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.