Employ ment itself may be terminated by notice. In the interest or both parties such notices are limited by law to the shortest periods. To strengthen their position in conflict, the workers have wholly re nounced the privilege of notice to be free at all times to order strikes.

The actual order does not,. as a rule, agree with the legal order. As a matter of fact, more often than not employments last through long periods, frequently for a lifetime. The tradition of cordial relations between the entrepreneur and his workers has by no means disap peared everywhere. Through all conflicts the actual interrelation of interests has sustained a tolerable harmony between the two parties, a "harmony which is solidified also by the respect which the worker cannot but entertain for the power of the entrepreneur, and the latter for the strength of the labor unions. Among well-intentioned entre preneurs, there exists a patriarchal spirit that extends beyond the bounds of legal obligation. Can a condition of law be accepted as satisfactory which is en durable only because the actual condition is, as a rule, more favor able than that which the law has decreed T If no other considera tions led to the. conclusion, the continuance. of strikes and lockouts, which so frequently disturb the course of events with heavy losses to both sides, show that the final equilibrium of the legal 9rder has not yet been reached. In fairness, we should not draw the worst in ference by suggesting that the entrepreneurs, wishing to evade con flict with the organized skilled workmen, laid their plans consciously to degrade labor progressively by unfitting it for anything but mechanical operations in order that there should be only unorganized workers of the lowest power of. resistance with whom to deal. .But it surely is obvious that the constantly repeated interruptions and costs of labor wars with their forcible suspension of operations are making inroads upon the yield and value of labor. This applies not only to 386 SOCIAL ECONOM.ICS services rendered by the wage-laborers but· also by the entrepreneurs themselves. It is equally apparent that under the present law the full latent power of even the well-paid, well-nourished worker is not called into play in the performance of his task. The entire potential yield of his efforts does not materialize· nor is the full value released from his labor for the good of society because the whole-hearted, faith ful will to work has not been called into action. Faithfulness and devotion are not for sale in the market at a fortnight's notice. The number of those who are called upon to perform an owner's duties in the large-scale industrial enterprises of our day, withou~ possessing the interests of. ownership, has become too large.

When we ask what it is that labor does to man, the answer is simple enough: labor makes man what he is. The man who does not work finds that his power' and his capacity· for enjoyment decay. The greatest wealth will no longer profit him. However simple the con ditions of his fellow-men, he has caUse to enjoy them so long as they may delight in the unrivalled happiness of useful exertion. The continuous exercise of power, according to the dictates of reason, is among the noblest aims of the economy. All increased satisfactions of needs fulfill the intentions of economy only for him who has been purged by labor. Wage labor, as it is found at present in the large scale industries, does not make of the laborer that which he might be were the meaning of the word, economy, wholly realized for him. The yield-wage of today obstructs the unfolding of the full values of labor and with it of the full values of life. This is not an indictment of the capitalistic entrepreneurs. They are not alone responsible for this state of affairs. It is only a description of existing conditions, a strict performance of the duties of theory.

The will to .work ha.s been greatly increased by the refinement of contracts of piece;.work, special agreements and bonuses, in so far as the workers are called upon. by these to make increased efforts in order to raise their pro ductivity and with it the yield-wage. However, no matter how far such re finements may be .carried, they will not overcome the incongruity of the trained worker's position in large-scale industry, which lies concealed in the fact that ·an .owner's duties are delegated to them while yet their position is not such as would call, out an owner's interest. Even should they so improve their position that the full .yield-wage which may be attributed to them in these forms is actually paid to them, they will still not be paid according to the full productivity that would be achieved by a body of workers heart and soul with the entrepreneur, such as we assumed in the theory of the simple economy.

The basis of the attribution of yield is always too narrow when the body of workers stands apart from the entrepreneur and is not attuned' to the willing ness and zest of contributing every effort, its full vigor and force, its full economic sympathy.

THE 0 R Y 0 F SOC IA L ,E CON 0 M Y 387 The advanced forms of profit-sharing yield very different results from these forms of wages. The former not only improve the conditions of the workers as such, but confer on an elite group of the workers a sha,re of the entrepreneur's position. For some of them this may be dignified into a promotion to the entre preneur's office proper, without in the least impairing the authority of the entrepreneur's leadership. It is possible that in this direction, methods may be found that will reconstruct the organization of the great industries in a manner satisfactory to all concerned. For the present, theory as such must renounce the pursuit of this suggestion; 80 far the facts are only nascent and there are no completed results to which one may appeal as to the co~mon prop erty of experience. A.s a rule labor organizations are inimical to refinements of the wage system which aim at bettering the yield-wage by enhancing the individual pro ductivity of workers. The personal enhancement of the yield of labor affords an immediate advantage only to a small select minority of workers. For the large mass it is disadvantageous, at least in its proximate effect, because it tends to depress wages as the direct result of raising the total of services sup plied. Even the profit-sharing system conflicts with the class-consciousness of the labor unions. The fortner gives separate interests to the elite and the mass of labor. Furthermore it isolates the workers in each plant, for those em ployed in the most profitable plants are given an opportunity to share in the.

industrial rent of the establishment and their interest is thus estranged from the common one of their class. So long as the class as such has to be adj usted to struggle, an agitated class consciousness will tolerate no wage system that threatens the fighting power of the class. However, in their own productive associations workers begin to look favorably on profit sharing. This may well be a sign that their goal will change when their attention is no longer centered on conflict. The labor organizations have been as much concerned with the problem of the adequate determination of the conditions of labor as with that of the wage rate. The struggle for a reduction of the hours of labor has furnished not less frequent incentive to strike than has that for the increase or maintenance of wages. Even those groups whose marginal productivity is too slight to promise any success in the adjustment of the rates of wages, find a wide field for effective effort in regard to the conditions of labor.

The protective legislation of the state has hitherto been almost exclusively confined to safeguarding men against oppressive services. It has accordingly limited the hours of labor. It has also required suitable provisions to protect the life and health of the workers. In social insurance there has been recognition of the task of securing immunity· for future cases of working-time lost by sick ness or accident. Such legislation has prescribed the formation of reserve funds for this purpose and has granted corresponding subventions. Historical judgment may be passed on the current capitalistic relations of labor only when their future evolution sheds light on the results to which they lead. If our era should turn out to be the necessary transition to a safe and humane provision for the excess population that could not be cared for in earlier times, then the eulogies bestowed today on its technical achievement would be finally due. However, if society should be torn asunder so that only a small class of enormous wealth remained in contrast with a proletarian mass while the middle class had disappeared, or even if the present status 388 SOC I AL E CON 0 M I C S should merely congeal, then the much lauded age of capitalistic technique and organization would, be condemned as the end of human culture. For the present let the words of Wilhelm Foerster in Jugrendlehrebe borne in mind as a warn ing: "intellectually and morally modern society is unequally matched against the enormous material forces which it has unchained through its science and technical arts."