Division

I

Yours and Mine and Ours

YOUR share and mine. How is this to be determined? Division is the great end and there is no science of it. The divisions of Nature, so far as we know, are unscientific. The divisions of Reuben, touching land and water rights, caused great searchings of heart because they were despotic. They were bound to be. Profits and wages, as measures of value, are arbitrary; this you immediately discover when you try to prove what share belongs to capital and what labor is worth.

It is perhaps the deepest error of economic thinking to imagine there could be a science of division. There may be a philosophy of it that will comprehend the facts not as truth but as points in fluid circumstance, with always a view beyond them. We are evolving in this country a philosophy of that character. It is another phase of the American contribution to economic reality.

With the first rude act of human coöperation, the problem of division begins. Two men mingle their strength to achieve a result neither one could have achieved alone. There is then something to divide.

If it is a simple difficulty, like moving a stone to discover the treasure, equal sharing is the law of amity. Note, however, that even in this case there is a compound principle. What two men have done is not simply twice as much as one might have done. Working separately, alternately, independently, they could have achieved nothing. Together they did it. If they separate, that mysterious power of combination is lost. If they do not separate, there is the beginning of organization. Clearly, therefore, a part of the treasure belongs to neither of them as individuals, but to an invisible new entity, which is both of them inseparably—that is to say, society.

Now imagine it to be a stone that two men cannot move—one that ten could not move by exerting their bodies against it. But a third man comes with an idea to exert mechanical power against it. He invents a lever device by means of which, acting under his direction, the two men easily move the stone. How now shall the treasure be divided? You have introduced ideas and capital. How shall these be rewarded? What is their rightful share against that of the two who contributed only the labor? What of the tool? Shall something on account of the tool be charged against the treasure as rent? Moreover, whose tool is it, since all three of them worked to make it?

The third man says: “It is my tool and I am entitled to be paid for the use of it. It is mine for two reasons. First, I invented it. Secondly, while we were making it, which was a labor of three months, I fed and clothed and housed you. Therefore, for all you contributed to the making of the tool—namely, your labor—you have received wages; and what is more, wages is all you are entitled to receive as your share of the treasure; and even so you are better off, for without my idea and my device you would not have got anything. I made your labor productive.”

The two retort: “Without our labor you would not have been able to create the tool or to use it afterward for the purpose intended. No wealth can be created but by labor. Therefore, if you become dogmatic, labor is entitled to the whole result.”

Arguing in this manner, they will never agree. In the effort they were united. Having by coöperation multiplied their power to obtain a divisible result, they immediately separate again and begin to quarrel as individuals. If the two will kill the capitalist and seize the treasure, they may; only then they destroy what is more valuable than the treasure—namely, a source of ideas. If, on the other hand, the capitalist leaves the two with wages only and takes all the rest for himself, he has destroyed the willingness of labor to coöperate, and that also is more valuable than the treasure.

II

The Irrational Dispute

This dispute, always in the same fundamental shape, is the demon that has threatened economic society from the beginning of modern industry, founded as it is on the principle of multiple effort. Like every other kind of demon, it has no reality but as a symbol of bad passions and unintelligence.

If it were that everyone separately possessed the means of production—the farmer his land and the artisan his tools—there would be no such quarrel over the worth of one kind of effort as against another, no wage system, no problem of division. There would be only problems of exchange. But that would be another state of economic life, more or less idyllic, desirable perhaps, but not any longer possible outside of fantasy. Under that system not more than a quarter of the population now existing could be sustained.

In this country, where it has been always easy for anyone who wanted it to acquire land, there is no such problem of division in agriculture as in industry. The agricultural problems are primarily problems of exchange. But as to the industrial means of production, especially in this country, they are so costly and so ramified in method and organization that individual ownership as a rule is impossible. Multiple ownership, like multiple effort, is a necessity of the scheme.

Contrast the village smith and the man in a modern automobile plant forging a crank shaft. The smith does it by hand. His capital, besides his skill, will be a forge that he built himself, an anvil, a hammer, tongs, a few coals, the raw material, a shed over his head. It takes him a day at least, and when he has finished it he charges what he thinks his skill, his time and the material to be worth.

The other, standing in front of a drop-forging machine, a two-ton hammer rising and falling at the touch of a lever, forges crank shafts at the rate of one a minute. The material is brought to him white hot. All he has to do is to place it squarely on the dies and trip the hammer. The power that drives the machine is delivered to him. He did not invent the machine. In a life-time he could not build one. Yet if it breaks or wears out, another will immediately appear in its place. If he owned it and had it in a shed of his own, he could not use it. He probably could not sell it for more than its junk value, because it fits only there in that one spot as a unit in a series of mechanical powers.

The amount of capital supporting this crankshaft forger is by no means limited to the cost of the mighty machine before him. Behind him is an originating chain of means and coördination up to the point at which a crank shaft shall appear; beyond him the chain of means and coördination continues to the point at which a complete motor car appears, containing the crank shaft. The motor car has then to be sold, and there is another great organization expressly to do that. If it fails, there will be nothing to divide. Over all this lies a science of management of which he knows little or nothing.

Consider that some definite share of the total automobile product must go to the man who forged the crank shaft, on a machine he did not invent, could not build or use as a smith in any enterprise of his own, moved by power he did not originate, acting on material delivered to his hand white hot, one act among thousands contributing to the creation of motor cars in quantity under a science of method he probably takes very little trouble to understand. What shall his share be? There is the problem of division in only one aspect, as it concerns labor.

Even if all the factors were constant, still it would be impossible to determine the exact value of this one man’s labor. To attempt it would require the work of analytical accountants to many times any imaginable cost of forging a crank shaft, and when they were through they would not agree. Fancy doing this for thousands of different operations in one plant. Besides, none of the factors is constant. Suppose you had a figure to express with tolerable accuracy the value of the labor required to forge a crank shaft. That will be its value in terms of what? Money, perhaps. But the buying power of money is variable. Then will it be the value in terms of the product—that is to say, a definite part of the total value of a motor car? Who knows what the value of a motor car is today or will be tomorrow?

Value is one instant of equilibrium in a flux of innumerable forces; it is either that or an abstraction. No other word has so bedeviled the minds of economists. Having imprisoned it many times in a formula only to see it escape again, it once occurred to them as a solution to abolish the word. Jevons, the English economist, seriously proposed it.

Since you cannot determine the specific value of labor’s contribution in a given case, there is no coming that way to a science of division. You might think to come at it by another way. Suppose you take the total product of wealth and slice it by segments, so much for capital as interest and profit, so much for labor, so much for reserve or to increase capital, and so on, by some rational principle, leaving each segment to be divided by any rule that works. But what is that rational principle?

To find it has been the great task of economists. They began by trying to say what were the sources of wealth. These, they have generally said, were three—land, capital, labor. They still say land by habit, meaning Nature in general; they said land at first because economic thinking began when agriculture was the chief occupation and the artisan was not regarded as a producer at all. By capital they meant what was on the land to work it with. By labor they meant at first peasant labor only. As industry rose, these terms were extended in meaning. Land meant natural resources of any kind; capital meant all means of production whatever, including plant, equipment, raw materials, credit and money; and labor meant wage earners either on the land or in factories.

No one will deny that land, capital and labor, in all such senses, are sources of wealth. They are not the only sources. It is strange that economists have so seldom regarded ideas as a source of wealth. Yet it is possible to argue that ideas have created all modern wealth. True, labor was required to externalize the ideas, but without the ideas that half of the population which is now industrial would not exist. It could not exist. Not only would it not exist as industrial population; it would not exist at all. It could never have lived. One must remember always that the most impressive single human fact of the last century and a quarter has been the increase of population that was made possible only by industry.

Having agreed that land, capital and labor were the sources of all wealth—ideas vaguely included in the term “capital,” if at all—the economists proceeded to imagine a law of rent, a law of profit, a law of wages; and it was all arbitrary, since there was no way to prove relative values. Some said capital was of first importance and should be first rewarded, because without capital, labor would return to a life primeval. Even these could not say what the reward of capital rightfully should be. How could they? Others said labor was of first importance because without labor the land would be barren; capital alone could not make it productive. Adam Smith, founder of conservative economic doctrine in Europe, said labor was the true source of all wealth; then he propounded not a ratio of division but a natural law of wages, which was the market price, for labor as for any other commodity, determined by conditions of supply and demand. Karl Marx, founder of extreme radical economic doctrine in the Old World, said labor was the only source of wealth and proposed to abolish capitalists, intellectuals, all people whatever who did not perform manual labor; others were parasites, living on the workers, exploiting them.

Again the dispute stands precisely where it did in the imaginary case of three men who had moved a stone to discover the treasure, one contributing ideas and capital, two contributing labor. So there is no coming by that way, either, to a science of division. Nor is there any way of coming to it.

Science is of method and means. Division is a transaction with life, concerning its ends. What are the ends? The ultimate end we do not know. We know what it is not. Certainly we do not live in order to produce. The object of increasing production is to make life richer, to free it of fear and want, to multiply its extensions. Idealism is not a science. Faith in the perfectibility of human relationship is not a science. Forethought for the common welfare is an emotion to begin with. There may be a science of profit, if you mean the arithmetic of private gain; but for a sense of profit in works without gain, for the sense of it in deserving the good opinion of your fellow man, there is no science whatever. Division is toward or from a people’s day dream. It may be governed by a conviction of things no one has yet seen. That is why there can be no science of it. There may be both an art and a philosophy of it. This is to be approached.

III

Creative Parts

In the work of creating wealth there are several parts. First, there is Nature’s part, which is miraculous—the soil, the minerals and gases below the soil, moisture, sunshine, seasons and periodicities, energy, the mysterious principles of life, reproduction and subdivision. Fortunately the earth has never to be paid. She loves to be exploited.

There is labor’s part. This is to speak of manual labor. It is a definite part; yet in our arrangement no one is fixed in that part. One may stop in it or pass through it. Largely that is a matter of temperament or capacity. There is no caste of job. A job of some kind is every normal man’s objective. Recently an English visitor, having addressed the students of a well-known American school, was asked by them to say what the difference was, as he could see it, between their school and Eton or Harrow. His response was to ask how many of them were going into business. They were all going to do that. Every one of them had a job in view.

“There,” said the visitor, “is the difference. If I had asked such a question at Eton or Harrow, no doubt some of the boys would be going into business. But others would be going into politics or diplomacy or the army or scholarship or administrative work or the management of a landed estate or the government of some dependency.”

There is capital’s part. Let it be supposed in the simplest way that capital represents all means of production, such as land, mines, power, machines, organization, and so on—together with the credit and money that command them. It is to be noted that in this country, capital in any sense tends less and less to represent individual proprietorship. In place of that is multiple proprietorship, increasingly diffused. The corporation, once the refuge of big business, is become the symbol of association, many little streams of capital running together to make a lake.

Consumer stock ownership is a wide fact, notably in the case of public-utility corporations producing light, heat and power; their customers become stockholders. So is employe stock ownership a wide fact, of increasing significance. It is to be noted also that as ownership becomes more widely distributed, ownership and management tend to become separate.

Management now appears as an institution in itself, and it is a new principle. Its point of view is not that of either labor or capital. What it does is to combine these and add a third, which is the point of view of the consumer, who is everybody—that is to say, society; and society is conceded to have rights of participation in the division of surplus wealth. This is on the ground as it was in the imaginary case of the two who combined to move a stone. Neither could have moved it alone to discover the treasure. A part of the treasure, therefore, belonged to neither one of them individually, because neither one could have possessed it alone, but to both of them inseparably as a society of consumers.

There is the imagination’s part—ideas, that is to say. Ideas are not separately rewarded, save in the case of one who gets a patent and sells his idea on a royalty basis. What happens otherwise, in cases that are as a million to one, is that ideas are freely contributed in the way of one’s job; and one who has many ideas will rise through the job, whatever it is, to superintendence, management, ownership. The reward is not for ideas particularly; it is for power of contribution to the science and understanding of production.

Then there is society’s part. How society, regarded as an entity above the individuals who compose it contributes to the production of wealth might become the subject of one dissertation. That it does we know. Not only do we know it. We recognize its right to participate in division as society, beyond what its members receive in such forms as interest, profit and wages. Society is the whole organism.

No one of us is society, but society is all of us. Its title to share in the total product of wealth is valid, because it contributes the principle of power that exists in combination. Moreover, it has needs and wants of its own. The members of society are separately discontinuous; society is continuous. Its life runs in time far beyond the cycle of any individual. Therefore it must govern both present and future. Its future objects and interests may often conflict with the present objects and interests of the individual. It has two forms of investment to be always making. One for this time and one for the future. And it must have the means. Where will it get the means if not from the total product of wealth? Education is one of society’s investments in its own future. The cost of education alone represents a considerable participation in the division of wealth currently produced.

Merely to distinguish these parts is to see that they are reciprocal. How absurd to debate their relative importance! As functions they are different; as parts they are inseparable. They serve each other, and this, as in any mechanism or organism, is according to laws of rhythm, harmony and tension. What is jointly intended is a divisible result.

Ideas of economic society in this symphonic character are not original. You will find them scattered all through the literature of conservative, radical and Utopian economics. Always they broke down at the point of division.

What is new in the American way with the divisible result is the will to make the social impulse victorious on a plane of sound business. To see it acting you have only to regard characteristic American division under its three principal heads—namely, wages, profits, consumer benefit. In each case there will appear to have taken place a definite change of view; it will turn out to be all one movement of thought.

IV

The Exploiting Lord’s Solution

The American way with wages is what European people are trying most earnestly to understand. The cause of their difficulty with it is historical. Ours is a new time and they do not know it. Ours is new modern; theirs is old modern. And they have not yet broken with feudal time. The hereditary capitalist is still the lord, representing supreme ownership, which anciently was monopoly of the land; and the wage earners are still his dependent people, with a continuous memory of having been exploited for profit.

Here is curious history. When it was as it was between the lord and the people, the lord possessing the land and the people belonging to the land instead of the land belonging to them, then to exploit labor was very simple. It occurred naturally. What the people produced above their own sustenance—the surplus of their labor, that is to say—belonged to the lord and was such as the lord and his retinue could directly consume: food, drink, clothing, armor, trappings and castles. All that was the lord’s profit. Everything he consumed was profit.

Now industry appears. The lord becomes capitalist. Not the same lord, to be sure, but the lord in principle, symbol and fact of hereditary power of possession, with the same way of feeling about people and the same notion of his right to take the whole surplus of labor because he owns or provides the means of production.

But a new dilemma presents itself. Hitherto the surplus was such as he or his household could directly consume. That is no longer the case. What shall he do with ten thousand pairs of shoes or half a million yards of cloth? This is machine industry, producing goods in great quantity. Now to get his profit he must sell these gods. To whom? To his own people? They cannot buy them. How, he may ask, can people buy their own surplus? Where will they get the money to buy it with? They have only their wage, and that is just enough to sustain them. If he has to increase their wages in order that they may be able to buy the surplus, that is the same as to give the goods back to them. In that case, where is the profit? He will have only what he himself can consume and they will have all the rest. He can see no profit in that, no sense whatever. He is sure that if people had so much they would not work; plenty would debauch them or cause them to multiply excessively. Anyway, here is a surplus he can neither consume or sell to his own people, unless, in effect, he gives it to them.

The solution of this riddle, when he thought of it, was quite simple, though perhaps not permanent. It was to sell the surplus in foreign markets, away from his own people, thereby converting it into gold profit. That was it—exchange the goods for gold. Hence foreign trade as it developed under the European system of industrialism; and this trade, unlike any that was in the world before, consisted not in silks, incense and jade; it was in staple goods of common use such as the people who produced them had never enough of for themselves.

There were two fallacies in the lord’s point of view. The first was the assumption that if people were prosperous they would cease to work. That false notion, from regarding work as a curse, is implanted in all the economic doctrines of the Old World. List, proposing a protective tariff system to make Germany a powerful industrial nation, said of course in the end, everybody having become prosperous, the competition of free imports would be necessary to save workmen from indolence. American labor is the most prosperous in the world. Is it the most or the least indolent in the world?

The other fallacy was to assume that if labor’s share in the surplus be increased by higher wages, profits in the same ratio would fall, tending to disappear. What happens is that the standard of living rises, effective wanting increases, new forces are released and the nature of profit changes. It ceases to be a toll and rises anew from a productive principle.

One is continually hearing that a cause of American prosperity is the existence of an insatiable domestic market for goods, protected by tariffs. American industry therefore does not have to peddle its wares in foreign markets. But that is merely to comment on the fact that the American people do, to a degree elsewhere unknown, consume their own surplus, meaning by surplus all that product of wealth which is more than enough to sustain life in the barest manner. Any other people might do the same thing. Number has nothing in principle to do with it. And as for the tariff, that is a common instrument of economic policy. Although we have used it in a way to oblige high wages, still we must have had a feeling for high wages to begin with, for we might have used the tariff instrument in many other ways.

V

Uprooting the Low Wage Fallacy

In European industry labor is a commodity, governed by a law of supply and demand. The industrialist prefers an overstocked labor market and speaks complacently of a labor reserve, meaning by that a supply in excess of the demand, so that labor will be docile and wages will stay down. Simply, he is a buyer of labor and his first rule of profit is to cheapen what he buys.

That language was once current in this country. The low-wage fallacy went with the pattern of industrialism as we received it from the Old World. It was not so long ago that American industry solidly opposed any law to restrict immigration, saying it could not do without cheap European labor to perform the manual task. It was so cheap that industry could afford to waste it, and did waste it in a callous manner. But the view has profoundly changed.

Those in the Department of Labor who have worked for many years in the field of immigration speak knowingly of the change. They have seen it take place. Formerly their difficulty was with the leaders of industry, who obstinately said that if they were cut off from the European labor supply they would be ruined. The country, moreover, would be delivered bound and gagged to an organized labor monopoly. Now in all senses the Department of Labor finds industry sympathetic. If it is a question of further restriction, some of the elders may be still a little dubious, wondering how far it is safe to go headlong in one direction, but the young men representing the science of management are spontaneous.

They say, “No, we don’t want that cheap labor. It is not good for the country.”

There it is. First, is it good for the country? Yes or no. On that ground it shall be decided. And it turns out that what is good for the country also is best for business. This is the invariable fact and has a kind of dramatic quality. It is the rule of experience, possessing apparently the validity of a natural law, that business has only to consider which of several ways has the highest social meaning, and that way, if it is pursued, will prove to be the one that pays best.

The effect of a few great examples upon current thought was transforming and sudden. The records and recollections of the Department of Labor contain prophecies of disaster from closing our gates to the cheap labor of the world by the same elder statesmen of industry who now, as converts, talk the new language as if they had always known it. High wages and low costs; greater productivity per man in order to increase the wage earner’s buying power; progressive division of the total product of wealth—and at the same time greater profits than before. They have perhaps forgotten what they formerly believed; at least, they seldom mention the fact of their own conversion.

What has happened in their lifetime to work this change of view? Many will say, and do, that it was the war. Industry was suddenly cut off from its supply of cheap unskilled labor; at the same time it was obliged by the war enormously to increase its output, with wages rising uncontrollably. Therefore necessity obliged it to find ways of doing with automatic equipment a great deal of work that had before this wasted men in drudgery. That is to say, industry had to exploit machines in place of men. In doing this it discovered new sources of profit. Spending machines and saving men turned out to pay.

This is somewhat true—just enough to be misleading. The way had already been discovered. There was a working science of it, notably in the automobile industry, where it had been demonstrated that by method, power and automatons the productive power of a man could be increased in a prodigious manner, with a result divisible in three directions. The wage earner got more wages, the public got cheaper motor cars and the profits were fabulous. The automobile industry offered only the most striking example. The same principle was working in many other places. Wages rising, costs falling, profits increasing. What the war did was to cause a wholesale reformation of industrial practice, under a new type of mentality, thus bringing to pass all at once a change that had been bound in any case to take place in a few years under stress of competition.

Moreover, the opinion that necessity alone was acting is blind to what it is that has changed. Not any view as to the rate of wage you can afford to pay as you increase the output of labor, not any view as to the effect of high wages on production. It is the meaning of wages that has changed.

There was for a long time no way of regarding wages but as the price of labor. To think of wages as payment for work performed, roughly measured by the quantity of output—even that was a big step. There was one more to take.

Now more and more wages are regarded as labor’s proportional share in the total product of wealth.

It is not enough that wages shall be high. It is necessary that they shall be proportional, for if they are not, if the output of wealth increases faster than wages, then no matter how high wages may be, the relative buying power of labor will fall. This is the view which comprehends the wage earner primarily as a consumer, in which capacity he is indispensable to prosperity.

VI

Finding the True Law of Wages—A Law of Proportion

The great error of industry had been to see the wage earner only as a producer. Not until it began to see him also as a consumer was it possible for a new philosophy of division to be imagined.

The equally great error of the wage earner had been to see himself only as a consumer, and it was not until he began to see himself also as a producer that it was possible for any philosophy of progressive division to act. There was nothing for it to act upon.

These two revolutions of thought have definitely occurred, and there is, for that reason, now the basis of a common language between capital and labor.

The American Federation of Labor, holding its forty-fifth annual convention at Atlantic City in 1925, declared:

“We hold that the best interests of wage earners, as well as the whole social group, are served by increasing production in quantity as well as quality, and by high-wage standards which assure sustained purchasing power to the workers, and therefore higher national standards for the environment in which they live and the means to enjoy cultured opportunities. We declare that wage reductions produce social and industrial unrest and that low wages are not conducive to low-production costs.”

Production first.

Here was a clean break with a doctrine that had obsessed the thought of organized labor from the beginning of its history—the doctrine that wages are paid out of capital’s profit. If that were true, then, as a wage earner, the less you gave to the job the more jobs there were and the more of its profit would capital be obliged to divide with labor. It is not true. Wages are paid out of production. Labor at last accepts the fact. In resisting the efforts of capital to increase the productivity of labor it has been all the time limiting the fund of divisible wealth out of which wages are paid. The wage earner now sees himself as producer. He embraces the principle of high productivity. Then he sees himself again as a consumer and stipulates that he must share increasingly in what is produced.

Business has already perceived him in the light of consumer, and how to sustain his buying power is its own anxiety. It is ready therefore to indorse both sides of the Atlantic City declaration.

Four years before this, in 1921, business had been divided. The evil of postwar deflation was upon it. Profits had collapsed. There were many who said, “Now is the time once for all to liquidate wages.” There was a movement to do so. Labor naturally prepared to resist, but that was not what stopped it.

There was a new faith to be tried. It said: “The trouble is not high wages. It is high costs. The trouble is not overproduction from too much capacity. It is that we employ our capacity wastefully. Let us reduce our costs by better method and more power and let wages stand. The result will be a greater consuming power than we ever had before.”

And so it was; and so much more it was than anyone could have imagined that capacity had to be tremendously expanded to satisfy the demand for goods.

Recently the American Federation of Labor has formulated what it calls a modern wage policy. In its first period organized labor struggled for higher money wages. But as prices sometimes rose faster than wages, so that the higher money wage bought even less than before, the demand was changed; it became a demand for higher real wages—that is to say, wages calculated on the buying power of money. Now says the American Federation of Labor:

“Very obvious changes in the productivity of labor today induce organized labor again to widen its wage policy. Higher real wages from a social point of view do not improve the situation of the worker if productivity increases more than real wages. For higher productivity without corresponding increase of real wages means that the additional product has to be bought by others than the wage earners. This means that the social position of the wage earner in relation to other consumers becomes worse, because his standard of living will not advance proportionately with those of other groups. Deteriorating social position—that is, declining purchasing power of the mass of the wage earners in relation to the national product—brings about industrial instability, which will develop into industrial crisis.

“The American Federation of Labor is the first organization of labor in the world to realize the importance of the factor of production in economic society. It no longer strives merely for higher money wages; it no longer strives merely for higher real wages; it strives for higher social wages, for wages which increase as measured by prices and productivity. This modern wage policy lifts the movement to an absolutely new level.”

There is the proportional idea of division clearly set forth. Business accepts it. It was business that came to it first from that point of view which regards the wage earner as a consumer. But there is this difference—that what business perceives to be both a necessity and a social ideal, labor claims as a moral right. In the American Federation’s formula the sentence, “very obvious changes in the productivity of labor . . . induces organized labor again to widen its wage policy,” is extremely naïve. Those very obvious changes—what are they? Who is responsible for them? Labor has not increased its own productivity. The means, the science and the method have all been provided. There you have introduced capital and ideas again and begin at once to touch the historic dispute. Who moved the stone?

In a study entitled Wages in the United States, published in 1927, showing among other facts that while prices declined 17.5 per cent during 1924 and 1926 wages actually advanced, the National Industrial Conference Board glances at this question of moral right, saying:

“It is clear that the increase in output per worker in recent years is due altogether to the greater use of machinery and power and to better management—that is, to the use of more capital and managerial intelligence, and not to any greater effort or more efficient application on the part of labor itself. Production efficiencies have for the most part been evolved through careful research and experimentation on the part of highly skilled engineering staffs, and this work has been financed by the employer without any assurance that it would bring him a return.

“It seems reasonable therefore that when this investment has turned out profitably, the credit and the profits which result should accrue to the employer and to the investors who supplied the capital for the experiment, and who would not have been likely to undertake it except for the prospect of profit. If, however, the employer belongs to the school of economic thought which holds that mounting wages, by enlarging domestic markets, are the surest insurance against business depression, he may distribute any portion of the increased profit in the form of higher wages, but it is difficult to establish any moral obligation to do so.”

As to labor’s attitude it says:

“Labor’s argument, briefly stated in general terms, holds that since in the final analysis it is labor which applies and makes effective the improved agencies of production, it is rightly entitled to share in the increased wealth created. While it is undoubtedly true that the most brilliantly conceived mechanical aid to production is worthless without human direction, it is still open to question whether this makes a case for labor’s demand.”

It is no issue worth raising. What organized labor now demands in the name of a modern wage policy, union and nonunion labor was already receiving. Labor unionism contributed nothing to the American philosophy of division and was slow either to believe in it or try it. Indeed, as that philosophy has clarified and spread, the strength of labor unionism has declined. What was required by scientific management was labor’s collaboration to increase production. This organized labor was reluctant to give. All the possibilities, together with the spirit of faith keeping, had first to be demonstrated in open-shop practice. It had to be demonstrated, and was demonstrated, notably in the motor industry, that with labor letting itself go and with capital keeping faith, division according to scientific management’s idea of it was a higher wage than organized labor could extort from capital by threat and conflict. It was higher because the energy otherwise wasted in the struggle to limit output was devoted to production.

Labor is following where it could not have led. To distribute the blame would be gratuitous. For generations the wage earner had been exploited as a commodity and his suspicions were very deep. He had been exploited also by his leaders, most of them honest, who kept telling him that since labor was the true source of wealth, even as Adam Smith admitted, it followed that labor was entitled to the whole product. They exhorted him therefore to rise and take possession of the means of production. Why labor never in fact did this, or ever seldom tried, was a question its intellectually radical leaders were obliged at last to examine. It seemed to them so easy. The owners were few, the workers were many. The explanation was that labor instinctively knew better. It might seize the means of production. That was simple enough to do. How could it seize the source of ideas?

VII

Application of That Law Also to Profits

None of this change of view as to the meaning of wages had ever been possible without also a change of attitude on the part of capital toward profits. This runs to the same deep level and recreates the ground of economic assumption. One illustration of the change, containing the emotional measure of it, happens to have presented itself in the perfect manner—perfect, because everything about it was unconscious.

Anyone who knew American business twenty-five years ago, particularly anyone who knew it from a Wall Street point of observation, will recall what the state of its feeling was about President Roosevelt. Man on horseback! demagogue! charlatan! radical! As a matter of tact, even as a matter of precaution, one learned never to mention his name carelessly in a Stock Exchange group, for the mere sound of it unexpectedly pronounced had been known to induce pathological consequences. There is a formal record of several Roosevelt panics. Keep all this in mind as the historical fact and look now at a decorative page printed in the August, 1927, number of the Magazine of Business. You see a half-tone reproduction of a painting entitled Modern Industrial St. Louis, a symbolic representation of industry. Beneath the picture is a text on business ethics, The Acquisition of Wealth, by Theodore Roosevelt, saying:

“The mere acquisition of wealth, in and by itself, beyond a certain point, speaks very little for the man compared with success in most other lines of endeavor. . . . Furthermore, the wealthy men who make money which does not represent service are public enemies.”

In a magazine of business, whose audience is business! There was no daring or propaganda in it. The editor’s thought was ornamental. This is a text to which American business now subscribes. That is the ethic to which it aspires.

What has happened in these twenty-five years?

Clearly, there is a new way of conceiving what profit is. This was bound to occur. A philosophy of division that had changed the meaning of wages could not have failed to bring an original light to play on the question of capital’s share.

Profit was another endless, indistinct beast that devoured the reason of economists, besides consuming the prosperity of the wage earner and damning the souls of men. Economic literature is full of his wickedness. For a long time there was no distinction between him and a less Satanic animal called interest. They were hunted together. But after they had been separated by intelligence and profit alone began to be tracked to his source and justification the controversy became even more violent and irrational.

What was the nature of profit? Always it seemed to be the difference between the cost of producing a thing and the price at which it was sold. Why was that difference? Even if you included interest as an item of cost, still there was that difference which somebody charged and everybody paid—and that was profit. Some said under a régime of perfect competition profit would tend to disappear, for everything would have to sell at cost. To this was the objection that if there was no profit, no hope of it, there would be no adventuring of capital. Economic society would in that case stagnate and perhaps die. Others, like Robert Owen, said competition was economic warfare and profit was the spoils. Therefore competiton must be abolished together with every trace of the heinous impulse to buy cheap and sell dear. The profit motive and money as the instrument of profit must be abolished, else there was no saving of mankind. Profit was the forbidden fruit that had wrecked the Garden of Eden.

That was seventy-five years ago, and the absurdity is still current in the world. It is the dogmatic puerility of communism.

However, there was no way to get rid of the profit motive. All attempts to do so, notably those of Robert Owen, with his labor exchange and labor notes in place of money, went shipwreck on the rocks of human nature. There came to be a fixed cynical notion about profit, that it was a toll upon wealth, charged by those who possessed the means of producing wealth, and charged by no rule of reason. What the traffic would bear—that was the only rule.

Under the old economy, even to this day, that is the nature of one kind of profit and that is the rule by which it is calculated. The robber baron, taking toll of the caravan, learned not to take more than the trader could afford to give, for if he took more, he either ruined the trade or caused the trader to go another way. Generally the industrial capitalist was controlled by that same idea, hence his everlasting dream of monopoly. To possess a monopoly was like holding a caravan pass. It might be in one case a monopoly of goods that enabled him to sell them dear; it might be also a monopoly of the means of production that enabled him to buy labor cheap. Often it was both. All profit in that character—and there has been an enormous lot of it—is a toll upon wealth. Consumers as such and labor as such are both exploited. Generally it was true that capital’s share was determined by occasion, circumstance and privilege. There was no social theory of division, nor had capital any vision of its own dynamic function. What it took for itself was as much as it could, and that was a large proportion of the total product.

Profit taking by that rule limits prosperity, for the obvious reason that it limits the production and exchange of wealth. This is commonly understood. The truth is not so clearly formulated that profit taking by that rule in any modern scheme limits also the power and profits of capital.

Here the proportional idea again, now touching capital’s share in the same way as before it touched labor’s share. There is no scientific way to determine what the right proportions are. The important thing is to have an idea of proportion. There is no such idea in taking all you can get and calling that your own. That is division by jungle law.

From a true philosophy of division you come naturally to a sense of proportion, and a proportional share defines itself as a quantity that bears a more or less constant relation—ideally a constant relation—to the total product of divisible wealth.

Now a principle begins to act. Probably it is a law. It is this: If capital’s profit in any case is more than a proportional share, it may keep it and consume it; but if it does, the profit ultimately will fail. Why? Because there is no permanent source of profit in itself. It cannot survive but it is rooted in common prosperity, in the well-being of society as a whole; and this is injured by disproportional division.

It is easy to reconstruct a picture of American industry as it was. Many ruins survive. In one of the old textile fields you may still see, in a valley on a water-power site, where the factory was. On a high hill, maybe boarded up, surrounded by a neglected private park, you will see what was the owner’s mansion. Obviously, a great deal was taken out of that business as capital’s share and consumed. The proportion was steep. The mansion and its setting must have cost more than the factory. With what sequel? The business has vanished. It was ruined by the competition of textile industrialists who, taking only a proportional share for themselves personally, returned their profits to the source, thereby increasing their plant, reducing their costs, improving the status and productivity of their wage earners, until now the volume of wealth produced is so great that no mansion in a private park could bear any important relation to it.

Perhaps the most impressive isolate example is Henry Ford. You may take him to be the richest man in the world. But in what is he rich? Not in money. In twenty years, from nothing, he and his associates have created the largest one unit of industry in the world. It is the most celebrated instance of profit making. Where is the profit? In what form does it exist? A house to live in, what his household has consumed in living, the Wayside Inn, a quantity of antiques and the Dearborn Independent—these are the things Ford has taken for himself personally, and the cost of them in proportion to the wealth he has created is trifling. The rest of the profit has been returned to its source. The more of it that was returned, the more of it there was, until at last it ceases to have the meaning of money, or of anything that can be converted into money. It is power. In one apearance it is personal power; actually it is not, for unless it continues to be employed in ways to increase the wealth of society as a whole it will fail, only to rise again in the hands of another.

He says himself, “All anybody can get out of this is a job.”

Although it may be elsewhere less visible or less dramatically emphasized, the same rule has governed the entire American automobile industry. And that is one reason why the motor-car industry of the world is centered here, not in Europe, where they made motor cars first and made them much better to begin with. The motive was profit. That is so. Only, in what character is profit? In the old character profit was an appropriation of wealth, some arbitrary part of the product detained as capital’s share, or a toll upon it—in any case, a quantity deducted from the total divisible result of ideas and labor and Nature collaborating.

VIII

Bankrupt Antagonisms

In our scheme it appears that profit, instead of representing anything deducted from the total product, may arise from what is added to that product. Invariably in the great instances it is so. The extraordinary profit runs to those who by ideas and method increase the productivity of capital and labor. That is to say, they reduce the cost. Their profit is not in the price; it is in the cost. With no change in price, they increase the profit by reducing the cost. Thus profit creates itself and is itself divisible. It arises, as was said, from a productive principle and is a new thing.

Profit in that sense is not in what you take. It is from what you give. To make a great profit you have to increase the total product of wealth more efficiently than your competitor. Having made the great profit in that way, it is rightfully your own to consume. You may remove it from the business and do anything you like with it. But unless you return it to its source—the greater part of it—the source will dry up. Why? Because if you do not pursue that line, another will, and he who does will presently have costs lower than yours, and your profit will cease.

Thus it is endlessly that profits are divided with society through a cheapening of goods. This day’s consumer of goods is consuming also the profits that capital made yesterday. The man who pays today a thousand dollars for a motor car better than one that sold for fifteen hundred dollars five years ago is actually consuming that part of the profit from fifteen-hundred-dollar motor cars that was returned to the motor industry in order to reduce the cost of production. The margin of profit in motor cars at one thousand dollars is less than it was in motor cars at fifteen hundred, but the quantity that can be sold at one thousand dollars is greater and the aggregate profit may be even more than before. Wherein you see that the consumer in the act of consuming profits returns them again to whence they came.

The classic economic dogma of antagonism is breaking down. We are privileged to witness that catastrophe, being the authors of it. Wages and profits are not opposed. Both derive from production. There is properly no conflict between producer and consumer. How could there be? Producer and consumer are the same person. Prosperity is from increasing the sum of social wealth for purposes of proportional division, and all its phenomena belong to the wonder of orchestration. Everyone’s part is supported by another’s part. One pursuing private gain in a ruthless manner as an exclusive end is a wild piper playing his own tune in a symphony band. He is not of our time and way of life.

Such thoughts become suddenly commonplace. They occur now more frequently in what business writes about itself than anywhere else. Take as typical this paragraph from the May, 1927, economic circular of the National City Bank of Wall Street, on the growth of wealth since 1921:

“Inasmuch as the amount which the individual can spend on necessities such as food and clothing is fairly limited, the excess has flowed out and created the demand for better housing, for automobiles, radios and the like that has gone to sustain the business boom. It has also made possible a larger attendance at schools and colleges. Shortages created by the war may be made up and the stimulation of business derived from them dissipated, but the impetus received from an improving state of general well-being goes on so long as each individual recognizes, and in his dealings with others is guided by, the principle that prosperity is dependent upon an even exchange of goods and services and that it is the wealth which each one produces that enables him to buy the products of others.”

An even exchange of goods. How radical that would have seemed only a few years ago!

We are hardly aware of the extent to which the idea of profit as private gain from ownership has been subordinated to the idea of profit as a wage for capital, social benefit regarded as its justification. One takes it for granted, yet it is a significant fact. Great bodies of capital appear that are practically unowned, unless you should say society owned them. The principle of private ownership has not been touched. Yet the meaning of ownership in these cases has fundamentally changed.

As the holder of shares in a large corporation, one is supposed to own some arithmetical part of the assets. That is technical. Does one in fact own that part? It is nothing one can separate or take away or do with at all as one personally likes. Nor could all the stockholders together act as absolute owners of a property employed in producing wealth essential to the welfare of society. Could they, for example, in a pet with society, shut it up willfully or destroy it? Formerly the owner could have done either—and any thought to the contrary would have outraged his sense of right.

As ownership becomes more widely distributed, capital shares represent ownership in no sense of old, but, instead, a right to participate in the profits. And more and more it is that the owners do not control the policy that governs the profits. The management does that. Management now becomes an institution apart from ownership. If the case to be supposed is that of a public-service corporation, which may be the highest example, the management says to the shareholders, technically the owners:

“We undertake to keep your investment safe and to return you 6 per cent on it. Profits more than that we propose to divide under three heads of benefit—namely, property benefit, to improve the service; employe benefit, to improve relationship and reward loyalty; and, thirdly, consumer benefit, which is the final aim.”

What the investor gets beyond his 6 per cent is a sense of security, for he may know that a property so handled will endure.

One is no longer surprised to find in the annual reports of corporations to their shareholders that a sense of social achievement is stressed above profit. The report of the largest light-and-power company in Virginia begins:

“Your company is a public utility holding company. Its purposes are twofold: First, as to the public served, to improve and develop the service in the territories occupied; and, second, as to the investing public”—to provide a sound investment.

The public first.

The last annual report of the largest public-utility corporation in the world said:

“The ideal and aim today of the American Telephone and Telegraph Company and its associated companies is a telephone service for the nation, free, so far as humanly possible, from imperfections, errors or delays, and enabling at all times anyone, anywhere, to pick up a telephone and talk to anyone else anywhere else, clearly, quickly and at reasonable cost.”

Service first. And from that motive more wealth among us in telephones than among all other people in the world together.

A proportional wage for labor, a proportional wage for capital, and from the profits that are over a distribution of benefits to the property, to the workers and to the public—that is management’s idea of division.

In this American philosophy you may find economic chivalry by looking for it. If you do, it is implicit there. The conscious view is still pragmatic. Any other is obscured in a curious way. Long before this a state of society had been imagined in which the desire for private gain as the paramount economic motive should yield to the idea of social function. But nobody had ever imagined it would really pay.