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The Theory of Business Enterprise

Thorstein Veblen

1904

Preface

In respect to its point of departure, the following inquiry

into the nature, causes, utility, and further drift of business

enterprise differs from other discussions of the same general

range of facts. Any unfamiliar conclusions are due to this choice

of a point of view, rather than to any peculiarity in the facts,

articles of theory, or method of argument employed. The point of

view is that given by the business man's work, -- the aims,

motives, and means that condition current business traffic. This

choice of a point of view is itself given by the current economic

situation, in that the situation plainly is primarily a business

situation.

A much more extended and detailed examination of the

ramifications and consequences of business enterprise and

business principles would feasible, and should give interesting

results. It might conceivably lead to something of a revision

(modernization) of more than one point in the current body of

economic doctrines. But it should apparently prove more

particulary interesting if it were followed up at large in the

bearing of this modern force upon cultural growth, apart from

what is of immediate economic interest. This cultural bearing of

business enterprise, however, belongs rather in the field of the

sociologist than in that of the professed economist; so that the

present inquiry, in its later chapters, sins rather by exceeding

the legitimate bounds of economic discussion on this head than by

falling short of them. In extenuation of this fault it is said

that the features of general culture touched upon in these

chapters bear too intimately on the economic situation proper to

admit their being left entirely on one side.

Of the chapters included in the volume, the fifth, on Loan

Credit, is taken without substantial change, from Volume IV of

the Decennial Publications of the University of Chicago, where it

appears as a monograph.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter One

Introductory

The material framework of modern civilization is the industrial

system, and the directing force which animates this framework is

business enterprise. To a greater extent than any other known

phase of culture, modern Christendom takes its complexion from

its economic organization. This modern economic organization is

the "Capitalistic System" or "Modern Industrial System," so

called. Its characteristic features, and at the same time the

forces by virtue of which it dominates modern culture, are the

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machine process and investment for a profit.

The scope and method of modern industry are given by the

machine. This may not seem to hold true for all industries,

perhaps not for the greater part of industry as rated by the bulk

of the output or by the aggregate volume of labor expended. But

it holds true to such an extent and in such a pervasive manner

that a modern industrial community cannot go on except by the

help of the accepted mechanical appliances and processes. The

machine industries -- those portions of the industrial system in

which the machine process is paramount -- are in a dominant

position; they set the pace for the rest of the industrial

system. In this sense the present is the age of the machine

process. This dominance of the machine process in industry marks

off the present industrial situation from all else of its kind.

In a like sense the present is the age of business

enterprise. Not that all industrial activity is carried on by the

rule of investment for profits, but an effective majority of the

industrial forces are organized on that basis. There are many

items of great volume and consequence that do not fall within the

immediate score of these business principles. The housewife's

work, e.g., as well as some appreciable portion of the work on

farms and in some handicrafts, can scarcely be classed as

business enterprise. But those elements in the industrial world

that take the initiative and exert a far-reaching coercive

guidance in matters of industry go to their work with a view to

profits on investment, and are guided by the principles and

exigencies of business. The business man, especially the business

man of wide and authoritative discretion, has become a

controlling force in industry, because, through the mechanism of

investments and markets, he controls the plants and processes,

and these set the pace and determine the direction of movement

for the rest. His control in those portions of the field that are

not immediately under his hand is, no doubt, somewhat loose and

uncertain; but in the long run his discretion is in great measure

decisive even for these outlying portions of the field, for he is

the only large self-directing economic factor. His control of the

motions of other men is not strict, for they are not under

coercion from him except through the coercion exercised by the

exigencies of the situation in which their lives are cast; but as

near as it may be said of any human power in modern times, the

large business man controls the exigencies of life under which

the community lives. Hence, upon him and his fortunes centres the

abiding interest of civilized mankind.

For a theoretical inquiry into the course of civilized

life as it runs in the immediate present, therefore, aud as it is

running into the proximate future, no single factor in the

cultural situation has an importance equal to that of the

business man and his work.

This of course applies with peculiar force to an inquiry

into the economic life of a modem community. In so far as the

theorist aims to explain the specifically modern economic

phenomena, his line of approach must be from the businessman's

standpoint, since it is from that standpoint that the course of

these phenomena is directed. A theory of the modern economic

situation must be primarily a theory of business traffic, with

its motives, aims, methods, and effects.

The Theory of Business Enterprise

by Thorstein Veblen

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1904

Chapter Two

The Machine Process

In its bearing on modern life and modern business, the

"machine process" means something more comprehensive and less

external than a mere aggregate of mechanical appliances for the

mediation of human labor. It means that, but it means something

more than that. The civil engineer, the mechanical engineer, the

navigator, the mining expert, the industrial chemist and

mineralogist, the electrician, -- the work of all these falls

within the lines of the modern machine process, as well as the

work of the inventor who devises the appliances of the process

and that of the mechanician who puts the inventions into effect

and oversees their working. The scope of the process is larger

than the machine.(1*) In those branches of industry in which

machine methods have been introduced, many agencies which are not

to be classed as mechanical appliances, simply, have been drawn

into the process, and have become integral factors in it.

Chemical properties of minerals, e.g., are counted on in the

carrying out of metallurgical processes with much the same

certainty and calculable effect as are the motions of those

mechanical appliances by whose use the minerals are handled. The

sequence of the process involves both the one and the other, both

the apparatus and the materials, in such intimate interaction

that the process cannot be spoken of simply as an action of the

apparatus upon the materials. It is not simply that the apparatus

reshapes the materials; the materials reshape themselves by the

help of the apparatus. Similarly in such other processes as the

refining of petroleum, oil, or sugar; in the work of the

industrial chemical laboratories; in the use of wind, water, or

electricity, etc.

Wherever manual dexterity, the rule of thumb, and the

fortuitous conjunctures of the seasons have been supplanted by a

reasoned procedure on the basis of a systematic knowledge of the

forces employed, there the mechanical industry is to be found,

even in the absence of intricate mechanical contrivances. It is a

question of the character of the process rater than a question of

the complexity of the contrivances employed. Chemical,

agricultural, and animal industries, as carried on by the

characteristically modern methods and in due touch with the

market, are to be included in the modern complex of mechanical

industry.(2*)

No one of the mechanical processes carried on by the use of

a given outfit of appliances is independent of other processes

going on elsewhere. Each draws upon and presupposes the proper

working of many other processes of a similarly mechanical

character. None of the processes in the mechanical industries is

self-sufficing. Each follows some and precedes other processes in

an endless sequence, into which each fits and to the requirements

of which each must adapt its own working. The whole concert of

industrial operations is to be taken as a machine process, made

up of interlocking detail processes, rather than as a

multiplicity of mechanical appliances each doing its particular

work in severalty. This comprehensive industrial process draws

into its scope and turns to account all branches of knowledge

that have to do with the material sciences, and the whole makes a

more or less delicately balanced complex of sub-processes.(3*)

Looked at in this way the industrial process shows two

well-marked general characteristics: (a) the running maintenance

of interstitial adjustments between the several sub-processes or

branches of industry, wherever in their working they touch one

another in the sequence of industrial elaboration; and (b) an

unremitting requirement of quantitative precision, accuracy in

point of time and sequence, in the proper inclusion and exclusion

of forces affecting the outcome, in the magnitude of the various

physical characteristics (weight, size, density, hardness,

tensile strength, elasticity, temperature, chemical reaction,

actinic sensitiveness, etc.) of the materials handled as well as

of the appliances employed. This requirement of mechanical

accuracy and nice adaptation to specific uses has led to a

gradual pervading enforcement of uniformity to a reduction to

staple grades and staple character in the materials handled, and

to a thorough standardizing of tools and units of measurement.

Standard physical measurements are of the essence of the

machine's regime.(4*)

The modern industrial communities show an unprecedented

uniformity and precise equivalence in legally adopted weights and

measures. Something of this kind would be brought about by the

needs of commerce, even without the urgency given to the movement

for uniformity by the requirements of the machine industry. But

within the industrial field the movement for standardization has

outrun the urging of commercial needs, and has penetrated every

corner of the mechanical industries. The specifically commercial

need of uniformity in weights and measures of merchantable goods

and in monetary units has not carried standardization in these

items to the extent to which the mechanical need of the

industrial process has carried out a sweeping standardization in

the means by which the machine process works, as well as in the

products which it turns out.

As a matter of course, tools and the various structural

materials used are made of standard sizes, shapes, and gauges.

When the dimensions, in fractions of an inch or in millimetres,

and the weight, in fractions of a pound or in grammes, are given,

the expert foreman or workman, confidently and without

reflection, infers the rest of what need be known of the uses to

which any given item that passes under his hand may be turned.

The adjustment and adaptation of part to part and of process to

process has passed out of the category of craftsmanlike skill

into the category of mechanical standardization. Hence, perhaps,

the greatest, most wide-reaching gain in productive celerity and

efficiency through modern methods, and hence the largest saving

of labor in modern industry.

Tools, mechanical appliances and movements, and structural

materials are scheduled by certain conventional scales and

gauges; and modern industry has little use for, and can make

little use of, what does not conform to the standard. What is not

competently standardized calls for too much of craftsmanlike

skill, reflection, and individual elaboration, and is therefore

not available for economical use in the processes. Irregularity,

departure from standard measurements in any of the measurable

facts, is of itself a fault in any item that is to find a use in

the industrial process, for it brings delay, it detracts from its

ready usability in the nicely adjusted process into which it is

to go; and a delay at any point means a more or less far-reaching

and intolerable retardation of the comprehensive industrial

process at large. Irregularity in products intended for

industrial use carries a penalty to the nonconforming producer

which urges him to fall into line and submit to the required

standardization.

The materials and moving forces of industry are undergoing a

like reduction to staple kinds, styles, grades, and gauge.(5*)

Even such forces as would seem at first sight not to lend

themselves to standardization, either in their production or

their use, are subjected to uniform scales of measurement; as,

e.g., water-power, steam, electricity, and human labor. The

latter is perhaps the least amenable to standardization, but, for

all that, it is bargained for, delivered, and turned to account

on schedules of time, speed, and intensity which are continually

sought to be reduced to a more precise measurement and a more

sweeping uniformity.

The like is true of the finished products. Modern consumers

in great part supply their wants with commodities that conform to

certain staple specifications of size, weight, and grade. The

consumer (that is to say the vulgar consumer) furnishes his hose,

his table, and his person with supplies of standard weight and

measure, and he can to an appreciable degree specify his needs

and his consumption in the notation of the standard gauge. As

regards the mass of civilized mankind, the idiosyncrasies of the

individual consumers are required to conform to the uniform

gradations imposed upon consumable goods by the comprehensive

mechanical processes of industry. "Local color" it is said, is

falling into abeyance in modern life, and where it is still found

it tends to assert itself in units of the standard gauge.

From this mechanical standardization of consumable goods it

follows, on the one hand, that the demand for goods settles upon

certain defined lines of production which handle certain

materials of definite grade, in certain, somewhat invariable

forms and proportions; which leads to well-defined methods and

measurements in the processes of production, shortening the

average period of "ripening" that intervenes between the first

raw stage of the product and its finished shape, and reducing the

aggregate stock of goods necessary to be carried for the supply

of current wants, whether in the raw or in the finished form.(6*)

Standardization means economy at nearly all points of the process

of supplying goods, and at the same time it means certainty and

expedition at neatly all points in the business operations

involved in meeting current wants. Besides this, the

standardization of goods means that the interdependence of

industrial processes is reduced to more definite terms than

before the mechanical standardization came to its present degree

of elaborateness and rigor. The margin of admissible variation,

in time, place, form, and amount, is narrowed. Materials, to

answer the needs of standardized industry, must be drawn from

certain standard sources at a definite rate of supply. Hence any

given detail industry depends closely on receiving its supplies

from certain, relatively few, industrial establishments whose

work belongs earlier in the process of elaboration. And it ma

similarly depend on certain other, closely defined, industrial

establishments for a vent of its own specialization and

standardization product.(7*) It may likewise depend in a strict

manner on special means of transportation.(8*)

Machine production leads to a standardization of services

as well as of goods. So, for instance, the modern means of

communication and the system into which these means are organized

are also of the nature of a mechanical process, and in this

mechanical process of service and intercourse the life of all

civilized men is more or less intimately involved. To make

effective use of the modern system of communication in any way or

all of its ramifications (streets, railways, steamship lines,

telephone, telegraph, postal service, etc.), men are required to

adapt their needs and their motions to the exigencies of the

process whereby this civilized method of intercourse is carried

into effect. The service is standardized, and therefore the use

of it is standardized also. Schedules of time, place, and

circumstance rule throughout. The scheme of everyday life must be

arranged with a strict regard to the exigencies of the process

whereby this range of human needs is served, if full advantage is

to be taken of this system of intercourse, which means that, in

so far, one's plans and projects must be conceived and worked out

in terms of those standard units which the system imposes.

For the population of the towns and cities, at least, much

the same rule holds true of the distribution of consumable goods.

So, also, amusements and diversions, much of the current

amenities of life, are organized into a more or less sweeping

process to which those who would benefit by the advantages

offered must adapt their schedule of wants and the disposition of

their time and effort. The frequency, duration, intensity, grade,

and sequence are not, in the main, matters for the free

discretion of the individuals who participate. Throughout the

scheme of life of that portion of mankind that clusters about the

centres of modern culture the industrial process makes itself

felt and enforces a degree of conformity to the canon of accurate

quantitative measurement. There comes to prevail a degree of

standardization and precise mechanical adjustment of the details

of everyday life, which presumes a facile and unbroken working of

all those processes that minister to these standardized human

wants.

As a result of this superinduced mechanical regularity of

life, the livelihood of individuals is, over large areas,

affected in an approximately uniform manner by any incident which

at all seriously affects the industrial process at any point.(9*)

As was noted above, each industrial unit, represented by a

given industrial "plant", stands in close relations of

interdependence with other industrial processes going forward

elsewhere, near or far away, from which it receives supplies --

materials, apparatus, and the like -- and to which it turns over

its output of products and waste, or on which it depends for

auxiliary work, such as transportation. The resulting

concatenation of industries has been noticed by most modern

writers. It is commonly discussed under the head of the division

of labor. Evidently the prevalent standardization of industrial

means, methods, and products greatly increases the reach of this

concatenation of industries, at the same time that it enforces a

close conformity in point of time, volume and character of the

product, whether the product is goods or services.(10*)

By virtue of this concatenation of processes the modern

industrial system at large bears the character of a

comprehensive, balanced mechanical process. In order to an

efficient working of this industrial process at large, the

various constituent sub-processes must work in due coordination

throughout the whole. Any degree of maladjustment in the

interstitial coordination of this industrial process at large in

some degree hinders its working. Similarity, any given detail

process or any industrial plant will do its work to full

advantage only when due adjustment is had between its work and

the work done by the rest. The higher the degree of development

reached by a given industrial community, the more comprehensive

and urgent becomes this requirement of interstitial adjustment.

And the more fully a given industry has taken on the character of

a mechanical process, and the more extensively and closely it is

correlated in its work with other industries that precede or

follow it in the sequence of elaboration, the more urgent, other

things equal, is the need of maintaining the proper working

relations with these other industries, the greater is the

industrial detriment suffered from any derangement of the

accustomed working relations, and the greater is the industrial

gain to be derived from a closer adaptation and a more facile

method of readjustment in the event of a disturbance, -- the

greater is also the chance for an effectual disturbance of

industry at the particular point. This mechanical concatenation

of industrial processes makes for solidarity in the

administration of any group of related industries, and more

remotely it makes for solidarity in the management of the entire

industrial traffic of the community.

A disturbance at any point, whereby any given branch of

industry fails to do its share in the work of the system at

large, immediately affects the neighbouring or related branches

which come before or after it in the sequence, and is transmitted

through their derangement to the remoter portions of the system.

The disturbance is rarely confined to the single plant or the

single line of production first affected, but spreads in some

measure to the rest. A disturbance at any given point brings more

or less derangement to the industrial process at large. So that

any maladjustment of the system involves a larger waste than

simply the disabling of one or two members in the complex

industrial structure.

So much is clear, that the keeping of the balance in the

comprehensive machine process of industry is a matter of the

gravest urgency if the productive mechanism is to proceed with

its work in an efficient manner, so as to avoid idleness, waste,

and hardship. The management of the various industrial plants and

processes in due correlation with all the rest, and the

supervision of the interstitial adjustments of the system, are

commonly conceived to be a work of greater consequence to the

community's well-being than any of the detail work involved in

carrying on a given process of production. This work of

interstitial adjustment, and in great part also the more

immediate supervision of the various industrial processes, have

become urgent only since the advent of the machine industry and

in proportion as the machine industry has advanced in compass and

consistency.

It is by business transactions that the balance of working

relations between the several industrial units is maintained or

restored, adjusted and readjusted, and it is on the same basis

and by the same method that the affairs of each industrial unit

are regulated. The relations in which any independent industrial

concern stands to its employees, as well as to other concerns,

are always reducible to pecuniary terms. It is at this point that

the business man comes into the industrial process as a decisive

factor. The organization of the several industries as well as the

interstitial adjustments and discrepancies of the industrial

process at large are of the nature of pecuniary transactions and

obligations. It therefore rests with the business men to make or

mar the running adjustments of industry. The larger and more

close-knit and more delicately balanced the industrial system,

and the larger the constituent units, the larger and more

far-reaching will be the effect of each business move in the

field.

NOTES:

1. Cf. Cooke Taylor, Modern Factory System, pp. 74-77.

2. Even in work that lies so near the fortuities of animate

nature as dairying, stock-breeding, and the improvement of crop

plants, a determinate, reasoned routine replaces the rule of

thumb. By mechanical control of his materials the dairyman, e.g.,

selectively determines the rate and kind of the biological

processes that change his raw material into finished product. The

stock-breeder's aim is to reduce the details of the laws of

heredity, as they apply within his field, to such definite terms

as will afford him a technologically accurate routine of

breeding, and then to apply this technological breeding process

to the production of such varieties of stock as will, with the

nearest approach to mechanical exactness and expedition, turn the

raw materials of field and meadow into certain specified kinds

and grades of finished product. The like is true of the

plant-breeders. Agricultural experiment stations and bureaus, in

all civilized countries, are laboratories working toward an

effective technological control of biological factors, with a

view to eliminating fortuitous, disserviceable, and useless

elements from the processes of agricultural production, and so

reducing these processes to a calculable, expeditious, and

wasteless routine.

3. Cf. Sombart, Moderne Kapitalismus, vol. II, ch. III.

4. Twelfth Census (U.S.): "Manufactures," pt. I, p. xxxvi.

5.. E.g., lumber, coal, paper, wool and cotton, grain, leather,

cattle for the packing houses. All these and many others are to

an increasing extent spoken for, delivered, and disposed of under

well-defined staple grades as to quality and dimensions, weight

and efficiency.

6. Well shown in the case of wheat and flour; but the like is

true as regards the stocks of other commodities carried by

producers, jobbers, retailers, and consumers.

7. Well illustrated by the interdependence of the various

branches of iron and steel production.

8. As seen, e.g., in the dependence of oil production or oil

refining on the pipe lines and their management, or in the

dependence of the prairie farmers on the railway lines, etc.

9. It may be noted in this connection, on the one hand, that a

population which is in no degree habituated to the modern

industrial process is unable to adapt its mode of life to the

requirements of this method of supplying human wants, and so can

derive but little benefit, and possibly great discomfort, from a

forcible intrusion of the machine industry; as, for instance,

many of the outlying barbarian peoples with whom the Western

industrial culture is now enforcing a close contact. On the other

hand, it is also true that even the most adequately trained

modern community, among whom the machine industry is best at

home, does not respond with fruitless alacrity to the demands and

opportunities which this system holds out. The adaptation of

habits of life and of ideals and aspirations to the exigencies of

the machine process is not nearly complete, nor does the

untrained man instinctively fall into line with it. Even the

best-trained, severely disciplined man of the industrial towns

has his seasons of recalcitrancy.

10. The dependence of one process upon the working of the others

is sometimes very strict, as, for instance, in the various

industries occupied with iron, including the extraction and

handling of the ore and other raw materials. In other cases the

correlation is less strict, or even very slight, as, e.g., that

between the newspaper industry and lumbering, through the

wood-pulp industry, the chief component of the modern newspaper

being wood-pulp.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter Three

Business Enterprise

The motive of business is pecuniary gain, the method is

essentially purchase and sale. The aim and usual outcome is an

accumulation of wealth.(1*) Men whose aim is not increase of

possessions do not go into business, particularly not on an

independent footing.

How these motives and methods of business work out in the

traffic of commercial enterprise proper - in mercantile and

banking business does not concern the present inquiry, except so

far as these branches of business affect the course of industrial

business in the stricter sense of the term. Nor is it necessary

were to describe the details of business routine, whether in the

mercantile pursuits or in the conduct of an industrial concern.

The point of the inquiry is that characteristically modern

business that is coextensive with the machine process described

above and is occupied with the large mechanical industry. The aim

is a theory of such business enterprise in outline sufficiently

full to show in what manner business methods and business

principles, in conjunction with the mechanical industry,

influence the modern cultural situation. To save space and

tedium, therefore, features of business traffic that are not of a

broad character and not peculiar to this modern situation are

left on one side, as being already sufficiently familiar for the

purpose in hand.

In early modern times, before the regime of the machine

industry set in, business enterprise on any appreciable scale

commonly took the form of commercial business - some form of

merchandising or banking. Shipping was the only considerable line

of business which involved an investment in or management of

extensive mechanical appliances and processes, comparable with

the facts of the modern mechanical industry.(2*) And shipping was

commonly combined with merchandising. But even the shipping trade

of earlier times had much of a fortuitous character, in this

respect resembling agriculture or any other industry in which

wind and, weather greatly affect the outcome. The fortunes of men

in shipping were on a more precarious footing than to-day, and

the successful outcome of their ventures was less a matter of

shrewd foresight and daily pecuniary strategy than are the

affairs of the modern large business concerns in transportation

or the foreign trade. Under these circumstances the work of the

business man was rather to take advantage of the conjunctures

offered by the course of the seasons and the fluctuations of

demand and supply than to adapt the course of affairs to his own

ends. The large business man was more of a speculative buyer and

seller and less of a financiering strategist than he has since

become.

Since the advent of the machine age the situation has

changed. The methods of business have, of course, not changed

fundamentally, whatever may be true of the methods of industry;

for they are, as they had been, conditioned by the facts of

ownership. But instead of investing in the goods as they pass

between producer and consumer, as the merchant does, the business

man now invests in the processes of industry; and instead of

staking his values on the dimly foreseen conjunctures of the

seasons and the act of God, he turns to the conjunctures arising

from the interplay of the industrial processes, which are in

great measure under the control of business men.

So long as the machine processes were but slightly developed,

scattered, relatively isolated, and independent of one another

industrially, and so long as they were carried on on a small

scale for a relatively narrow market, so long the management of

them was conditioned by circumstances in many respects similar to

those which conditioned the English domestic industry of the

eighteenth century. It was under the conditions of this inchoate

phase of the machine age that the earlier generation of

economists worked out their theory of the business man's part in

industry. It was then still true, in great measure, that the

undertaker was the owner of the industrial equipment, and that he

kept an immediate oversight of the mechanical processes as well

as of the pecuniary transactions in which his enterprise was

engaged; and it was also true, with relatively infrequent

exceptions, that an unsophisticated productive efficiency was the

prime element of business success.(3*) A further feature of that

precapitalistic business situation is that business, whether

handicraft or trade, was customarily managed with a view to

earning a livelihood rather than with a view to profits on

investment.(4*)

In proportion as the machine industry gained ground, and as

the modern concatenation of industrial processes and of markets

developed, the conjunctures of business grew more varied and of

larger scope at the same time that they became more amenable to

shrewd manipulation. The pecuniary side of the enterprise came to

require more unremitting attention, as the chances for gain or

loss through business relatIons simply, aside from mere

industrial efficiency, grew greater in number and magnitude. The

same circumstances also provoked a spirit of business enterprise,

and brought on a systematic investment for gain. With a fuller

development of the modern closeknit and comprehensive industrIal

system, the point of chief attention for the business man has

shifted from the old-fashioned surveillance and regulation of a

given industrial process, with which his livelihood was once

bound up, to an alert redistribution of investments from less to

more gainful ventures,(5*) and to a strategic control of the

conjunctures of business through shrewd investments and

coalitions with other business men.

As shown above, the modern industrial system is a

concatenation of processes which has much of the character of a

single, comprehensive, balanced mechanical process. A disturbance

of the balance at any point means a differential advantage (or

disadvantage) to one or more of the owners of the sub-processes

between which the disturbance falls; and it may also frequently

mean gain or loss to many remoter members in the concatenation of

processes, for the balance throughout the sequence is a delicate

one, and the transmission of a disturbance often goes far. It may

even take on a cumulative character, and may thereby seriously

cripple or accelerate branches of industry that are out of direct

touch with those members of the concatenation upon which the

initial disturbance falls. Such is the case, for instance, in an

industrial crisis, when an apparently slIght initial disturbance

may become the occasion of a widespread derangement. And such, on

the other hand, is also the case when some favorable condition

abruptly supervenes in a given industry, as, e.g., when a sudden

demand for war stores starts a wave of prosperity by force of a

large and lucrative demand for the products of certain

industries, and these in turn draw on their neighbors in the

sequence, and so transmit a wave of business activity.

The keeping of the industrial balance, therefore, and

adjusting the several industrial processes to one another's work

and needs, is a matter of grave and far-reaching consequence in

any modern community, as has already been shown. Now, the means

by which this balance is kept is business transactions, and the

men in whose keeping it lies are the business men. The channel by

which disturbances are transmitted from member to member of the

comprehensive industrial system is the business relations between

the several members of the system; and, under the modern

conditions of ownership, disturbances, favorable or unfavorable,

in the field of industry are transmitted by nothing but these

business relations. Hard times or prosperity spread through the

system by means of business relations, and are in their primary

expression phenomena of the business situation simply. It is only

secondarily that the disturbances in question show themselves as

alterations in the character or magnitude of the mechanical

processes involved. Industry is carried on for the sake of

business, and not conversely; and the progress and activity of

industry are conditioned by the outlook of the market, which

means the presumptive chance of business profits.

All this is a matter of course which it may seem simply

tedious to recite.(6*) But its consequences for the theory of

business make it necessary to keep the nature of this connection

between business and industry in mind. The adjustments of

industry take place through the mediation of pecuniary

transactions, and these transactions take place at the hands of

the business men and are carried on by them for business ends,

not for industrial ends in the narrower meaning of the phrase.

The economic welfare of the community at large is best served

by a facile and uninterrupted interplay of the various processes

which make up the industrial system at large; but the pecuniary

interests of the business men in whose hands lies the discretion

in the matter are not necessarily best served by an unbroken

maintenance of the industrial balance. Especially is this true as

regards those greater business men whose interests are very

extensive. The pecuniary operations of these latter are of large

scope, and their fortunes commonly are not permanently bound up

with the smooth working of a given Sub-process in the industrial

system. Their fortunes are rather related to the larger

conjunctures of the industrial system as a whole, the

interstitial adjustments, Or to conjunctures affecting large

ramifications of the system. Nor is it at all uniformly to their

interest to enhance the smooth working of the industrial system

at large in so far as they are related to it. Gain may come to

them from a given disturbance of the system whether the

disturbance makes for heightened facility or for widespread

hardship, very much as a speculator in grain futures may be

either a bull or a bear. To the business man who aims at a

differential gain arising out of interstitial adjustments or

disturbances of the industrial system, it is not a material

question whether his operations have an immediate furthering or

hindering effect upon the system at large. The end is pecuniary

gain, the means is disturbance of the industrial system, - except

so far as the gain is sought by the old-fashioned method of

permanent investment in some one industrial or commercial plant,

a case which is for the present left on one side as not bearing

on the point immediately in hand.(7*) The point immediately in

question is the part which the business man plays in what are

here called the interstitial adjustments of the industrial

system; and so far as touches his transactions in this field it

is, by and large, a matter of indifference to him whether his

traffic affects the system advantageously or disastrously. His

gains (or losses) are related to the magnitude of the

disturbances that take place, rather than to their. bearing upon

the welfare of the community.

The outcome of this management of industrial affairs through

pecuniary transactions, therefore, has been to dissociate the

interests of those men who exercise the discretion from the

interests of the community. This is true in a peculiar degree and

increasingly since the fuller development of the machine industry

has brought about a closeknit and wide-reaching articulation of

industrial processes, and has at the same time given rise to a

class of pecuniary experts whose business is the strategic

management of the interstitial relations of the system. Broadly,

this class of business men, in so far as they have no ulterior

strategic ends to serve, have an interest in making the

disturbances of the system large and frequent, since it is in the

conjunctures of change that their gain emerges. Qualifications of

this proposition may be needed, and it will be necessary to

return to this point presently.

It is, as a business proposition, a matter of indifference to

the man of large affairs whether the disturbances which his

transactions set up in the industrial system help or hinder the

system at large, except in so far as he has ulterior strategic

ends to serve. But most of the modern captains of industry have

such ulterior ends, and of the greater ones among them this is

peculiarly true. Indeed, it is this work of far-reaching business

strategy that gives them full title to the designation, "Captains

of Industry." This large business strategy is the most admirable

trait of the great business men who with force and insight swing

the fortunes of civilized mankind. And due qualification is

accordingly to be entered in the broad statement made above. The

captain's strategy is commonly directed to gaining control of

some large portion of the industrial system. When such control

has been achieved, it may be to his interest to make and maintain

business conditions which shall facilitate the smooth and

efficient working of what has come under his control, in case he

continues to hold a large interest in it as an investor; for,

other things equal, the gains from what has come under his hands

permanently in the way of industrial plant are greater the higher

and more uninterrupted its industrial efficiency.

An appreciable portion of the larger transactions in railway

and "industrial" properties, e.g., are carried out with a view to

the permanent ownership of the properties by the business men

into whose hands they pass. But also in a large proportion of

these transactions the business men's endeavors are directed to a

temporary control of the properties in order to close out at an

advance or to gain some indirect advantage; that is to say, the

transactions have a strategic purpose. The business man aims to

gain control of a given block of industrial equipment - as, e.g.,

given railway lines or iron mills that are strategically

important - as a basis for further transactions out of which gain

is expected. In such a case his efforts are directed, not to

maintaining the permanent efficiency of the industrial equipment,

but to influencing the tone of the market for the time being, the

apprehensions of other large operators, or the transient faith of

investors.(8*) His interest in the particular block of industrial

equipment is, then, altogether transient, and while it lasts it

is of a factitious character.

The exigencies of this business of interstitial disturbance

decide that in the common run of cases the proximate aim of the

business man is to upset or block the industrial process at some

one or more points. His strategy is commonly directed against

other business interests and his ends are commonly accomplished

by the help of some form of pecuniary coercion. This is not

uniformly true, but it seems to be true in appreciably more than

half of the transactions in question. In general, transactions

which aim to bring a coalition of industrial plants or processes

under the control of a given business man are directed to making

it difficult for the plants or processes in question to be

carried on in severalty by their previous owners or managers.(9*)

It is commonly a struggle between rival business men, and more

often than not the outcome of the struggle depends on which side

can inflict or endure the greater pecuniary damage. And pecuniary

damage in such a case not uncommonly involves a setback to the

industrial plants concerned and a derangement, more or less

extensive, of the industrial system at large.

The work of the greater modern business men, in so far as

they have to do with the ordering of the scheme of industrial

life, is of this strategic character. The dispositions which they

make are business transactions, "deals," as they are called in

the business jargon borrowed from gaming slang. These do not

always involve coercion of the opposing interests; it is not

always necessary to "put a man in a hole" before he is willing to

"come in on" a "deal." It may often be that the several parties

whose business interests touch one another will each see his

interest in reaching an amicable and speedy arrangement; but the

interval that elapses between the time when a given "deal" is

seen to be advantageous to one of the parties concerned and the

time when the terms are finally arranged is commonly occupied

with business manoeuvres on both or all sides, intended to "bring

the others to terms." In so playing for position and endeavoring

to secure the largest advantage possible, the manager of such a

campaign of reorganization not infrequently aims to "freeze out"

a rival or to put a rival's industrial enterprise under suspicion

of insolvency and "unsound methods," at the same time that he

"puts up a bluff" and manages his own concern with a view to a

transient effect on the opinions of the business community. Where

these endeavors occur, directed to a transient derangement of a

rival's business or to a transient, perhaps specious, exhibition

of industrial capacity and earning power on the part of one's own

concern, they are commonly detrimental to the industrial system

at large; they act temporarily to lower the aggregate

serviceability of the comprehensive industrial process within

which their effects run, and to make the livelihood and the peace

of mind of those involved in these industries more precarious

than they would be in the absence of such disturbances. If one is

to believe any appreciable proportion of what passes current as

information on this head, in print and by word of mouth, business

men whose work is not simply routine constantly give some

attention to manoeuvring of this kind and to the discovery of new

opportunities for putting their competitors at a disadvantage.

This seems to apply in a peculiar degree, if not chiefly, to

those classes of business men whose operations have to do with

railways and the class of securities called "industrials." Taking

the industrial process as a whole, it is safe to say that at no

time is it free from derangements of this character in any of the

main branches of modern industry. This chronic state of

perturbation is incident to the management of industry by

business methods and is unavoidable under existing conditions. So

soon as the machine industry had developed to large proportions,

it became unavoidable, in the nature of the case, that the

business men in whose hands lies the conduct of affairs should

play at cross-purposes and endeavor to derange industry. But

chronic perturbation is so much a matter of course and prevails

with so rare interruptions, that, being the normal state of

affairs, it does not attract particular notice.

In current discussion of business, indeed ever since the

relation of business men to the industrial system has seriously

engaged the attention of economists, the point to which attention

has chiefly been directed is the business man's work as an

organizer of comprehensive industrial processes. During the later

decades of the nineteenth century, particularly, has much

interest centred, as there has been much provocation for its

doing, on the formation of large industrial consolidations; and

the evident good effects of this work in the way of heightened

serviceability and economies of production are pointed to as the

chief and characteristic end of this work of reorganization. So

obvious are these good results and so well and widely has the

matter been expounded, theoretically, that it is not only

permissible, but it is a point of conscience, to shorten this

tale by passing over these good effects as a matter of common

notoriety. But there are other features of the case, less

obtrusive and less attractive to the theoreticians, which need

more detailed attention than they have commonly received.

The circumstances which condition the work of consolidation

in industry and which decide whether a given move in the

direction of a closer and wider organization of industrial

processes will be practicable and will result in economies of

production, -- these circumstances are of a mechanical nature.

They are facts of the comprehensive machine process. The

conditions favorable to industrial consolidation on these grounds

are not created by the business men. They are matters of "the

state of industrial arts," and are the outcome of the work of

those men who are engaged in the industrial employments rather

than of those who are occupied with business affairs. The

inventors, engineers, experts, or whatever name be applied to the

comprehensive class that does the intellectual work involved in

the modern machine industry, must prepare the way for the man of

pecuniary affairs by making possible and pitting in evidence the

economies and other advantages that will follow from a

prospective consolidation.

But it is not enough that the business man should see a

chance to effect economies of production and to heighten the

efficiency of. industry by a new combination. Conditions

favorable to consolidation on these grounds must be visible to

him before he can make the decisive business arrangements; but

these conditions, taken by themselves, do not move him. The

motives of the business man are pecuniary motives, inducements in

the way of pecuniary gain to him or to the business enterprise

with which he is identified. The end of his endeavors is, not

simply to effect an industrially advantageous consolidation, but

to effect it under such circumstances of ownership as will give

him control of large business forces or bring him the largest

possible gain. The ulterior end sought is an increase of

ownership, not industrial serviceability. His aim is to contrive

a consolidation in which he will be at an advantage, and to

effect it on the terms most favorable to his own interest.

But it is not commonly evident at the outset what are the

most favorable terms that he can get in his dealings with other

business men whose interests are touched by the proposed

consolidation, or who are ambitious to effect some similar

consolidation of the same or of competing industrial elements for

their own profit. It rarely happens that the interests of the

business men whom the prospective consolidation touches all

converge to a coalition on the same basis and under the same

management. The consequence is negotiation and delay. It commonly

also happens that some of the business men affected see their

advantage in staving off the coalition until a time more

propitious to their own interest, or until those who have the

work of consolidation in hand can be brought to compound with

them for the withdrawal of whatever obstruction they are able to

offer.(10*) Such a coalition involves a loss of independent

standing, or even a loss of occupation, to many of the business

men interested in the deal. If a prospective industrial

consolidation is of such scope as to require the concurrence or

consent of many business interests, among which no one is very

decidedly preponderant in pecuniary strength or in strategic

position, a long time will be consumed in the negotiations and

strategy necessary to define the terms on which the several

business interests will consent to come in and the degree of

solidarity and central control to which they will submit.

It is notorious, beyond the need of specific citation, that

the great business coalitions and industrial combinations which

have characterized the situation of the last few years have

commonly been the outcome of a long-drawn struggle, in which the

industrial ends, as contrasted with business ends, have not been

seriously considered, and in which great shrewdness and tenacity

have commonly been shown in the staving off of a settlement for

years in the hope of more advantageous terms. The like is true as

regards further coalitions, further consolidations of industrial

processes which have not been effectcd, but which are known to be

feasible and desirable so far as regards the mechanical

circumstances of the case. The difficulties in the way are

difficulties of ownership, of business interest, not of

mechanical feasibility.

These negotiations and much of the strategy that leads up to

a business consolidation are of the nature of derangements of

industry, after the manner spoken of above. So that business

interests and manoeuvres commonly delay consolidations,

combinations, correlations of the several plants and processes,

for some appreciable time after such measures have become

patently advisable on industrial grounds. In the meantime the

negotiators are working at cross-purposes and endeavoring to put

their rivals in as disadvantageous a light as may be, with the

result that there is chronic derangement, duplication, and

misdirected growth of the industrial equipment while the strategy

is going forward, and expensive maladjustment to he overcome when

the negotiations are brought to a close.(11*)

Serviceability, industrial advisability, is not the decisive

point. The decisive point is business expediency and business

pressure. In the normal course of business touching this matter

of industrial consolidation, therefore, the captain of industry

works against, as well as for, a new and more efficient

organization. He inhibits as well as furthers the higher

organization of industry.(12*) Broadly, it may be said that

industrial consolidations and the working arrangements made for

the more economical utilization of resources and mechanical

contrivances are allowed to go into effect only after they are

long overdue.

In current economic theory the business man is spoken of

under the name of "entrepreneur" or "undertaker," and his

function is held to be the coordinating of industrial processes

with a view to economics of production and heightened

serviceability. The soundness of this view need not be

questioned. It has a great sentimental value and is useful in

many ways. There is also a modicum of truth in it as an account

of facts. In common with other men, the business man is moved by

ideals of serviceability and an aspiration to make the way of

life easier for his fellows. Like other men, he has something of

the instinct of workmanship. No doubt such aspirations move the

great business man less urgently than many others, who are, on

that account, less successful in business affairs. Motives of

this kind detract from business efficiency, and an undue yielding

to them on the part of business men is to be deprecated as an

infirmity. Still, throughout men's dealing with one another and

with the interests of the community there runs a sense of equity,

fair dealing, and workmanlike integrity; and in an uncertain

degree this bent discountenances gain that is got at an undue

cost to others, or without rendering some colorable equivalent.

Business men are also, in a measure, guided by the ambition to

effect a creditable improvement in the industrial processes which

their business traffic touches. These sentimental factors in

business exercise something of a constraint, varying greatly from

one person to another, but not measurable in its aggregate

results. The careers of most of the illustrious business men show

the presence of some salutary constraint of this kind. Not

infrequently an excessive sensitiveness of this kind leads to a

withdrawal from business, or from certain forms of business which

may appeal to a vivid fancy as peculiarly dishonest or peculiarly

detrimental to the community.(13*) Such grounds of action, and

perhaps others equally genial and equally unbusinesslike, would

probably be discovered by a detailed scrutiny of any large

business deal. Probably in many cases the business strategist,

infected with this human infirmity, reaches an agreement with his

rivals and his neighbors in the industrial system without

exacting the last concession that a ruthless business strategy

might entitle him to. The result is, probably, a speedier

conclusion and a smoother working of the large coalitions than

would follow from the unmitigated sway of business

principles.(14*)

But the sentiment which in this way acts in constraint of

business traffic proceeds on such grounds of equity and fair

dealing as are afforded by current business ethics; it acts

within the range of business principles, not in contravention of

them; it acts as a conventional restraint upon pecuniary

advantage, not in abrogation of it. This code of business ethics

consists, after all, of mitigations of the maxim, Caveat emptor.

It touches primarily the dealings of man with man, and only less

directly and less searchingly inculcates temperance and

circumspection as regards the ulterior interests of the community

at large. Where this moral need of a balance between the services

rendered the community and the gain derived from a given business

transaction asserts itself at all, the balance is commonly sought

to be maintained in some sort of pecuniary terms; but pecuniary

terms afford only a very inadequate measure of serviceability to

the community.

Great and many are the items of service to be set down to the

business man's account in connection with the organization of the

industrial system, but when all is said, it is still to be kept

in mind that his work in the correlation of industrial processes

is chiefly of a permissive kind. His furtherance of industry is

at the second remove, and is chiefly of a negative character. In

his capacity as business man he does not go creatively into the

work of perfecting mechanical processes and turning the means at

hand to new or larger uses. That is the work of the men who have

in hand the devising and oversight of mechanical processes. The

men in industry must first create the mechanical possibility of

such new and more efficient methods and correlations, before the

business man sees the chance, makes the necessary business

arrangements, and gives general directions that the contemplated

industrial advance shall go into effect. The period between the

time of earliest practicability and the effectual completion of a

given consolidation in industry marks the interval by which the

business man retards the advance of industry. Against this are to

be offset the cases, comparatively slight and infrequent, where

the business men in control push the advance of industry into new

fields and prompt the men concerned with the mechanics of the

case to experiment and exploration in new fields of mechanical

process.

When the recital is made, therefore, of how the large

consolidations take place at the initiative of the business men

who are in control, it should be added that the fact of their

being in control precludes industrial correlations from taking

place except by their advice and consent. The industrial system

is organized on business principles and for pecuniary ends. The

business man is at the centre; he holds the discretion and he

exercises it freely, and his choice falls out now On one side,

now on the other. The retardation as well as the advance is to be

set down to his account.

As regards the economies in cost of production effected by

these consolidations, there is a further characteristic feature

to be noted, a feature of some significance for any theory of

modern business. In great measure the saving effected is a saving

of the costs of business management and of the competitive costs

of marketing products and services, rather than a saving in the

prime costs of production. The heightened facility and efficiency

of the new and larger business combinations primarily affect the

expenses of office work and sales, and it is in great part only

indirectly that this curtailment and consolidation of business

management has an effect upon the methods and aims of industry

proper. It touches the pecuniary processes immediately, and the

mechanical processes indirectly and in an uncertain degree. It is

of the nature of a partial neutralization of the wastes due to

the presence of pecuniary motives and business management, - for

the business management involves waste wherever a greater number

of men or transactions are involved than are necessary to the

effective direction of the mechanical processes employed. The

amount of "business" that has to be transacted per unit of

product is much greater where the various related industrial

processes are managed in severalty than where several of them are

brought under one business management. A pecuniary discretion has

to be exercised at every point of contact or transition, where

the process or its product touches or passes the boundary between

different spheres of ownership. Business transactions have to do

with ownership and changes of ownership. The greater the

parcelment in point of ownership, the greater the amount of

business work that has to be done in connection with a given

output of goods or services, and the slower, less facile, and

less accurate on the whole, is the work. This applies both to the

work of bargain and contract, wherein pecuniary initiative and

discretion are chiefly exercised, and to the routine work of

accounting, and of gathering and applying information and

misinformation.

The standardization of industrial processes, products,

services, and consumers, spoken of in an earlier chapter, very

materially facilitates the business man's work in reorganizing

business enterprises on a larger scale; particularly does this

standardization serve his ends by permitting a uniform routine in

accounting, invoices, contracts, etc., and so admitting a large

central accounting system, with homogeneous ramifications, such

as will give a competent conspectus of the pecuniary situation of

the enterprise at any given time.

The great, at the present stage of development perhaps the

greatest, opportunity for saving by consolidation, in the common

run of cases, is afforded by the ubiquitous and in a sense

excessive presence of business enterprise in the economic system.

It is in doing away with unnecessary business transactions and

industrially futile manoeuvring on the part of independent firms

that the promoter of combinations finds his most telling

opportunity. So that it is scarcely an over-statement to say that

probably the largest, assuredly the securest and most

unquestionable, service rendered by the great modern captains of

industry is this curtailment of the business to be done, this

sweeping retirement of business men as a class from the service

and the definitive cancelment of opportunities for private

enterprise.

So long as related industrial units are under different

business managements, they are, by the nature of the case, at

cross-purposes, and business consolidation remedies this untoward

feature of the industrial system by eliminating the peCuniary

element from the interstices of the system as far as may be. The

interstitial adjustments of the industrial system at large are in

this way withdrawn from the discretion of rival business men, and

the work of pecuniary management previously involved is in large

part dispensed with, with the result that there is a saving of

work and an avoidance of that systematic mutual hindrance that

characterizes the competitive management of industry. To the

community at large the work of pecuniary management, it appears,

is less serviceable the more there is of it. The heroic role of

the captain of industry is that of a deliverer from an excess of

business management. It is a casting out of business men by the

chief of business men.(15*)

The theory of business enterprise sketched above applies to

such business as is occupied with the interstitial adjustments of

the system of industries. This work of keeping and of disturbing

the interstitial adjustments does not look immediately to the

output of goods as its source of gain, but to the alterations of

values involved in disturbances of the balance, and to the

achievement of a more favorable business situation for some of

the enterprises engaged. This work lies in the middle, between

commercial enterprise proper, on the one hand, and industrial

enterprise in the stricter sense, on the other hand. It is

directed to the acquisition of gain through taking advantage of

those conjunctures of business that arise out of the

concatenation of processes in the industrial system.

In a similar manner commercial business may be said to be

occupied with conjunctures that arise out of the circumstances of

the industrial system at large, but not originating in the

mechanical exigencies of the industrial processes. The

conjunctures of commercial business proper are in the main

fortuitous, in so far that they are commonly not initiated by the

business men engaged in these commercial pursuits. Commercial

business, simply as such, does not aim to guide the course of

industry.

On the other hand, the large business enterprise spoken of

above initiates changes in industrial organization and seeks its

gain in large part through such alterations of value levels as

take place on its own initiative. These alterations of the value

levels, of course, have their effect upon the output of goods and

upon the material welfare of the community; but the effect which

they have in this way is only incidental to the quest of profits.

But apart from this remoter and larger guidance of the course

of industry, the business men also, and more persistently and

pervasively, exercise a guidance over the course of industry in

detail. The production of goods and services is carried on for

gain, and the output of goods is controlled by business men with

a view to gain. Commonly, in ordinary routine business, the gains

come from this output of goods and services. By the sale of the

output the business man in industry "realizes" his gains. To

"realize" means to convert salable goods into money values. The

sale is the last step in the process and the end of the business

man's endeavor.(16*) When he has disposed of the output, and so

has converted his holdings of consumable articles into money

values, his gains are as nearly secure and definitive as the

circumstances of modern life admit. It is in terms of price that

he keeps his accounts, and in the same terms he computes his

output of products. The vital point of production with him is the

vendibility of the output, its convertibility into money values,

not its serviceability for the needs of mankind. A modicum of

serviceability, for some purpose or other, the output must have

if it is to be salable. But it does not follow that the highest

serviceability gives the largest gains to the business man in

terms of money, nor does it follow that the output need in all

cases have other than a factitious serviceability. There is, on

the one hand, such a possibility as overstocking the market with

any given line of goods, to the detriment of the business man

concerned, but not necessarily to the immediate disadvantage of

the body of consumers. And there are, on the other hand, certain

lines of industry, such as many advertising enterprises, the

output of which may be highly effective for its purpose but of

quite equivocal use to the community. Many well-known and

prosperous enterprises which advertise and sell patent medicines

and other proprietary articles might be cited in proof.

In the older days, when handicraft was the rule of the

industrial system, the personal contact between the producer and

his customer was somewhat close and lasting. Under these

circumstances the factor of personal esteem and disesteem had a

considerable play in controlling the purveyors of goods and

services. This factor of personal contact counted in two

divergent ways: (1) producers were careful of their reputation

for workmanship, even apart from the gains which such a

reputation might bring; and (2) a degree of irritation and

ill-will would arise in many cases, leading to petty trade

quarrels and discriminations on other grounds than the gains to

be got, at the same time that the detail character of dealings

between producer and consumer admitted a degree of petty knavery

and huckstering that is no longer practicable in the current

large-scale business dealings. Of these two divergent effects

resulting from close personal relations between producer and

consumer; the former seems on the whole to have been of

preponderant consequence. Under the system of handicraft and

neighborhood industry, the adage that "Honesty is the best

policy" seems on the whole to have been accepted and to have been

true. This adage has come down from the days before the machine's

regime and before modern business enterprise. Under modern

circumstances, where industry is carried on on a large scale, the

discretionary head of an industrial enterprise is commonly

removed from all personal contact with the body of customers for

whom the industrial process under his control purveys goods or

services. The mitigating effect which personal contact may have

in dealings between man and man is therefore in great measure

eliminated. The whole takes on something of an impersonal

character. One can with an easier conscience and with less of a

sense of meanness take advantage of the necessities of people

whom one knows of only as an indiscriminate aggregate of

consumers. Particularly is this true when, as frequently happens

in the modern situation, this body of consumers belongs in the

main to another, inferior class, so that personal contact and

cognizance of them is not only not contemplated, but is in a

sense impossible. Equity, in excess of the formal modicum

specified by law, does not so readily assert its claims where the

relations between the parties are remote and impersonal as where

one is dealing with one's necessitous neighbors who live on the

same social plane. Under these circumstances the adage cited

above loses much of its axiomatic force. Business management has

a chance to proceed on a temperate and sagacious calculation of

profit and loss, untroubled by sentimental considerations of

human kindness or irritation or of honesty.

The broad principle which guides producers and merchants,

large and small, in fixing the prices at which they offer their

wares and services is what is known in the language of the

railroads as "charging what the traffic will bear."(17*) Where a

given enterprise has a strict monopoly of the supply of a given

article or of a given class of services this principle applies in

the unqualified form in which it has been understood among those

who discuss railway charges. But where the monopoly is less

strict, where there are competitors, there the competition that

has to be met is one of the factors to be taken account of in

determining what the traffic will bear; competition may even

become the most serious factor in the case if the enterprise in

question has little or none of the character of a monopoly. But

it is very doubtful if there are any successful business ventures

within the range of the modern industries from which the monopoly

element is wholly absent.(18*) They are, at any rate, few and not

of great magnitude. And the endeavor of all such enterprises that

look to a permanent continuance of their business is to establish

as much of a monopoly as may be. Such a monopoly position may be

a legally established one, or one due to location or the control

of natural resources, or it may be a monopoly of a less definite

character resting on custom and prestige (good-will). This latter

class of monopolies are not commonly classed as such; although in

character and degree the advantage which they give is very much

the same as that due to a differential advantage in location or

in the command of resources. The end sought by the systematic

advertising of the larger business concerns is such a monopoly of

custom and prestige. This form of monopoly is sometimes of great

value, and is frequently sold under the name of good-will,

trademarks, brands, etc. Instances are known where such

monopolies of custom, prestige, prejudice, have been sold at

prices running up into the millions.(19*)

The great end of consistent advertising is to establish such

differential monopolies resting on popular conviction. And the

advertiser is successful in this endeavor to establish a

profitable popular conviction, somewhat in proportion as he

correctly apprehends the manner in which a popular conviction on

any given topic is built up.(20*) The cost, as well as the

pecuniary value and the magnitude, of this organized fabrication

of popular convictions is indicated by such statements as that

the proprietors of a certain well-known household remedy, reputed

among medical authorities to be of entirely dubious value, have

for a series of years found their profits in spending several

million dollars annually in advertisements. This case is by no

means unique.

It has been said,(21*) no doubt in good faith and certainly

with some reason, that advertising as currently carried on gives

the body of consumers valuable information and guidance as to the

ways and means whereby their wants can be satisfied and their

purchasing power can be best utilized. To the extent to which

this holds true, advertising is a service to the community. But

there is a large reservation to be made on this head. Advertising

is competitive; the greater part of it aims to divert purchases,

etc., from one channel to another channel of the same general

class.(22*) And to the extent to which the efforts of advertising

in all its branches are spent on this competitive disturbance of

trade, they are, on the whole, of slight if any immediate service

to the community. Such advertising, however, is indispensable to

most branches of modern industry; but the necessity of most of

the advertising is not due to its serving the needs of the

community nor to any aggregate advantage accruing to the concerts

which advertise, but to the fact that a business concern which

falls short in advertising fails to get its share of trade. Each

concert must advertise, chiefly because the others do. The

aggregate expenditure that could advantageously be put into

advertising in the absence of competition would undoubtedly be

but an inconsiderable fraction of what is actually incurred, and

necessarily incurred under existing circumstances.(23*)

Not all advertising is wholly competitive, or at least it is

not always obviously so. In proportion as an enterprise has

secured a monopoly position, its advertising loses the air of

competitive selling and takes on the character of information

designed to increase the use of its output independently. But

such an increase implies a redistribution of consumption on the

part of the customers.(24*) So that the element of competitive

selling is after all not absent in these cases, but takes the

form of competition between different classes of wares instead of

competitive selling of different brands of the same class of

wares.

Attention is here called to this matter of advertising and

the necessity of it in modern competitive business for the light

which it throws on "cost of production" in the modern system,

where the process of production is under the control of business

men and is carried on for business ends. Competitive advertising

is an unavoidable item in the aggregate costs of industry. It

does not add to the serviceability of the output, except it be

incidentally and unintentionally. What it aims at is the sale of

the output, and it is for this purpose that it is useful. It

gives vendibility, which is useful to the seller, but has no

utility to the last buyer. Its ubiquitous presence in the costs

of any business enterprise that has to do with the production of

goods for the market enforces the statement that the "cost of

production" of commodities under the modern business system is

cost incurred with a view to vendibility, not with a view to

serviceability of the goods for human use.

There is, of course, much else that goes into the cost of

competitive selling, besides the expenses of advertising,

although advertising may be the largest and most unequivocal item

to be set down to that account. A great part of the work done by

merchants and their staff of employees, both wholesale and

retail, as well as by sales-agents not exclusively connected with

any one mercantile house, belongs under the same head. Just how

large a share of the costs of the distribution of goods fairly

belongs under the rubric of competitive selling can of course not

be made out. It is largest, on the whole, in the case of

consumable goods marketed in finished form for the consumer, but

there is more or less of it throughout. The goods turned out on a

large scale by the modern industrial processes, on the whole,

carry a larger portion of such competitive costs than the goods

still produced by the old-fashioned detail methods of handicraft

and household industry; although this distinction does not hold

hard and fast. In some extreme cases the cost of competitive

selling may amount to more than ninety per cent. of the total

cost of the goods when they reach the consumer. In other lines of

business, commonly occupied with the production of staple goods,

this constituent of cost may perhaps fall below ten per cent of

the total. Where the average, for the price of finished goods

delivered to the consumers, may lie would be a hazardous

guess.(25*)

It is evident that the gains which accrue from this business

of competitive selling and buying bear no determinable relation

to the services which the work in question may render the

community. If a comparison may be hazarded between two unknown

and indeterminate quantities, it may perhaps be said that the

gains from competitive selling bear something more of a stable

relation to the service rendered than do the gains derived from

speculative transactions or from the financiering operations of

the great captains of industry. It seems at least safe to say

that the converse will not hold true. Gains and services seem

more widely out of touch in the case of the large-scale

financiering work. Not that the work of the large business men in

reorganizing and consolidating the industrial process is of

slight consequence; but as a general proposition, the amount of

the business man's gains from any given transaction of this

latter class bear no traceable relation to any benefit which the

community may derive from the transaction.(26*)

As to the wages paid to the men engaged in the routine of

competitive selling, as salesmen, buyers, accountants, and the

like, - much the same holds true of them as of the income of the

business men who carry on the business on their own initiative.

Their employers pay the wages of these persons, not because their

work is productive of benefit to the community, but because it

brings a gain to the employers. The point to which the work is

directed is profitable sales, and the wages are in some

proportion to the efficiency of this work as counted in terms of

heightened vendibility.

The like holds true for the work and pay of the force of

workmen engaged in the industrial processes under business

management. It holds, in a measure, of all modern industry that

produces for the market, but it holds true, in an eminent degree,

of those lines of industry that are more fully under the guidance

of modern business methods. These are most closely in touch with

the market and are most consistently guided by considerations of

vendibility. They are also, on the whole, more commonly carried

on by hired labor, and the wages paid are competitively adjusted

on grounds of the vendibility of the product. The brute

serviceability of the output of these industries may be a large

factor in its vendibility, perhaps the largest factor; but the

fact remains that the end sought by the business men in control

is a profitable sale, and the wages are paid as a means to that

end, not to the end that the way of life may be smoother for. the

ultimate consumer of the goods produced.(27*)

The outcome of this recital, then, is that wherever and in so

far as business ends and methods dominate modern industry the

relation between the usefulness of the work (for other purposes

than pecuniary gain) and the remuneration of it is remote and

uncertain to such a degree that no attempt at formulating such a

relation is worth while. This is eminently and obviously true of

the work and gains of business men, in whatever lines of business

they are engaged. This follows as a necessary consequence of the

nature of business management.

Work that is, on the whole, useless or detrimental to the

community at large may be as gainful to the business man and to

the workmen whom he employs as work that contributes

substantially to the aggregate livelihood. This seems to be

peculiarly true of the bolder flights of business enterprise. In

so far as its results are not detrimental to human life at large,

such unproductive work directed to securing an income may seem to

be an idle matter in which the rest of the community has no

substantial interests. Such is not the case. In so far as the

gains of these unproductive occupations are of a substantial

character, they come out of the aggregate product of the other

occupations in which the various classes of the community engage.

The aggregate profits of the business, whatever its character,

are drawn from the aggregate output of goods and services; and

whatever goes to the maintenance of the profits of those who

contribute nothing substantial to the output is, of course,

deducted from the income of the others, whose work tells

substantially.

There are, therefore, limits to the growth of the

industrially parasitic lines of business just spoken of. A

disproportionate growth of parasitic industries, such as most

advertising and much of the other efforts that go into

competitive selling, as well as warlike expenditure and other

industries directed to turning out goods for conspicuously

wasteful consumption, would lower the effective vitality of the

community to such a degree as to jeopardize its chances of

advance or even its life. The limits which the circumstances of

life impose in this respect are of a selective character, in the

last resort. A persistent excess of parasitic and wasteful

efforts over productive industry must bring on a decline. But

owing to the very high productive efficiency of the modern

mechanical industry, the margin available for wasteful

occupations and wasteful expenditures is very great. The

requirements of the aggregate livelihood are so far short of the

possible output of goods by modern methods as to leave a very

wide margin for waste and parasitic income. So that instances of

such a decline, due to industrial exhaustion, drawn from the

history of any earlier phase of economic life, carry no

well-defined lesson as to what a modern industrial community may

allow itself in this respect.

While it is in the nature of things unavoidable that the

management of industry by modern business methods should involve

a large misdirection of effort and a very large waste of goods

and services, it is also true that the aims and ideals to which

this manner of economic life gives effect act forcibly to offset

all this incidental futility. These pecuniary aims and ideals

have a very great effect, for instance, in making men work hard

and unremittingly, so that on this ground alone the business

system probably compensates for any wastes involved in its

working. There seems, therefore, to be no tenable ground for

thinking that the working of the modern business system involves

a curtailment of the community's livelihood. It makes up for its

wastefulness by the added strain which it throws upon those

engaged in the productive work.

NOTES:

1. The ulterior ground of efforts directed to the accumulation of

wealth is discussed at some length in the Theory of the Leisure

Class, ch. II. and V, and the economic bearing of the business

man's work is treated in a paper on "Industrial and Pecuniary

Employments," in the Proceedings of the thirteenth annual meeting

of the American Economic Association. Cf. also Marshall,

Principles of Economics (3d ed.), bk. I. ch. III, bk. IV. ch.

XII, bk. V. ch. IV, bk. VII. ch. VII and VIII; Bagehot, Economic

Studies, especially pp. 53 et seq.; Walker, Wages Question, ch.

XIV; and more especially Sombart, Moderne Kapitalismus, vol. I.

ch. I, VIII, XIV, XV; Marx, Kapital, bk. I. ch. IV; Schmoller,

Grundriss, bk. II. ch. VII.

2. It is significant that joint-stock methods of organization and

management -- that is to say, impersonally capitalistic methods

-- are traceable, for their origin and early formulation, to the

shipping companies of early modern times. Cf. K. Lehmann, Die

geschichtliche Entwickelung des Aktienrechts bis zum Code de

Commerce. The like view is spoken for by Ehrenberg, Zeitglter der

Fugger; see vol. II. pp. 325 et seq.

3. Cf. Cantillon, Essai sur le Commerce, 1e partie, ch. III, VI,

IX, XIV, XV, Wealth of Nations, bk. I; Bucher, Enstehung der

Volks wirtschaft (3d ed.), ch. IV and V; Sombart, Kapitalismus,

Vol. I bk. I.

4. Sombart, vol. I. ch. IV-VIII; Ashley, Economic History and

Theory, bk. II, ch. VI, especially pp. 389-397.

5. Cf. Marshall, Principles of Economics, on the "Law of

Substitution," e.g. bk. VI. ch. I. The law of substitution

implies freedom of investment and applies fully only in so far as

the investor in question is not permanently identified with a

given industrial plant or even with a given line of industry. It

requires great facility in shifting from one to another point of

investment. It is therefore only as the business situation has

approached the modern form that the law of substitution has come

to be of considerable importance to economic theory; for a theory

of business, such as business was in mediaeval and early modern

times, this law need scarcely have been formulated.

6. See Sombart, Kapitalismus, vol. 1. chap. VIII.

7. It is chiefly the passive owner of stock and the like that

holds permanently to a given enterprise, under the fully

developed modem business conditions. The active business man of

the larger sort is not in this way bound to the glebe of the

given business concern.

8. Cf. testimony of J.B. Dill, Report of the Industrial

Commission, vol. I. pp. 1078, 1080-1085; "Digest of Evidence,"

p., 77. also testimony of various witnesses on stock speculation

and corporate management, and particularly the special report to

the Commission, on "Securities of Industrial Combinations and

Railroads," vol. XIII., especially pp. 920-922.

9. The history of the formation of any one of the great

industrial coalitions of modem times will show how great and

indispensable a factor in the large business is the invention and

organization of difficulties desired to force rival enterprises

to come to terms. E.g. the manoeuvres preliminary to the

formation of the United States Steel Corporation, particularly

the movements of the Carnegie Company, show how this works on a

large scale. Cf. E.S. Meade, Trust Finance, pp. 204-217. Report

of the Industrial Commission, vol. XIII., "Review of Evidence,"

pp. v-vii, with the testimony relating to this topic. The

pressure which brings about a new adjustment (coalition) is

commonly spoken of as "excessive competition."

10. Cf., e.g., the accounts of the formation of the United States

Steel Corporation or the Shipbuilding Company.

11. Witness the rate wars and the duplications of inefficient

track and terminal equipment among the railways, and the similar

duplications in the iron and steel industry. The system of

railway terminals in Chicago, e.g., is an illuminated

object-lesson of systematic ineptitude.

12. The splendid reach of this inhibitory work of the captain of

industry, as well as of his aggressive work of consolidation, is

well shown, for instance, in the history and present position of

the railway industry in America. It is and has for a long term of

years been obvious that a very comprehensive unification or

consolidation, in respect of the mechanical work to be done by

the railway system, is eminently desirable and feasible, -

consolidation of a scope not only equalling, but far out

reaching, the coalitions which have lately been effected or

attempted. There is no hazard in venturing the assertion that

several hundreds of men who are engaged in the mechanical work of

railroading, in one capacity and another, are conversant with

feasible plans for economizing work and improving the service by

more comprehensive and closer correlation of the work; and it is

equally obvious that nothing but the diverging interests of the

business men concerned hinders these closer and larger feasible

correlations from being put into effect. It is easily within the

mark to say that the delay which railway consolidation has

suffered up to the present, from business exigencies as distinct

from the mechanical circumstances of the case, amounts to an

average of at least twenty years. Ever since railroading began in

this country there has been going on a process of reluctant

consolidation, in which the movements of the business men in

control have tardily followed up the opportunities for economy

and efficient service which the railroad industry has offered.

And their latest and boldest achievements along this line, as

seen from the standpoint of mechanical advisability, have been

foregone conclusions since a date so far in the past as to be

forgotten, and taken at their best they fall short to-day by not

less than some fifty per cent. of their opportunities. Cf. Report

of the Industrial Commission, vol. XIX., "Transportation,"

especially pp. 304-348.

Like other competitive business, but more particularly such

business as has to do with the interstitial adjustments of the

industrial system, the business of railway consolidation is of

the nature of a game, in which the end sought by the players is

their own pecuniary gain and to which the industrial

serviceability of the outcome is incidental only. This is

recognized by popular opinion and is made much of by popular

agitators, who take the view that when once the game between the

competing business interests has been played to a finish, in the

definitive coalition of the competitors under one management,

then the game will go on as a somewhat one-sided conflict between

the resulting monopoly and the community at large.

So again, as a further illustration, it is and from the

outset has been evident that the iron-ore beds of northern

Wisconsin, Michigan, and Minnesota ought, industrially speaking,

to have been worked as one collective enterprise. There are also

none but business reasons why practically all the ore beds and

iron and steel works in the country are not worked as one

collective enterprise. It is equally evident that such

correlations of work as are permitted by the business coalitions

already effected in this field have resulted in a great economy

of production, and that the failure to carry these coalitions

farther means an annual waste running up into the millions. Both

the economies so effected and the waste so incurred are to be set

down to the account of the business manners who have gone so far

and have failed to go farther. The like is obvious as regards

many other branches of industry and groups of industries.

13. Illustrative instances will readily suggest themselves. Many

a business man turns by preference to something less dubious than

the distilling of whiskey or the sale of deleterious household

remedies. They prefer not to use deletrious adulterants, even

within the limits of the law. They will rather use wool than

shoddy at the same price. The officials of a railway commonly

prefer to avoid wrecks and manslaughter, even if there is no

pecuniary advantage in choosing the more humane course. More than

that, it will be found true that the more prosperous of the

craft, especially, take pride and pains to make the service of

their roads or the output of their mills as efficient, not simply

as the pecuniary advantage of the concern demands, but as the

best pecuniary results will admit. Instances are perhaps not

frequent, but they are also not altogether exceptional, where a

prosperous captain of industry will go out of his way to heighten

the serviceability of his industry even to a degree that is of

doubtful pecuniary expediency for himself. Such aberrations are,

of course, not large; and if they are persisted in to any very

appreciable extent the result is, of course, disastrous to the

enterprise. The enterprise in such a case falls out of the

category of business management and falls under the imputation of

philanthropy.

14. The captains of the first class necessari1y are relatively

exempt from these unbusinesslike scruples.

15. See Report of the Industrial Commission. vol. I., Testimony

of J.W. Gates, pp. 1029-1039; S. Dodd, pp. 1049-1050; N.B.

Rogers, p. 1068; vol. XIII, C.M. Schwab, pp. 451, 459, H.B.

Butler, p. 490; L.R. Hopkins, pp. 346, 347; A.S. White, pp. 254,

256.

16. Cf. Marx, Kapital, bk. I, pt. II.

17. The economic principle of "charging what the traffic will

bear" is discussed with great care and elaboration by R. T. Ely,

Monopolies and Trusts, ch. III, "The Law of Monopoly Price." Cf.,

for illustration of the practical working of this principle,

testimony of C.M. Schwab, Report of the Industrial Commission,

vol. XIII. pp. 453-455.

18. "Monopoly" is here used in that looser sense which it has

colloquially, not in the strict sense of an exclusive control of

the supply, as employed, e g., by Mr Ely in the volume cited

above. This usage is the more excusable since Mr. Ely finds that

a "monopoly" in the strict sense of the definition practically

does not occur in fact. Cf. Jenks, The Trust Problem, ch. IV.

19. E.g. the prestige value of Ivory Soap.

20. Cf. W.D. Scott, The Theory of Advertising; J. L. Mahin, The

Commercial Value of Advertising, pp. 4-6, 12-13, 15; E.

Fogg-Meade, "The Place of Advertising in Modern Business,"

Journal of Political Economy, March 1901; Sombart, vol. II. ch.

XX-XXI; G. Tarde, Psychologie Economique, vol. I. pp. 187-190.

The writing and designing of advertisements (letterpress,

display, and illustrations) has grown into a distinct calling; so

that the work of a skilled writer of advertisements compares not

unfavorably, in point of lucrativeness, with that of the avowed

writers of popular fiction.

The psychological principles of advertising may be formulated

somewhat as follows: A declaration of fact, made in the form and

with the incidents of taste and expression to which a person is

accustomed, will be accepted as authentic and will be acted upon

if occasion arises, in so far as it does not conflict with

opinions already accepted. The acceptance of an opinion seems to

be almost entirely a passive matter. The presumption remains in

favor of an opinion that has once been accepted, and an

appreciable burden of proof falls on the negative. A competent

formulation of opinion on a given point is the chief factor in

gaining adherents to that opinion, and a reiteration of the

statement is the chief factor in carrying conviction. The truth

of such a formulation is a matter of secondary consequence, but a

wide and patent departure from known fact generally weakens its

persuasive effect. The aim of the advertiser is to arrest

attention and then present his statement in such a manner that it

is easily assimilated into the habits of thought of the person

whose conviction is to be influenced. When this is effectually

done a reversal of the conviction so established is a matter of

considerable difficulty. The tenacity of a view once accepted in

this way is evidenced, for instance, by the endless number and

variety of testimonials to the merits of well-advertised but

notoriously worthless household remedies and the like.

So acute an observer as Mr Sombart is still able to hold the

opinion that "auf Schwindel ist dauerud noch nie ein Unternehmen

begrundet worden" (Kopitalismus, vol. II. p. 376). Mr Sombart has

not made acquaintance with the adventures of Elijah the Restorer,

nor is he conversant with American patent-medicine enterprise.

With Mr. Sombart's view may be contrasted that of Mr L.F. Ward,

an observer of equally large outlook and acumen:

"The law of mind as it operates in society as an aid to

competition and in the interest of the individual is essentially

immoral. It rests primarily on the principle of deception. It is

an extension to other human beings of the method applied to the

animal world by which the latter was subjected to man. This

method was that of the ambush and the snare. Its ruling principle

was cunning. Its object was to deceive, circumvent, ensnare, and

capture. Low animal cunning was succeeded by more refined kinds

of cunning. The more important of these go by the names of

business shrewdness, strategy, and diplomacy, none of which

differ from ordinary cunning in anything but the degree of

adroitness by which the victim is outwitted. In this way social

life is completely honeycombed with deception." "The Psychologic

Basis of Social Economics," Ann. of Am. Acad., vol. III. pp. 83

84 [475-476].

21. Fogg-Meade, "Place of Advertising in Modern Business," pp.

218, 224-236.

22. Advertising and other like expedients for the sale of goods

aim at changes in the "substitution values" of the goods in

question, not at an enhancement of the aggregate utilities of the

available output of goods.

23. Cf. Jenks, The Trust Problem, pp. 21-28; Report of the

Industrial Commission, vol. XIX. pp. 611-612.

24. Cf. Bohm-Bawerk, Positive Theory of Capital, bk. III, ch. V,

VII-IX, on the value of alternative and complementary goods.

25. Where competitive selling makes up a large proportion of the

aggregate final cost of the marketed product, this fact is likely

to show itself in an exceptionally large proportion of good-will

in the capitalization of the concerns engaged in the given line

of business; as, e.g., the American Chicle Company.

26. Cf. Ed. Hahn, Die Wirtschaft der Welt am Ausgang des XIX

Jahrhunderts. - "In unserem heutigen Wirtsehaftsleben ist der

Gewinn durch den Zuwachs der Produktion, mit dem fruhere

Jahrhunderte rechneten, ganz und gar zuruckgedrangt, er ist

unwesentlich geworden."

27. It might, therefore, be feasible to set up a theory to the

effect that wages are competitively proportioned to the

vendibility of the product; but there is no cogent ground for

saying that the wages in any department of industry, under a

business regime, are proportioned to the utility which the output

has to any one else than the employer who sells it. When it is

further taken into account that the vendibility of the product in

very many lines of production depends chiefly on the wastefulness

of the goods (cf. Theory of the Leisure Class, ch. V), the

divergence between the usefulness of the work and the wages paid

for it seems wide enough to throw the whole question of an

equivalence between work and pay out of theoretical

consideration. Cf., however, Clark, The Distribution of Wealth,

especially ch. VII. and XXII.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter 4

Business Principles

The physical basis of modern business traffic is the machine

process, as described in Chapter II. It is essentially a modern

fact, - late and yet in its early stages of growth, especially as

regards its wider sweep in the organization of the industrial

system. The spiritual ground of business enterprise, on the other

hand, is given by the institution of ownership. "Business

principles" are corollaries under the main proposition of

ownership; they are principles of property, - pecuniary

principles. These principles are of older date than the machine

industry, although their full development belongs within the

machine era. As the machine process conditions the growth and

scope of industry, and as its discipline inculcates habits of

thought suitable to the industrial technology, so the exigencies

of ownership condition the growth and aims of business, and the

discipline of ownership and its management inculcates views and

principles (habits of thought) suitable to the work of business

traffic.

The discipline of the machine process enforces a

standardization of conduct and of knowledge in terms of

quantitative precision, and inculcates a habit of apprehending

and explaining facts in terms of material cause and effect. It

involves a valuation of facts, things, relations, and even

personal capacity, in terms of force. Its metaphysics is

materialism and its point of view is that of causal sequence.(1*)

Such a habit of mind conduces to industrial efficiency, and the

wide prevalence of such a habit is indispensable to a high degree

of industrial efficiency under modern conditions. This habit of

mind prevails most widely and with least faltering in those

communities that have achieved great things in the machine

industry, being both a cause and an effect of the machine

process.

Other norms of standardization, more or less alien to this

one, and other grounds for the valuation of facts, have prevailed

elsewhere, as well as in the earlier phases of the Western

culture. Much of this older standardization still stands over, in

varying degrees of vigor or decay, in that current scheme of

knowledge and conduct that now characterizes the Western culture.

Many of these ancient norms of thought which have come down from

the discipline of remote and relatively primitive phases of the

cultural past are still strong in the affections of men, although

most of them have lost greatly in their power of constraint. They

no longer bind men's convictions as they once did. They are

losing their axiomatic character. They are no longer self-evident

or self-legitimating to modern common sense, as they once were to

the common sense of an earlier time.

These ancient norms differ from the modern norms given by the

machine in that they rest on conventional, ultimately sentimental

grounds; they are of a putative nature. Such are, e.g., the

principles of (primitive) blood relationship, clan solidarity,

paternal descent, Levitical cleanness, divine guidance,

allegiance, nationality. In their time and under the

circumstances which favored their growth these were, all and

several, powerful factors in controlling human conduct and

shaping the course of events. In their time each of these

institutional norms served as a definitive ground of

authentication for such facts as fell under its particular scope,

and the scope of each was very wide in the day of its best vigor.

As time has brought change of circumstances, the facts of life

have gradually escaped from the constraint of these ancient

principles; so that the dominion which they now hold over the

life of civilized men is relatively slight and shifty.

It is among these transmitted institutional habits of thought

that the ownership of property belongs. It rests on the like

general basis of use and wont. The binding relation of property

to its owner is of a conventional, putative character. But while

these other conventional norms cited above are in their decline,

this younger one of the inherited institutions stands forth

without apology and shows no apprehension of being crowded into

the background of sentimental reminiscence.

In absolute terms the institution of ownership is ancient, no

doubt; but it is young compared with blood-relationship, the

state, or the immortal gods. Especially is it true that its

fuller development is relatively late. Not until a comparatively

late date in West European history has ownership come to be

emancipated from all restrictions of a non-pecuniary character

and to stand in a wholly impersonal position, without admixture

of personal responsibility or class prerogative.(2*) Freedom and

inviolability of contract has not until recently been the

unbroken rule. Indeed, it has not even yet been accepted without

qualification and extended to all items owned. There still are

impediments in the way of certain transfers and certain

contracts, and there are exemptions in favor of property held by

certain privileged persons, and especially by certain sacred

corporations. This applies particularly to the more backward

peoples; but nowhere is the "cash nexus" free from all admixture

of alien elements. Ownership is not all-pervading and

all-dominant, but it pervades and dominates the affairs of

civilized peoples more freely and widely than any other single

ground of action, and more than it has ever done before. The

range and number of relations and duties that are habitually

disposed of on a pecuniary footing are greater than in the past,

and a pecuniary settlement is final to a degree unknown in the

past. The pecuniary norm has invaded the domain of the older

institutions, such as blood-relationship, citizenship, or the

church, so that obligations belonging under the one or the other

of these may now be assessed and fulfilled in terms of a money

payment, although the notion of a pecuniary liquidation seems to

have been wholly remote from the range of ideas - habits of

thought - on which these relations and duties were originally

based.

This is not the place for research into the origin and the

primitive phases of ownership, nor even for inquiry into the

views of property current in the early days of the Western

culture. But the views current on this head at present - the

principles which guide men's thinking and roughly define the

right limits of discretion in pecuniary matters - this

common-sense apprehension of what are the proper limits, rights,

and responsibilities of ownership, is an outgrowth of the

traditions, experiences, and speculations of past generations.

Therefore some notice of the character of these traditional views

and the circumstances out of which they have arisen in the recent

past is necessary to an understanding of the part which they play

in modern life.(3*) The theory of property professed at a given

time and in a given cultural region shows what is the habitual

attitude of men, for the time being, on questions of ownership;

for any theory that gains widespread and uncritical acceptance

must carry a competent formulation of the deliverances of common

sense on the matter with which it deals. Otherwise it will not be

generally accepted. And such a commonplace view is in its turn an

outcome of protracted experience on the part of the community.

The modern theories of property run back to Locke,(4*) or to

some source which for the present purpose is equivalent to Locke;

who, on this as on other institutional questions, has been proved

by the test of time to be a competent spokesman for modern

culture in these premises. A detailed examination of how the

matter stood in the theoretical respect before Locke, and whence,

and by what process of selection and digestion, Locke derived his

views, would lead too far afield. The theory is sufficiently

familiar, for in substance it is, and for the better part of two

centuries has been, held as an article of common sense by nearly

all men who have spoken for the institution of property, with the

exception of some few and late doubters.(5*)

This modern European, common-sense theory says that ownership

is a "Natural Right." What a man has made, whatsoever "he hath

mixed his labor with," that he has thereby made his property. It

is his to do with it as he will. He has extended to the object of

his labor that discretionary control which in the nature of

things he of right exercises over the motions of his own person.

It is his in the nature of things by virtue of his having made

it. "Thus labor, in the beginning, gave a right of property." The

personal force, the functional efficiency of the workman shaping

material facts to human use, is in this doctrine accepted as the

definitive, axiomatic ground of ownership; behind this the

argument does not penetrate, except it be to trace the workman's

creative efficiency back to its ulterior source in the creative

efficiency of the Deity, the "Great Artificer." With the early

spokesmen of natural rights, whether they speak for ownership or

for other natural rights, it is customary to rest the case

finally on the creator's discretionary dispositions and

workmanlike efficiency. But the reference of natural rights back

to the choice and creative work of the Deity has, even in Locke,

an air of being in some degree perfunctory; and later in the

life-history of the natural-rights doctrine it falls into

abeyance; whereas the central tenet, that ownership is a natural

right resting on the productive work and the discretionary choice

of the owner, gradually rises superior to criticism and gathers

axiomatic certitude. The Creator presently, in the course of the

eighteenth century, drops out of the theory of ownership.

It may be worth while to indicate how this ultimate ground of

ownership, as conceived by modern common sense, differs from the

ground on which rights of the like class were habitually felt to

rest in mediaeval times. Customary authority was the proximate

ground to which rights, powers, and privileges were then

habitually referred. It was felt that if a clear case of

devolution from a superior could be made out, the right claimed

was thereby established; and any claim which could not be brought

to rest on such an act, or constructive act, of devolution was

felt to be in a precarious case. The superior from whom rights,

whether of ownership or otherwise, devolved held his powers by a

tenure of prowess fortified by usage; the inferior upon whom

given rights and powers devolved held what fell to his lot by a

tenure of service and fealty sanctioned by use and wont. The

relation was essentially a personal one, a relation of status, of

authority and subservience. Hereditary standing gave a

presumption of ownership, rather than conversely. In the last

resort the chain of devolution by virtue of which all rights and

powers of the common man pertained to him was to be traced back

through a sequence of superiors to the highest, sovereign secular

authority, through whom in turn it ran back to God. But neither

in the case of the temporal sovereign nor in that of the divine

sovereign was it felt that their competence to delegate or

devolve powers and rights rested on a workmanlike or creative

efficiency. It was not so much by virtue of His office as creator

as it was by virtue of His office as suzerain that the Deity was

felt to be the source and arbiter of human rights and duties. In

the course of cultural change, as the medieval range of ideas and

of circumstances begins to take on a more modern complexion,

God's creative relation to mundane affairs is referred to with

growing frequency and insistence in discussions of all questions

of this class; but for the purpose in hand His creative relation

to human rights does not supersede His relation of sovereignty

until the modern era is well begun. It may be said that God's

tenure of office in the medieval conception of things was a

tenure by prowess, and men, of high and low degree, held their

rights and powers of Him by a servile tenure. Ownership in this

scheme was a stewardship. It was a stewardship proximately under

the discretion of a secular lord, more remotely under the

discretion of the divine Overlord. And the question then pressing

for an answer when a point of competency or legitimacy was raised

in respect of any given human arrangement or institution was not,

What hath God wrought? but, What hath God ordained?

This medieval range of conceptions first began to break down

and give place to modern notions in Italy, in the Renaissance.

But it was in the English-speaking communities that the range of

ideas upon which rests the modern concept of natural rights first

gathered form and reached a competent expression. This holds true

with respect to the modern doctrines of natural rights as

contrasted with the corresponding ancient doctrines. The

characteristically modern traits of the doctrine of natural

rights are of English derivation. This is peculiarly true as

regards the natural right of ownership. The material, historical

basis of this English right of ownership, considered as a habit

of thought, is given by the modern economic factors of handicraft

and trade, in contrast with the medieval institutions of status

and prowess. England, as contrasted with the Continent, during

modern times rapidly substituted the occupation of the merchant

and the ubiquitous free artisan as the tone-giving factors of her

everyday life, in place of the prince, the soldier, and the

priest. With this change in the dominant interests of everyday

life came a corresponding change in the discipline given by the

habits of everyday life, which shows itself in the growth of a

new range of ideas as to the meaning of human life and a new

ground of finality for human institutions. New axioms of right

and truth supplant the old as new habits of thought supersede the

old.

This process of substitution, as a struggle between rival

concepts of finality in political theory, reached a dramatic

climax in the revolution of 1688. As a battle of axioms the

transition comes to a head in the controversy between John Locke

and Sir Robert Filmer. Filmer was the last effective spokesman of

the medieval axiom of devolution. Locke's tracing of natural

rights, the right of property among the rest, back to the

workmanlike performance of the Creator, marks the form in which,

at the point of transition, the modern view pays its respects to

the superseded axiom of devolution and takes leave of it.

The scope given to the right of ownership in later modern

times is an outgrowth of the exigencies of mercantile traffic, of

the prevalence of purchase and sale in a "money economy." The

habits of thought enforced by these exigencies and by the

ubiquitous and ever recurring resort to purchase and sale decide

that ownership must naturally, normally, be absolute ownership,

with free and unqualified discretion in the use and disposal of

the things owned. Social expediency may require particular

limitations of this full discretion, but such limitations are

felt to be exceptional derogations from the "natural" scope of

the owner's discretion.

On the other hand, the metaphysical ground of this right of

ownership, the ultimate fact by virtue of which such a

discretionary right vests in the owner, is his assumed creative

efficiency as a workman; he embodies the work of his brain and

hand in a useful object, - primarily, it is held, for his own

personal use, and, by further derivation, for the use of any

other person to whose use he sees fit to transfer it. The

workman's force, ingenuity, and dexterity was the ultimate

economic factor, - ultimate in a manner patent to the common

sense of a generation habituated to the system of handicraft, how

ever doubtful such a view may appear in the eyes of a generation

in whose apprehension the workman is no longer the prime mover

nor the sole, or even chief, efficient factor in the industrial

process. The free workman, master of his own motions and with

discretion as to what he would turn his efforts to, if to

anything, had by Locke's time become an habitual fact in the life

of the English community to such a degree that free labor, of the

character of handicraft, was accepted uncritically as the

fundamental factor in all human economy, and as the presumptive

original fact in industry and in the struggle for wealth. So

settled did this habit of thought become that no question was

entertained as to the truth of the assumption.

It became a principle of the natural order of things that

free labor is the original source of wealth and the basis of

ownership. In point of historical fact, no doubt, such was not

the pedigree of modern industry or modern ownership; but the

serene, undoubting assumption of Locke and his generation only

stands out the more strongly and unequivocally for this its

discrepancy with fact. It is all the more evidently a competent

expression of the trend which English common sense was following

at this time, since this doctrine of a "natural" right of

property based on productive labor carries all before it, in the

face of the facts. In this matter English thought, or rather

English common sense, has led; and the advanced Continental

peoples have followed the English lead as the form of economic

organization exemplified by the English-speaking communities has

come to prevail among these Continental peoples.

Such a concept belongs to the regime of handicraft and petty

trade, and it is from, or through, the era of handicraft that it

has come down to the present.(6*) It fits into the scheme of

handicraft, and it is less fully in consonance with the facts of

life in any other situation than that of handicraft. Associated

with the system of handicraft, as its correlate, was the system

of petty trade; and as the differentiation of occupations was

carried to a high degree, purchase and sale came to prevail very

generally, and the community acquired a commercial complexion and

commercial habits of thought. Under these circumstances the

natural right of ownership came to comprise an extreme freedom

and facility in the disposal of property. The whole sequence of

growth of this natural right is, of course, to be taken in

connection with the general growth of individual rights that

culminated in the eighteenth-century system of Natural Liberty.

How far the English economic development is to be accounted the

chief or fundamental factor in the general growth of natural

rights is a question that cannot be taken up here. The outcome,

so far as it immediately touches the present topic, was that by

the time of the industrial revolution a fairly consistent

standardization of economic life had been reached in terms of

workmanship and price. The writings of Adam Smith and his

contemporaries bear witness to this. And this eighteenth-century

standardization stands over as the dominant economic institution

of later times.(7*) Such, in outline, seem to be the historical

antecedents and the spiritual basis of the modern institution of

property, and therefore of business enterprise as it prevails in

the present.(8*)

This sketch of the genesis of the modern institution of

property and of modern business principles may seem dubious to

those who are inclined to give it a more substantial character

than that of a habit of thought, - that is to say, those who

still adhere to the doctrine of natural rights with something of

the eighteenth-century naivete. But whatever may be accepted as

the ulterior grounds of that cultural movement which culminated

in the system of Natural Liberty, it is plain that the industrial

and commercial experience of western Europe, and primarily of

England, from the fifteenth to the eighteenth century, had much

to do with the outcome of the movement in so far as natural

liberty touches economic matters. It is as an outcome of this

recently past phase of economic development that we have

incorporated in the law, equity, and common sense of to-day,

these peculiarly free and final property rights and obligations,

that is to say, those peculiar principles that control current

business and industry. We owe to the eighteenth century a very

full discretIon and free swing in all pecunIary matters. It has

given freedom of contract, together with security and ease of

credit engagements, whereby the competitive order of business has

been definitively installed.(9*)

The subject-matter about which this modern pecuniary

discretion turns, with all its freedom and inviolability of

contract, is money values. Accordingly there underlies all

pecuniary contracts. an assumption that the unIt of money value

does not vary. Inviolability of contracts involves this

assumption. It is accepted unquestioningly as a point of

departure in all business transactions. In the making and

enforcement of contracts it is a fundamental point of law and

usage that money does not vary.(10*) Capitalization as well as

contracts are made in its terms, and the plans of the business

men who control industry look to the money unit as the stable

ground of all their transactions. Notoriously, business men are

jealous of any attempt to change the value or lessen the

stability of the money unit, which goes to show how essential a

principle in business traffic is the putative invariability of

the money unit.(11*)

Usage fortified by law decides that when prices vary the

variation is held to occur in the value of the vendible

commodities, not in the value of the money unit, since money is

the standard of value. There is, of course, no intention here to

question the position, familiar to all economists, that

fluctuations in the course of prices may as well be due to

variation on the part of the money metals as to a variation on

the part of the articles whose prices fluctuate. In so far as the

distinction so made between variations in the one or the other

member of a value ratio has a meaning - which it is not always

clear that it has - it does not touch the argument. It is a

matter of common notoriety, which has also had the benefit of

reiterated statistical proof, that, as measured, for instance, in

terms of livelihood or of labor, the value of money has varied

incontinently throughout the course of history.

But in the routine of business throughout the nineteenth

century the assumed stability of the money unit has served as an

axiomatic principle, in spite of facts which have from time to

time shown the falsity of that assumption.(12*)

The all-dominating issue in business is the question of gain

and loss. Gain and loss is a question of accounting, and the

accounts are kept in terms of the money unit, not in terms of

livelihood, nor in terms of the serviceability of the goods, nor

in terms of the mechanical efficiency of the industrial or

commercial plant. For business purposes, and so far as the

business man habitually looks into the matter, the last term of

all transactions is their outcome in money values. The base line

of every enterprise is a line of capitalization in money values.

In current business practice, variations from this base line are

necessarily rated as variations on the part of the other factors

in the case, not as variations of the base line. The business man

judges of events from the standpoint of ownership, and ownership

runs in terms of money.(13*)

Investments are made for profit, and industrial plants and

processes are capitalized on the basis of their profit-yielding

capacity. In the accepted scheme of things among business men,

profits are included as intrinsic to the conduct of business. So

that, in place of the presumption in favor of a simple pecuniary

stability of wealth, such as prevails in the rating of

possessions outside of business traffic, there prevails within

the range of business traffic the presumption that there must in

the natural course of things be a stable and orderly increase of

the property invested. Under no economic system earlier than the

advent of the machine industry does profit on investment seem to

have been accounted a normal or unquestionably legitimate source

of gain. Under the agrarian-manorial regime of the Middle Ages it

was not felt that the wealth of the large owners must, as a

matter of course, increase by virtue of the continued employment

of what they already had in hand - whatever may be the historical

fact as regards the increase of wealth in their hands.

Particularly, it was not the sense of the men of that time that

wealth so employed must increase at any stated, "ordinary" rate

per time unit. Similarly as regards other traffic in those days,

even as regards mercantile ventures. Gain from investment was

felt to be a fortuitous matter, not reducible to a stated rate.

This is reflected, e.g., in the tenacious protests against the

taking or paying of interest and in the ingenious sophistries by

which the payment of interest was defended or explained away.

Only under more settled commercial relations during the era of

handicraft did the payment of interest gradually come to be

accepted into full legitimacy. But even then gains from other

business employments than mercantile traffic were apparently

viewed as an increase due to productive labor rather than as a

profit on investment.(14*) In industrial pursuits, as distinct

from mercantile traffic proper, profits apparently come to figure

as a regular and ordinary incident only when the industries come

to be carried on on a mercantile basis by relatively large

employers working with hired labor.

This orderly increase is, of course, taken account of in

terms of the money unit. The "ordinary" rate of profits in

business is looked upon as a matter of course by the body of

business men. It is part of their common-sense view of affairs,

and is therefore a normal phenomenon.(15*) Gain, they feel, is

normal, being the purpose of all their endeavors; whereas a loss

or a shrinkage in the values invested is felt to be an untoward

accident which does not belong in the normal course of business,

and which requires particular explanation. The normality, or

matter-of-course character, of profits in the modern view is well

shown by the position of those classical economists who are

inclined to include "ordinary profits" in the cost of production

of goods.

The precise meaning of "ordinary profits" need not detain the

argument. It may mean net average profits, or it may mean

something else. The phrase is sufficiently intelligible to the

business community to permit the business men to use it without

definition and to rest their reasoning about business affairs on

it as a secure and stable concept; and it is this commonplace

resort to the term that is the point of interest here.

At any given time and place there is an accepted ordinary

rate of profits, more or less closely defined, which, it is felt,

should accrue to any legitimate and ordinarily judicious business

venture. However shifty the definition of this rate of profits

may be, in concrete, objective terms, it is felt by the men of

affairs to be of so substantial and consistent a character that

they habitually capitalize the property engaged in any given

business venture on the basis of this ordinary rate of profits.

Due regard being had to any special advantages and drawbacks of

the individual case, any given business venture or plant is

capitalized at such a multiple of its earning-capacity as the

current ordinary rate of profits will warrant.(16*)

Proceeding on the common-sense view built up out of this

range of habits of thought with respect to normal profits and

price phenomena, the business community holds that times are

ordinary or normal so long as the accepted or reasonable rate of

profits accrues on the accustomed capitalization; whereas times

are good or brisk if the rate of gain is accelerated, and hard or

dull if profits decline. This is the meaning of the phrases,

"brisk times" and "dull times," as currently used in any business

community.

Under the exigencies of the quest of profits, as conditioned

by the larger industry and the more sweeping business

organization of the last few decades, the question of capital in

business has increasingly become a question of capitalization on

the basis of earning-capacity, rather than a question of the

magnitude of the industrial plant or the cost of production of

the appliances of industry. From being a sporadic trait, of

doubtful legitimacy, in the old days of the "natural" and "money"

economy, the rate of profits or earnings on investment has in the

nineteenth century come to take the central and dominant place in

the economic system. Capitalization, credit extensions, and even

the productiveness and legitimacy of any given employment of

labor, are referred to the rate of earnings as their final test

and substantial ground. At the same time the "ordinary rate of

profits" has become a more elusive idea. The phenomenon of a

uniform rate of profits determined by competition has fallen into

the background and lost something of its matter-of-fact character

since competition in the large industry has begun to shift from

the position of a stable and continuous equilibration to that of

an intermittent, convulsive strain in the service of the larger

business men's strategy. The interest of the business community

centres upon profits and upon the shifting fortunes of the

profit-maker, rather than upon accumulated and capitalized goods.

Therefore the ultimate conditioning force in the conduct and aims

of business is coming to be the prospective profit-yielding

capacity of any given business move, rather than the aggregate

holdings or the recorded output of product.

But this latest development in the field of industrial

business has not yet come to control the field. It is rather an

inchoate growth of the immediate present than an accomplished

fact even of the recent past, and it can be understood only by

reference to those conditions of the recent past out of which it

comes. Therefore it is necessary to turn back to a further

consideration of the old-fashioned business traffic as it used to

go on by the competitive method before the competitive order

began seriously to be dislocated and take on an intermittent

character, as well as to a consideration of that resort to credit

which has, in large part, changed the competitive system of

business from what it was at the beginning of the nineteenth

century to what it has become at its close.

NOTES:

1. See ch. IX.

2. Cf. e.g. E. Jenks, Law and Politics in the Middle Ages, ch. VI

and VII.

3. "It has been said that the science of one age is the common

sense of the next. It might with equal truth be said that the

equity of one age becomes the law of the next. If positive law is

the basis of order, ideal right is the active factor in

progress." - H.S. Foxwell, Introduction to Menger's Right to the

Whole Produce of Labor, p. XI. Cf. the entire passage.

4. See the essay, of Civil Government, ch. V.

5. Apart from the familiar historical materials for the study of

the growth of national rights, including the right of property,

there are a number of late writings that may be consulted; e.g.

Jellinek, Declaration of the Rights of Man and of the Citizen;

Ritchie, Natural Rights; Bonar, chapters relating to this topic

in Philosophy and Political Economy; Hoffding, History of Modern

Philosophy, vol. I; Albee, History of English Utilitarianism;

and, lately come to hand, Scherger, Evolution of Modern Liberty.

These and other writers treat of natural rights and the law of

nature chiefly in other bearings than that of ownership; while

the legal writers treat the subject from the legal rather than

the de facto standpoint. It is also not unusual to spend

attention chiefly on the pedigree of the doctrines rather than on

the genesis and growth of the concepts. An endeavor at a genetic

account of the modern concepts of ownership is found in Jenks,

Law and Politics in the Middle Ages, so also in Cunningham,

Western Civilization in its Economic Aspects.

6. What appears to be necessary to the development of such a

sentiment is that neither slavery nor the machine system shall be

present in sufficient force to give a pronounced bias to the

community's habits of thought, at the same time that each member

of the community, or each minor group of persons, habitually

carries on its own work at its own discretion and for its own

ends. Such a situation may or may not involve handicraft as that

term is specifically understood. A presumption of similar import,

but less pronounced and less defined, seems to prevail in an

uncertain degree among many peoples on a low stage of culture.

The tenet, accordingly, has some claim to stand as an egression

of "natural" right, even when "natural" is taken in an

evolutionary sense.

7. Taken by and large, the standardization of conduct, knowledge,

and ideals Current in the eighteenth century, and consonant with

the eighteenth-century economic situation, is in the last

analysis reducible to terms of workmanlike efficiency rather than

terms of material cause and effect. This leaning to personal,

workmanlike efficiency as an ultimate term shows itself even in

the science of that time, e.g. in the quasi-personal character

imputed to the so-called "natural laws" which then largely

occupied scientific speculation; similarly in the Romantic

literature and political philosophy.

8. As late as the close of the sixteenth century English law and

usage in the matter of loans for interest and other contracts of

a pecuniary character were in a less advanced state, admitted a

less full and free discretion, than the corresponding development

on the Continent; but from about that time the English rapidly

gains on the Continental community in the habitual acceptance and

application of these "business principles," and it has since then

held the lead in this respect. Cf. Ashley, Economic History, vol.

II. ch. VI.

9. Cf. Sombart, Kapitalismus, vol. II. ch. II.

10. On the putative stability of the money unit, cf. W.W.

Carlile, The Evolution of Modern Money, pt. II. ch. IV.

11. Economists are in the habit of speaking of money as a medium

of exchange, a "great wheel" for the circulation of goods. In the

same connection business traffic is spoken of as a means of

obtaining goods suitable for consumption, the end of all purchase

and sale being consumable goods, not money values. It may be true

in some profound philosophical sense that money values are not

the definitive term of business endeavor, and that the business

man seeks through the mediation of money to satisfy his craving

for consumable goods. Looking at the process of economic life as

a whole and taking it in its rationalized bearing as a collective

endeavor to purvey goods and services for the needs of collective

humanity, the office of the money unit - money transactions,

exchange, credit, and all the rest that make up the phenomena of

business - is perhaps justly rated as something subsidiary,

serving to facilitate the distribution of consumable goods to the

consumers, the Consumption of goods being the objective point of

all this traffic. Such is the view of this matter given by the

rationalistic, normalizing speculations of the eighteenth-century

philosophers; and such is, in substance, the view spoken for by

those economists who still consistently remain at the standpoint

of the eighteenth century. The contention need neither be

defended nor refuted here, since it does not seriously touch the

facts of modern business. Within the range of business

transactions this ulterior end does not necessarily come into

view, at least not as a motive that guides the transactions from

day to day. The matter is not so conceived in business

transactions, it does not so appear on the face of the negotiable

instruments, it is not in this manner that the money unit enters

into the ruling habits of thought of business men.

12. Still, latterly, in the traffic of some of the more

wide-awake business men, account is practically taken of the

variations of the unit of value. What may be the future effects

of habitual and incontinent variations of the unit, such as

prevail in the present, is of course impossible to foretell.

These variations seem due mainly to the extensive prevalence of

credit relations; and the full development of credit relations in

business is apparently a matter of the future rather than of the

recent past, in spite of the great improvements that have been

made in the use of credit. The modern conventional imputation of

stability to the money unit dates back to the regime of a "money

economy," such as prevailed under the circumstances of handicraft

and the earlier huckstering commerce, and it holds its place in

the developed "credit economy" largely as a survival of this more

elementary past phase of economic life.

13. The conventional acceptance of the money unit as an

invariable measure of value and standard of wealth is of very

ancient derivation. (Cf. Carlile, Evolution of Modern Money, pt.

II. ch. I; Ridgeway, Origin of Metallic Currency and Weight

Standards, ch. I, II) Its present-day consequences are also of

first-rate importance, as will be indicated in a later chapter.

14. Cf., e.g., Mun, England's Treasure, particularly ch. II;

Ashley, Economic History and Theory, bk. II. ch. VI. pp. 391-397.

This, essentially handicraft, presumption is reflected even in

the classical economists, who feel a moral necessity of

explaining profits on some basis of productivity, or even of

workmanship in some sophisticated sense. The whole discussion of

the doctrine of Wages of Superintendence will serve to illustrate

the case; the point is well shown in Mr Davidson's article on

"Earnings of Management" in Palgrave's Dictionary of Political

Economy.

15. The "ordinary" rate, of course, differs in detail from one

line of business to another, as well as from place to place.

16. This statement applies with greater aptness to the business

situation of England during the earlier three-quarters of the

nineteenth century, and to the American situation of the third

quarter of the century, than it does to the situation of the last

decade. Qualifications required by the later phases of business

development will be noted presently.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter Five

The Use of Loan Credit

Credit serves two main uses in the regular course of such

business as is occupied with the conduct of industry. - (a) that

of deferred payments in the purchase and sale of goods - book

accounts, bills, checks, and the like belong chiefly under this

head; and (b) loans or debts - notes, stock shares,

interest-bearing securities, deposits, call loans, etc., belong

chiefly here. These two categories of credit extension are by no

means clearly distinct. Forms of credit which commonly serve the

one purpose may be turned to the other use; but the two uses of

credit are, after all, broadly distinguishable. For many purposes

of economic theory such a distinction might not be serviceable,

or even practicable; it is here made merely for present use. It

is chiefly with credit of the latter class, or rather with credit

in so far as it is turned to use for the latter purpose, that

this inquiry is concerned.

Suppose due credit arrangements have already been made - in

the way of investments in stocks, interest-bearing securities and

the like - such as to place the management of the industrial

equipment in competent hands. This supposition is not a violent

one, since a condition roughly approximating to this prevails in

any quiescent period of industry when there is no appreciable

depression. Under these "normal" conditions, the capital invested

in any given industrial venture is turned over within a certain,

approximately definite, length of time. The length of time

occupied by the turnover may vary from one establishment to

another, but in any given case the length of the turnover is one

of the important factors that determine the chances of gain for

the business concern in question. Indeed, if the general

conditions of the trade and of the market are given, the two

factors which determine the status and value of a given sound

concern, as seen from the business man's standpoint, are the

magnitude of the turnover and the length of time it occupies.

The business man's object is to get the largest aggregate

gain from his business. It is manifestly for his interest, as far

as may be, to shorten the process out of which his earnings are

drawn,(1*) or, in other words, to shorten the period in which he

turns over his capital. If the turnover consumes less than the

time ordinarily allowed in the line of industry in which he is

engaged, he gains more than the current rate of profits in that

line of business, other things equal; whereas he loses if the

turnover takes more than the normal time. This fact is forcibly

expressed in the maxim, "Small profits and quick returns." There

are two chief means of shortening the interval of the turnover,

currently resorted to in industrial business. The first is the

adoption of more efficient, time-saving industrial processes.

Improvements of industrial plant and industrial processes having

this in view are gaining in importance in the later developments

of business, since a closer attention is now given to the time

element in investments, and great advances have been made in this

direction.(2*) A second expedient for accelerating the rate of

turnover is the competitive pushing of sales, through larger and

more urgent advertising and the like. It is needless to say that

this means of accelerating business also receives due attention

at the hands of modern business men.

But the magnitude of the turnover, "the volume of business,"

is of no less consequence than its rapidity. It is, of course, a

trite commonplace that the earnings of any industrial business

are a joint function of the rate of turnover and the volume of

business.(3*) The business man may reach his end of increased

earnings by either the one or the other expedient, and he

commonly has resource to both if he can. His means of increasing

the magnitude of the turnover is a resort to credit and a close

husbanding of his assets. He is under a constant incentive to

increase his liabilities and to discount his bills receivable.

Indebtedness in this way comes to serve much the same purpose, as

regards the rate of earnings, as does a time-saving improvement

in the processes of industry.(4*) The effect of the use of credit

on the part of a business man so placed is much the same as if

his capital had been turned over a greater number of times in the

year. It is accordingly to his interest to extend his credit as

far as his standing and the state of the market will admit.(5*)

But on funds obtained on credit the debtor has to pay

interest, which, being deducted from the gross earnings of the

business, leaves, as net gain due to his use of credit, only the

amount by which the increment of gross earnings exceeds the

interest charge. This sets a somewhat elastic limit to the

advantageous use of loan credit in business. In ordinary times,

however, and under capable management, the current rate of

business earnings exceeds the rate of interest by an appreciable

amount; and in times of ordinary prosperity, therefore, it is

commonly advantageous to employ credit in the way indicated.

Still more so in brisk times, when opportunities for earnings are

many and promise to increase. To turn the proposition about, so

as to show the run of business motives in the case: whenever the

capable business manager sees an appreciable difference between

the cost of a given credit extension and the gross increase of

gains to be got by its use, he will seek to extend his credit.

But under the regime of competitive business whatever is

generally advantageous becomes a necessity for all competitors.

Those who take advantage of the opportunities afforded by credit

are in a position to undersell any others who are similarly

placed in all but this respect. Speaking broadly, recourse to

credit becomes the general practice, the regular course of

competitive business management, and competition goes on on the

basis of such a use of credit as an auxiliary to the capital in

hand. So that the competitive earning capacity of business

enterprises comes currently to rest on the basis, not of the

initial capital alone, but of capital plus such borrowed funds as

this capital will support.

The competitive rate of earnings is brought to correspond

with this basis of operation; the consequence being that under

such competitive employment of credit the aggregate earnings of

an enterprise resting on a given initial capital will be but

slightly larger than it might have been if such a general

recourse to credit to swell the volume of business did not

prevail. But since such use of credit prevails generally, a

further consequence is that any concern involved in the open

business competition, which cannot or does not take recourse to

credit to swell its volume of business, will be unable to earn a

"reasonable" rate of profits. So that the general practice drives

all competitors to the use of the same expedient; but since the

advantage to be derived from this expedient is a competitive

advantage only, the universality of the practice results in but a

slight, if any, increase of the aggregate earnings of the

business community. Borrowed funds afford any given business

concern a differential advantage as against other competitors;

but it is, in the main, a differential advantage only. The

competitive use of such funds in extending business operations

may, incidentally, throw the management of some portion of the

industrial process into more competent or less competent hands.

So far as this happens, the credit operations in question and the

use of the borrowed funds may increase or diminish the output of

industry at large, and so may affect the aggregate earnings of

the business community. But, apart from such incidental shifting

of the management of industry to more competent (or less

competent) hands, this competitive use of borrowed funds has no

aggregate effect upon earnings or upon the industrial output.

The current or reasonable rate of profits is, roughly, the

rate of profits at which business men are content to employ the

actual capital which they have in hand.(6*) A general resort to

credit extension as an auxiliary to the capital in hand results,

on the whole, in a competitive lowering of the rate of profits,

computed on capital plus credit, to such a point as would not be

attractive to a business man who must confine himself to the

employment of capital without credit extension. On an average, it

may be said, the aggregate earnings of the aggregate capital with

credit extension are but slightly greater than the aggregate

earnings of the same capital without credit extension would be in

the absence of a competitive use of credit extension. But under

modern conditions business cannot profitably be done by any one

of the competitors without the customary resort to credit.

Without the customary resort to credit a "reasonable" return

could not be obtained on the investment.

To the extent to which the competitive recourse to credit is

of the character here indicated - to the extent to which it is a

competitive bidding for funds between competent managers - it may

be said that, taken in the aggregate, the funds so added to

business capital represent no material capital or "production

goods." They are business capital, only. they swell the volume of

business, as counted in terms of price, etc., but they do not

directly swell the volume of industry, since they do not add to

the aggregate material apparatus of industry, or alter the

character of the processes employed, or enhance the degree of

efficiency with which industry is managed.

The "buoyancy" which a speculative inflation of values gives

to industrial business may indirectly increase the material

output of industry by enhancing the intensity with which the

industrial process is carried on under the added stimulus; but

apart from this psychological effect the expansion of business

capital through credit extension has no aggregate industrial

effect. This secondary effect of credit inflation may be very

considerable and is always present in brisk times. It is commonly

obvious enough to be accounted the chief characteristic of a

period of "prosperity." For a theory of industry this indirect

effect of credit inflation would be its main characteristic, but

for a theory of business it occupies the place of a corollary

only.

To the view set forth above, - that borrowed funds do not

increase the aggregate industrial equipment, - the obj ection may

present itself th at all funds borrowed represent property owned

by some one (the lender or his creditors), and transferred, in

usufruct, by the loan transaction to the borrower; and that these

funds can, therefore, be converted to productive uses, like any

other funds, by drawing into the industrial process, directly or

indirectly, the material items of wealth whose fluent form these

funds are.(7*) The objection fails at two points: (a) while the

loans may be covered by property held by the lender, they are not

fully covered by property which is not already otherwise engaged;

and even if such were the case, it would (b) not follow that the

use of these funds would increase the technical (material) outfit

of industry.

As to the first point (a): Loans made by the financial houses

in the way of deposits or other advances on collateral are only

to a fractional extent covered by liquid assets;(8*) and anything

but liquid assets is evidently beside the point of the present

question. An inconsiderable fraction of these loans is

represented by liquid assets. The greater part of the advances

made by banking houses, for instance, rest on the lender's

presumptive ability to pay eventually, on demand or at maturity,

any claims that may in the course of business be presented

against the lender on account of the advances made by him. It is

a business truism that no banking house could at a moment meet

all its outstanding obligations.(9*) A necessary source of

banking profits, e.g., is a large excess of the volume of

business over reserves.

As to (b): Another great part of the basis of such loans is

made up of invested funds and collateral held by the lender.

These at the same time are much of the basis on which rests the

lender's presumptive ability to pay claims presented. But these

investments, in industry or real estate, in interest-bearing

securities and collateral of whatever description, represent

future income of the lender's debtors (as, e.g., government and

municipal securities), or property which is already either

engaged in the industrial process or tied up in forms of wealth

(as, e.g., real estate) which do not lend themselves to

industrial uses. Loans obtained on property which has no present

industrial use, which cannot in its present form or under

existing circumstances be employed in the processes of industry

(as, e.g., speculative real estate), or loans on property which

is already engaged in the industrial process (as, e.g., stocks,

industrial plant, goods on hand, real estate in use),(10*)

represent, for the purpose in hand, nothing more substantial than

a fictitious duplication of material items that cannot be drawn

into the industrial process. Therefore such loans cannot, at

least not directly, swell the aggregate industrial equipment or

enhance the aggregate productivity of industry; for the items

which here serve as collateral are already previously in use in

industry to the extent to which they can be used. Property of

these kinds - what is already in use in industry and what is not

of use for industrial purposes - may be "coined into means of

payment," and so may be made to serve as additional pecuniary

(business) capital, but such property is mechanically incapable

of serving as additional material (industrial) capital. To a very

considerable extent the funds involved in these loans, therefore,

have only a pecuniary (business) existence, not a material

(industrial) one; and, so far as that is true, they represent, in

the aggregate, only fictitious industrial equipment. Even such

inconsiderable portion of them, however, as represents metallic

reserves also adds nothing to the effective material apparatus of

industry; since money as such, whether metallic or promissory, is

of no direct industrial effect; as is evident from the well-known

fact that the absolute quantity of the precious metals in use is

a matter of no consequence to the conduct of either business or

industry, so long as the quantity neither increases nor decreases

by an appreciable amount. Nummus nummum non parit.

So that all advances made by banking houses or by other

creditors in a like case, - whether the advances are made on

mortgage, collateral or personal notes, in the form of deposits,

note issues, Or. what not; whether they are taken to represent

the items of property covered by the collateral, the cash

reserves of the banks, or the general solvency of the creditor or

debtor, - all these "advances" go to increase the "capital" of

which business men have the disposal; but for the material

purposes of industry, taken in the aggregate, they are purely

fictitious items.(11*) Cash loans (such as savings-bank deposits

(12*) and the like) belong in the same category. All these

advances afford the borrower a differential advantage in bidding

against other business men for the control and use of industrial

processes and materials, they afford him a differential advantage

in the distribution of the material means of industry; but they

constitute no aggregate addition to the material means of

industry at large. Funds of whatever character are a pecuniary

fact, not an industrial one; they serve the distribution of the

control of industry only, not its materially productive work.

Loan credit in excess of what may serve to transfer the

management of industrial materials from the owner to a more

competent user - that is to say, in so far as it is not, in

effect, of the nature of a lease of industrial plant - serves, on

the whole, not to increase the quantity of the material means of

industry nor, directly, to enhance the effectiveness of their

use; but, taken in the aggregate, it serves only to widen the

discrepancy between business capital and industrial equipment. So

long as times are brisk this discrepancy ordinarily goes on

widening through a progressive extension of credit. Funds

obtained on credit are applied to extend the business; competing

business men bid up the material items of industrial equipment by

the use of funds so obtained; the value of the material items

employed in industry advances; the aggregate of values employed

in a given undertaking increases, with or without a physical

increase of the industrial material engaged; but since an advance

of credit rests on the collateral as expressed in terms of value,

an enhanced value of the property affords a basis for a further

extension of credit, and so on.(13*)

Now, the base line of business transactions is the money

value (market or exchange value, price) of the items involved,

not their material efficiency. The value of the money unit is by

conventional usage held to be invariable, and the lenders

perforce proceed on this assumption, so long as they proceed at

all.(14*) Consequently, any increase of the aggregate money

values involved in the current industrial business enterprises

will afford a basis for an extension of loans, indistinguishable

from any other block of capitalized values, even if the increase

of capitalized values is due to credit advances previously made

on the full cash value of the property hypothecated, The

extension of loans on collateral, such as stock and similar

values involved in industrial business, has therefore in the

nature of things a cumulative character. This cumulative

extension of credit through the enhancement of prices goes on, if

otherwise undisturbed, so long as no adverse price phenomenon

obtrudes itself with sufficient force to convict this cumulative

enhancement of capitalized values of imbecility. The extension of

credit proceeds on the putative stability of the money value of

the capitalized industrial material, whose money value is

cumulatively augmented by this extension itself. But the money

value of the collateral is at the same time the capitalized value

of the property, computed on the basis of its presumptive

earning-capacity. These two methods of rating the value of

collateral must approximately coincide, if the capitalization is

to afford a stable basis for credit; and when an obvious

discrepancy arises between the outcome given by the two ratings,

then a rerating will be had in which the rating on the basis of

earning-capacity must be accepted as definitive, since earnings

are the ground fact about which all business transactions turn

and to which all business enterprise converges. A manifest

discrepancy presently arises in this way between the aggregate

nominal capital (capital plus loans) engaged in business, on the

one hand, and the actual rate of earning-capacity of this

business capital, on the other hand; and when this discrepancy

has become patent a period of liquidation begins.

To give a readier view of the part played by loan credit in

this discrepancy between the business capital and the

earning-capacity of industrial concerns, it will be in place to

indicate more summarily what are the factors at play.

The earnings of the business community, taken as a whole, are

derived from the marketable output of goods and services turned

out by the industrial process - disregarding such earnings as

accrue to one concern merely at the cost of another. The

effective industrial capital, from the use of which this output,

and therefore these earnings, arise, is the aggregate of

capitalized material items actually engaged in industry. The

business capital, on the other hand, is made up of this

capitalized industrial material taken as a fund of values, plus

good-will, plus whatever funds are obtained on credit by using

this capitalized industrial material as collateral, plus funds

obtained on other, non-industrial, property used as collateral.

Through the competitive use of funds obtained on credit, as

spoken of above, the nominal value of the capitalized industrial

material is cumulatively augmented so as to make it approximately

equal to its original capitalization plus whatever funds are

obtained on credit of all kinds. On this basis of an expanded

collateral a further extension of credit takes place, and the

funds so obtained are incorporated in the business capital and

turned to the like competitive use, and so on.(15*) Capital and

earnings are counted in terms of the money unit. Counted in these

terms, the earnings (industrial output) are also increased by the

process of iflation though credit, since the competitive Use of

funds spoken of acts to bid up prices of whatever products are

used in industry, and of whatever speculative property is

presumed to have some eventual industrial use. But the nominal

magnitude (value) of the earnings is not increased in as large a

ratio as that of the business capital; since the demand whereby

the values of the output are regulated is not altogether a

business demand (for productive goods), but is in great part, and

indeed in the last resort mainly, reducible to a consumptive

demand for finished goods.(16*)

Looking at credit extension and its use for purposes of

capital as a whole, the outcome which presents itself most

strikingly at a period of liquidation is the redistribution of

the ownership of industrial property incident to the liquidation.

The funds obtained on credit are in great measure invested

competitively in the same aggregate of material items that is

already employed in industry apart from the use of loan credit,

with the result that the same range of items of wealth are rated

at a larger number of money units. In these items of wealth -

which, apart from the use of credit, are owned by their nominal

owners - the creditors, by virtue of the credit extension, come

to own an undivided interest proportioned to the advances which

they have made. The aggregate of these items of property comes

hereby to be potentially owned by the creditors in approximately

the proportion which the loans bear to the collatcral plus the

loans. The outcome of credit extension, in this respect, is a

situation in which the creditors have become potential owners of

such a fraction of the industrial equipment as would be

represented by the formula: (17*)

loans/capitalization (=collateral + loans)

In a period of liquidation this potential ownership on the part

of the creditors takes effect to the extent to which the

liquidation is carried through.(18*)

The precise measure and proportion in which the industrial

property of the business community passes into the hands of the

creditors in a period of liquidation can, of course, not be

specified; it depends on the degree of shrinkage in values, as

well as on the degree of thoroughness with which the liquidation

is carried out, and perhaps on other still less ascertainable

causes, among which is the degree of closeness of organization of

the business community. It is, however, through the shrinkage of

market values of the output and the industrial plant that the

transfer of ownership to the creditor class takes place. In case

no shrinkage of values took place, no such general transfer of

ownership to the creditors as a class would become evident.

In point of fact, the shrinkage commonly supervenes, in the

course of modern business, when a general liquidation comes;

although it is conceivable that the period of acute liquidation

and its attendant shrinkage of values need not supervene. Such

would probably be the case in the absence of competitive

investment in industrial material on a large scale. Secondary

effects, such as perturbations of the rate of interest,

insolvency, forced sales, and the like, need scarcely be taken up

here, although it may be well to keep in mind that these

secondary effects are commonly very considerable and farreaching,

and that they may in specific instances very materially affect

the outcome.

The theoretical result of this summary sketch of loan credit

so far seems to be: (a) an extension of loan credit beyond that

involved in the transference of productive goods from their

owners to more competent users is unavoidable under the regime of

competitive business - credit expansion is normally in some

degree "abnormal" or "excessive"; (b) such a use of credit does

not add to the aggregate of industrially productive equipment nor

increase its material output of product, and therefore it does

not add materially to the aggregate gross earnings obtained by

the body of business men engaged in industry, as counted in

material terms of wealth or of permanent values;(19*) (c) it

diminishes the aggregate net profits obtained by the business men

engaged in industry, as counted in such terms, in that it

requires them to pay interest, to creditors outside the

industrial process proper, on funds which, taken as an aggregate,

represent no productive goods and have no aggregate productive

effect; (d) there results an overrating of the aggregate capital

engaged in industry, compared with the value of the industrial

equipment at the starting-point, by approximately the amount of

the aggregate deposits and loans on collateral; (e) the

overrating swells the business capital, thereby raises the

valuation of collateral, and gives rise to a further extension of

credit, with further results of a like nature; (f) commonly

beginning at some point where the extension of credit is

exceptionally large in proportion to the material substratum of

productive goods, or where the discrepancy between nominal

capital and earning-capacity is exceptionally wide, the

overrating is presently recognized by the creditor and a

settlement ensues; (g) on the consequent withdrawal of credit a

forced rerating of the aggregate capital follows, bringing the

nominal aggregate into approximate accord with the facts of

earning-capacity; (h) the shrinkage which takes place in reducing

the aggregate rating of business capital from the basis of

capital goods plus loans to the basis of capital goods alone,

takes place at the expense of debtors and nominal owners of

industrial equipment, in so far as they are solvent; (i) in the

period of liquidation the gain represented by the credit

inflation goes to the creditors and claimants of funds outside

the industrial process proper, except that so much as is

cancelled in bad debts is written off; (j) apart from secondary

effects, such as heightened efficiency of industry due to

inflated values, changes of the rate of interest, insolvency,

etc., the main final outcome is a redistribution of the ownership

of property whereby the creditor class, including holders and

claimants of funds, is benefited.

Since the modern industrial situation began to take form,

there have been two principal forms of credit transactions

current in the usage of the business community for the purpose of

investment: the old-fashioned loan, the usage of which has come

down from an earlier, day. and the stock share, whereby funds are

invested in a joint stock company or corporation. The latter is a

credit instrument, so far as touches the management of the

property represented, in that (in earlier usage at least) it

effects a transfer of a given body of property from the hands of

an owner who resigns discretion in its control to a board of

directors who assume the management of it. In addition to these

two methods of credit relation there has, during the late-modern

industrial period, come into extensive use a third class of

expedients, viz. debentures of one form and another - bonds of

various tenor, preferred stock, preference shares, etc., ranging,

in point of technical character and degree of liability, from

something approaching the nature of a bill of sale to something

not readily distinguishable in effect from a personal note. The

typical (latest and most highly specialized) instrument of this

class is the preferred stock. This is in form a deed of ownership

and in effect an evidence of debt. It is typical of a somewhat

comprehensive class of securities in use in the business

community, in the respect that it sets aside the distinction

between capital and credit. In this respect, indeed, preferred

stock, more adequately perhaps than any other instrument,

reflects the nature of the "capital concept" current among the

up-to-date business men who are engaged in the larger industrial

affairs.

The part which debenture credit, nominal and virtual, plays

in the financing of modern industrial corporations is very

considerable, and the proportion which it bears in the

capitalization of these corporations apparently grows larger as

time passes and shrewder methods of business gain ground. In the

field of the "industrials" proper, debenture credit has not until

lately been employed with full effect. It seems to be from the

corporation finance of American railway companies that business

men have learned the full use of an exhaustive debenture credit

as an expedient for expanding business capital. It is not an

expedient newly discovered, but its free use, even in railway

finance, is relatively late. Wherever it prevails in an

unmitigated form, as with some railway companies, and latterly in

many other industrial enterprises, it throws the capitalization

of the business concerns affected by it into a peculiar,

characteristically modern, position in relation to credit. When

carried out thoroughly it places virtually the entire capital,

comprising the whole of the material equipment, on a credit

basis. Stock being issued by the use of such funds as will pay

for printing the instruments, a road will be built or an

industrial plant established by the use of funds drawn from the

sale of bonds; preferred stock or similar debentures will then be

issued, commonly of various denominations, to the full amount

that the property will bear, and not infrequently somewhat in

excess of what the property will bear. When the latter case

occurs, the market quotations of the securities will, of course,

roughly adjust the current effective capitalization to the run of

the facts, whatever the nominal capitalization may be. The common

stock in such a case represents "goodwill," and in the later

development it usually represents nothing but "good-will."(20*)

The material equipment is covered by credit instruments

debentures. Not infrequently the debentures cover appreciably

more than the value of the material equipment, together with such

property as useful patent rights or trade secrets; in such a case

the good-will is also, to some extent, covered by debentures, and

so serves as virtual collateral for a credit extension which is

incorporated in the business capital of the company. In the ideal

case, where a corporation is financed with due perspicacity,

there will be but an inappreciable proportion of the market value

of the company's good-will left uncovered by debentures. In the

case of a railway company, for instance, no more should be left

uncovered by debentures than the value of the "franchise," and

probably in most cases not that much actually is uncovered.

Whether capitalized good-will (including "franchise" if

necessary) is to be rated as a credit extension is a nice

question that can apparently be decided only on a legal

technicality. In any case so much seems clear - that good-will is

the nucleus of capitalization in modern corporation finance. In a

well financed, flourishing corporation, good-will, indeed,

constitutes the total remaining assets after liabilities have

been met, but the total remaining assets may not nearly equal the

total market value of the company's good-will; that is to say,

the material equipment (plant, etc.) of a shrewdly managed

concern is hypothecated at least once, commonly more than once,

and its immaterial properties (good-will), together with the

evidences of its indebtedness, may also to some extent be drawn

into the hypothecation.(21*)

What has just been said of the part borne by good-will and

debentures in the capitalization of corporations should be taken

in connection with what was said above (pp. 100-104) as to the

nature of the securities offered as collateral in procuring a

credit extension. The greatcr part of the securities used as

collateral, and so "coined into means of payment," are evidences

of debt, at the first remove or farther from their physical

basis, instruments of credit recording a previous credit

extension.

In the earlier period of growth of this debenture

financiering in industry, as, e.g., in the railroad financiering

of the third quarter of the nineteenth century, the process of

expansion by means of debenture credit, in any given case, was

worked out gradually, over a more or less extended period of

time. But as the possibilities of this expedient have grown

familiar to the business community, the time consumed in

perfecting the structure of debentures in each case has been

reduced; until it is now not unusual to perfect the whole

organizztion, with its load of debentures, at the inception of a

corporate enterprise. In such a case, when a corporation starts

with a fully organized capital and debt, the owners of the

concern are also its creditors; they are, at the start, the

holders of both common and preferred stock, and probably also of

the bonds of the company - so adding another increment of

confusion to the relation between modern capital and credit, as

seen from the old-fashioned position as to what capitalization

and its basis should be.

This syncopated process of expanding capital by the help of

credit financiering, however, is seen at its best in the

latter-day reorganizations and coalitions of industrial

corporations; and as this class of transactions also illustrate

another interesting and characteristically modern feature of

credit financiering, the whole matter may best be set out in the

way of a sketch of what takes place in a case of coalition of

industrial corporations on a large scale such as recent

industrial history has made familiar.

The avowed end of these latter-day business coalitions is

economy of production and sale and an amicable regulation of

intercorporate relations. So far as bears on the functioning of

credit in the attendant business transactions, the presence or

absence of these purposes, of course, does not affect the course

of events or the outcome. These avowed incentives do not touch

the credit operations involved. On the other hand, the need of

large credit in consummating the deal, as well as the presumptive

gains to be drawn from the credit relations involved, offer

inducements of their own to men who are in a position to effect

such a coalition. Inducements of this kind seem to have been of

notable effect in bringing on some of the recent operations of

this class.

Credit operations come into these transactions mainly at two

points: in the "financing" of the deal, and in the augmentation

of debentures; and at both of these points there is a chance of

gain on the one hand to the promoter (organizer) and the credit

house which finances the operation, and on the other hand to the

stockholders. The gain which accrues to the two former is the

more unequivocal, and this seems in some cases to be the dominant

incentive to effect the reorganization. The whole operation of

reorganization may, therefore, best be taken up from the point of

view of the promoter, who is the prime mover in the matter.

A reorganization of industrial concerns on a large scale,

such as are not uncommon at the present time, involves a campaign

of business strategy, engaging, it is said, abilities and

responsibilities of a very high order. Such a campaign of

business strategy, as carried out by the modem captains of

industry, runs, in the main, on credit relations, in the way of

financial backing, options, purchases, leases, and the issuance

and transfer of stock and debentures. In order to carry through

these large "deals," in the first place, a very substantial basis

of credit is required, either in the hands of the promoter

(organizer) himself or in the hands of a credit house which

"finances" the organization for him.

The strategic use of credit here involved is, in effect, very

different from the old-time use of loan credit in investments. In

transactions of this class the time element, the credit period,

is an inconspicuous factor at the most; it plays a very

subordinate and uncertain part. The volume of credit at the

disposal of a given strategist is altogether the decisive point,

as contrasted with the lapse of time over which the incident

credit extension may run. The usefulness of the credit extension

is not measured in terms of time, nor are the gains which accrue

to the creditor in the case proportioned to the length of time

involved.

This follows from the peculiar nature of the work which these

great captains of industry have in hand, and more remotely,

therefore, from the peculiar character of the earnings which

induce them to undertake the work. Their work, though it is of

the gravest consequence to industry, is not industrial business,

in that it is not occupied with anything like the conduct of a

continuous industrial process. Nor is it of the same class as

commercial business, or even banking business, in that there is

no investment in a continued sequence of transactions. It differs

also from stock and produce speculation, as that is currently

conceived,(22*) in that it does not depend on the lapse of time

to bring a change of circumstances; although it has many points

of similarity with stock speculation. In its details this work

resembles commercial business, in that it has to do with

bargaining; but so does all business, and this peculiar work of

the trust promoter differs from mercantile business in the

absence of continuity. Perhaps its nearest business analogue is

the work of the real estate agent.

The volume of credit involved is commonly very great; whereas

the credit period, the lapse of time, is a negligible factor.

Indeed, if an appreciable credit period intervenes, that is a

fortuitous circumstance. The time element in these credit

operations is in abeyance, or at the best, it is an indeterminate

magnitude. Hence the formula shown above (p. 95, n. 3) is

practically not applicable to business of this class. So far as

bears upon the credit operations involved in these transactions

of the large finance, the question about which interest turns is

almost exclusively the volume of the turnover; its velocity is a

negligible quantity. Such strategic use of credit is not confined

to the business of making or marring industrial coalitions. It is

habitually to be met with in connection with stock (and produce)

speculation, and ramifications of the like use of credit run

through the dealings of the business community at large in many

directions; but it rarely attains the magnitude in the service of

stock speculation which it reaches in the campaign incident to a

trust-making deal. The form of credit extension employed in these

transactions with indeterminate time also varies. The older and

more familiar form is that of the call loan, together with the

stock exchange transactions for which call loans are largely

used. Here the time element is present, especially in form; but

the credit period is somewhat indeterminate, as is also the gain

that accrues to the creditor from the transaction; although the

creditor's gain here continues to be counted at a (variable) rate

per cent. per time-unit. The strategic use of credit in the

affairs of the large business finance has much in common with the

call loan. Indeed, the call loan in set form is often resorted to

as a valuable auxiliary recourse, although the larger

arrangements for financing such a campaign of business strategy

are not usually put in the form of a call loan. The arrangement

between the promoter and the financial agent is commonly based on

a less specific stipulation as to collateral, and the payment for

credit obtained takes even less, if any, account of the length of

the credit period. In financing a campaign of coalition the

credit house that acts as financial agent assumes, in effect, an

even less determinate credit responsibility. Here, too, the gains

accruing to the creditor are no longer, even nominally, counted

per cent. per time-unit, but rather in the form of a bonus based

mainly on the volume of the turnover, with some variable degree

of regard to other circumstances.

Answering to the essentially timeless character of the gains

accruing to the financial agent, the earnings of the promoter

engaged in transactions of this class are also not of the nature

of profits per cent. per time-unit, but rather a bonus which

commonly falls immediately into the shape of a share in the

capitalization of the newly organized concern. Much of the

increment of capital, or capitalization, that goes to the

promoter is scarcely distinguishable from an increase of the

liabilities of the new corporation (e.g. preferred stock); and

the remainder (e.g. common stock) has also some of the

characteristics of a credit instrument. It is worth noting that

the cost of reorganization, including the bonus of the promoter

and the financial agent, is, in the common run of cases, added to

the capitalization; that is to say, as near as this class of

transactions may be spoken of in terms borrowed from the

old-fashioned business terminology, what answers to the

"interest" due the creditor on the credit extension involved is

incorporated in the "capital" of the debtor, without

circumlocution or faltering.(23*)

The line between credit and capital, or between debt and

property, in the values handled throughout these strategic

operations of coalition, remains somewhat uncertain. Indeed, the

old-fashioned concepts of "debt" and "property," or "liabilities"

and "assets," are not fairly applicable to the facts of the case

- except, of course, in the way of a technical legal distinction.

The old-fashioned law and legal presumptions and the

new-fashioned facts and usages are parting company, at this point

as well as at some others in the affairs of modern business.

When such a large transaction in the reorganization of

industrial concerns has been completed, the values left in the

hands of the former owners of the concerns merged in the new

coalition are only to a fractional and uncertain extent of the

nature of material goods. They are in large part debentures, and

much of the remainder is of a doubtful character. A large

proportion of the nominal collective capital resulting in such

cases is made up of the capitalized good-will of the concerns

merged.(24*) This good-will is chiefly a capitalization of the

differential advantages possessed by the several concerns as

competitors in business, and is for the most part of no use for

other than competitive business ends. It has for the most part no

aggregate industrial effect. The differential advantages

possessed by business concerns as competitors disappear when the

competitors are merged, in the degree in which they cease to

compete with rival bidders for the same range of business. To

this aggregate defunct good-will of the consolidated concerns

(which in the nature of things can make only an imaginary

aggregate) is added something in the way of an increment of

good-will belonging to the new corporation as such;(25*) and the

whole is then represented, approximately, by the common stock

issued. The nominal capital of the concerns merged (in good part

based on capitalized goodwill) is aggregated, after an

appraisement which commonly equalizes the proportion of each by

increasing the nominal shares of all. This aggregate is covered

with common and preferred stock, chiefly preferred, which is a

class of debentures issued under the form of capital. The stock,

common and preferred, goes to the owners of the concerns merged,

and to the promoter and the financial agent, as indicated above.

In case bonds are issued, these likewise go to the former owners,

in so far as they do not replace outstanding liabilities of the

concerns merged.

"Capital" in the enlightened modern business usage means

"capitalized presumptive earning-capacity," and in this

capitalization is comprised the usufruct of whatever credit

extension the given business concern's industrial equipment and

good-will will support.(26*) By consequence the effectual

capitalization (shown by the market quotations) as contrasted

with the nominal capital (shown by the par value of the stock of

all descriptions) fluctuates with the fluctuations of the

prevalent presumption as to the solvency and earning-capacity of

the concern and the good faith of its governing board.

When the modern captain of industry reorganizes and

consolidates a given range of industrial business concerns,

therefore, and gives them a collective form and name as an

up-to-date corporation, the completed operation presents, in

syncopated form and within a negligible lapse of time, all that

intricate process of cumulative augmentation of business capital

through the use of credit which otherwise may come gradually in

the course of business competition. At the same time it involves

a redistribution of the ownership of the property engaged in

industry, such as otherwise occurs at a period of liquidation.

The result is, of course, not the same at all points, but the

equivalence between the two methods of expanding business capital

and distributing the gains is close in some respects. The

resemblances and the differences between the two processes, so

far as relates to credit, are worth noticing. The trust-maker is

in some respects a surrogate for a commercial crisis.

When credit extension is used competitively in the

old-fashioned way for increasing the business of competing

concerns, as spoken of above (pp. 94-100, 109-114), the expansion

of business capital through credit operations occupies a period

of some duration, commonly running over an interval recognized as

a period of speculative advance or "rising prosperity." The

expansion of capitalized values then takes place more or less

gradually through a competitive enhancement of the prices of

industrial equipment and the like. The creditors then commonly

come in for their resulting share in the industrial equipment

only at the period of liquidation, with its attendant shrinkage

of values. In the timeless credit transactions involved in the

modern reorganizations of industrial business, on the other hand,

the creditors' claim takes effect without an appreciable lapse of

time, a liquidation, or a shrinkage of values.

The whole process of credit extension, augmentation of

business capital, and distribution of proceeds is reduced to a

very simple form. The credit extension is effected in two main

forms: (a) the "financing" undertaken by the credit house in

conjunction with the promoter, and (b) the issuance of

debentures. The bonus of the financing house and promoter, as

well as the debentures, are all included in the recapitalization,

together with an increment of good-will and any other incidental

items of expense or presumptive gain. The resulting collective

capitalization (assets and liabilities) is then distributed to

the several parties concerned in the transaction. The outcome, so

far as touches the present argument, being that when the

operation is completed the ownership of the recapitalized

industrial equipment, with whatever other property is involved,

appears distributed between the former owners, the promotcr, and

the credit house which financed the operation. But, by virtue of

the debentures distributed, the former owners, together with the

other parties named, appear in the role of creditors of the new

corporation as well as owners of it; they commonly come out of

the transaction with large holdings of preferred stock or similar

debentures at the same time that they hold the coommon stock. The

preferr.ed stock, of course, is presently disposed of by the

large holders to outside parties. The material equipment is then

practically the same as it was before; the business capital has

been augmented to comprise such proportion of the goodwill of the

several concerns incorporated as had not previously been

capitalized and hypothecated, together with the good-will imputed

to the new corporation and such debentures as these items of

wealth will float.

The effective capitalization resulting is, of course,

indicated by the market quotations of the securities issued

rather than by their face value. The value of the corporation's

business capital so indicated need suffer no permanent shrinkage;

it will suffer none if the monopoly advantage (good-will) of the

new corporation is sufficient to keep its earning-capacity up to

the rate on which the capitalization is based.

It appears, then, that in the affairs of latterday business,

as shown by modern corporation finance, capital and credit

extension are not always distinguishable in fact, nor does there

appear to be a decisive business reason why they should be

distinguished. "Capital" means "capitalized putative

earning-capacity," expressed in terms of value, and this

capitalization comprises the use of all feasible credit

extension. The business capital of a modern corporation is a

magnitude that fluctuates from day to day; and in the quotations

of its debentures the magnitude of its credit extension also

fluctuates from day to day with the course of the market. The

precise pecuniary magn itude of the business community's invested

wealth, as well as the aggregate amount of the community's

indebtedness, depends from hour to hour on the quotations of the

stock exchange; and it rarely happens that it remains nearly the

same in the aggregate from one week's end to the next. Both

capital and credit, therefore, vary from hour to hour. and,

within narrow limits, from place to place. The magnitude and

fluctuations of business capital, - "capital" in the sense in

which that term is used in business affairs, - of course, stand

in no hard and fast relation to the material magnitude of the

industrial equipment; nor do variations in the magnitude of the

business capital reflect variations in the magnitude or the

efficiency of the industrial equipment in any but the loosest and

most indecisive manner. So also, and for the same reason, the

magnitude and the variations of the aggregate credit afloat at a

given time bear, at the most, but a remote, indirect, and shifty

relation to the aggregate of material wealth and the material

changes to which this wealth is subject. All this applies with

peculiar cogency wherever and in so far as industry and business

are carried on hy modern expedients and in due contact with the

market.

NOTES:

1. This, of course, has nothing to say to Bohm-Bawerk's theory of

the enhancement of production through lengthening the processes

of industry. His theory of the "roundabout method" applies to the

technical, material efficiency of the mechanical process; whereas

the point in question here is the interval occupied in the

turning over of a given business capital. Bohm-Bawerk's position

may be questionable, however, on other grounds.

2. Cf., e.g., Werner Sombart, "Der Stil des modernen

Wirthschaftslebens." Achiv fur soz. Gestzg. u. Statistik, vol.

XVII, pp. 1-20, especially pp. 4-15. Reprinted as ch. IV, vol. II

of Der moderne Kapitalismus (Leipzig, 1902).

3. Cf., e.g., Marshall, Principles of Economics (3d ed.), bk VI,

ch. VII, secs. 3 and 4.

4. Cf. Laughlin, Principles of Money, p. 86.

5. The turnover will count for more in gross earnings at current

rates if instead of his own capital alone the business man also

engages whatever funds he can borrow by using his capital as

collateral. The turnover counted on capital (value of the

industrial equipment) plus credit, at current rates, will be

greater than that counted on the capital aaone used without

credit extension. The turnover may be expressed as the product of

the mass of values employed multiplied by the velocity. Hence, if

credit be taken as an indeterminate fraction (capital/n) of the

capital used as collateral, we may say that

Turnover = (1/time)(capital + capital/n), i.e.

T = (1/t)(c + c/n) = (c + c/n)/t; t = (c + c/n)/T

The algebraic statement serves to bring out the equivalence

between an acceleration of the rate of turnover and an increase

of the volume of business capital. Cf. Jevons, Theory of

Political Economy, pp. 249-258.

Sombart is mistaken in saying (Kapitalismus, vol. II. ch. VI,

p. 74) that the use of credit lengthens the time of turnover of

capital. Credit shortens the time relatively to the magnitude of

the turnover; i.e. a given initial capital by the help of credit

turns over a larger pecuniary magnitude in a given time: (c +

c/n)/t > c/t.

6. Marshall, as above.

7. Cf. Laughlin, Principles of Money, ch. IV.

8. Property convertible into cash at will.

9. The legally obligatory reserve for the National Banks, for

instance, is 25 per cent of combined note circulation and

deposits in central reserve banks, 15 per cent in others. --

Revised Statutes, 5191.

10. This takes accountof advance made by other lenders than the

regular banking houses who exclude mortgages on real estate from

their collateral; such, e.g., as the long time advances

(investments in securities) made by saving banks, insurance

companies, minor private and mortgage banks, private lenders,

etc.

11. This truism is frequently overlooked in theoretical

discussions; hence, as the present argument requires its

recognition, it is here stated in this explicit way.

12. The cash loans made by depositors to savings banks in the

form of deposits.

13. Cf. Twelfth Census of the United States, vol. VII, p. c.

14. Few, perhaps, would in set terms maintain an argument that

the value of money does not vary, but still fewer would, in a

credit transaction, proceed on a supposition at variance with

that position. As the economists are accustomed to say, money is

the standard of deferred payments. It is also, in the

unreflecting apprehension of those who have practically to deal

with wealth phenomena, felt to be the standard and inflexible

measure of wealth. The fact that this convertional usage is

embodied in law acts acts greatly to fortify the naive acceptance

of money and price as the definitive terms of wealth. See pp.

82-86 above.

15. Cf. Knies, Geld and Credit, vol. II, ch. VI, sec. C,

especially pp. 303 et seq.

16. The enhancement of the market value of the output does not,

in fact, keep pace with the inflation of business capital during

a period of speculative advance. In order that it should do so,

and afford nominal earnings proportionate to the inflated

capital, it would be necessary that incomes should increase

proportionately to the inflation of capital; but, even if this

happened, the expenses of production would thereby be so

increased (through the advance of wages and the like) as to

offset the entire of values for all consumptive goods and leave

only the advance in the values of productive goods as a net

margin from which to draw an increase of earnings. The

discrepancy under discussion, however, is not due entirely to the

presence of credit, and a fully detailed analysis of the causes

out of which it arises can, therefore, not properly be presented

in this place.

17. So long as the rating of the capitalized property remains

undisturbed, the formual which expresses the creditors' claim

maintain the form given above. It then signifies nothing more

than that the creditors hold a claim on such a proportion of the

aggregate capitalized property involved as their advances bear to

the aggreage capitalization. But so soon as a rerating of the

capitalized property enters the problem the formula becomes

loans/(capitalization + delta capitalization)

or loans/(capitalization - delta capitalization),

according as the rerating of capitalization is in the direction

of enhancement or depreciation: 1/(cap + delta cap) or 1/(cap -

delta cap). During brisk times, when capitalization advances,the

claim represented by a given loan covers a decreasing proportion

of the aggregate capitalized property involved 1/(cap + delta

cap); the denominator increases and teh quotient consequently

decreases. Whereas, in a period of liquidation the ratio of the

creditors' claim to the aggregate capitalization increases by

force of the lowered rating of the capitalized property 1/(cap -

deltal cap).

18. All those who, at a period of liquidation, are holders of

fluent funds or of claims to fixed sums of money are, for the

present purpose, in the position of creditors.

19. This disregards the indirect effects of a speculative advance

in the way of heightened intensity of application and fuller

employment of the industrial plant.

20. See chapter VI.

21. The question of "stock watering" "overcapitalization" and the

like is scarcely pertinent in the case of a large industrial

corporation financed as the modern situation demands. Under

modern circumstances the common stock can scarcely fail to be all

"water", unless in a small concern or under incompetent

management. Nothing but "water" - under the name of good-will -

belongs in the common stock; whereas the preferred stock, which

represents material equipment, is a debenture.

"Overcapitalization," on the other hand, if it means anything

under modern business conditions, must mean overcapitalization as

compared with earning-capacity, for there is nothing else

pertinent to compare it with; and earning-capacity fluctuates,

while the basis (interest rates) on which the earning-capacity is

to be capitalized also fluctuates independently.

In effect, the adjustment of capitalization to

earning-capacity is taken care of by the market quotations of

stock and other securities; and no other method of adjustment is

of any avail, because capitalization is a question of value, and

market quotations are the last resort in questions of value. The

value of any stock listed on the exchange, or otherwise subject

to purchase and sale, fluctuates from time to time; which comes

to the same thing as saying that the effectual capitalization of

the concern, represented by the securities quoted, fluctuates

from time to time. It fluctuates more or less, sometimes very

slowly, but always at least so much as to compensate the

long-period fluctuations of discount rates in the money market;

which means that the purchase price of a given fractional

interest in the corporation as a going concern fluctuates so as

to equate it with the capitalized value of its putative

earning-capacity, computed at current rates of discount and

allowing for risks. Cf. Report of the Industrial Commission, vol.

I. p. 587 (Testimony of Rogers); vol. XIII. pp. 106-107

(Testimony of E.R. Chapman). See also Chapter VI below.

22. See, e.g. Emery, Speculation on the Stock and Produce

Exchanges of the United States, ch. IV; Hadley, Economics, ch.

IV.

23. Report of the Industrial Commission, vol. I, (Testimony of

W.H. Moore) pp. 960-963, (W.E. Reis) p. 949, (Gates) p. 1032;

vol. IX. (T.L. Greene) p. 491; vol. XIII, p. viii, with

corresponding testimony. See also Chapter VI below.

24. Report of the Industrial Commission, vol. I (Testimony of

Dodd) pp. 1054-1055, 1057, 1058-1059, (Gates) pp. 1021-1022; vol.

XIII, p. ix, with testimony.

25. Report of the Industrial Commission, vol. I (Testimony of Dos

Passos) p. 1179; vol. XIII (C.R. Flint) p. 48. Testimony to the

same effect recurs elsewhere in the Report. See p. 125, n. 1

above.

26. See Chapter VI below.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter 6

Modern Business Capital

What has been said on the use of loan credit has anticipated

much of what is peculiar in modern business capital. Such is

necessarily the case, since it is in the extensive use of credit

that the later phases of the management of capital contrast most

strikingly with the corresponding features of earlier business

traffic. To follow the terminological precedents set by German

writers, the late-modern scheme of economic life is a "credit

economy," as contrasted with the "money economy" that

characterizes early-modern times. The nature of business capital

and its relations to the industrial process under the later, more

fully developed, credit economy is in some degree different from

what it was before the full and free use of credit came to occupy

its present central position in business traffic; and more

particularly is it at variance with the theoretical expositions

of the economists of the past generation.

It has been the habit of economists and others to speak of

"capital" as a stock of the material means by which industry is

carried on, - industrial equipment, raw materials, and means of

subsistence. This view is carried over from the situation in

which business and industry stood at the time of Adam Smith and

of the generation before Adam Smith, from whose scheme of life

and of thought he drew the commonplace materials and conceptions

with which his speculations were occupied. It further carries

over the point of view occupied by Adam Smith and the generation

to whom he addressed his speculations. That is to Say, the

received theoretical formulations regarding business capital and

its relations to industry proceed on the circumstances that

prevailed in the days of the "money economy," before credit and

the modern corporation methods became of first-class consequence

in economic affairs. They canvass these matters from the point of

view of the material welfare of the community at large, as seen

from the standpoint of the utilitarian philosophy. In this system

of social philosophy the welfare of the community at large is

accepted as the central and tone-giving interest, about which a

comprehensive, harmonious order of nature circles and gravitates.

These early speculations on business traffic turn about the

bearing of this traffic upon the wealth of nations, particularly

as the wealth of nations would stand in a "natural" scheme of

things, in which all things should work together for the welfare

of mankind.

The theory, or what there is in the way of a theory, of

business capital in the received body of doctrines is worked out

from the point of view and for the theoretical purposes of the

eighteenth century scheme of natural liberty, natural rights, and

natural law; and the received theorems concerning the part played

by capital and by the capitalist are substantially of the

character of laws of nature, as that term was understood during

the period to which these theorems owe their genesis. What these

received theorems declare concerning the nature and normal

function of capital and of the capitalist need not be recited

here; their content is familiar enough to all readers, lay and

learned. Also the merits of such a point of view for purposes of

economic theory, and the adequacy of the received concept of

capital for the purposes to which it was originally applied, need

not detain the inquiry. Modern business management does not take

that point of view, nor does "capital" carry such a meaning to

the modern business man; because the guiding circumstances under

which modern business is carried on are not those supposed to be

given by a beneficent order of nature, nor do the controlling

purposes of business traffic include that general well-being

which constituted the final term of Adam Smith's social

philosophy.

As a business proposition, "capital" means a fund of money

values; and since the credit economy and corporation finance have

come to be the ruling factors in industrial business, this fund

of money values (taken as an aggregate) bears but a remote and

fluctuating relation to the industrial equipment and the other

items which may (perhaps properly) be included under the

old-fashioned concept of industrial capital.(1*)

Capital has been spoken of as the capitalized (aggregated)

cost of industrial equipment, etc.,(2*) a view which had its

significance for economic theory a hundred years ago; but since

corporation finance has come to pervade the management of

business this view is no longer of particular use for a

theoretical handling of the facts. To avoid the tedium of

argument it may be conceded that under the old dispensation, of

partnerships and individual management in business, the basis of

capitalization was the cost of the material equipment owned by

any given concern; and so far as the methods of partnership and

private firms still prevails such may still be the current method

of capitalization, especially de jure. But in so far as business

procedure and business conceptions have been shaped in the image

of the modem corporation (or limited liability company), the

basis of capitalization has gradually shifted, until the basis is

now no longer given by the cost of material equipment owned, but

by the earning-capacity of the corporation as a going

concern.(3*)

A given corporation's capital is, of course, de jure a

magnitude fixed in the past by an act of legislature chartering

the company, or by an issuance of stock by the company under the

terms of its charter or of the acts which enable it. But this de

jure capitalization is nominal only, and there are few, if any,

cases in which the effective capital of a company coincides with

its de jure capital. Such could be the case only so long as all

the securities which go to make up the company's capital were

quoted at par on the market. The effective capitalization of any

modern company, that is to say, the capitalization which is

effective for current business purposes as distinct from the

formal requirements of the charter, is given by the quotations of

the company's securities, or by some similar but less overt

market valuation in case the company's capital is not quotable on

the market. The effective (business) capitalization, as distinct

from the de jure capitalization, is not fixed permanently and

inflexibly by a past act of incorporation or stock issue. It is

fixed for the time being only, by an ever recurring valuation of

the company's properties, tangible and intangible, on the basis

of their earning-capacity. (4*)

In this capitalization of earning-capacity the nucleus of the

capitalization is. not the cost of the plant, but the concern's

good-will, so called, as has appeared in the last preceding

chapter.(5*) "Good-will" is a somewhat extensible term, and

latterly it has a more comprehensive meaning than it once had.

Its meaning has, in fact, been gradually extended to meet the

requirements of modern business methods. Various items, of very

diverse character, are to be included under the head of

"good-will"; but the items included have this much in common that

they are "immaterial wealth," "intangible assets"; which, it may

parenthetically be remarked, signifies among other things that

these assets are not serviceable to the community, but only to

their owners. Good-will taken in its wider meaning comprises such

things as established customary business relations, reputation

for upright dealing, franchises and privileges, trade-marks,

brands, patent rights, copyrights, exclusive use of special

processes guarded by law or by secrecy, exclusive control of

particular sources of materials. All these items give a

differential advantage to their owners, but they are of no

aggregate advantage to the community.(6*) They are wealth to the

individuals concerned differential wealth; but they make no part

of the wealth of nations.(7*)

It is in the industrial corporations that this capitalization

of good-will is seen to the best advantage - including, under the

term "industrial corporations," railway companies, iron and steel

concerns, mines, etc., as well as what are known in the stock

market specifically as "industrials." The corporation is, of

course, not the only form of business concern in the industrial

field, but it is the typical, characteristic form of business

organization for the management of industry in modem times, and

the peculiarities of modem capital are therefore best seen in

these modern corporations. Many of these corporations have grown

out of partnerships and firms previously existing, and such is

still the genesis of many of the corporations that come forward

from time to time. In such a case of conversion from partnership

or firm to corporation the rule is that the new corporation takes

over a body of good-will, under one form and name or another,

previously pertaining to the partnership which it displaces.

Conversely, when a flourishing partnership or similar private

firm has gained an assured footing of good-will, in the way of

any or all of the items enumerated under that term above, its

lot, as prescribed by modern business exigencies, is to go up

into a corporation, either by simple conversion into the

corporate form or through coalition with other firms into a

larger corporate whole. There is in this matter no hard and fast

rule, of course. On the one hand, the approved methods of

corporation finance may in some measure be resorted to by a

private firm, Without formal conversion of the concern into the

corporate form; and on the other hand, an incorporated company

may continue to carry on its business after the manner usual with

privately owned concerns. But taken by and large, it will be

found that with the assumption of the corporate form is

associated a more modern method of capitalization and a freer use

of credit. The advantages which the corporate form offers in

these respects are commonly not neglected. The more archaic forms

of organization and business management, in which recourse is

commonly not had to the characteristic methods of corporation

finance, prevail chiefly in those "backward" lines of industry in

which monopoly or other differential advantages of an intangible

nature are not readily attainable; such, e.g., as farming,

fishing, local merchandising, and the minor mechanical trades and

occupations. In this range of industries large (corporate)

organization has hitherto been virtually impracticable, and here

at the same time differential advantages, of the nature of

good-will (as indicated above), are relatively scant and

precarious. Where extensive differential advantages of this kind

come in, the corporate form of organization is also likely to

come in.

The cases are also frequent where a corporation starts out

full-fledged from the beginning, without derivation from a

previously existing private firm. Where this happens, the start

is commonly made with some substantial body of immaterial goods

on which to build up the capitalization; it may be a franchise,

as in the case of a railway, telegraph, telephone, street-car,

gas, or water company; or it may be the control of peculiar

sources of material, as in the case of an oil or natural gas

company, or a salt, coal, iron, or lumber company; or it may be a

special industrial process, patented or secret; or it may be

several of these. When a corporation begins its life history

without such a body of immaterial differential advantages, the

endeavors of its management are early directed to working up a

basis of good-will in the way of trade-marks, clientele, and

trade connections which will place it in something of a monopoly

position, locally or generally (8*) Should the management not

succeed in these endeavors to gain an assured footing on some

such "immaterial" ground, its chances of success among rival

corporations are precarious, its standing is insecure, and its

managers have not accomplished what is looked for at their hands.

The substantial foundation of the industrial corporation is its

immaterial assets.

The typical modern industrial corporation is a concern of

sufficient magnitude to be of something more than barely local

consequence, and extends its trade relations beyond the range of

the personal contact of its directive officials. Its properties

and its debts are also commonly owned, in part at least, by

persons who stand in no direct personal relation to the board of

managers. In an up-to-date corporation of this character the

typical make-up of the corporate capital, or capitalization, is

somewhat as follows: The common stock approximately covers the

immaterial properties of the concern, unless these immaterial

properties are disproportionately large and valuable; in case of

a relatively small and local corporation the common stock will

ordinarily somewhat more than cover the value of the immaterial

property and comprise something of the plant; in case of the

larger concerns the converse is likely to be true, so that here

the immaterial property, intangible assets, is made to serve in

some measure as a basis for other securities as well as for the

common stock. The common stock, typically, represents intangible

assets and is accounted for by valuable trade-marks, patents,

processes, franchises, etc. Whatever material properties,

tangible assets, are in hand or to be acquired are covered by

preferred stock or other debentures. The various forms of

debentures account for the material equipment and the working

capital (the latter item corresponding roughly to the economists'

categories of raw materials, wages fund, and the like). Of these

debentures the preferred stock is the most characteristic modern

development. It is, de jure, counted as a constituent of the

concern's capital and the principal is not repayable; in this

(legal) respect it is not an evidence of debt or a credit

instrument.(9*) But it has little voice in the direction of the

concern's business policy.(10*) In practice the management rests

chiefly on the holdings of common stock. This is due in part to

the fact that the preferred bears a stated rate of dividends and

is therefore taken up by scattered purchasers as an investment

security to a greater extent than the common. In this (practical)

respect it amounts to a debenture. Its practical character as a

debenture is shown by the stated rate of dividends, and where it

is "cumulative" that feature adds a further step of assimilation

to the ordinary class of debentures. Indeed, in point of

practical effect preferred stock is in some respects commonly a

more pronounced credit instrument than the ordinary mortgage; it

alienates the control of the property which it represents more

effectually than the ordinary bond or mortgage loan, in that it

may practically be a debt which, by its own terms, cannot be

collected, so that by its own terms it may convey a credit

extension from the holder to the issuing corporation in

perpetuity. Its effect is to convey the discretionary control of

the material properties which it is held to represent into the

hands of the holders of the common stock of the concern. The

discretionary management of the corporate capital is, by this

device, quite as effectually as by the use of ordinary credit

instruments, vested in the common stock, which is held to

represent the corporation's goodwill. The discretionary disposal

of the entire capital vests in securities representing the

intangible assets. In this sense, then, the nucleus of the modern

corporate capitalization is the immaterial goods covered by the

common stock.(11*)

This method of capitalization, therefore, effects a somewhat

thoroughgoing separation between the management and the ownership

of the industrial equipment. Roughly speaking, under corporate

organization the owners of the industrial material have no voice

in its management, and where preferred stock is a large

constituent of the capital this alienation of control on the

parts of the owners may be, by so much, irrevocable. Preferred

stock is, practically, a device for placing the property it

represents in perpetual trust with the holders of the common

stock, and, with certain qualifications, these trustees are not

answerable for the administration of the property to their

trustors. The property relation of the owners to their property

is at this point attenuated to an extreme degree. For most

business purposes, it should be added, the capital covered by

other forms of debentures is in much the same position as that

covered by the preferred stock.(12*)

The various descriptions of securities which in this way

represent corporate capital are quotable on the market and are

subject to market fluctuations; whereby it comes about that the

aggregate effective magnitude of the corporate capital varies

with the tone of the market, with the manoeuvres of the business

men to whom is delegated the management of the companies, and

with the accidents of the seasons and the chances of peace and

war. Accordingly, the amount of the business capital of a given

concern, or of the business community as a whole, varies in

magnitude in great measure independently of the mechanical facts

of industry, as was noted above in speaking of loan credit.(13*)

The market fluctuations in the amount of capital proceed on

variations of confidence on the part of the investors, on current

belief as to the probable policy or tactics of the business men

in control, on forecasts as to the seasons and the tactics of the

guild of politicians, and on the indeterminable, largely

instinctive, shifting movements of public sentiment and

apprehension. So that under modern conditions the magnitude of

the business capital and its mutations from day to day are in

great measure a question of folk psychology rather than of

material fact.

But in this uncertain and shifting relation of the business

capital to the material equipment there are one or two points

which may be set down as fairly secure. Since the credit

instruments involved in modern capitalization may be used as

collateral for a further credit extension, as noted in the

chapter on loan credit,(14*) the aggregate nominal capital in

hand at a given time is, normally, larger by an appreciable

amount than the aggregate value of the material properties

involved;(15*) and at the same time the current value of these

material properties is also greater than it would be in the

absence of that credit financiering for which corporate

capitalization affords a basis.(16*)

German writers have familiarized economic readers with the

terms "credit economy," "money economy" (Geldwirtschaft), and

"natural economy" (Naturalwirtschaft), the later-modern scheme of

economic life being characterized as a "credit economy." What

characterizes the early-modern scheme, the "money economy," and

sets it off in contrast with the natural economy (distribution in

kind) that went before it in West-European culture, is the

ubiquitous resort to the market as a vent for products and a

source of supply of goods. The characteristic feature of this

money economy is the goods market. About the goods market

business and industrial interests turn in early modern times; and

to this early-modern system of industrial life the current

doctrines of political economy are adapted, as indicated above.

The credit economy - the scheme of economic life of the

immediate past and the present - has made an advance over the

money economy in the respect which chiefly distinguishes the

latter. The goods market, of course, in absolute terms is still

as powerful an economic factor as ever, but it is no longer the

dominant factor in business and industrial traffic, as it once

was. The capital market has taken the first place in this

respect. The capital market is the modern economic feature which

makes and identifies the higher "credit economy" as such. In this

credit economy resort is habitually had to the market as a vent

for accumulated money values and a source of supply of

capital.(17*)

Trading under the old regime was a traffic in goods; under

the new regime there is added, as the dominant and characteristic

trait, trading in capital. Both in the capital and in the goods

market there are professional traders, as well as buyers and

sellers who resort to the market to dispose of their holdings and

to supply their needs of what the market affords. In either class

of trading the ends sought by those engaged in the business are

generically the same. The endeavors of those who are in the

business of trading, who buy in order to sell and sell in order

to buy, are directed to the pecuniary gain that is to be got

through an advantageous discrepancy between the price paid and

the price obtained; but on the part of those who resort to the

market to supply their needs the end sought is not the same in

the two cases. The last buyer of goods buys for consumption, but

the last negotiator of capital buys for the sake of the ulterior

profit; in substance he buys in order to sell again at an

advance. The advance which he has in view is to come out of the

prospective earnings of the capital for which he negotiates. What

he has in view as his ulterior end in the transaction is the

conversion of the values for which he negotiates into a larger

outcome of money values, - whatever process of production and the

like may intervene between the inception and the goal of his

traffic.(18*)

The value of any given block of capital, therefore, turns on

its earning-capacity; or, as the mathematical expression has it,

the value of capital is a function of its earning-capacity, (19*)

not of its prime cost or of its mechanical efficiency. It is only

more remotely, and through the mediation of the earning-capacity,

that these last-named factors sensibly affect the value of the

capital. This earning-capacity of capital depends in its turn,

not so much on the mechanical efficiency of the valuable items

bought and sold in the capital market, as on the tension of the

market for goods. To recur to an expression already employed in a

similar connection, the question of earning-capacity of capital

relates primarily to its effectiveness for purposes of

vendibility, and only at the second remove to its effectiveness

in the way of material serviceability. But the earning-capacity

which in this way affords ground for the valuation of marketable

capital (or for the market capitalization of the securities

bought and sold) is not its past or actual earning-capacity, but

its presumptive future earning-capacity; so that the fluctuations

in the capital market -the varying market capitalization of

securities - turn about imagined future events. The forecast in

the case may be more or less sagacious, but, however sagacious,

it retains the character of a forecast based on other grounds

besides the computation of past results.

All capital which is put on the market is in this way

subjected to an interminable process of valuation and revaluation

- i.e. a capitalization and recapitalization - on the basis of

its presumptive earning-capacity, whereby it all assumes more or

less of a character of intangibility. But the most elusive and

intangible items of this marketable capital are, of course, those

items which consist of capitalized good-will, since these are

intangible goods from start to finish. It is upon this factor of

good-will in capital that a change in presumptive

earning-capacity falls most immediately, and this factor shows

the widest and freest market fluctuations. The variations in the

capitalized value of merchantable good-will are relatively wide

and unstable, as is shown by the quotations of common stock.

In the capital market the commodity in which trading is done,

then, is the capitalized putative earning-capacity of the

property covered by the securities bought and sold. This property

is in part tangible, in part intangible, the two categories being

seldom clearly distinguishable. The items bought and sold are put

into merchantable form by being standardized in terms of money

and subdivided into convenient imaginary shares, which greatly

facilitates the traffic. The earning-capacity on which the market

capitalization runs and about which the traffic in merchantable

capital turns is a putative earning-capacity. It follows that

this putative earning-capacity of a given block of capital, as it

takes shape in the surmises of outside investors, may differ

appreciably from the actual earning-capacity of the capital as

known to its managers; and it may readily be to the latter's

interest that such a discrepancy between actual and imputed

earning-capacity should arise.(20*) When, e.g., the putative

earning-capacity of the capital covered by a given line of

securities, as shown by the market quotations, rises appreciably

above what is known to its managers to be its actual

earning-capacity, the latter may find their advantage in selling

out, or even in selling short; while in the converse case they

will be inclined to buy. Moreover, putative earning-capacity is

the outcome of many surmises with respect to prospective earnings

and the like; and these surmises will vary from one man to the

next, since they proceed on an imperfect, largely conjectural,

knowledge of present earning-capacity and on the still more

imperfectly known future course of the goods market and of

corporate policy. Hence sales of securities are frequent, both

because outsiders vary in their estimates and forecasts, and

because the information of the outsiders does not coincide with

that of the insiders. The consequence is that a given block of

capital, representing, e.g., a controlling interest in a given

industrial enterprise, may, and in practice it commonly will,

change owners much more frequently than a given industrial plant

was wont to change owners under the old regime, before the fully

developed corporation finance came to occupy the field of

industrial business.(21*)

It follows, further, that under these circumstances the men

who have the management of such an industrial enterprise,

capitalized and quotable on the market, will be able to induce a

discrepancy between the putative and the actual earning-capacity,

by expedients well known and approved for the purpose. Partial

information, as well as misinformation, sagaciously given out at

a critical juncture, will go far toward producing a favorable

temporary discrepancy of this kind, and so enabling the managers

to buy or sell the securities of the concern with advantage to

themselves. If they are shrewd business men, as they commonly

are, they will aim to manage the affairs of the concern with a

view to an advantageous purchase and sale of its capital rather

than with a view to the future prosperity of the concern, or to

the continued advantageous sale of the output of goods or

services produced by the industrial use of this capital.

That is to say, the interest of the managers of a modern

corporation need not coincide with the permanent interest of the

corporation as a going concern; neither does it coincide with the

interest which the community at large has in the efficient

management of the concern as an industrial enterprise. It is to

the interest of the community at large that the enterprise should

be so managed as to give the best and largest possible output of

goods or services; whereas the interest of the corporation as a

going concern is that it be managed with a view to maintaining

its efficiency and selling as large an output as may be at the

best prices obtainable in the long run; but the interest of the

managers, and of the owners for the time being, is to so manage

the enterprise as to enable them to buy it up or to sell out as

expeditiously and as advantageously as may be. The interest of

the community at large demands industrial efficiency and

serviceability of the product; while the business interest of the

concern as such demands vendibility of the product; and the

interest of those men who have the final discretion in the

management of these corporate enterprises demands vendibility of

the corporate capital. The community's interest demands that

there should be a favorable difference between the material cost

and the material serviceability of the output; the corporation's

interest demands a favorable pecuniary difference between

expenses and receipts, cost and sale price of the output; the

corporation directorate's interest is that there should be a

discrepancy, favorable for purchase or for sale as the case may

be, between the actual and the putative earning-capacity of the

corporation's capital.

It has been noted in an earlier chapter that there

unavoidably results a discrepancy, not uncommonly a divergence,

between the industrial needs of the community and the business

needs of the corporations. Under the regime of the old-fashioned

"money economy," with partnership methods and private ownership

of industrial enterprises, the discretionary control of the

industrial processes is in the hands of men whose interest in the

industry is removed by one degree from the interests of the

community at large. But under the regime of the more adequately

developed "credit economy," with vendible corporate capital,(22*)

the interest of the men who hold the discretion in industrial

affairs is removed by one degree from that of the concerns under

their management, and by two degrees from the interests of the

community at large.

The business interest of the managers demands, not

serviceability of the output, nor even vendibility of the output,

but an advantageous discrepancy in the price of the capital which

they manage. The ready vendibility of corporate capital has in

great measure dissociated the business interest of the

directorate from that of the corporation whose affairs they

direct and whose business policy they dictate, and has led them

to centre their endeavors upon the discrepancy between the actual

and the putative earning-capacity rather than upon the permanent

efficiency of the concern. Their connection with the concern is

essentially transient; it can be terminated speedily and silently

whenever their private fortune demands its severance. Instances

are abundant, more particularly in railway management, where this

discrepancy between the business interest of the concern and the

private business interest of the managers for the time being has

led to very picturesque developments, such as could not occur if

the interests of the management were bound up with those of the

corporation in the manner and degree that once prevailed. The

fact is significant that the more frequent and striking instances

of such management of corporate affairs for private ends have

hitherto occurred in railroading, at the same time that the

methods and expedients of modern corporation finance have also

first and most widely reached a fair degree of maturity in

railroading. It holds out a suggestion as to what may fairly be

looked for when corporation finance shall have made itself more

thoroughly at home in the "industrials" proper. Indeed, the field

of the "industrials" is by no means barren of instances

comparable with the maturer and more sagacious railroad

financiering.(23*)

The stock market interest of those men who have the

management of industrial corporations is a wide and multifarious

one. It is not confined to the profitable purchase and sale of

properties whose management they may have in hand. They are also

interested in making or marring various movements of coalition or

reorganization, and to this ulterior end it is incumbent on them

to "manipulate" securities with a view to buying and selling in

such a manner as to gain control of certain lines of

securities.(24*) Hence it is a rule of this class of business

traffic to cultivate appearance, - to avoid, or sometimes to

court, the appearance of sin. So that under this leadership the

course of industrial affairs is, in great measure, if not

altogether, guided with a view to a plausible appearance of

prosperity or of adversity, as the case may be. Under given

circumstances it may as well become the aim of men in control to

make an adverse showing as a favorable one. The higher exigencies

of the captain of industry's personal fortunes, as distinct from

those of the corporation controlled by him, may from time to time

be best sewed by an apparent, if not an actual, mismanagement of

industrial affairs. A convincing appearance of decline or

disaster will lower the putative earning-capacity of the concern

below its real earning-capacity and so will afford an

advantageous opportunity for buying with a view to future advance

or with a view to strategic control. Various other expedients

looking to the like outcome are well known to the craft, besides

bona fide mismanagement. A given line of securities may be

temporarily depressed by less heroic tactics; but the point in

question here is the fact that under this system of corporation

finance the affairs of the corporation are in good part managed

for tactical ends which are of interest to the manager rather

than to the corporation as a going concern.

What was said in speaking of credit extension without a

determinate time interval (25*) applies to this class of

business, with a slight change of phrase. In this higher

development of corporation finance, in the manipulations of

vendible capital, the interval of the turnover spoken of above

becomes an indeterminate factor. The gains of the business come

to have but an uncertain and shifty relation to the lapse of time

and cannot well be calculated per cent. per time-unit. There is,

therefore, on these higher levels of business management,

properly speaking no ascertainable ordinary rate of earnings. The

capital which may be distinctively regarded as operative in the

business of manipulation, the valuable items specifically

employed in the traffic in vendible corporate capital, is made up

of the operator's good-will and his financial solvency. Solvency

on a large scale is requisite to carrying on traffic of this

class, but the collateral on which this extensive solvency

constructively rests is to but a partial extent drawn into the

business as a basis for an actual credit extension. What counts

in the case is the solvency of the operator rather than an

outright resort to the credit extension which this solvency might

afford. The working capital involved in these transactions is

accordingly of a peculiarly elusive character, and the time

element in the use of this capital is hard to determine, if such

a time element can properly be said to enter into the case at

all.

More in detail, the business man in pursuit of gain along

this line must, in the ordinary case, be possessed of large

holdings of property, this being the basis of the solvency

necessary to the business. These holdings are commonly in the

form of securities in the concern whose vendible capital is the

subject of his traffic, as well as in other corporations. These

securities represent capital, tangible and intangible, which is

already employed in the ordinary business of the concern by which

they have been issued; the capital, therefore, is already in use

to the full extent and is presumably yielding the ordinary rate

of earnings. But the solvency for which the ownership of this

capital affords a basis may further be useful in enabling the

owner to carry on a traffic in vendible corporate capital without

withdrawing any appreciable portion of his holdings from the

lucrative investments in which they have been placed. In other

words, he is able, under modern circumstances, to make a

secondary use of his investments for the purpose of trading in

vendible corporate capital; but this secondary use of investments

bears no hard and fast quantitative relation to the investments

in question, nor does it in any determinate way interfere with

the ordinary employment of this invested capital in the

commonplace conduct of the corporations' business traffic. The

capital employed, as well as the potential credit extension which

it affords for the purposes of this higher business traffic, is

therefore in a peculiar degree intangible, and, in respect of its

amount, highly elusive.

Much the same is true of the good-will employed in this

traffic. It is also in good part good-will which already serves

the purposes of the commonplace business traffic of the

corporations on whose securities the business man in question

rests his solvency. So that in this higher business traffic the

good-will engaged is also here turned to a secondary use. The

business economies which are in this way made practicable by a

reduplication of uses and made to inure to the greater business

men's profit are of great magnitude; but the magnificent

additions which are in this way made to the business community's

capitalizable forces need scarcely be dwelt on here.

The elusive and flexuous character of the elements of wealth

engaged, as well as the absence of an ascertainable ordinary rate

of earnings in this line of business, has led economists to speak

of this traffic in vendible capital as a "speculative"

business.(26*) The mere buying and selling of stocks by outsiders

for a rise or a decline is of course a speculative business; it

is a typical form of speculative business. But in so far as such

buying and selling is carried on by the managers of the

corporations whose securities are the subject of the traffic, and

especially where the securities are bought and sold with a view

to the control of the corporations in question and their

management for private, tactical ends, a characterization of the

business as "speculative" is inadequate and beside the point.

This higher reach of corporation financiering has little if any

more of a speculative character than what belongs to the

commonplace business management of any industrial enterprise. In

all business enterprise that stands in relations with the market

and depends on vendibility of its output there is more or less

uncertainty as to the outcome.(27*) In this sense all industrial

business, as well as commercial business, has something of a

speculative character. But it is little to the purpose on that

account to lump industrial enterprises and corporation

financiering together as "speculative business" and deal with

them as if this were their most salient and consequential

bearing. What speculative risk there is in these lines of

business is incidental, and it neither affords the incentive to

engaging in these pursuits nor does it bound the scope of their

bearing upon economic affairs. The speculative risk involved is

no greater, relatively to the magnitude of the interests

involved, in this larger traffic that deals in vendible capital

than it is in the ordinary lines of business traffic that deal in

vendible products. In both cases there may be speculation, but in

both cases it is a side issue. Indeed, as near as one may

confidently hold an opinion on so dark a question, the certainty

of gain, though perhaps not the relative amount of it, seems

rather more assured in the large-scale manipulation of vendible

capital than in business management with a view to a vendible

product.

What may obscure the question is the fact that the

manipulations involved in this traffic in vendible capital

commonly impose increased risks upon the business concerns

engaged in industry - the corporations whose capital is involved,

as well as other firms. The everyday business of the corporations

whose securities are involved, as well as of other business

concerns engaged in rival or related lines of industry, is

rendered more hazardous than it might be in the absence of this

financiering traffic in vendible capital. The manipulations carry

risk, not so much to the manipulators as such, as to the

corporations whose properties are the subject of manipulation;

but since the manipulators commonly own but a relatively small

proportion of the properties involved or touched by their

manipulations, the risks which arise do not fall chiefly on them.

To this is to be added, as of prime importance for the whole

question, that the manipulators have the advantage of being able,

in great part, to foresee the nature, magnitude, and incidence of

the risks which they create. Rightly seen, this, of course, goes

to say that the increased speculative risk due to the traffic in

vendible capital does not fall on that traffic, but on the

business enterprise engaged about the output of vendible goods.

The traffic in vendible capital is not without its speculative

risks, but the risks which it creates fall with relatively

greater weight upon the business men who are not immediately

concerned in this traffic. Indeed, so secure and lucrative is

this class of business, that it is chiefly out of gains accruing,

directly and indirectly, from such traffic in vendible capital

that the great modern fortunes are being accumulated; and both

the rate and the magnitude of these accumulations, whether taken

absolutely or relatively to the total increase of wealth, surpass

all recorded phenomena of their kind. Nothing so effective for

the accumulation of private wealth is known to the history of

human culture.

The aim and substantial significance of the "manipulations"

of vendible capital here spoken of is an ever recurring

recapitalization of the properties involved, whereby the

effective capitalization of the corporations whose securities are

the subject of the traffic is increased and decreased from time

to time. The fluctuations, or pulsations, of this effective

capitalization are shown by the market quotations of the

securities, as noted above.(28*) It is out of these variations in

capitalization that the gains of the traffic arise, and it is

also through the means of these variations of capitalization that

the business men engaged in this higher finance are enabled to

control the fortunes of the corporations and to effect their

strategic work of coalition and reorganization of business

enterprises. Hence this traffic in vendible capital is the

pivotal and dominant factor in the modern situation of business

and industry.(29*) It has been noted above that what may be

called the working capital on which this higher corporation

finance proceeds is made up, chiefly, of two elements: the

solvency (and consequent potential credit) of the men engaged,

and the "good-will" of these men. Both of these elements are of a

somewhat intangible and elusive character, resting, as they do,

somewhat indirectly and shiftily on elements already elsewhere

engaged in business enterprise. The solvency in question rests in

large part on the capital of the corporations whose

capitalization is subject to the fluctuations induced by the

traffic in vendible capital. It is therefore necessarily a

somewhat indeterminate and unstable magnitude. To this is to be

added the "floating capital" and banking capital at the disposal

of these men. If a common-sense view be taken of the business,

the good-will engaged must also be added to the assets. There is

involved a very considerable and very valuable body of good-will,

appertaining to the financiers engaged and to the financing firms

associated with them.(30*) This goodwill and this solvency is

capital, for the purpose in hand, as effectually as the good-will

and securities incorporated in the capitalization of any

corporation engaged in industrial business.

But hitherto this particular category of goodwill has not

been formally capitalized. There may be peculiar difficulties in

the way of reducing this good-will to the form of a fund,

expressing it in terms of a standard unit, and so converting it

into quotable common stock, as has been done with the

corresponding good-will of incorporated industrial enterprises.

So also as regards the body of solvency engaged, - the potential

credit, or credit capacity, of the promoters and financiers.

Perhaps this latter had best also be treated as an element of

good-will; it is difficult to handle under any other, more

tangible, conception. It may be difficult to standardize, fund,

and capitalize these unstable but highly efficient factors of

business enterprise; but the successful capitalization of

good-will and credit extensions in the case of the modern

industrial corporations argues that this difficulty should not be

insurmountable in case an urgent need, - that is to say, the

prospect of a profitably vendible result, - should press for a

formal capitalization of these peculiar elements of business

wealth. There can be no question, e.g., but that the good-will

and large solvency belonging to such a firm as J.P. Morgan and

Company for the purposes of this class of business enterprise are

an extremely valuable and substantial asset, as is also, and more

unequivocally, the good-will of the head of that firm. These

intangible assets, immaterial goods, should, in all consistency,

be reduced to standard units, funded, issued as common stock, and

so added to the statistical aggregate of the country's

capitalized wealth.

It is safe to affirm that this good-will of the great

reorganizer has in some measure entered in capitalized form into

the common stock of the United States Steel Corporation, as also

into that of some of the other great combinations that have

latterly been effected. The "good-will" of Mr Carnegie and his

lieutenants, as well as of many other large business men

connected with the steel industry, has also no doubt gone to

swell the capitalization of the great corporation. But good-will

on this higher level of business enterprise has a certain

character of inexhaustibility, so that its use and capitalization

in one corporation need not, and indeed does not, hinder or

diminish the extent to which it may be used and capitalized in

any other corporation.(31*) The case is analogous, though

scarcely similar, to that of the workmanlike or artistic skill of

a handicraftsman, or an artist, which may be embodied in a given

product without abating the degree of skill possessed by the

workman. Like other good-will, though perhaps in a higher degree

of sublimation, it is of a spiritual nature, such that, by virtue

of the ubiquity proper to spiritual bodies, the whole of it may

undividedly be present in every part of the various structures

which it has created. Indeed, the fact of such good-will having

been incorporated in capitalized form in the stock of any given

corporation seems rather to augment than to diminish the amount

at which it may advantageously be capitalized in the stock of the

next corporation into which it enters. It has also the

correlative spiritual attribute that it may imperceptibly and

inscrutably withdraw its animating force from any one of its

creatures without thereby altering the material circumstances of

the corporation which suffers such an intangible shrinkage of its

forces.

There can be no question but that the good-will of the

various great organizers and their financiering houses has

repeatedly been capitalized, probably to its full amount, in the

common stock of the various corporations which they have created;

but taken in the sense of an asset belonging to the financing

house as a corporation, it is not known that this item of

immaterial wealth has yet been formally capitalized and offered

in quotable shares on the market or included in the schedules of

personal property.(32*)

The sublimation of business capital that has been going

forward in recent times has grave consequences for the owners of

property as well as for the conduct of industry. In so far as

invested property is managed by the methods of modem corporation

finance, it is evident that the management is separated from the

ownership of the property, more and more widely as the scope of

corporation finance widens. The discretion, the management, lies

in the hands of the holders of the intangible forms of property;

and with the extension of corporation methods it is increasingly

true that this management, again, centres in the hands of those

greater business men who hold large blocks of these intangible

assets. The reach of a business man's discretionary control,

under corporation methods, is not proportioned simply to the

amount of his holdings. If his holdings are relatively small,

they give him virtually no discretion. Whereas if they are

relatively large, they may give him a business discretion of much

more than a proportionate reach. The effective reach of a

business man's discretion might be said to increase as the square

of his holdings; although this is to be taken as a suggestive

characterization rather than as an exact formula.

Among the holdings of industrial property that count in this

way toward control of the business situation, the intangible

assets (represented by common stock, good-will, and the like) are

chiefly of consequence. Hence follow these two results: the

fortunes of property owners are in large measure dependent on the

discretion of others the owners of intangible property; and the

management of the industrial equipment tends strongly to centre

in the hands of men who do not own the industrial equipment, and

who have only a remote interest in the efficient working of this

equipment. The property of those who own less, or who own only

material goods, is administered by those who own more, especially

of immaterial goods; and the material processes of industry are

under the control of men whose interest centres on an increased

value of the immaterial assets.(33*)

NOTES:

1. The distinction between business capital and "industrial

capital" or "capital goods" has been shown by Knies, Geld und

Credit, vol. I. ch. II. pp. 40-60. Distinctions having a very

similar erect in some bearings are to be found in Rodbertus

("private capital" and "national capital"), in Bohm-Bawerk

("acquisitive capital" and "productive capital," or "private

capital" and "social capital"), in Clark ("capital" and "capital

goods"). Similar distinctions are made by various writers to help

out the incompetency of the received definition of the term. The

merit of these distinctions does not concern the present inquiry,

since they are made for other purposes than that here aimed at.

The distinction made above is not an attempt to recast the

terminology of economic theory, but is simply an expedient for

present use. It amounts to an unqualified acceptance of the

concept (more or less well defined) which business men habitually

attach to the term "capital." Mr F.A. Fetter has latterly spoken

for the restriction of "capital," as a technical term,

practically to what is here called "business capital." Mr

Fetter's "capital concept," however, should probably not be taken

to cover intangible assets. The practical distinction is visible

in the testimony of various witnesses before the Industrial

Commission, as also in the special report on "Securities,"

Report, vol. XIII.

2. Even so late and competent a student of corporate capital as

J. von Korosi is bound by this antique preconception, and his

work has suffered in consequence. See Finanzielle Ergebnisse der

Actiengesellschaften, p. 3.

3. This state of the case is brought out, in a veiled manner, by

the well-known proposition, expounded in varying form by various

writers, that the cost of equipment on which capitalization must,

in theory, take place is the cost of reproduction of all valuable

items included, tangible and intangible.

4. "Nothing is more illusive and delusive than the idea that if a

corporation's stock be only paid in in money at the outset it is

therefore better off than one that has issued its stock for

property that could not be converted for one cent on the dollar.

The question is what assets the corporation has got at the time

of the particular transaction, and that can be ascertained only

by present inquiry." - Testimony of F.L. Stetson, Report of the

Industrial Commission, vol. I. p. 976. Cf. Meade, Trust Finance,

ch. XVI and XVIII.

5. Earning-capacity is practically accepted as the effective

basis of capitalization for corporate business concerns,

particularly for those whose securities are quoted on the market.

It is in the stock market that this effective capitalization

takes place. But the law does not recognize such a basis of

capitalization; nor are business men generally ready to adopt it

in set form, although they constantly have recourse to it, in

effect, in operations of investment and of credit extension. Cf.

Report of the Industrial Commission, vol. I. pp. 6, 17, 21 (Test.

F.B. Thurber); p. 967 (Test. F.L. Stetson); pp. 585-587 (Test.

H.H. Rogers); pp. 110-111, 124 (Test. H.O. Havemeyer); pp. 1021,

1032 (Test. J.W. Gates); pp. 1054-1055 (Test S. Dodd); vol. XIII.

pp. 287-288 (Test. H. Burn); p. 388 (Test. J. Morris); pp.

107-108 (Test. E.R. Chapman). See Quarterly Journal of Economics,

February 1903, pp. 344-345, "The Holyoke Water Case," for an

illustrative decision.

6. The advantages afforded their owners by these intangible

assets have latterly been discussed by economists under such

headings as "Rent" or "Quasi-Rent." These discussions, it is

believed, are of great theoretical weight. In business practice,

however, the items in question are treated as capital, which must

avail as an excuse for including them here in business Capital.

7. Compare Bohm-Bawerk's and Clark's distinctions between

"private" and "social" capital, and between "capital" and

"capital goods."

8. See Chapter III above.

9. On the books of the corporation it is, of course, carried as

an item of liability; as is the common stock; but that is a

technical expedient of accountancy, and does not touch the

substantial question.

10. See testimony of various witnesses on "Capitalization" before

the Industrial Commission, vols. I, IX, XIII.

11. As one of many illustrative cases, the Rubber Goods

Manufacturing Company may be taken as a typical instance of a

corporation organized in a conservative but up-to-date manner for

permanent success and stable value. Its authorized issue of stock

is $25,000,000 7 per cent cumulative preferred, and $25,000,000

common. The actual issue in 1901 was about $8,000,000 preferred

and $17,000,000 common, of which the preferred was presumed to

cover the value of the tangible assets. Another coalition

organized by the same promoter (Mr C.R. Flint), the American

Chicle Company, illustrates the same general feature. The

preferred stock of this company ($3,000,000) "in round numbers

was three times the amount of tangible assets," while the common

stock ($6,000,000) represents no tangible assets. The aggregate

capitalization is about nine times the tangible assets. The

witness says that this corporation has been proved by events to

be "on a conservative basis from the fact that the company has

paid 8 per cent on its common stock," which has been selling at

80. - Report of the Industrial Commission, vol. XIII. pp. 47, 50.

12. It may be argued that this identification of the common stock

with the intangible assets holds true in theory only, in the

sense that this is the view held by the business men who occupy

themselves with such matters; while in point of fact no

distinction of this nature between common and preferred stock is

or can practically be maintained after the stock has once found

its way into the market. It might seem, in other words, that when

the stock has once passed the stage of organization and gone into

the hands of the purchasers, each share represents nothing but an

undivided interest in the aggregate capitalization of the

concern, so that the particular item of wealth represented by a

given share or given form of security can no longer be

identified.

On the face of the situation such appears to be the case, but

there are facts which argue for the view set out above. It is,

e.g., well known that whenever circumstances arise which

immediately affect the value of the good-will of a corporation,

it is the quotations of the common stock that first and most

decidedly are affected. If the goodwill of the concern makes a

great and rapid gain, e.g. through manoeuvres which put it in a

position of monopoly or through changes in the goods market which

greatly increase the demand for the concern's product, and the

like, it is the quotation of the common stock that measures and

registers the advantage which thereby accrues to the concern, and

the market fluctuation of the common stock is likewise the

instrument by means of which manipulations are carried through

that affect these intangible assets. At the same time this rule

does not hold hard and fast, as is seen in case of a liquidation

when the capital of the concern may have shrunk to such

dimensions that the entire capital, including the intangible

assets, will no more than satisfy the claims represented by the

debentures. Still, in point of practical fact, the (theoretical)

preconception of businessmen that the common stock in some

intelligible sense covers the intangible assets is fairly borne

out by everyday experience, taken by and large.

A curious parallel might be traced between the current

endeavors of the business community to organize and manage the

industrial equipment on the basis of immaterial assets and the

medieval business perplexities and actions relative to loans on

interest. In both cases the business community has had to face

untried exigencies together with a popular, traditional prejudice

that discountenances the expedients by which these exigencies are

to be met. The medieval presumption was that the management of

productive goods and the profits accruing from their use must go

to their users. (Cf. Ashley, Economic History, vol. I. ch. III,

vol. II ch. VI; Endemann, Die nationalokonomische Grundsatze der

kanonistischen Lehre.) The modern presumption is that the

management of the equipment and the gains from such management

must vest in the owner. The modern exigencies decide that the

equipment must be managed by others than the owners and that

profits must largely accrue to those who financially manage the

concern. The expedient by which this result is sought to be

reached is the fiction of intangible assets and the impersonal,

irrevocable credit extension covered by the preferred stock. The

effect is to dissociate ownership from management. This is the

necessary outcome of a "credit economy" consistently and fully

carried through. The management of the material equipment of

industry is thrown into the hands of those who own the immaterial

wealth; that is to say, those who own the claim to manage the

equipment. The current prejudice which insists on management by

the owners is set aside by feigning that this claim has an

industrial value, and so capitalizing it on the basis of the

differential advantage which accrues to its holders.

13. See also a discussion by E.S. Meade, Quarterly Journal of

Economics, February 1902, pp. 217 et seq., of how "good-will" may

vary in magnitude, or even disappear, when a concern eaters a

larger coalition; also, on the same general head, W.F.

Willoughby," Integration of Industry in the United States,"

ibid., November 1902.

14. p. 113 above.

15. cap' = cap + cap/n > cap, in which cap' is the nominal

capital, as increased by the credit element cap/n.

16. mat' = mat + (1/n)(cap/n) > mat, in which mat' is the current

value of the material equipment,as increased (over mat) by the

competitive demand for equipment due to the credit element cap/n.

One of the substantial secondary benefits to be noted as flowing

from these modem business expedients is the effect of corporation

finance upon the aggregate nominal wealth of the community. A

given community, possessed of a given complement of material

wealth, is richer in capital if a large proportion of its

industrial equipment is capitalized and managed by corporation

methods, quite apart from any increase in the material items of

which the community is possessed. (Cf. Twelfth Census of the

United States, "Manufactures," pt. I. p. xcvi) Wealth may in this

way be increased (about twofold on an average), inexpensively, by

the simple expedient of incorporating the community's business

concerns in the form of joint-stock companies. The more highly

involved and the more widely extended the corporation

financiering is, the richer, in statistical terms of capital, is

the community, other things equal. Among these other things are

the material facts of the case.

17. The commodities bought and sold in the goods market are the

outcome of a process of production and are useful for a material

purpose; those bought and sold in the capital market are the

outcome of a process of valuation and are useful for purposes of

pecuniary gain.

18. Cf. Marx, Kapital (4th ed.) bk. I, ch. IV.

19. Effective capital = current market value of nominal capital =

presumptive earning capacity x purchase period, neglecting

fortuitous and incalculable items which may affect any given

case.

If nominal capital = cap, effective capital = cap', presumed

annual earnings = ea', and the purchase period of capitalized

property (years' purchase) = yp = 1/interest rate per annum, we

have cap <> cap' = ea' x yp = ea'/int.

This equation between cap' and ea' is disturbed by the

presence in any given case of variable factors which cannot be

included in the equation, but it remains true after all

qualification has been made that cap' = f(ea'/int).

20. Something of this kind is the usual ground of the obstinate

resistance which most business men oppose to publicity of

accounts. In lines of business, as, e.g. railroading, in which

accounts are readily and effectually sophisticated ("doctored"),

the objections to publicity are commonly less strenuous.

21. Cf., e.g., Eberstadt, Deutsche Kapitalismarkt.

22. The capital of any industrial concern under the "money

economy" is, of course, also vendible, but with relative

difficulty; while the readier vendibility of modern corporate

capital is so characteristic and consequential a factor in

business and contrasts so broadly with the old-fashioned business

methods that it may fairly be spoken of as vendibility par

excellence. The "holding company" is the mature development of

this traffic in vendible capital in industrial business.

23, It may be noted, by the way, that the question of the

turnover (spoken of on p. 95 above) becomes, under the

circumstances of the modern corporation finance, in great part a

question of the interval between the purchase and sale of the

capital engaged in industry on the one hand, and of the magnitude

of the discrepancy between actual and putative earning-capacity

on the other hand, rather than a question of the period of the

industrial process and the magnitude of the output and its price.

The formula there shown becomes: --

turnover = capital/time (actual earning capacity/n = putative

earning capacity - actual earning capacity)

in which capital is the amount of the operator's investment in

the concern's securities, the time is the interval between

purchase and sale of the securities, and the putative earning

capacity is taken to exceed the actual earning capacity by an

indeterminate fraction of the latter.

24. Cf. Chapter III above.

25, Cf. Chapter V above.

26. Cf. Emery, "Place of the Speculator in the Theory of

Distribution." Proceedings of the twelfth annual meeting of the

American Economic Association; also "Discussion" following Mr

Emery's paper.

27. Well shown in Mr Emery's paper cited above.

28. p. 154.

29. As is true of good-will and credit extensions generally, so

with respect to the good-will and credit strength of these

greater business men ; it affords a differential advantage and

gives a differential gain. In the traffic of corporation finance

this differential gain is thrown immediately into the form of

capital and so is added to the nominal capitalized wealth of the

community. What it gives to its holders in this capitalized form

is a claim to a proportionate share in the existing wealth. If

other things are supposed to remain the same (which may not be

the case), the claim so enforced by the great financiers on the

basis of good-will and credit extension deducts that much from

the wealth held by the rest, the previous holders, as counted in

terms of material wealth; as counted in term of money value, of

course, the holdings of previous holders do (or need) not suffer,

since the new claim take the form of an edition to the number of

capitalized value units, although the increased aggregate number

of value units constitutes a claim on the same aggregate mass of

wealth as before. The pro rata reduction of the material

magnitude of the several shares of wealth is not felt as an

impoverishment, because it does not take the form of a reduction

of the nominal value of the shares.

This capitalization of the gains arising from a differential

advantage results in a large "saving" and increase of capital.

The wealth so drawn in by the financiers (entrepreneurs) is

nearly all held as capital, very little of it being consumed in

current expenses of living. It has been cogently argued that the

profits of the undertakers is the chief and normal source of

capitalized savings in the modern situation, and the method here

indicated seem to be the method by which such saving is chiefly

effected. An extremely suggestive discussion of the undertaker's

gains in this connection occurs in a paper by L.V. Birck

("Driftsherrens Geviust"), read before the Danish Economic

Association, December 1901. More immediately to the point still

is V. Schou's discussion of Mr Birck's paper. (See

Nationalokonomisk Tidsskrift, January-February 1902, pp. 76,

78-80) J.B. Clark, in lectures hitherto unprinted, follows a line

of analysis somewhat closely parallel with Schou, though not

carried to quite the same length.

This process of combined recapitalization and saving may be

stated formally as follows: The initial value of the properties

submitted for coalition and recapitalization, cap, is in the

normal case augmented by the increment delta, making the

effective value of the properties = cap + delta, in effective

units, Uc. This augmented effective value of the properties =

Uc(cap + delta) is capitalized at a nominal value of cap' =

Un(cap + delta), in nominal units, Un, nominally equivalent to

Uc. In the recapitalization the number of units of capitalization

is increased by an element of intangible assets assigned the

owners on account of a presumed increase of earning-capacity due

to the coalition. This element of good-will due to coalition may

be called co. Further there is added the bonus of the promoter,

taken as a block of stock in the new capitalization, pro. Hence

Un(cap') = Un(cap + delta) = Un(cap + co + pro). Un (pro) = Un

(cap' - cap - co) = Un (delta - co) is evidently a secure gain to

the promoter of Uc(delta - co) , which is a fraction of the

effective value Uc(cap + delta). This is saved by him in the

capitalized form. The account of the former owners of the

properties will then stand as follows: Uc(cap + delta - pro) <>

Uc(cap) according as Uc delta <> Uc(pro). The nominal gain of the

owners, co, may or may not be a real gain according as the event

may prove that the promoter's bonus has not or has absorbed the

entire effective augmentation of value, delta, due to the

coalition ; it is therefore a problematical gain, which may or

may not, in the event, prove to be an effective element of

capitalized savings.

The constitution of delta will decide what is the ultimate

source of the savings effected by this transaction. If delta

consists entirely of economies of production, the capitalized

savings held by the promoter and former owners as a result of the

transaction represent new values added to, or saved to, the

aggregate wealth of the community. If delta consists entirely of

good-will in the shape of monopoly advantage, the saving is

effected at the cost of the community and for the benefit of the

promoter and owners; it is then an involuntary or subconscious

saving on the part of the community, whereby a part of the

community's wealth at large passes into the hands of the

recapitalized corporation. Where delta is made up of these two

constituents together, the result, as regards the present point,

should be plain without discussion. If, on the other hand, delta

= 0, so that cap' = cap, then the promoter's savings; pro, are

secured at the cost of the former owners; Uc(cap' - pro) = Uc(cap

+ (delta = 0) - pro) = Uc(cap - pro). Whereas if Uc(pro) =

Uc(delta), Uc(co) = 0, leaving the owners without effective

profit or loss in spite of any nominal increase of the

capitalization.

30. "Good-will" in this field of enterprise most frequently takes

the form of a large ability to help or hinder other financiers

and financing houses in any similar manoeuvres in which they may

be engaged, or an ability to put them in the way of lucrative

financing transactions. The guild of financiers is commonly split

up into more or less well-defined factions, each comprising an

extensive ramification of financing houses and financiers

furthering one another's endeavors under more or less settled

working arrangements. These working arrangements are a large part

of the financiers' "good-will."

31. This category of good-will stands in a relation to the

creation of vendible capital similar to that which the corporate

good-will of an industrial business concern bears to the creation

of vendible products.

32. Parenthetically it may be remarked that the failure to

capitalize such items of good-will is likely to involve a virtual

evasion of the tax on personal property, and may, therefore, be

questionable on moral grounds.

The case of J.P. Morgan and Company is, of course, not here

cited as being a unique or peculiar instance, but simply as a

typical and striking illustration of what happens and of what

might be accomplished in a number of large and very consequential

cases of the same class.

33. This dissociation of the business control from workmanlike

efficiency and from immediate contact with or ownership of the

industrial plant gives the existing situation a superficial

resemblance to the feudal system, in so far as touches the

immateriality of the captain's connections with the everyday life

and interests of the community of whose affairs he is master. It

gives a certain plausibility to the attempted interpretation of

latter-day economic developments in feudalistic terms. - See

Ghent, Our Benevolent Feudalism.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter 7

The Theory of Modern Welfare

Before business principles came to dominate everyday life the

common welfare, when it was not a question of peace and war,

turned on the ease and certainty with which enough of the means

of life could be supplied. Since business has become the central

and controlling interest, the question of welfare has become a

question of price. Under the old regime of handicraft and petty

trade, dearth (high prices) meant privation and might mean famine

and pestilence; under the new regime low prices commonly mean

privation and may on occasion mean famine. Under the old regime

the question was whether the community's work was adequate to

supply the community's needs; under the new regime that question

is not seriously entertained.

But the common welfare is in no less precarious a case. The

productive efficiency of modern industry has not done away with

the recurrence of hard times, or of privation for those classes

whose assured pecuniary position does not place them above the

chances of hard times. Distress may not be so extreme in modern

industrial communities, it does not readily reach the famine

mark; but such a degree of privation as is implied in the term

"hard times" recurs quite as freely in modern civilized countries

as among the industrially less efficient peoples on a lower level

of culture. The oscillation between good times and bad is as wide

and as frequent as ever, although the average level of material

well-being runs at a higher mark than was the case before the

machine industry came in.

This visible difference between the old order and the new is

closely dependent on the difference between the purposes that

guide the older scheme of economic life and those of the new.

Under the old order, industry, and even such trade as there was,

was a quest of livelihood; under the new order industry is

directed by the quest of profits. Formerly, therefore, times were

good or bad according as the industrial processes yielded a

sufficient or an insufficient output of the means of life.

Latterly times are good or bad according as the process of

business yields an adequate or inadequate rate of profits. The

controlling end is different in the present, and the question of

welfare turns on the degree of success with which this different

ulterior end is achieved. Prosperity now means, primarily,

business prosperity; whereas it used to mean industrial

sufficiency.

A theory of welfare which shall account for the phenomena of

prosperity and adversity under the modern economic order must,

accordingly, proceed on the circumstances which condition the

modern situation, and need not greatly concern itself with the

range of circumstances that made or marred the common welfare

under the older regime, before the age of machine industry and

business enterprise.(1*) Under the old order, when those in whose

hands lay the discretion in economic affairs looked to a

livelihood as the end of their endeavors, the welfare of the

community was regulated "by the skill, dexterity, and judgment

with which its labor was generally applied."(2*) What would mar

this common welfare was the occasionally disastrous act of God in

the way of unpropitious seasons and the like, or the act of man

in the way of war and untoward governmental exactions. Price

variations, except as conditioned by these untoward intrusive

agencies, had commonly neither a wide nor a profound effect upon

the even course of the community's welfare. This holds true, in a

general way, even after resort to the market had come to be a

fact of great importance in the life of large classes, both as an

outlet for their products and as a base of supplies of consumable

goods or of raw materials, - as in the better days of the

handicraft system.

Until the machine industry came forward, commerce (with its

handmaiden, banking) was the only branch of economic activity

that was in any sensible degree organized in a close and

comprehensive system of business relations. "Business" would then

mean "commerce," and little else. This was the only field in

which men habitually took account of their own economic

circumstances in terms of price rather than in terms of

livelihood. Price disturbances, even when they were of

considerable magnitude, seem to have had grave consequences only

in commerce, and to have passed over without being transmitted

much beyond the commercial houses and the fringe of occupations

immediately subsidiary to commercial business.

Crises, depressions, hard times, dull times, brisk times,

periods of speculative advance, "eras of prosperity," are

primarily phenomena of business; they are, in their origin and

primary incidence, phenomena of price disturbance, either of

decline or advance. It is only secondarily, through the mediation

of business traffic, that these matters involve the industrial

process or the livelihood of the community. They affect industry

because industry is managed on a business footing, in terms of

price and for the sake of profits. So long as business enterprise

habitually ran its course within commercial traffic proper, apart

from the industrial process as such, so long these recurring

periods of depression and exaltation began and ended within the

domain of commerce.(3*) The greatest field for business profits

is now afforded, not by commercial traffic in the stricter sense,

but by the industries engaged in producing goods and services for

the market. And the close-knit, far-reaching articulation of the

industrial processes in a balanced system, in which the

interstitial adjustments are made and kept in terms of price,

enables price disturbances to be transmitted throughout the

industrial community with such celerity and effect that a wave of

depression or exaltation passes over the whole community and

touches every class employed in industry within a few weeks. And

somewhat in the same measure as the several modern industrial

peoples are bound together by the business ties of the world

market, do these peoples also share in common any wave of

prosperity or depression which may initially fall upon any one

member of this business community of nations. Exceptions from

this rule, of course, are such periods of prosperity or

depression as result from local (material) accidents of the

seasons and the like, - accidents that may inflict upon one

community hardships which through the mediation of prices are

transmuted into gain for the other communities that are not

touched by the calamitous act of God to which the disturbance is

due.

The true, or what may be called the normal, crises,

depressions, and exaltations in the business world are not the

result of accidents, such as the failure of a crop. They come in

the regular course of business. The depression and the exaltation

are in a measure bound together. In the recent past, since

depression and exaltation have been normal features of the

situation, every strongly marked period of exaltation

(prosperity) has had its attendant period of depression; although

it does not seem to follow in the nature of things that a wave of

depression necessarily has its attendant reaction in the way of a

period of business exaltation. In the recent past - the last

twenty years or so - it has been by no means anomalous to have a

period of hard times, or even a fairly pronounced crisis, without

a wave of marked exaltation either preceding or following it in

such close sequence as conveniently to connect the two as action

and reaction. But it would be a matter of some perplexity to a

student of this class of phenomena to come upon a wave of marked

business exaltation (prosperity) that was not promptly followed

by a crisis or by a period of depression more or less pronounced

and prolonged. Indeed, as the organization of business has

approached more and more nearly to the relatively consummate

situation of to-day, - say during the last twenty years of the

nineteenth century, - periods of exaltation have, on the whole,

grown less pronounced and less frequent, whereas periods of

depression or "hard times" have grown more frequent and

prolonged, if not more pronounced. It might even be a tenable

generalization, though perhaps unnecessarily broad, to say that

for a couple of decades past the normal condition of industrial

business has been a mild but chronic state of depression, and

that any marked departure from commonplace dull times has

attracted attention as a particular case calling for a particular

explanation. The causes which have given rise to any one of the

more pronounced intervals of prosperity during the past two

decades are commonly not very difficult to trace; but it would be

a bootless quest to go out in search of special causes to which

to trace back each of the several periods of dull times that

account for the greater portion of the past quarter of a century.

Under the more fully developed business system as it has stood

during the close of the century dull times are, in a way, the

course of nature; whereas brisk times are an exceptional

invention of man or a rare bounty of Providence.

What current economic theory has to say on the common welfare

is more frequently found under the caption of crisis and

depression than in any other one connection. And the theory of

crisis and depression has, as is well known, been one of the less

happy passages in the economists' repertory of doctrines. It has

been customary to approach the problem from the side of the

industrial phenomena involved - the mechanical facts of

production and consumption; rather than from the side of business

enterprise - the phenomena of price, earnings, and

capitalization. This untoward accident of a false start is

probably accountable for the fact that no tenable theory of these

phenomena has yet been offered. The solutions attempted have

commonly proceeded by an analysis of industrial life apart from

business enterprise; that is to say, they have sought to explain

the occurrence of crises under that old-fashioned "natural

economy" or "money economy" under which crises did not normally

occur.(4*)

Taking as a point of departure the patent fact that crises,

depressions, and brisk times are in their first incidence

phenomena of business, of prices and capitalization, an

explanation of their appearance and disappearance, and of their

bearing upon the common welfare, may be sought by harking back to

those business principles that underlie modern capitalistic

enterprise. An analysis of the current, common-sense business

views of price and investment should indicate the genesis and

manner of growth of these mass movements of the business

community, as well as the character of those circumstances which

may further or inhibit such movements. Business depression and

exaltation are, at least in their first incidence, of the nature

of psychological fact, just as price movements are a

psychological phenomenon.

The everyday circumstances which condition the modern

business management of industry are sufficiently well known, and

they have already been reviewed in some detail in earlier

chapters; but they may perhaps advantageously be outlined again

in so far as they bear immediately on the question in hand.

(1) Industry is carried on by means of investment, which is

made with a view to pecuniary gain (the earnings). The business

man's endeavors in managing the affairs of the concern in which

investment has been made look to the same end. The gains are kept

account of as a percentage on the investment, and both they and

the industrial plant or process through the management of which

they are procured are counted in terms of money, and, indeed, in

no other terms. The plant or process (or the investment, whatever

form it takes) is capitalized on the basis of the gains which

accrue from it, and this capitalization proceeds on the ground

afforded by the current rate of interest, weighted by

consideration of any prospective change in the earning-capacity

of the concern. The management of the concern is effected by a

more or less intricate and multifarious sequence of bargains. The

decisive consideration at every point in this traffic of

investment and administration is the consideration of price in

one relation or another.

(2) The industry to which the business men in this way resort

as the ways and means of gain is of the nature of a mechanical

process, or it is some employment (as commerce or banking) that

is closely bound up with the mechanical industries. Broadly, it

is such industry as lies under the dominion of the machine, in

that it is involved in that comprehensive quasi-mechanical

process of modern industrial life that has been discussed in an

earlier chapter. This implication of each industry in a

comprehensive system, or this articulation with other branches of

industry, is of such a nature as to place each industrial concern

in dependence on one or more other branches of industry, from

which it draws its materials, appliances, etc., and to which it

disposes of its output; and these relations of dependence and

articulation form an endless sequence. That is to say, the

interindustrial relations into which any branch of industry

necessarily enters do not run to a final term in any direction;

within the process of industry at large there is no member that

stands in the relation of an initial term to any sequence of

processes. The ramification of industrial dependence is without

limits. The method of these relations of one concern to another,

or of one branch of industry to another, is that of bargaining,

contracts of purchase and sale. It is a pecuniary relation, in

the last resort a price relation, and the balance of this system

of interstitial relations is a price balance.

(3) These interstitial pecuniary relations, between the

several concerns or branches of industry that make up the

comprehensive industrial system at large, involve credit

relations of greater or less duration. The bargaining, by means

of which industry is managed and the interstitial relations

adjusted, takes the form of contracts for future performance. All

industrial concerns of appreciable size are constantly involved

in such contracts, which are, on an average, of considerable

magnitude and duration, and commonly extend in several

directions. These contracts may be of the nature of loans,

advances, outstanding accounts, engagements for future delivery

or future acceptance, but in the nature of the case they involve

credit obligations. Credit, whether under that name or under the

name of orders, contracts, accounts, and the like, is inseparable

from the management of modern industry in all that concerns the

working relations between businesses that are not under one

ownership, or between which the relations resting on separate

ownership have not been placed in abeyance by some such expedient

as lease, pool, syndicate, trust agreement, and the like. Credit

relations of one kind and another are also found expedient and

profitable at many points where their employment is not precisely

unavoidable. These extended credit relations are requisite to the

most expeditious and profitable conduct of business, and so to

the highest degree of success of the business. Under the regime

of the machine industry and modern business methods it is

probably fair to say that the use of credit, apart from loan

capital and leases, unavoidably goes to the extent required to

cover all goods in process of elaboration, from the raw material

to the finished goods, in so far as the goods change hands (in

point of ownership) during the process.

(4) The conduct of industry by competing business concerns

involves an extensive use of loan credit, as spoken of in Chapter

V above.

The four conditions recited are characteristic features of

that recent past during which brisk times, crises, and

depressions followed one another with some regularity as

incidents of the normal course of business.(5*) Certain

qualifications of this characterization are necessary to fit the

immediate present. These will be indicated presently.

In brisk times the use of credit is large; it may be as a

cause or an effect of the acceleration of business; most commonly

it seems to be both a cause and an effect. No appreciable

business acceleration takes place without an extension of credit,

at least in the form of contracts of purchase and sale for future

performance, if not also in the form of loans. In times of

protracted depression the use of credit seems on the whole to be

somewhat restricted, at least such is the current apprehension of

the case among business men. Still, it cannot confidently be said

that seasons of protracted depression are due solely to an

absence of credit relations or to an unwillingness to enter into

credit relations. A comparison of the course of interest rates,

e.g., does not warrant the generalization that the readiness with

which loans can be negotiated need be appreciably different in

brisk and in dull times.(6*) The readiness with which contracts

of purchase and sale are negotiated is appreciably greater in

brisk times than in times of depression; that, indeed, is the

obvious difference between the two.

Of the three phases of business activity, depression,

exaltation, and crisis, the last named has claimed the larger and

livelier attention from students, as it is also the more

picturesque phenomenon. An industrial crisis is a period of

liquidation, cancelment of credits, high discount rates, falling

prices and "forced sales," and shrinkage of values. It has as a

sequel, both severe and lasting, a shrinkage of capitalization

throughout the field affected by it. It leaves the business men

collectively poorer, in terms of money value; but the property

which they hold between them may not be appreciably smaller in

point of physical magnitude or of mechanical efficiency than it

was before the liquidation set in. It commonly also involves an

appreciable curtailment of industry, more severe than lasting;

but the effects which a crisis has in industry proper are

commonly not commensurate with its consequences in business or

with the importance attached to a crisis by the business

community. It does not commonly involve an appreciable

destruction of property or a large waste of the material articles

of wealth. It leaves the community at large poorer in point of

market values, but not necessarily in terms of the material means

of life. The shrinkage incident to a crisis is chiefly a

pecuniary, not a material, shrinkage; it takes place primarily in

the intangible items of wealth, secondarily in the price rating

of the tangible items. Apart from such rerating of wealth, the

most substantial immediate effect of a crisis is an extensive

redistribution of the ownership of the industrial equipment, as

noted in speaking of the use of credit.

The play of business exigencies which lead to such a period

of liquidation seems to run somewhat as follows: Many firms have

large bills payable falling due at near dates, at the same time

that they hold bills receivable also in large amounts. To meet

the demand of their creditors they call upon their debtors, who

may in their turn have bills receivable or may hold loans on

collateral. The initial move in the sequence of liquidation may

be the calling in of a call loan, or a call for additional

collateral on a call loan. At some point, earlier or later, in

the sequence of liabilities the demand falls upon the holder of a

loan on collateral which is, in the apprehension of his creditor,

insufficient to secure ready liquidation, either by a shifting of

the loan or by a sale of the collateral. The collateral is

commonly a block of securities representing capitalized wealth,

and the apprehension of the creator may be formulated as a doubt

of the conservative character of the effective capitalization on

which it rests. In other words, there is an apprehension that the

property represented by the collateral is over-capitalized, as

tested by the current quotations, or by the apprehended future

quotations, of the securities in question. The market

capitalization of the collateral has taken place on the basis of

high prices and brisk trade which prevail in such a period of

business exaltation as always precedes an acute crisis. When such

a call comes upon a given debtor, the call is passed along to the

debtors farther along in the sequence of liabilities, and the

sequence of liquidations thereby gets under way, with the effect,

notorious through unbroken experience, that the collateral all

along the line declines in the market. The crisis is thereby in

action, and the further consequences follow as a wellknown matter

of course. All this is familiar matter, known to business men and

students by common notoriety.

The immediate occasion of such a crisis, then, is that there

arises a practical discrepancy between the earlier effective

capitalization on which the collateral has been accepted by the

creditors, and the subsequent effective capitalization of the

same collateral shown by quotations and sales of the securities

on the market. But since the earlier capitalization commonly, in

the normal case, comes out of a period of business prosperity,

the point of inquiry is as to the ground and method of this

effective capitalization of collateral during the period of

prosperity that goes before a crisis, and this, in turn, involves

the question of the nature and causes of a period of prosperity.

The manner in which the capitalization of collateral, and

thereby the discrepancy between the putative and actual

earning-capacity of capital, is increased by loan credit during

an era of prosperity has been indicated in some detail in Chapter

V above. But it may serve to enforce the view there taken, if it

can be shown on similar lines that a period of prosperity will

bring on a like discrepancy between putative and actual

earning-capacity, and therefore between putative and eventual

capitalization of collateral, even independently of the expansion

effected by loan credit.

A period of prosperity is no more a matter of course than a

crisis. It has its beginning in some specific combination of

circumstances. It takes its rise from some traceable favorable

disturbance of the course of business. In such a period the

potent fact which serves as incentive to the acceleration of

business is a rise of prices. This rise of prices presently

becomes general as prosperity progresses and becomes an habitual

fact, but it takes its start from some specific initial

disturbance of prices. That is to say, prices rise first in some

one industry or line of industries.(7*)

By new investments, as well as by extending the operations of

the plants already employed, business men forthwith endeavor to

take advantage of such a rise. The endeavor to market an

increased supply of the things for which there is an enlarged

demand, brings on an increased demand and an advance of prices in

those lines of industry from which the concerns that had the

initial advantage draw their supplies. In part by actual increase

of demand and in part through a lively anticipation of an

advanced demand, aggressive business enterprise extends its

ventures and pushes up prices in remoter lines of industry. This

transmission of the favorable disturbance of business

(substantially a psychological phenomenon) follows very promptly

under modern conditions, so that any differential advantage that

accrues at the outset to the particular line of industry upon

which the initial disturbance falls is presently lost or greatly

lessened. In the meantime extensive contracts for future

performance are entered into in all directions, and this

extensive implication of the various lines of industry serves, of

itself, to maintain the prosperity for the time being. If the

original favorable disturbance of demand and prices, to which the

prosperity owes its rise, falls off to the earlier level of

demand, the era of prosperity has thereby a term set to its run;

although the date of its termination is always at some distance

in the future, beyond the time when the original demand has

ceased to act. The reason for this retardation, whereby the close

of an era of prosperity is always delayed, other things equal,

beyond the lapse of the cause from which it has arisen, is (1)

the habit of buoyancy, or speculative recklessness, which grows

up in any business community under such circumstances, (2) the

continued life of a considerable body of contracts for future

performance, which acts to keep up the demand for such things as

are required in order to fill these contracts and thereby keeps

up prices in so far. In general it may be said that after the

failure of the favorable price disturbance to which it is due, an

era of prosperity will continue for that (indefinite) further

period during which the fringe of outstanding contracts continues

to dominate the business situation. Some further, new contracts

will always continue to be made during this period, and some

unfilled contracts will always be left standing over when the

liquidation sets in; but, broadly speaking, the wind-up comes,

not when this body of outstanding contracts have run out or been

filled, but when the business of filling them and of filling the

orders to which they give rise no longer occupies the attention

of the business community in greater measure than the rest of

current business.

The run of business exigencies on which an era of prosperity

goes forward may be sketched in its general features somewhat as

follows: Increased demand and enhanced prices, with the large

contracts which follow from such a state of the market, increase

the prospective earnings of the several concerns engaged. These

prospective earnings may eventually be realized in full measure,

or they may turn out to have been putative earnings, only. that

is largely a question of how far in the future the liquidation

lies. The business effect of increased prospective earnings,

however, is much the same whether the event proves the

expectation of increased earnings to have been well grounded or

not. The expectation in either case leads the business men to bid

high for equipment and supplies. Thereby the effective (market)

capitalization is increased to answer to the increased

prospective earnings. This recapitalization of industrial

property, on the basis of heightened expectation, increases the

value of this property as collateral. The inflated property

becomes, in effect, collateral even without a formal extension of

credit in the way of loans; because, in effect, the contracts

entered into are a credit extension, and because the property of

the contracting parties is liable to be drawn into liquidation in

case of non-fulfilment of the contracts. But during the free

swing of that buoyant enterprise that characterizes an era of

prosperity contracts are entered into with a somewhat easy

scrutiny of the property values available to secure a contract.

So that as regards this point not only is the capitalization of

the industrial property inflated on the basis of expectation, but

in the making of contracts the margin of security is less closely

looked after than it is in the making of loans on collateral.

There results a discrepancy between the effective capitalization

during prosperity and the capitalization as it stood before the

prosperity set in, and the heightened capitalization becomes the

basis of an extensive ramification of credit in the way of

contracts (orders); at the same time the volume of loan credit,

in set form, is also greatly increased during an era of

prosperity.(8*)

An era of prosperity is an era of rising prices. When prices

cease to rise prosperity is on the wane, although it may not

promptly terminate at that juncture. This follows from the fact

that the putative increase of earnings on which prosperity rests

is in substance an apprehended differential gain in increased

selling price of the output over the expenses of production of

the output. Only so long as the selling price of the output

realizes such a differential gain over the expenses of

production, is the putative increased rate of earnings realized;

and so soon as such a differential advantage ceases, the era of

prosperity enters on its closing phase.

Such a differential advantage arises mainly from two causes:

(1) The lines of industry which are remote, industrially

speaking, from the point of initial disturbance, - from which,

that is to say, the lines of industry first and chiefly affected

by the rise draw supplies of one kind or another, - these remote

lines of industry are less promptly and less acutely affected by

the favorable disturbance of the price level; this retardation of

the disturbance affords the industries nearer the seat of

disturbance a differential advantage, which grows less the

farther removed the given enterprise is from the point of initial

disturbance.(9*) (2) The chief and most secure differential

advantage in the case is that due to the relatively slow advance

in the cost of labor during an era of prosperity. Wages

ordinarily are not advanced at all for a considerable period

after such an era of prosperity has set in; and so long as the

eventual advance of wages does not overtake the advance in prices

(which in the common run of cases it never does in full measure),

so long, of course, a differential gain in the selling price

accrues, other things equal, to virtually all business

enterprises engaged in the industries affected by the prosperity.

There are, further, certain (outlying) lines of industry, as,

e.g., farming, which may not be drawn into the movement in any

appreciable degree, and the price of supplies drawn from these

outlying industries need not rise; particularly they need not

advance in a degree proportionate to the advance in the prices of

the goods into which they enter as an element of their expenses

of production. To an uncertain but commonly appreciable extent

there is also a progressive cheapening of the processes of

production during such an era, and this cheapening, particularly

in so far as it affects the production of the goods contracted

for, as contrasted with the appliances of production, serves also

to maintain the differential advantage between the contracted

sale price and the expenses of production of the goods contracted

for.

In the ordinary course, however, the necessary expenses of

production presently overtake or nearly overtake the prospective

selling price of the output. The differential advantage, on which

business prosperity rests, then fails; the rate of earnings falls

off. the enhanced capitalization based on enhanced putative

earnings proves greater than the earnings realized or in prospect

on the basis of an enhanced scale of expenses of production; the

collateral consequently shrinks to a point where it will not

support the credit extension resting on it in the way of

outstanding contracts and loans; and liquidation ensues, after

the manner frequently set forth by those who have written on

these subjects.(10*)

At some point in the system of investment and business

extension will be found some branches of industry which have

gradually lost what differential advantage they started out with

when they entered on the era of prosperity; and if these are

involved in large contracts and undertakings which are carried

over into the phase of the movement at which this particular

branch of industry has ceased to have a differential advantage in

the price of its output over the cost of its supplies of material

or labor, then what may have been a conservative capitalization

of their holdings at an early phase, while their earning-capacity

rested on a large differential advantage, will become an

excessive capitalization after their earning-capacity has

declined through loss of their differential advantage. Some

branch or branches and some firms or class of firms necessarily

fall into this position in the course of a period of phenomenally

brisk times. A business concern so placed necessarily becomes a

debtor, and its liabilities necessarily become, in some degree,

bad debts. It is forced by circumstances to deliver its output at

prices which preclude its obtaining such a margin as its

extension of business presupposed. That is to say, its

capitalization becomes excessive through shrinkage of its

earning-capacity (as counted in terms of price). A concern of

this class which is a debtor is precluded from meeting its

obligations out of its current earnings; and if, as commonly

happens in an appreciable proportion of cases, its obligations

have already been augmented to the extent which its recent

earning-capacity would warrant, then the concern is insolvent for

the time being. If the claims against it are pressed, it has no

recourse hut liquidation through forced sales or bankruptcy.

Either expedient, if the case is one of considerable magnitude,

is disastrous to the balanced sequence of credit relations in

which the business community is involved. The system of credit

relations prevailing at such a time has grown up on the basis of

an earning-capacity transiently enhanced by a wave of

differential price advantage; and when this wave has passed, even

if it leaves prices higher all around, the differential advantage

of at least most concerns is past. The differential price

advantage has come to the several branches or firms in

succession, and has, in the typical case, successively left each

with an excessive capitalization, and has left many with a body

of liabilities out of proportion to their subsequent

earning-capacity. This situation may, evidently, come about in

this manner, even without lowering the aggregate (pecuniary)

earning-capacity of the business community to the level at which

it stood before the wave of prosperity set in.(11*)

But when such a situation has come, all that is required to

bring on the general catastrophe is that some considerable

creditor find out that the present earning-capacity of his debtor

will probably not warrant the capitalization on which his

collateral is appraised, In self-defence he must decline the

extension of a loan, and forced liquidation must follow. Such a

liquidation involves cutting under the ruling prices of products,

which lessens the profits of competing firms and throws them into

the class of insolvents, and so extends the readjustment of

capitalization.

The point of departure for the ensuing sequence of

liquidation is not infrequently the failure of some banking

house, but when this is the case it is pretty sure to be a bank

whose funds have been "tied up" in "unwise" loans to industrial

enterprises of the class spoken of above.(12*)

The abruptness of the recapitalization and of the

redistribution of ownership involved in a period of liquidation

may be greatly mitigated, and the incidence of the shrinkage of

values may be more equably distributed, by a judicious leniency

on the part of the creditors or by a well-advised and discreetly

weighted extension of credit by the government to certain

sections of the business community. Such measures of alleviation

were had, with happy effect, in the case of a recent stringency

which is sometimes spoken of as an averted crisis. But where the

situation answers the specifications recited above, in respect of

a large and widely prevalent discrepancy between earning-capacity

and capitalization, a drastic readjustment of values is

apparently unavoidable.

The point has already been adverted to once or twice that the

most substantial immediate outcome of such a liquidation as is

involved in a crisis is a redistribution of the ownership of the

property concerned in the liquidation, whereby creditors and

similar claimants gain at the expense of the solvent debtors.

Such being the case, it would logically follow that the large

creditors should see and follow up their advantage by concertedly

pushing the body of debtors to an abrupt liquidation, and so

realizing as large a gain as possible with the least practicable

delay, whenever the situation offers.

Such may be the logic of the circumstances, but such is not

the course practically taken by the large creditors under the

circumstances. For this there is more than one reason. It is not,

apparently, that human kindness overrules the creditors' impulse

to gain at the expense of the debtors. The ever recurring

object-lessons afforded by operations in the stock and money

market enforce the belief that when one business man gets the

advantage of another he will commonly use the advantage without

humanitarian reserve, if only the advantage is offered hIm in

terms which he can comprehend. But short-sightedness and lack of

insight beyond the conventional routine seem to be fairly

universal traits of the class of men who engage in the larger

business activities. So that, while it would be to the

unequivocal advantage of the large creditor, in point of material

gain, to draw in his debtor's property at such a reduced

valuation as comes in a period of abrupt liquidation, yet he does

not ordinarily see the matter in that light; because the

liquidation involves a shrinkage of the money value of the

property concerned, and the business man, creditor or debtor, is

not in the habit of looking beyond the money rating of the

property in question or beyond the most immediate future. The

conventional base line of business traffic, of course, is the

money value, and a recognition of the patent fact that this base

line wavers incontinently, and that it may on occasion shift very

abruptly, apparently exceeds the business man's practical powers

of comprehension. Money value is his habitual bench-mark, and he

holds to the conviction that this bench-mark is stable, in spite

of the facts.(13*)

It is true, cases occur, from time to time, of transactions

of some appreciable magnitude in which some degree of recognition

of this fact is met with. Some large business man may yet rise to

the requisite level of intelligence, and may comprehend and

unreservedly act upon the fact that the money base line of

business traffic at large is thoroughly unstable and may readily

be manipulated, and it will be worth going out of one's way to

see the phenomenal gains and the picturesque accompaniments of

such a man's work. Parenthetically it may be remarked that if

such a degree of insight should become the common property of the

business community, business traffic as now carried on might

conceivably collapse through loss of its base line. What is yet

lacking in order to such a consummation is perhaps nothing more

serious than that business capital be reduced to a somewhat more

thorough state of intangibility than it has yet attained, and

that does not seem a remote contingency.(14*)

There is, however, another and more constraining circumstance

which hinders the large creditors from wilfully pushing the

debtors to a reckoning when things are ripe for liquidation. As

was indicated above, the sequence of credit relations in an era

of prosperity is endlessly ramified through the business

community; whereby it happens that very few creditors are not

also debtors, or stand in such relation to debtors as would

involve them in some loss, even if this loss should not be

commensurate with their eventual gain at the cost of other

debtors. This circumstance by itself has a strong deterrent

effect, and when taken in connection with what was said above of

the habitual inability of the men in business to appreciate the

instability of money values, it is probably sufficient to explain

the apparently shortsighted conduct of those large creditors to

seek to mitigate the severity of liquidation when the liquidation

has come due.

The account here offered of the "method" of crises and eras

of prosperity does not differ greatly from accounts usually met

with, except in explaining these phenomena as primarily phenomena

of business rather than of industry. The disturbances of the

mechanical processes of industry, which are a conspicuous feature

of any period of crisis, follow from the disturbance set up in

the pecuniary traffic instead of leading up to the latter. While

industry and business stand in a relation of mutual cause and

effect, in this as in other cases, the initiative in such a

movement belongs with the business traffic rather than with the

industrial processes.

Industry is controlled by business exigencies and is carried

on for business ends. The effects of a wide disturbance in

business, therefore, reach the industrial processes pretty

directly, and the consequences, in the way of an expansion or

curtailment of industrial activity and an enlarged or shortened

output of product, are, of course, both immediate and important.

As a primary effect, on the industrial side, of an era of

prosperity, the community gains greatly in aggregate material

wealth. The gain in material wealth, of course, is not equably

distributed; most of it goes to the larger business men,

eventually in great part to those who come out of the subsequent

liquidation on the credit side. To some extent this aggregate

material gain is offset by the unavoidable waste incident to the

stagnation that attends upon an era of prosperity. It is further

offset by the fact that good times carry with them an

exceptionally wasteful expenditure in current consumption. Also,

the usual and more effectual impetus to an era of prosperity,

when it is not an inflation of the currency, is some form of

wasteful expenditure, as, e.g., a sustained war demand or the

demand due to the increase of armaments, naval and military, or

again, such an interference with the course of business as is

wrought by a differentially protective tariff. The later history

of America and Germany illustrates both these methods of

procuring an era of prosperity. These methods, it will be

noticed, are, in their primary incidence, of the nature of a

waste of industrial output or energy; but the prosperity achieved

is, none the less, to be recognized as a beneficial outcome in

point of heightened industrial activity as well as in point of

increased comfort for the industrial classes.

To the workmen engaged in industry, particularly, substantial

benefits accrue from an era of prosperity. These benefits come,

not in the way of larger returns for a given amount of work, but

more work, fuller employment, at about the earlier rate of pay.

To the workmen it often means a very substantial gain if they can

get a fuller livelihood by working harder or longer, and an era

of prosperity gives them a chance of this kind. Gradually,

however, as prosperity - that is to say, the advancing price

level rises and spreads, the increased cost of living neutralizes

the gain due to fuller employment, and after the era of

prosperity has been under way for some time the gain in the

amount of work obtainable is likely to be fairly offset by the

increased cost of living. As noted above, much of the business

advantage gained in an era of prosperity is due to the fact that

wages advance more tardily than the prices of goods. An era of

prosperity does not commonly bring an increase of wages until the

era is about to close. The advance of wages in such a case is not

only a symptom indicating. that the season of prosperity is

passing, but it is a business factor which must by its own proper

effect close the season of prosperity as soon as the advance in

wages becomes somewhat general. Increasing wages cut away the

securest ground of that differential price advantage on which an

era of prosperity runs.

Periods of crisis or of prosperity are, after all, relatively

simple phenomena with strongly marked features, and a passable

explanation of them is correspondingly easy. They have also the

ad vantage of having received much attention at the hands of the

students of economic history. On the other hand, protracted

depression, not traceable to widespread hardship or calamity

arising from circumstances outside the range of business

transactions, is a relatively new and untried subject for

economic theory. Newer, more obscure. with less pronounced

features and less definite limits than movements of speculative

advance or speculative crises, this phenomenon has to a less

extent engaged the steady attention of students. An inquiry into

the life history and the causes and effects of depression, from

the point of view of a theory of business, may therefore scarcely

be expected to yield concise or secure conclusions.

Since industry waits upon business, it is a matter of course

that industrial depression is primarily a depression in business.

It is in business that depression is felt, since it is on the

business side of economic activity that the seat of economic

sensibility may be said to lie; it is also in business

(pecuniary) terms that the depression is measured whenever a

measure or estimate of the matter is attempted. In so far as

there is an attendant derangement of the mechanical processes and

of the mechanical articulation of processes in industry, the

derangement follows from the pecuniary exigencies of business.

Depression and industrial stagnation follow only in case the

pecuniary exigencies of the situation are of such a character as

to affect the traffic of the business community in an inhibitory

way. But business is the quest of profits, and an inhibition of

this quest must touch the seat of its vital motives. Industrial

depression means that the business men engaged do not see their

way to derive a satisfactory gain from letting the industrial

process go forward on the lines and in the volume for which the

material equipment of industry is designed. It is not worth their

while, and it might even work them pecuniary harm. Commonly their

apprehension of the discrepancy which forbids an aggressive

pursuit of industrial business is expressed by the phrase

"overproduction." An alternative phrase, intended to cover the

same concept, but less frequently employed, is

"underconsumption."(15*)

The controversial question as to the tenability of any given

"overproduction" doctrine may, for the present purpose, be left

on one side; it lies outside the theory of business and it has no

merits or demerits for the purposes of a theory of business. The

point of interest here is rather the ground of its acceptation

among business men and the meaning which this notion has for

them; that is to say, it is chiefly of interest here to inquire

into the habits of thought which give cogency and effect to the

dogma of "overproduction" as practically held by the body of

business men, - what it practically means, why the dogma is held,

and what is its effect on the course of business enterprise.

"Overproduction," or "underconsumption," as it is met with in

the views of business men, is neither a vacant dogma nor a shifty

apology wherewith to cover their own delinquencies, but a very

concretely real state of affairs. It is a state of affairs that

prevails when business is persistently dull; and the concept

covered by the term comprises the sufficient cause of the

dulness, in the apprehension of the business community, even

though they may not always speak of the difficulty by that name.

It may be worth while, even at the risk of tedium, to point out

that this concept of "overproduction" applies, not to the

material, mechanical bearing of the situation, but to its

pecuniary bearing. The notion is never seriously entertained that

there is or may be an embarrassing excess of goods, or of the

appliances for their production, above what would be of some

human use if the business situation permitted them to be turned

to use.

(1) The supply of consumable goods is, practically, never

greater than the community's capacity for consuming them. An

embarrassing excess in any line is practically a remote

contingency at the most.(16*) There are many eloquent passages in

the economic manuals which may be called in witness of this

truism, where much pains is taken to show that human wants are,

in the nature of the case, indefinitely extensible. Nothing

stands in the way, we are told, but "difficulty of attainment" of

the goods with which to satisfy these wants. (2) In times of

depression, or "hard times," there is, under the modern

industrial system at least, no overproduction in the sense of a

production so large as to overtax the working capacity of the

industrial appliances and processes employed, nor so large, even,

as to overtax the normal powers of the force of workmen or

require them to work overtime and holidays. Quite the contrary.

That sort of thing happens only in brisk times, when there is no

overproduction. Seriously to recite such platitudes as these may

seem like a trifling with the patience of the printer, or it may

be taken for a light-headed excess of "wissenschaftlicher

Methode"; but these two formulations appear to cover all the

conceivable ways in which overproduction may occur, so long as

the term is construed from the point of view of the mechanical

facts of the case. Seen from this side a period of depression is

a period of underproduction; mills tun on half time or none, and

the supply of goods that finds its way into the hands of

consumers is sensibly scant for the demands of comfort.

The difficulty is, of course, a pecuniary one, and the phrase

is used by business men in that pecuniary sense in which it has

an immediate bearing on business. "Excessive competition" is an

alternative phrase. There is an excess of goods, or of the means

of producing them, above what is expedient on pecuniary grounds,

- above what there is an effective demand for at prices that will

repay the cost of production of the goods and leave something

appreciable over as a profit. It is a question of prices and

earnings. The difficulty is that not enough of a product can be

disposed of at fair prices to warrant the running of the mills at

their full capacity, or running them at a rate near enough to

their capacity to yield a fair profit. Or, to turn the

proposition about, as business men are in the habit of doing,

there is more of an output offered than will be carried off at a

fair price, such a price as will afford fair or ordinary profits

on the investment and the running expenses. There is too large a

productive capacity; there are, too many competitive producers

and too much industrial apparatus to supply the market at

reasonable prices. The matter reduces itself to a question of

fair prices and ordinary profits.(17*)

If there is a large volume of outstanding credit obligations,

that will complicate the situation. There is always a

considerable amount of interest bearing securities outstanding,

and the claims of these securities have to be satisfied before

dividends can be paid on stock, or before profits accrue to

industrial ventures which have issued the Securities. These fixed

charges, together with others of a like kind, narrow the margin

from which profits are derived and increase the handicap which a

season of dull times brings to the business men in charge of

industry. At the same time fixed charges preclude shutting down,

except at a sure and considerable loss. The business men involved

are constrained to go on, and in the absence of wide combinations

in industry they are constrained to go on at such competitive

prices as to preclude reasonable profits.

The question of fair prices and reasonable profits has some

reference to current rates of interest. A "fair" rate of profits

is such a rate as bears a reasonable relation to the current rate

of interest, although this relation of profits to interest rates

does not appear to be a strict one. Still, there undoubtedly is

some reference to the current rate of interest as a sort of zero

line to which profits should not decline. New investments are

made on the basis of current rates of interest and with a view to

securing the differential gain promised by the excess of

prospective profits over interest rates.

In a period of depression the aggregate industrial equipment

is, notoriously, not running at its full capacity; there are many

idle and half-idle plants and many idle workmen. The concerns in

question find themselves unable to do a full run of business at

reasonable profits. Still, unless the depression is of

exceptionally short duration, there is always some new investment

going on. More or less of new capital continues to find its way

into industrial business in competition with the concerns that

are already in the field.(18*) In case of a protracted depression

the aggregate of new investments so made may, in the course of

years, amount to a very considerable addition to the industrial

outfit, and the production of the new establishments may very

appreciably increase the aggregate output. Indeed, the output of

the new establishments is a notable factor in swelling the supply

and keeping down prices. But the new investments made during the

depression are profitable, at least at the start. Or even if this

should be questioned when stated in this broad way, it will at

least hold true that they are commonly entered upon with a

well-advised expectation of their being profitable if the

situation does not materially change between the time when the

new venture was entered upon and the time when the new equipment

has got under way. If the interval between the inception of the

new enterprise and its completion is a long one, the situation

may so change in the meantime as to leave it unprofitable even if

it has been conservatively planned. There are also, of course,

fraudulent enterprises which are not expected by their promoters

to pay a profit on the investment; and there are probably, also,

always some ventures entered upon during dull times with a view

to being beforehand in preparation for better times. But after

all has been said in qualification of the main proposition, it

remains true that some new investment is going on with a

well-advised expectation of reasonable profits on the basis of

current costs, prices, and rates of interest.(19*) The rate of

interest in times of depression may be unsatisfactory to lenders;

it may be discouraging by comparison with the customary range of

interest rates during better times. Still, the obstacle to

business is not to be sought in an effectual discouragement of

lenders, for in point of fact money is readily to be had on good

security during any protracted depression.(20*)

There is also the fact that investment is continually going

on, which argues that the difficulty is neither that capital

cannot be found for investment, nor that investment has no

prospect of reasonable profits. Practically, no exceptional

amount of fluent funds is withheld from the market, - except in

time of panic, which is another matter. It may be added that the

rate of interest need not be notably low in time of depression,

just as, on the other hand, a period of business exaltation is

not uniformly accompanied by a notably high rate of interest.

But a low or declining rate of interest is effective in the

way of depressing the business situation, even though a

depression may go on without it. The line of its bearing upon

business depression, or at least one line, is as follows:

Established business concerns (particularly corporations) engaged

in industry have some appreciable fixed (interest) charges to

meet - on leases, mortgages, and interest-bearing securities

(preferred stock and bonds). These outstanding obligations and

securities may have been negotiated, "floated," at an earlier

period of higher interest rates and higher profits, or they may

have been carried over through a period of higher interest rates.

In the former case these interest charges are excessively high as

compared with the present capitalized value of the property on

which they rest, computing the capitalization on the basis of the

present cost of replacing this property and the present interest

charge which this cost of replacement would bear. In the latter

case the original capitalization of the corresponding items of

property will have undergone a practical (effective)

recapitalization at a lower figure to correspond with the higher

rate of interest prevalent during the interval in question; and

in the subsequent period of low interest, the fixed charge on

this recapitalization is excessively high as compared with the

current effective capitalization of the property. The liabilities

are excessive, in respect of their interest charges, as compared

with the present earning-capacity of the property represented by

them.(21*)

What gives effect to this drawback for the business

enterprises which have such fixed interest charges to meet is the

fact that the new investments, and those concerns that have gone

into bankruptcy or receivers' hands, come into competition with

the old. These new or rejuvenated concerns are not committed to a

scale of fixed charges carried over from a higher interest level;

and these are therefore carrying only such interest charges as

the current effective capitalization of their property will

warrant, whether effective capitalization be taken to mean cost

of production of the equipment, earning-capacity of the concern,

or market quotation of its securities. These unincumbered

competitors are presumed to be making reasonable profits at

current prices, and their presence in the competitive market

therefore precludes an advance of prices to such a scale as would

afford a reasonable profit to the other establishments after

paying their interest charges on what is, in effect,

over-capitalized property.

This tentative explanation of depression applies only so far

as the period of depression is a time of relatively low rates of

interest. But depression does not uniformly coincide with low

interest rates; besides which, there are other facts in the case

which limit the applicability of the explanation formulated

above. To explain protracted depression, e.g., this line of

argument would be convincing only on the supposition of a

progressively falling rate of interest, - a condition not

commonly met with in a protracted period of depression.

But this explanation, applicable within a limited range of

the phenomena that make up a period of depression, points the way

to another class of considerations that go far toward explaining

the rest. It appears that the phase of the difficulty covered by

this explanation is traceable to a discrepancy between the

accepted capitalization, the interest charges, and the

earning-capacity. And it appears equally plain that the only

remedy applicable to the case (barring a speculative exaltation

of business) is a recapitalization of the concerns affected on a

lower basis, to fit the lowered cost of production of the

equipment and its lowered earning-capacity. But under existing

conditions of law such a remedy cannot be applied to the interest

bearing securities, - except by process of insolvency, - and it

is very reluctantly applied to other capitalized wealth; besides

which it is, practically, very difficult to effect such an avowed

recapitalization as applied to the stock of incorporated

companies, particularly in the case of those whose stock is

ostensibly the capitalized value of their plant.

Such a readjustment of nominal value to actual value as shown

by the facts of earning-capacity is continually going on, in some

measure; but it does not cover the entire range of facts

involved, and it is nearly always of the nature of a reluctant

concession, following only after the need of it has become

somewhat pressing. It can, therefore, in the common run of cases,

not catch up with the progressive difficulty which it is designed

to meet, in so far as the difficulty is of a progressive

character.

A discrepancy between accepted capitalization and current

earning-capacity, similar to the discrepancy discussed above but

of a progressive character, arises under modern conditions apart

from a fall in the rate of interest. The discrepancy pointed out

and provisionally disposed of above, due to a fall in interest

rates, is a discrepancy between the nominal value (accepted

capitalization) of the older establishments, computed on their

earlier earning-capacity or on the original cost of their

equipment, on the one hand, and their present actual value on the

other hand, computed on their current earning-capacity in

competition with rivals that have the advantage of a lower cost

of equipment, or, in other words, a lower interest charge per

unit of earning-capacity. Under the regime of the later, more

fully developed machine production, a discrepancy having a

similar effect arises out of a persistent divergence between the

past cost of production of a given equipment and the current cost

of a like or equivalent equipment at any subsequent date, -

supposing that there intervenes no inflation of prices and no

extraneous cause making for a speculative advance.(22*)

Suppose prices of finished goods to be stable or to vary by

inconsequential fluctuations, negligible for purposes of the

argument, and suppose the rate of interest to be in a similarly

negligible position. In other words, suppose such a condition as

the business community would recognize as ordinary, normal,

sound, without ground for pronounced hopes or fears. Under modern

circumstances, dominated as the modern situation is by the

machine industry, such a state of affairs is unstable, even apart

from any disturbance of an extraneous kind. It is unstable by

virtue of the forces at work in its own process, and these

forces, on the whole, make for a progressive change in. the

direction of depression.

It has appeared above that the depressing effect which a

relatively low (declining) rate of interest has upon industrial

business is due to its setting up a discrepancy between the

accepted capitalization of older establishments and the cost of

new establishments of an equivalent earning-capacity. Now, under

the circumstances of the more fully developed machine industry,

such as it has stood for a couple of decades past, a similar

discrepancy results from the gradual but uninterrupted

progressive improvements of industrial processes. "The state of

the industrial arts," as the older economists are in the habit of

calling it, is no longer to be conceived as stationary, even for

the time being. No "statical" theory of the industrial arts or of

business prosperity is tenable, even for the purposes of a

"statical" theory of the industrial situation. Progressively

increasing efficiency of the processes in use is a pervading

trait of the industrial situation. No two successive years are

now on the same, or virtually the same, plane in respect of the

efficiency of the industrial arts; indeed, the "period of

production" can no longer safely be construed to begin and end on

the same level in this respect. At the same time the

progressively wider and more close-knit articulation of the

several industries in a comprehensive process is also going

forward, and this also affects all branches of industrial

business in some degree and in the same direction, as will appear

presently.

The items of the equipment (plant, materials, and in a

measure even good-will) in which any industrial enterprise

invests, and by the use of which the business men in industry

turn out their output of vendible goods, are themselves products

of the machine industry. Machine processes, ever increasing in

efficiency, turn out the mechanical appliances and materials with

which the processes are carried on, at an ever decreasing cost;

so that at each successive step the result is a process having a

higher efficiency at a lower cost.(23*) This is now no longer a

sporadic effect of ingenious contrivances having a local and

limited application, to be handled as trade secrets and exploited

as an enduring differential advantage.

The cost of production of "capital goods" is steadily and

progressively lowered, as counted in terms of the processes

involved in their production. In a competitive market this is

reflected, with greater or less promptitude, in the prices of

such capital goods to all buyers. But the buyers whose purposes

this lower scale of prices particularly subserves are chiefly the

new investors who go into business in the way of new industrial

establishments or extensions of the old. Each new venture or

extension goes into the competitive traffic of producing and

selling any line of staple goods with a differential advantage,

as against those that have gone before it, in the way of a lower

scale of costs. A successively smaller aggregate value of new

equipment will turn out a given volume of vendible product. In so

far as there is no collusive control of the output or the prices,

this means that the newcomers will cut under the scale of prices

at which their predecessors have been content to supply the

goods. The run of competitive prices is lowered; which means that

at the new competitive prices, and with their output remaining on

its old footing as regards expenses of production, the older

establishments and processes will no longer yield returns

commensurate with the old accepted capitalization.(24*) From the

inherent character of the machine industry itself, therefore, it

follows that the earning-capacity of any industrial enterprise

enters on a decline from the outset, and that its capitalization,

based on its initial putative earning-capacity, grows

progressively antiquated from the start. The efficiency of the

machine process in the "instrumental industries" sets up a

discrepancy between cost and capitalization. So that a

progressive readjustment of capitalization to correspond with the

lowered earning-capacity is required by the nature of the case It

is also, in the nature of the case, impracticable.

In so far as the process of investment and business

management involves the use of credit, in the way of

interest-bearing securities or loans equivalent to such

securities, this element of credit retards the readjustment by

force of the fixed charges which it involves. This retardation

(aided as it is by the reluctance of business men to lower their

capitalization) is of sufficient effect to hinder

recapitalization, on the whole, from overtaking the progressive

need of it, with the result that a fair or "ordinary" rate of

profits on industrial investments is not permanently attainable

in the field of open competition. In order that the rate of

interest should effectually further business depression in this

way, therefore, it is not necessary that the rate should rise or

fall, or that it should be relatively high or low, or th at it

should be uniform over the field, but only that there should be a

rate of interest in each case, and that there should be some

appreciable volume of credit involved in industrial investments.

Credit is, in fact, a ubiquitous factor in modern industrial

business, and its effects in the way indicated are therefore to

be counted in as a constant force in the situation.

However, even apart from the presence of this ubiquitous

credit element, a similar effect would probably result from the

progressive enhancement of industrial efficiency when this

enhancement proceeds at such a rate as has been the case for some

time past. As has been shown in an earlier chapter, business men

keep account of their wealth, their outgo and their income, in

terms of money value, not in terms of mechanical serviceability

or of consumptive effect. Business traffic and business outcome

are standardized in terms of the money unit, while the industrial

process and its output are standardized in terms of physical

measurements (mechanical efficiency). In the current habits and

conventions of the business community, the unit of money is

accepted and dealt with as a standard measure. The stability of

the standard unit cannot be effectually questioned within the

scope of business traffic. According to the practical metaphysics

of the business community, the money unit is an invariable

magnitude, whatever may be true of it in fact. A man imbued with

these business metaphysics and not given to fine-spun reflection,

as business men commonly are not, is richer or poorer in his own

apprehension, according as his balance sheet shows a greater or

less number of these standard units of value. Investment,

expenses, vendible output, earnings, fixed charges, and

capitalization run in terms of this value unit. A reduction of

earnings or of capitalization, as rated in terms of the value

unit, is felt as an impoverishment. The reduction of

capitalization in these terms is, therefore, a hardship, which is

only reluctantly and tardily submitted to, even if it carries no

hardship in the way of a reduced command over the material means

of production, of life, or of comfort. A business man's rating in

the business community likewise rests on the pecuniary magnitude

of his holdings and his transactions, not on the mechanical

serviceability of his establishment or his output; and this

business rating is a large part of the business man's everyday

ambition. An enhancement of it is a source of secure

gratification and self-respect, and a reduction of it has a very

substantial contrary effect.(25*) A reduction of the pecuniary

showing is submitted to only reluctantly and tardily, after it

has become unavoidable, and only to the least feasible extent.

But under conditions, such as now prevail, which involve the

requirement of a progressive rerating of this kind, this

reluctant concession never overtakes the need of readjustment, -

and the discrepancy between capitalization and earning-capacity

is therefore chronic so long as no extraneous circumstances come

in temporarily to set aside the trend of business affairs in this

respect. It may, therefore, be said, on the basis of this view,

that chronic depression, more or less pronounced, is normal to

business under the fully developed regime of the machine

industry.(26*)

This deplorable trend given to business by the excessive

prevalence and efficiency of the machine industry can, however,

be set aside by several factors more or less extraneous to the

industrial system proper. Even within the mechanical system of

industry there is at least one factor of some consequence that

consistently acts to mitigate the trend indicated, and that may

even put it in abeyance from time to time. As has been pointed

out above, questions of business are fundamentally questions of

price. A decline of prices which widely touches business

interests brings depression. Conversely, an appreciable advance

in prices, from whatever cause, means improvement in business.

Such an advance in prices may come of a speculative movement;

which in turn may arise from a variety of circumstances, for the

most part circumstances extraneous to the industrial process. For

the present, however, the question of a speculative movement is

best left on one side. Another factor touches the case more

intimately. As has more than once been the case, prices may be

advanced through a freer supply of the precious metals, or by an

inflation of the currency, or a more facile use of credit

instruments as a subsidiary currency mechanism. Now, the growing

efficiency of industry has an effect in lowering the (material)

cost of production of the precious metals and so increasing the

ease with which they are supplied, after the same manner as it

affects the supply of goods for industrial or consumptive use.

But the increased supply of the precious metals has, of course,

an effect upon prices contrary to that exerted by the increasing

supply of goods. In so far as this effect is had, it acts to

correct or mitigate the trend of business toward chronic

depression.(27*)

But certain circumstances come in to qualify the salutary

effect of a lowered cost of the precious metals. Improvements in

the industrial processes affect the (industrial) cost of

production of the precious metals in a less degree than the cost

of other goods; at least, such seems to have been the case

recently. But beyond this, and of graver consequence, is a

peculiarity affecting the value of the money metals. The annual

product of the money metals is not annually consumed, nor nearly.

The use of them as money does not consume them except

incidentally and very slowly. The mass of these metals in hand at

any given time is very considerable and is relatively

imperishable, so that the annual accretion is but a small

fraction of the aggregate supply. The lowered cost of the annual

supply has therefore but a relatively slight effect upon the

aggregate value of the available supply.

The case is different as regards the annual output of

vendible products, whether for industrial or consumptive use. In

this case, and particularly as regards this matter of new

Investments and extensions of Industrial equipment, the annual

output counts for by far the greater factor in making the current

value of the available supply, if indeed it is not to be regarded

as substantially the only factor that comes in question here.

Accordingly, it is only under very exceptional circumstances, at

times when the precious metals are supplied with extraordinary

freedom, that the in creased output of these metals can offset

the trend of business toward depression. Ordinarily this factor

can count for no more than a mitigation of the "tendency of

profits to a minimum." And even this mitigating effect, it may be

remarked, appears to be of less radical consequence for the

general situation of business now than it was during the earlier

phases of the machine industry's regime. The most telling effect

of an increased supply of the precious metals seems to be the

incitement which it gives to speculative inflation.(28*)

It will be noted that the explanation here offered of

depression makes it a malady of the affections. The discrepancy

which discourages business men is a discrepancy between that

nominal capitalization which they have set their hearts upon

through habituation in the immediate past and that actual

capitalizable value of their property which its current

earning-capacity will warrant. But where the preconceptions of

the business men engaged have, as commonly happens, in great part

been fixed and legalized in the form of interest-bearing

securities, this malady of the affections becomes extremely

difficult to remedy, even though it be true that these legalized

affections, preconceptions, or what not, centre upon the

metaphysical stability of the money unit.

But while it is true that depression is primarily a business

difficulty and rests on emotional grounds, that does not hinder

its having grave consequences for industry and for the material

welfare of the community outside the range of business interests.

Business enterprise, it is true, proceeds on metaphysical grounds

and is swayed by considerations of nominal wealth rather than by

considerations of material serviceability; but, none the less,

business enterprise and business metaphysics control the course

of industry.

Dull times in business means dull times in industry, of

course. But a caution is necessary on this head. The yearly

output does not usually vary extremely between brisk and dull

times, except as measured in price. As measured in material terms

the discrepancy in the volume of output between brisk and dull

times is much less. The gross output as measured by weight and

tale is less in dull than in brisk times, other things equal; but

the deficiency as measured in these terms is much less than the

price returns would indicate. Indeed, the output as measured by

weight and tale need not average very appreciably less during a

protracted depression than during a preceding period of good

times.(29*) The volume of business as well as the volume of

output (by weight and tale) of industry may increase during a few

years of depression at nearly if not quite as high a rate as

during a corresponding period of good times. A transition from

dull to brisk times, however, commonly if not invariably involves

a rapid increase in values, while a converse transition involves

a corresponding shrinkage of values, though commonly a slower

shrinkage, - except where a crisis intervenes.

The primary hardship of a period of depression is a

persistent lesion of the affections of the business men; the

greatest secondary hardship is what falls upon the workmen, in

the way of partial unemployment and a decline in wages, with

consequent precariousness and reduction of their livelihood.(30*)

For those workmen who continue to find fairly steady employment

during the depression, however, even at reduced wages, the loss

is more apparent than real; since the cheapening of goods offsets

the decline in wages. Indeed, the cheapening of the means of

living is apt to offset the fall in wages fully, for such workmen

as have steady work. So that in the case of the workmen also, as

well as in that of the business men, the distress which dull

times brings is in some part a spiritual, emotional matter.

To the rest of the community, those classes that are outside

of business enterprise and outside of the industrial occupations

proper, that is to say, those (non-industrial) classes who live

on a fixed salary or similar fixed income, dull times are a

thinly disguised blessing. They suffer in their affections from

the reflected emotional detriment of the business community, but

they gain in their ease of livelihood and in their savings by all

the difference between the price scale of brisk and of dull

times. To these classes an era of prosperity brings substantially

nothing but detriment.(31*)

Depression is primarily a malady of the affections of the

business men. That is the seat of the difficulty. The stagnation

of industry and the hardships suffered by the workmen and other

classes are of the nature of symptoms and secondary effects. Any

proposed remedy, therefore, must be of such a nature as to reach

this emotional seat of the trouble and restore the balance

between the nominal value of the business capital engaged and the

earnings of the business; that is to say, a remedy, to be

efficacious, must restore profits to a "reasonable" rate; which

means, practically, that prices must be brought to the level on

which the accepted capitalization has been made. Such a remedy,

to offset the disastrous cheapening of products through

mechanical improvements, has been found in business coalitions

and working arrangements of one kind and another, looking to the

"regulation" of prices and output. Latterly this remedy is

becoming familiar to the business community as well as to

students of the business situation, and its tangible, direct, and

unequivocal efficiency in correcting this main infirmity of

modern business is well recognized. So much so, indeed, that its

urgent advisability has been formulated in the maxim that "Where

combination is possible competition is impossible." What is

required is a business coalition on such a scale as to regulate

the output and eliminate competitive sales and competitive

investment within a field large enough to make up a

self-balanced, passably independent industrial system, - such a

coalition of business enterprises as is loosely called a "trust."

Such a business coalition, if it is comprehensive and closely

controlled, can adjust the output of goods and services to the

market with some nicety, and can maintaIn the balance of the

ruling prices, or the price scale agreed upon, with such effect

that the received capitalization need not become obsolete even in

the face of very radical improvements in the processes of

industry. Its effect, in the case of ideal success, is to

neutralize the cheapening of goods and services effected by

current industrial progress. It offsets industrial improvements

in so far as these improvements affect the cost of goods more

than they affect the value of the money metals. It might seem at

first sight that by thIs inhibitory effect of the trust the

entire advantage derivable from industrial improvements within

the scope of the trust should inure to the gaIn of the business

men in the combination, but such does not appear to be the

practical outcome. The practical outcome appears more nearly to

be that material advantage inures to no one from industrial

improvements under the control of the trust, in so far as the

trust successfully carries its point. This feature of trust

management will be taken up again in a different connection.

In addition to its prime purpose of checking the decline of

earnings on past investments, such a business coalition is also

enabled to distribute any unavoidable effect of the progressively

reduced cost of production of the productive goods employed,

somewhat equably over the entire field of industry comprised in

the coalition, and so obviate the pressure of this untoward

industrial progress falling with exceptional severity at any

given point. Economies effected are at the same time made to

accrue to the collective business organization, showing

themselves in the way of increased dividends and increased

effective (market) capitalization of the coalition's property,

instead of being dissipated in competitive selling, and so going

to the body of consumers or to the industrial system at large.

To return to a point temporarily set aside above. By

supposition, in what has just been said, anything like a

speculative inflation has been excluded from the discussion of

business depression; and necessarily so, since the two do not

come at the same time. But at one point the two show a feature in

common. Under both of these two widely different conditions of

the business situation there is a discrepancy between the

accepted capitalization and the actual earning-capacity.(32*) But

the two differ even at this point in that, in the case of

inflation, the discrepancy is not felt until the climax, when a

widespread realization of the discrepancy brings on an abrupt

readjustment, in the crisis which follows inflation; whereas in a

period of depression the sense of this discrepancy and the

protest against it is the most striking circumstance of the case.

The discrepancy between capitalization and earning-capacity in a

period of speculative movement comes of an inflation of

capitalization; whereas in time of depression the discrepancy is

due to a shrinkage of earning-capacity, - both capitalization and

earning-capacity being, of course, counted in terms of money

values. A speculative movement offsets or checks the trend to

depression whenever it occurs; and for some appreciable time

past, such speculative movements appear to have been the only

force which has from time to time broken the otherwise

uninterrupted course of business depression. Under the regime of

a perfected machine industry and a perfect business organization,

with active competition throughout, it is at least probable that

depression would not be seriously interrupted by any other cause.

But it has been a point of economic dogma in modern times -

not to call it a point of theory, since it is not held on

reasoned grounds - that depression and inflation, followed by

crisis, succeed one another with a rough periodicity,

interminably and in the nature of the case. The periodicity (with

an interval of some ten to twelve years from phase to phase) has

not been established with any cogent show of evidence, except for

the period from 1816 to 1873; and even within that period the

evidence has not been convincing to all students of these

phenomena. A tentative explanation of the periodicity, such as

there may have been within that period, as well as of its absence

before and after the period in question, may be offered on the

basis of the views here set forth. keeping in mind the point that

the disturbance, both in the case of inflation and in that of

depression, is a discrepancy between capitalization and

earning-capacity, and also the manner in which this discrepancy

arises, it may be said that prior to the earlier date mentioned

the modern industrial system was not such a comprehensive and

articulate process that a disturbance in one part or one member

of the system need be transmitted forthwith through the channels

of business to all the rest. A speculative movement need not

spread forthwith throughout the industrial system. The great

episodes of speculation and collapse that occurred during earlier

modem times were not of the nature of speculative inflation

affecting the entire business community occupied with industry.

They are rather of the nature of commercial speculation verging

on gambling.(34*) So also, the crises of that earlier time, when

they were not collapses of gambling ventures, were commonly

produced by some great disaster which brought an absolute

material loss upon the community, such as crop failures,

invasions, or heavy war expenditures. On the other hand, as

regards periods of depression prior to the early years of the

nineteenth century, they were also rare if not unknown, except

when due to failure of resources or the burdens of government.

The conditions out of which depression could come, as a

persistent disturbance of business through a divergence between

the capitalization and the earning-capacity of investments, were

not had. The developed machine system was absent, and without

this the cost of production of productive goods could not be

progressively lowered at a rate large enough to set up and

maintain a persistent divergence between capitalization and

earning-capacity in industrial enterprises.

At some uncertain point in the first half of the nineteenth

century the system of machine industry, and the business system

based upon it, attained such a breadth and consistency that

business disturbances of appreciable magnitude in any part would

affect values throughout the system. It had then grown so large

and was so closely articulated a structure that the relations of

its members to one another and to the system as a whole were of

greater moment for the fortunes of these members and for the

orderly process of the whole than were the relations of the

members to industrial factors lying outside the system of the

machine industry and the business community. Hence industrial

crises in the proper sense of the word seem well at home in this

period. They spread with great force and facility whenever they

came; and they had the true character of business crises, in that

they ran with great severity without involving an appreciable

aggregate loss of material wealth, except in terms of price. They

commonly meant a cancelment of values, without appreciable

aggregate loss of goods. They seem also to have been true to the

staple definition of crises in that they followed upon a period

of speculative inflation in industrial investments.

Chronic depression, however, does not seem to belong, as a

consistent feature of the course of things, in this

nineteenth-century period, prior to the eighties or the middle of

the seventies. The usual course, it is commonly held, was rather:

inflation, crisis, transient depression, gradual advance to

inflation, and so on over again.(35*)

On the view of these phenomena here spoken for, an attempt at

explaining this circuit may be made as follows: A crisis, under

this early nineteenth-century situation, was an abrupt collapse

of capitalized values, in which the capitalization was not only

brought to the level of the earning-capacity which the

investments would have shown in quiet times, but appreciably

below that level. The efficiency and the reach of the machine

industry in the production of productive goods was not then so

great as to lower the cost of their production rapidly enough to

overtake the shrinkage in capitalization and so prevent the

latter from rising again in response to the stimulus of a

relatively high earning-capacity. The shock-effect of the

liquidation passed off before the cheapening of the means of

production had time to catch up with the shrinkage of

capitalization due to the crisis, so that after the shock-effect

had passed there still remained an appreciable

under-capitalization as a sequel of the period of liquidation.

Therefore there did not result a persistent unfavorable

discrepancy between capitalization and earning-capacity, with a

consequent chronic depression. On the other hand, the

earning-capacity of investments was high relatively to their

reduced capitalization after the crisis. Actual earning-capacity

exceeded the nominal earning-capacity of industrial plants by so

appreciable a margin as to encourage a bold competitive advance

and a sanguine financiering on the part of the various business

men, so soon as the shock of the liquidation had passed and

business had again fallen into settled channels. But such a bold

competitive advance means the beginning of an extension of credit

and a speculative movement in industry, such as has been

discussed some pages back in connection with crises. This

movement has a cumulative character, after the manner there

indicated, and its outcome is an inflation of capitalization and

a large extension of credit, which normally ends in a period of

liquidation.

Within the period spoken of (1816-1873) this liquidation is

apparently always brought on by some extraneous disturbance. But

it seems that the theory would require us to say that the

extraneous disturbance requisite to bring such a speculative

movement to a head will be slighter the farther the movement has

gone; so that in the earlier stages of a given period of

inflation a liquidation could be brought on only by some

relatively violent disturbance, whereas at a higher phase of

speculative inflation a relatively slight disturbance would

suffice.

Now, it takes some time for such a speculative movement to

bring on so large a discrepancy between capitalization and

earning-capacity as may not be adjusted by other means than a

widespread and severe liquidation.(36*) Hence a rough periodicity

in the recurrence of these seasons of buoyancy and of collapse in

capitalized values. Other factors, and varying ones, have, no

doubt, been present in each of the historic crises of the

nineteenth century, and these other factors would have to be

taken due account of in any history of crises, and even in any

theory of crises, which aimed at anything like an exhaustive

treatment; but the factors here pointed out seem to be the

characteristic and constant ones in the sequence of crises within

this period, at the same time that they are the factors which are

in a peculiar degree connected with that process of business

management in modern industry which is the objective point of the

present inquiry.

Since the seventies, as an approximate date and as applying

particularly to America and in a less degree to Great Britain,

the course of affairs in business has apparently taken a

permanent change as regards crises and depression. During this

recent period, and with increasing persistency, chronic

depression has been the rule rather than the exception in

business. Seasons of easy times, "ordinary prosperity," during

this period are pretty uniformly traceable to specific causes

extraneous to the process of industrial business proper. In one

case, the early nineties, it seems to have been a peculiar crop

situation, and in the most notable case of a speculative

inflation, the one now (1904) apparently drawing to a close, it

was the Spanish-American War, coupled with the expenditures for

stores, munitions, and services incident to placing the country

on a war footing, that lifted the depression and brought

prosperity to the business community. If the outside stimulus

from which the present prosperity takes its impulse be continued

at an adequate pitch, the season of prosperity may be prolonged;

otherwise there seems little reason to expect any other outcome

than a more or less abrupt and searching liquidation.

What would be an adequate pitch of the stimulus making for

prosperity is, of course, not easy to say, but it is probably

safe to say that in order to keep up the season of prosperity for

a considerable number of years the stimulus would have to be

gradually increased. That is to say in other words, the

absorption of goods and services by extra-industrial

expenditures, expenditures which as seen from the standpoint of

industry are pure waste, would have to go on in an increasing

volume. If the wasteful expenditure slackens, the logical outcome

should be a considerable perturbation of business and industry,

followed by depression; if the waste on war, colonization,

provincial investment, and the like, comes to an abrupt stop, the

logical consequence, in the absence of other counteracting

factors, should be a crisis of some severity. (37*)

It was said above that since the seventies the ordinary

course of affairs in business, when undisturbed by transient

circumstances extraneous to the industrial system proper, has

been chronic depression. The fact of such prevalent depression

will probably not be denied by any student of the situation

during this period, so far as regards America and, in a degree,

England.(38*) For the Continent of Europe this characterization

would have to be materially qualified. But the reply is ready to

han d that governmental interferences with trade have been so

ubiquitous on the Continent, particularly in the German-speaking

communities, that their case is fairly to be thrown out of any

general theory. It may also be questioned whether the industrial

system of Germany, e.g., throughout this period conforms to the

requirements of the theory in respect of the degree of

development of the machine industry which such a state of affairs

supposes.(39*)

The explanation of this persistent business depression, in

those countries where it has prevailed, is, on the view here

spoken for, quite simple. By an uncertain date toward the close

of the seventies the advancing efficiency and articulation of the

processes of the machine industry reached such a pitch that the

cost of production of productive goods has since then

persistently outstripped such readjustment of capitalization as

has from time to time been made. The persistent decline of

profits, due to this relative overproduction of industrial

apparatus, has not permitted a consistent speculative expansion,

of the kind which abounds in the earlier half of the nineteenth

century, to get under way. When a speculative movement has been

set up by extraneous stimuli, during this late period, the

inherent and relatively rapid decline of earning-capacity on the

part of older investments has brought the speculative inflation

to book before it has reached such dimensions as would bring on a

violent crisis. And when a crisis of some appreciable severity

has come and has lowered the capitalization, the persistent

efficiency and facile balance of processes in the modern machine

industry has overtaken the decline in capitalization without

allowing time for recovery and consequent boom. The cheapening of

capital goods has overtaken the lowered capitalization of

investments before the shock-effect of the liquidation has worn

off. Hence depression is normal to the industrial situation under

the consummate regime of the machine, so long as competition is

unchecked and no deus ex machina interposes.(40*)

The persistent defection of reasonable profits calls for a

remedy. The remedy may be sought in one or the other of two

directions: (1) in an increased unproductive consumption of

goods; or (2) in an elimination of that "cutthroat" competition

that keeps profits below the "reasonable" level. If enough of the

work or of the output is turned to wasteful expenditures, so as

to admit of but a relatively slight aggregate saving, as counted

by weight and tale, profitable prices can be maintained on the

old basis of capitalization. If the waste is sufficiently large,

the current investment in additional industrial equipment will

not be sufficient to lower prices appreciably through

competition.(41*)

Wasteful expenditure on a scale adequate to offset the

surplus productivity of modern industry is nearly out of the

question. Private initiative cannot carry the waste of goods and

services to nearly the point required by the business situation.

Private waste is no doubt large, but business principles, leading

to saving and shrewd investment, are too ingrained in the habits

of modern men to admit an effective retardation of the rate of

saving.(42*) Something more to the point can be done, and indeed

is being done, by the civilized governments in the way of

effectual waste. Armaments, public edifices, courtly and

diplomatic establishments, and the like, are almost altogether

wasteful, so far as bears on the present question. They have the

additional advantage that the public securities which represent

this waste serve as attractive investment securities for private

savings, at the same time that, taken in the aggregate, the

savings so invested are purely fictitious savings and therefore

do not act to lower profits or prices. Expenditures met by

taxation are less expedient for this purpose; although indirect

taxes have the peculiar advantage of keeping up the prices of the

goods on which they are imposed, and thereby act directly toward

the desired end. The waste of time and effort that goes into

military service, as well as the employment of the courtly,

diplomatic, and ecclesiastical personnel, counts effectually in

the same direction. But however extraordinary this public waste

of substance latterly has been, it is apparently altogether

inadequate to offset the surplus productivity of the machine

industry, particularly when this productivity is seconded by the

great facility which the modern business organization affords for

the accumulation of savings in relatively few hands. There is

also the drawback that the waste of time involved in military

service reduces the purchasing pow er of the classes that are

drawn into the service, and so reduces the amount of wasteful

consumption which these classes might otherwise accomplish.(43*)

So long as industry remains at its present level of

efficiency, and especially so long as incomes continue to be

distributed somewhat after the present scheme, waste cannot be

expected to overtake production, and can therefore not check the

untoward tendency to depression. But if the balance cannot be

maintained by accelerating wasteful consumption, it may be

maintained by curtailing and regulating the output of goods.

"Cutthroat" competition, that is to say, free competitive

selling, can be done away by "pooling the interests" of the

competitors, so soon as all or an effective majority of the

business concerns which are rivals in the market combine and

place their business management under one directive head. When

this is done, by whatever method, selling of goods or services at

competitively varying prices is replaced by collective selling

("collective bargaining") at prices fixed on the basis of "what

the traffic will bear." That is to say, prices are fixed by

consideration of what scale of prices will bring the largest

aggregate net earnings, due regard being had to the effect of a

lower price in increasing sales as well as to the reduction of

cost through the increase of output. The outcome, as regards the

scale of prices, may easily be a reduction of the price to

consumers; but it may also, and equally readily, be an increase

of the average price. But the prices of the output which is in

this way brought to a monopoly basis are nearly certain to run

more even than prices of the like output while sold competitively

by rival concerns.

What has been said in the last paragraph supposes that the

combination of business enterprises is so comprehensive as to

place the resulting coalition in a position of practical

monopoly. Such a result is not always attained, however,

especially not in the earlier attempts at coalition in any

particular branch of industry; although the endeavor is commonly

related until at last a virtual monopoly is achieved. But even

where no effective monopoly is achieved, a coalition of this kind

has a salutary effect, at least temporarily. In almost all cases

a consolidation of this kind is able to effect considerable

economies in the cost of production, as pointed out in an earlier

chapter, and such economies bring relief through enabling the

combined industrial ventures to earn a reasonable profit at a

lower price for their product than before. They are therefore

able to go on on a scale of prices which was not remunerative

while they stood on their old footing of severalty. But the

relief which comes of such measures, so long as competitive

selling goes on in rivalry with concerns standing outside the

coalition, is only transient. The declining cost of production,

and the consequent competitive investment and extension in the

industry, presently catches up with the gain in economy; the

margin of advantage in the competition is lost, and depression

again overtakes the consolidated enterprises on their new

footing. The remedy again is a wider coalition, making possible

farther economies, and making some approach to a position of

secure monopoly.

It is only on a footing of monopoly that this grinding

depression can be definitively set aside. But the monopoly need

not be absolute in order to afford a somewhat enduring relief.

What is necessary is that the monopoly should comprehend all but

a negligible fraction of the business concerns and the equipment

engaged in the field within which competition has kept profits

below a reasonable level. What is a negligible quantity in such a

case is not to be determined on general considerations, since it

depends in each case on circumstances affecting the particular

industry. But, in a general way, the more nearly complete the

monopoly, the more effectually is it likely to serve its

purpose,(44*)

Such business coalitions have the effect of bringing profits

to a reasonable level, not only by making it possible to regulate

output and prices, but also by the economies which are made

practicable on this footing. Coalitions of a less comprehensive

character, as spoken of above, also effect economies in the cost

of production. But the larger coalitions which bring the business

to a monopoly basis have not only the advantage which comes of

the large-scale organization of the industrial process, but they

also enjoy peculiar advantages in the matter of cost, due to

their monopoly position. These added advantages are more

particularly advantages in buying or bargaining for all goods,

materials, and services required, as well as in selling the

output. So long as the coalitions are not comprehensive enough

effectually to eliminate competition, they are constrained to

both buy and sell in competition with others. But when the

coalition comes effectually to cover its special field of

operation, it is able, not only to fix the prices which it will

accept (on the basis of what the traffic will bear), but also in

a considerable measure to fix the prices or rates which it will

pay for materials, labor, and other services (such as

transportation) on a similar basis, - unless it should

necessarily have to do with another coalition that is in a

similar position of monopoly.

The rule which governs the fixing of rates on this side of

the business dealings of a monopolistic coalition is similar to

that which guides its transactions in the matter of sales. Prices

and rates, as, e.g., for materials and labor, are not depressed

to the lowest possible point, but to the lowest practicable

point, - to the point compatible with the largest net profits.

This may or may not be a point below the rates necessary under a

regime of competitive buying. It may be added that only in rare

cases does a coalition attain so strong a position in respect of

its purchases (of materials or services) as to lift this side of

its business entirely above the reach of competition.(45*)

Wherever this expedient of coalition has been found

practicable, the chronic depression of recent times and the

confusion and uncertainty which goes with a depressed competitive

business situation have been obviated. The great coalitions do

not suffer acutely from the ills of depression, except in cases

where their industrial processes are to a peculiar degree in the

position of intermediaries within the range of the competitive

industries, as is the case, e.g., with most railroads. But even

in such a case the coalition which has a monopoly is more

fortunate as regards the stability of its balance sheet than the

same traffic would be without the advantage of monopoly.

Barring providential intervention, then, the only refuge from

chronic depression, according to the view here set forth, is

thoroughgoing coalition in those lines of business in which

coalition is practicable. But since this would include the

greater part of those lines of industry which are dominated by

the machine process, it seems reasonable to expect that the

remedy should be efficacious. The higher development of the

machine process makes competitive business impracticable, but it

carries a remedy for its own evils in that it makes coalition

practicable. The ulterior effects of thoroughgoing monopoly, as

regards the efficiency of industry, the constancy of employment,

the rates of wages, the prices of goods to consumers, and the

like, are, of course, largely matter of surmise, and cannot be

taken up in this inquiry, the present purpose being merely to

give in outline an economic theory of current business

enterprise.

A further consideration hearing on the later phases of the

business situation may be added. The great coalitions and the

business manoeuvres connected with them have the effect of adding

to the large fortunes of the greater business men; which adds to

the large incomes that cannot be spent in consumptive

expenditures; which accelerates the increase of investments;

which brings competition if there is a chance for it; which tends

to bring on depression, in the manner already indicated. The

great coalitions, therefore, seem to carry the seed of this

malady of competition, and this evil consequence can accordingly

be avoided only on the basis of so comprehensive and rigorous a

coalition of business concerns as shall wholly exclude

competition, even in the face of any conceivable amount of new

capital seeking investment.

What has made chronic depression the normal course of things

in modern industrial business is the higher development of the

machine process, given, of course, the traits of human nature as

it manifests itself in business traffic. The machine process

works this effect by virtue, chiefly if not altogether, of these

two characteristics: (1) a relatively rapid rate of increasing

efficiency; and (2) the close interdependence of the several

lines of industrial activity in a comprehensive system, which is

growing more comprehensive and closeknit as improvement and

specialization of industrial processes go on. The last-named

factor counts for more in proportion as the interdependence grows

closer and more comprehensive. Disturbances are progressively

transmitted with greater facility and effect throughout the

system, and each line of industrial business comes to stand in

relatively intimate relations to an ever increasing range of

other lines with which it carries on a traffic of purchase or

sale. A consequence of this state of things is that any business

coalition, in order effectually to serve its purpose of

maintaining earnings and capitalization, is required to be of

larger scope and closer texture. As the exigencies which enforce

the resort to coalition uninterruptedly gain in scope and

urgency, the "trust" must take the same course of growth to meet

these exigencies; until, with some slight further advance along

the accustomed lines, the trust which shall serve the modern

business situation must comprehend in one close business

coalition virtually the whole field of industry within which the

machine process is the dominant industrial factor.(46*)

To this there is a broad exception, given by the

circumstances of the industrial organization. This organization

rests on the distinction between business management and

ownership. The workmen do not and cannot own or direct the

industrial equipment and processes, so long as ownership prevails

and industry is to be managed on business principles. The labor

supply, or the working population, can therefore not be included

in the ideally complete business coalition suggested above,

however consummate the machine system and the business

organization built upon it may become. So that when the last step

in business coalition has been taken, there remains the

competitive friction between the combined business capital and

the combined workmen.

From the considerations recited above it appears that the

competitive management of industry becomes incompatible with

continued prosperity so soon as the machine process has been

developed to its fuller efficiency. Further technological advance

must act to heighten the impracticability of competitive

business. As it is sometimes expressed, the tendency to

consolidation is irresistible. Modern circumstances do not permit

the competitive management of property invested in industrial

enterprise, much less its management in detail by the individual

owners. In short, the exercise of free contract, and the other

powers inhering in the natural right of ownership, are

incompatible with the modern machine technology. Business

discretion necessary centres in other hands than those of the

general body of owners. In the ideal case, so far as the machine

technology and its business concomitants are consistently carried

through, the general body of owners are necessary reduced to the

practical status of pensioners dependent on the discretion of the

great holders of immaterial wealth; the general body of business

men are similarly, in the ideal outcome, disfranchised in point

of business initiative and reduced to a bureaucratic hierarchy

under the same guidance; and the rest, the populace, is very

difficult to bring into the schedule except as raw material of

industry. What may take place to accentuate or mitigate this

tendency is a question of the drift of sentiment on the matter of

property rights, business obligations, and economic policy. So

far as the economic factors at play in the modern situation shape

this drift of sentiment they do so in large part indirectly,

through the disciplinary effect of new and untried circumstances

of politics and legal relation to which their working gives rise.

NOTES:

1. Such a discussion as Patten's Theory of Prosperity applies to

the regime of "natural economy", and passably also to that of

handicraft and petty trade, but does not seriously touch the

modern situation. The like is true generality for current

discussions of this topic.

2. Wealth of Nations, Introduction.

3. This means, in concrete terms, prior to the regime of the

machine industry. Since the coming in of the machine, modern

business enterprise has taken over the management of industry;

that is to say, industry has come to be managed by the method of

investment for a profit by what is in aim and animus essentially

the commercial method. As has been remarked above, capital has

become vendible in a decisive degree. The material factors

engaged in industry , particularly in the machine industry

proper, are vendible in about the same (perhaps on an average in

a higher) degree as the material items handled by commercial

traffic are vendible. This is true of raw materials, labor power,

and industrial equipment, but it is peculiarly true of the

industrial equipment - the mechanical factors in the stricter

sense. It is in these mechanical appliances primarily, but in the

other factors of the machine industry in only a slightly lower

degree, that the traffic of investment, and of purchase and sale

connected with investment, is particularly active. Within these

wider limits a further limitation may be made. "Vendibility" of

all items involved is, as a broadly general rule, carried to the

highest pitch in those branches of industry that have to do with

the production of "producer's goods." These branches are at the

same time, and partly in consequence of this fact, more widely

and intimately related to other branches of industry than are any

other group of industrial processes that might be named. It seems

to be this extreme prevalence of vendibility, together with this

more far-reaching and more exacting articulation with the

industrial process at large, that chiefly gives substantial

significance to a classification of these lines of industry as

"Produktivmittel-Industrien" by late German writers. There is,

for business purposes, a difference of degree, in both of the

respects named, between this (ill-defined) group of industrial

processes on the one hand, and the contrasted group occupied with

the production of consumption goods on the other hand. The

"productive-goods industries" show the modern industrial and

business traits in an accentuated form and force, and they are,

by consequence, in a strategically primary position in the

business situation.

4. Cf., e.g., A. Spiethoff, Jahrbuch f. Gesetzgebung Verwaltung

u. Volkswirtschaft, vol. XXVI. Heft 2 . "Vorbemerkungen zu einer

Theorie der Uberproducktion." and vol. XXVII, pp. 348-353;

Turgan-Baranowsky, Theorie und Geschicte der Handelskrisen in

England, pp. 16-28; L. Pohle, Periodische Wirschaftskrisen,

especially sec. II, with subjoined notes.

5. This is well exemplified in Tugan-Baranowsky (Handelskrise),

who declares at the outset (p. 17) that money and price are

negligible factors for the purpose in hand. He thereby commits

himself to the position that these crises are phenomena of the

material processes of economic life (production and consumption),

not of business traffic. Hence the ultimate failure of this acute

observer and theoretician to reach a tenable solution to the

question. Substantially the is true of Marx, whom Tugan follows,

though with large reservations. (Cf. Marx, Capital, vol. III, ch.

XV)

6. The "cycle" of exaltation, crisis, and depression has

frequently been describe. Perhaps as effective a description and

analysis as any is that of Tugan-Baranowsky, Handelskrisen, chap.

VIII.

7. Cf., however, Cassel, "Om Kriser och Daliga Tider," Ekonomisk

Tidskrift, vol. vi, no. 2, pp. 69-78.

8. As, e.g., the era of prosperity 1897-1902 took its start from

the demand for supplies caused by the Spanish-American War,

though other favorable circumstances acted to give it volume. Mr

Carver, possibly following suggestions given by Spiethoff's

discussion, has suggested that the lines of business in which the

favorable initial disturbance arises are necessarily those

engaged in the production of "producer's goods"; the reason for

this being that, in the nature of the case, "the value of

producer's goods tends to fluctuate more violently than the value

of consumer's goods," inasmuch as the value of producer's goods

varies somewhat as the magnitude of the margin of profits, while

that of the consumer's goods varies somewhat as the magnitude of

the entire demand on which this margin of profits rests as an

increment. (The value of producer's goods = f(delta), that of

consumer's goods = f(demand + delta).) From the like line of

argument it should follow that the initial break in time of

crisis must come in some line of business occupied with

producer's goods. Cf. Quarterly Journal of Economics, May l903,

pp. 497-500. See also foot-note on p. 181 above.

9. Cf. Sombart, Kapitalismus, vol II, ch. I, on the motive forces

at work in advancing business enterprise.

10. The "intitial disturbance" here spoken of may of course be of

a progressive or recurring character, and so may keep the

differential advantage going in a progressive manner, as, e.g.,

in the case of a progressive demand for supplies due to a

protracted war or to a period of continued preparation for war,

such as has occurred in America during the last few years.

11. There is a point or two of further detail in what may be

called the method of prosperity and crisis, which are best

discussed in connection with the phenomena of depression. These

will, therefore, be taken up presently. The above

characterization of an era of prosperity and the manner of its

exhausting itself will serve as a description of the course which

such an era takes under the regime of the more highly developed

business methods of the high tide of the nineteenth century. For

the earlier, less fully developed, business situation of the

early nineteenth century the corresponding course of events runs

somewhat different, owing, chiefly at least, (1) to a slower rate

of transmission of any price disturbance, and (2) to the greater

range and value of "outlying" industries which are very tardily

if at all drawn into the exuberant movement of prosperity. In

this connection it is worth noting that during this earlier

period of the nineteenth century the production of specifically

productive goods had not been carried to the point afterward

attained, either in the differentiation and specialization of

industries occupied with this class of goods or in the relative

volume of this class of industries.

12. The several phases of this sequence of exaltation and

depression for any given business concern, may be stated as

follows: -

Let ea = earnings; pr = sale price of output; exp = expenses

of production of output; mar = margin of gain on output = pr -

exp; cap = intitial effective capitalization; yp = year's

purchase at (current rates = int) = 1/int, disregarding risk; cr

= normal credit extension on given cap = cap/n = f(cap/int).

Then at the initial phase,

ea = (mar = pr -exp)outp,

cap = ea x yp = ea/int,

cr = cap/n,

At the subsequent phase, of exaltation,

ea' = ea + delta ea = mar' x outp

= [(pr' = pr + delta pr) - exp] outp

=(mar + delta mar) outp > ea,

cap' = ea'/int = (ea + delta ea)/int > cap,

cr' = cap'/n = (cap + delta cap)/n > cr.

At the concluding phase, of depression,

ea'' = ea' - delta ea' = mar'' x outp

= [pr' - (exp' = exp + delta exp)] outp < ea'

cap'' = ca''/int = (ea'- delta ea')/int < cap',

cr'' = cap''/n = (cap' - delta cap')/n < cr'.

For simplicity of statement, in all this no account is taken of

the element of risk, nor of the fluctuations of discount rates or

the variations of volume of output. If these be included in the

calculation as variables, the result is much the same. They are

functions of the variables already included, and their inclusion

would, on the whole, accentuate the oscillations shown by the

computation as it stands.

13. A crisis may take its rise from credit extension in other

than properly industrial business. Such, e.g., was in great

measure the American crisis in l837, when the most obvious and

disastrous inflation was in speculative land values and the

credits based on them. But it is no stretch of the concept to say

that in that case the situation out of which the crisis arose was

an overcapitalization of the land values in question. Capitalized

land is, of course, "capital" for business purposes as truly as

any other body of values that are capitalized and drawn into the

money market.

14. It is, in great part, through or by force of fluctuations of

this base line of money values that large accumulations of wealth

are made. One might almost say that this is the "normal" method

by which saving are made and capitalized in later modern times.

Fluctuations in the stock market, of course, are of this

character, as are commonly also large variations of the course of

prices outside the stock market, as well as fluctuations of the

money market. The great gains of successful promoters of

corporations and the like come in this manner usually. They are

due to enlargement of the money value of a given block of

industrial equipment independently of any change in the physical

character of the equipment which comes near saying that the large

fortunes originate in such changes of the base line, - from which

it follows that the larger accretions to the volume of capital

are of this origin. The large profits are made in the form of

capital, which is acquired by virtue of a price variation. See

foot-note, pp. 168-170.

15. A substantial move in this direction would be that advocated

by Mr F.S. Stetson before the New York Bar Association, and

reiterated before the United States Industrial Commission: "To

permit the formation of a distinct class of business stock

corporations whose capital stock may be issued as representing

proportional parts of the whole capital without any nominal or

money value." The market value of such shares would be the only

value assigned them, and little of a base line in the way of a

legally imputed value would remain. The de jure value would no

longer hinder a free recognition of the facts. - Report of the

Industrial Commission, vol. I. p. 976.

16. Cf. Hobson, Problem of the Unemployed, ch. V., Vialles, La

consommation et les crises economiques, especially "Introduction"

and ch. III.

17. Something that might bear such a construction occurs, e.g.,

locally, when a run of fish exceeds the ability of the workmen to

take care of them. The fatuity of appealing to such an example is

plain.

18. Cf. Smart, Studies in Economics, ch. VII.

19. For the present purpose a concern which passes through a

liquidation and reappears with a rerated and reorganized

capitalization and body of liabilities also has much of the

character of a new investment.

20. Cf. L. Pohle, Bevolkerungsbewegung, Kapitalbildung und

periodische Wirtschaftskrisen, who concludes that depression is

due to a scarcity of capital as compared with population; the

rate of increase of capital is conceived to fall short of the

rate of increase of population, hence periodical depression.

Cf., on the other hand, Macrosty, Trusts and the State, p.

133, who finds, by recourse to the testimony before the Royal

Commission on the Depression of Trade and Industry, that there is

at such times capital constantly seeking investment and entering

into competition with what is already invested. Cf. Final Report

of the Royal Commission on Depression of Trade and Industry

(1886). "The replies received from Chambers of Commerce to the

inquiries we addressed to them confirm the statements made by the

witnesses who appeared before us. Those replies testify to the

general maintenance or increase of the volume of trade,

accompanied in many cases by a shrinkage in its value, and in all

cases by a serious diminution of profit. They also show how

general is the belief in commercial circles that overproduction,

the fall of prices, and more effective foreign competition,

assisted by high tariffs, go far to account for the existing

position of trade and industry in this country." (pp. ix-x). Cf.

also pp. xi-xv of the Report.

21. Cf., e.g., Burton, Crises and Depressions, ch. IV, especially

pp 113-115.

22. More in detail, what happens in connection with

interest-bearing securities carried over an interval of high

interest rates and business activity may be formulated as

follows: When current interest rates advance, securities bearing

a fixed rate (of dividends or interest) decline on the market.

That is to say, the effective capitalized value of the claim to

these fixed rates of income, as shown by the market quotations,

shrinks. At the same time, since the period during which this

readjustment occurs is a period of acceleration in business, the

earning-capacity (actual or putative) of the property on which

these securities rest has increased over what it was at the time

the securities were floated. Hence this property (industrial

equipment) is also recapitalized, in the market quotations, at a

higher value than it had when the securities were floated. The

effective recapitalization carried out by the market quotations

acts, for the present purpose, to the same effect upon the value

of both of the items considered, this effect being to leave a

margin of the property previously covered by the securities

uncovered and available as collateral on which to float a new

extension of credit, in the form of mortgage loan or

interest-bearing security. In the common run of business

procedure this available margin, between the current (higher)

capitalized value of the property (collateral) and the current

(lower) capitalized value of the securities resting upon it is

promptly covered by a fresh credit extension ; whether this

extension takes the set form of loan, bonds, preferred stock, and

the like, or the less patent form of a larger volume of

obligations in the way of contracts and the like, - the result,

as touches the securities and their basis, being that the same

nominal volume of securities with the same aggregate interest

charge rests on a (materially) smaller block of the industrial

equipment after this readjustment of capitalization is had than

it did when the securities were placed. When depression ensues,

and the rate of earnings and interest declines, the effective

capitalization of the securities with a fixed rate of income is

increased (if the securities are felt to be secure) to correspond

with the lower rate of interest; whereas the capitalized value of

the block of industrial equipment on which these securities (plus

whatever may have been added in the interval) rest shrinks to

correspond with the same facts. A discrepancy, such as was

adjusted by a recapitalization during the interval of high rates,

reappears, but in the inverse sense. And this discrepancy cannot

be corrected, since the margin on which the previous adjustment

was made has disappeared, and no corresponding margin on the

other side emerges. Business accounts do not deal in negative

quantities, except under stress of a necessity that violates the

premises on which business accountancy proceeds.

Recurring to the notation employed on page 153, and letting l

= par value of securities with fixed charges, r = rate per annum

of fixed charges, l' = market value (effective capitalization) of

these securities,

cap' = ea(yp = 1/int), l' = lr/int,

but if int becomes int' (= int + delta int), l' becomes

l'' = lr/(int + delta int = int') < l',

cap' at the same time becomes cap'' = (ea + delta ea)/(int +

delta int) = ea'/int';

whereas in a period of falling interest,

int' = int - delta int, and i'' = lr/(int' = (int - delta

int) > l'.

23. Compare Hobson, Problem of the Unemployed, ch. V, and

Tugan-Baranowsky, Handelskrisen, ch. I and VI. In his criticism

(pp. 191-193) Tugan has quite missed the point of Hobson's theory

as well as of his illustration, having apparently not understood

Hobson's exposition, which is, in effect, very similar to his

own. See also Hobson, Modern Capitalism, ch. VII, especially

secs. 8 and 16.

24. The typical form taken by this acceleration in the machine

production of machinery, but in fact it involves the production

of other material factors as well as the mechanical apparatus,

notably the materials used in industry.

25. The established concerns having been capitalized on the basis

of past cost, we can say that in the older establishments, cap -

f(cost), but in the new establishments with an equal earning

capacity, cap1 = f(cost1 = cost - delta cost); hence the rate of

earnings [ = f(ea/cost)] will be progressively higher as cost

decreases:

f(ea/cost) < f(ea/(cost - delta cost)) < f(ea/(cost - 2 delta

cost), etc.

26. Recurring to the notation employed in note 2, page 168, and

letting Um = unit of material efficiency, then a given

established concern, A, with a given equipment Um(cap)a = Ue(cap)

= Um(cap) = Ue(ea/int), presently finds itself in competition

with a younger concern, B, having an equivalent material

equipment = Um(cap)b procured at a lower cost and requiring lower

earnings (=ea') and lower fixed charges.

Um(cap)b = Uc(ea'/int = (ea - delta ea)/int) = Ue(cap' = cap

- delta cap).

But Um(cap)a = Um(cap)b as competitors in the market. Hence, with

the competitive lowering of earnings, and therefore of effective

capitalization, A's account comes to stand:

Um(cap)a = Uc(cap') - Uc(cap - delta cap) < Un(cap).

In effect A is overcapitalized by Uc(cap - cap'). A's nominal

capital, Un(cap)a = Uc(cap' + delta cap), while A's effective

capitalization

Uc(cap')a = Uc(cap - delta cap).

The business man's sensibilities in the case, therefore, suffer a

lesion

= f[Un(ea/int) - Uc((ea - delta ea)/int)],

which is a monotonic function. The discrepancy between Un(cap)z

and Uc(cap') is, in large part, embodied in securities with fixed

charges; which makes a readjustment very difficult even apart

from A's reluctance.

27. With the above analysis may be contrasted Marx's discussion

of the declining rate of profits and the manner in which he

conceives overproduction, speculation, and crises to arise out of

the tendency of profits to a minimum. (Kapital, vol. III, ch. XV)

In the same connection, see Tugan-Baranowsky's criticism of Marx,

Handelskrisen, ch. VII.

28. In point of direct material serviceability, no doubt, a fresh

supply of the precious metals is one of the least useful forms of

wealth to the production of which industrial effort can be

directed, but for the purposes of business prosperity at large it

is probably the most serviceable solution that can be made to the

aggregate wealth. Rapidly increasing efficiency in the production

of other forms of wealth is detrimental to the business

interests, in that it brings depression; but a rapid increase of

the precious metals is the most fortunate material circumstances

for the business interests that industrial activity can bring,

because it puts off depression by keeping up prices.

29. Cf. Smart, Studies in Economics, Essay VI, "Must Prices

Fall?" Distribution of Incomes, bk. II, ch. III.

30. Work goes on during dull times, though at a slackened pace,

and extensions and improvements are continually being made. The

volume of output consequently increases, so that, even if there

has been a setback to production at the beginning of the

depression, the aggregate output presently again reaches the

volume which it had when the dull times set in. It may be added

that the rate of consumption is also appreciably lower during

dull times, particularly in the more wasteful forms of

consumption. This lowered aggregate consumption offsets the

lowered intensity of production during dull times to such an

extent that it is probably safe to say that the net surplus

product, measured by weight and tale, is at least not appreciably

smaller during depression than during prosperity. Cf. Carroll D.

Wright, Testimony in Report of the Industrial Commission, vol.

VII. p. 25.

31. The reduced scale of living of the working population is the

chief factor that counts as an offset against the reduction of

the gross production during dull times, as indicated above.

32. Cf. articles by G. Cassel, "Om Kriser och Daliga Tider," now

running in Ekonomisk Tidskrift (1904, Nos. 1 and 2), for a

parallel discussion of the topics here dealt with. Mr Cassel's

exposition connects more closely with the received notions of

Capital, Production, etc. and goes more into detail at certain

points, particularly on Saving, Investment (Kapitalbildning), and

Pecuniary Expectancy (Vantandet). His exposition is not yet

completed, but so far as may be gathered from what has come to

hand he should reach substantially the same outcome as that given

above.

33. In the case of a speculative inflation,

cap = ea/cost x 1/int < cap' = (ea + delta ea)/cost x 1/int;

in the case of depression,

cap' = ea/(cost x int) > cap'' = (ea - delta ea)/(cost x int)

In the former case the current capitalization during

inflation, being cap', exceeds the bona fide capital value as

proved by events, cap; while in the same of depression the

nominal capital, being cap', exceed the capitalization warranted

by current earning capacity, cap''.

34. So impressive a fact has the gambling character of early

periods of inflation and crises been that it has led economists

to look for gambling as a matter of course in later phenomena

that have been classed as inflation and crises, even when no

gambling element has been obviously present. It has been felt

that gambling must presumptively be present whenever there is

inflation or crises, because the showing of earlier history runs

that way.

35. Cf., e.g., Burton, Crises and Depressions, ch. VIII, for a

succinct account of depressions and crises in the United States

during this period.

36. The speculative movement requires time, because the inflation

is a cumulative one and is carried out unintentionally and in a

sense unconsciously.

37. These extra-industrial expenditures that have brought

prosperity are here spoken of as wasteful, not thereby implying

that they may not be beneficial to the community even in respect

to their effect upon the aggregate income or the aggregate

accumulation of wealth in the community. They are called wasteful

simply because these expenditures directly, in their first

incidence, merely withdraw and dissipate wealth and work from the

industrial process, and unproductively consume the products of

industry. Indirectly they have a beneficial aggregate effect upon

industry by inducing an employment of the fill productive

efficiency of the industrial apparatus; so that in a very short

time, it is at least conceivable, the aggregate net output of the

industrial process may be as large and serviceable as before the

wasteful expenditures were entered upon, even with the

destruction of that portion of the product which goes to maintain

the wasteful expenditures. At the same time, the effect upon

business must be held to be patently favorable. The wasteful

expenditures enhance demand and so increase the vendibility of

the output, - they increase profits and raise capitalization.

They therefore act unequivocally to advance the values of the

business men's holdings and increase their gains, as counted in

business terms. The wasteful expenditure is good for trade. It is

only in the eventual liquidation that a disadvantageous business

consequence comes in view.

It will be seen that on this view of the effect of wasteful

expenditure the position occupied by some early economists, as

Malthus, Lauderdale, Chalmers, and others, as well as by some

later ones, as Robertson, Hobson, is substantially well taken,

although the defence of waste which these economists offer may be

incomplete. Waste seems necessary to keep trade brisk, and

therefore to keep the industrial processes working at their full

capacity. The ulterior reason for this state of the case being

the fact that the decisive ground which determines the margin of

activity in business, and therefore in industry, is the business

men's reluctance to accept a reduction of profits as measured in

terms of price. The opponents of the Malthusian view failed to

appreciate the decisive importance of price, as contrasted with

serviceability, among the motives on which business proceeds.

38. The objection would not come unexpected that this state of

the case is not to be taken as normal, - a point of opinion not

readily to be decided, since it rests on a difference in the

point of view.

39. Cf. Sombart, Kapitalismuc, vol. I, ch. XVIII-XX.

40. Cf. Hobson, Problem of the Unemployed, Appendix to ch. V.

41. Cf. Hobson, Problem of the Unemployed, ch. VI. Mr Hobson does

not use the term "waste" in this connection. Also Vialles,

Consommation, final chapter.

42. "Saving" at the same time takes place automatically in the

current operations of coalition and incorporation, as indicated

above, pp. 166-176.

43. Hobson (Problem of the Unemployed), whose analysis of

overproduction and its relation to depression goes farther than

any other, reviews and criticises (ch. VIII) the palliative

measures that have been advocated. He finds them, all and

several, inadequate and inconsequent, in that they do not touch

the root of the evil - oversaving or "underconsumption." They do

not touch this because they do not mitigate the automatic saving

and investment process that necessarily goes with the possession

of large private incomes. But in point of practical efficiency

his own proposed remedies must also be scheduled under the head

of "palliatives." These proposed remedies are measures looking to

a "Reformed Distribution of Consuming Power" (ch. VI), such as

taxation of "unearned" incomes, higher wages, shorter working

day. The aim is "to increase the proportion of the total wealth

of the community, which falling to them as wages shall be spent

in raising the general standard of working-class consumption."

The contemplated move is manifestly chimerical in any community,

such as the modem industrial communities, where public policy is

with growing singleness of purpose guided by business interests

with a naive view to an increase of profits.

Cf. also Smart, Studies in Economics, Essay VIII, On

"Overproduction"; also Essay IX, "The Socializing of

Consumption," particularly sec. 8, on "The Limits of

Consumption," pp. 293-298.

44. The obvious remark may be added, for completeness of

statement, that the various branches of industry lend themselves

to management by monopoly in extremely varying degrees, some,

e.g., farming, as an extreme instance, not being amenable to this

method of management under existing circumstances; others, again,

as, e.g., retail merchandising, can be managed by this method

only to a very restricted extent; while at the other end of the

scale, in such industries as railroading, monopoly management,

more or less unqualified, is fairly unavoidable.

45. Hitherto probably none of the American coalitions have

succeeded in freeing themselves from the inconveniences of

competitive bidding for labor, and very few have achieved a

purely monopolistic buying, either of materials or of any of the

various kinds of services which they require. With regard to raw

materials alone have some, as, e.g., the Standard Oil Company,

been able to compass an effectual monopoly. Something approaching

this position has been accomplished by a very few other

coalitions, as, e.g., the Sugar Refineries, the Cotton Seed Oil

Company, the United States Steel Corporation, and in a local way

certain coal, railway, lumber, and warehouse companies.

46. It is, e.g., already apparent that the general railway system

of America must presently come under one management, and it must

fall into a coalition with the group of industries that are

occupied with the supply and elaboration of iron, coal, and

lumber.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter 8

Business Principles in Law and Politics

Popular welfare is bound up with the conduct of business;

because industry is managed for business ends, and also because

there prevails throughout modern communities a settled habit of

rating the means of livelihood and the amenities of life in

pecuniary terms. But apart from their effect in controlling the

terms of livelihood from day to day, these principles are also in

great measure decisive in the larger affairs of life, both for

the individual in his civil relations and for the community at

large in its political concerns. Modern (civilized) institutions

rest, in great part, on business principles. This is the meaning,

as applied to the modern situation, of the current phrases about

the Economic Interpretation of History, or the Materialistic

Theory of History.

Because of this settled habit of seeing all the conjunctures

of life from the business point of view, in terms of profit and

loss, the management of the affairs of the community at large

falls by common consent into the hands of business men and is

guided by business considerations. Hence modern politics is

business politics, even apart from the sinister application of

the phrase to what is invidiously called corrupt politics. This

is true both of foreign and domestic policy. Legislation, police

surveillance, the administration of justice, the military and

diplomatic service, all are chiefly concerned with business

relations, pecuniary interests, and they have little more than an

incidental bearing on other human interests. All this apparatus

is also charged with the protection of life and personal liberty,

but its work in this bearing has much of a pecuniary color.

Legislation and legal decisions are based on the dogma of

Natural Liberty. This is peculiarly true as regards the

English-speaking peoples, the foundation of whose jurisprudence

is the common law, and it holds true in an especial degree of

America. In other European communities the sway of natural rights

preconceptions is not so unmitigated, but even with them there is

a visibly growing predilection for the natural-rights standpoint

in all matters touching business relations. The dogma of natural

liberty is peculiarly conducive to an expeditious business

traffic and peculiarly consonant with the habits of thought which

necessarily prevail in any business community.

The current body of natural-rights preconceptions antedates

the modern business situation. The scheme of natural rights grew

up and found secure lodgement in the common sense of the

community, as well as with its lawgivers and courts, under the

discipline of the small industry and petty trade ("domestic

industry") whose development culminated in the eighteenth

century.(1*) In industrial matters the efficient and autonomous

factor in the days of the small industry was the individual

workman, his personal force, dexterity, and diligence; similarly

in the petty trade of the precapitalistic English situation the

decisive factor was the discretion and sagacity of the small

merchant and petty employer, who stood in the direct personal

relations with their customers and their employees. In so far as

trade and industry was not restrained by conventional

regulations, statutory or customary, both trade and industry was

in effect an open field of free competition, in which man met man

on a somewhat equable footing. While the competitors were not on

a footing of material equality, the industrial system was

sufficiently loose-jointed, of a sufficiently diffuse growth, to

make competition effective in the absence of mandatory

restrictions. The like will hold of the business organization

associated with the small industry. Both trade and industry were

matters of personal efficiency rather than comprehensively

organized processes of an impersonal character.(2*)

Natural rights, as they found their way into the conceptions

of law and equity, were in effect the assumed equal rights of men

so situated on a plane of at least constructive equality that the

individuals concerned would be left in a position of effectively

free choice if conventional restrictions were done away. The

organization was not, mechanically, a close-knit one, in the

sense that the concatenation of industrial processes or of

business transactions was not rigorous either in point of time

relations or of the quantity and character of the output or the

work. Neither were the place, pace, circumstances, means, or

hours of work closely determined for the workman or his employer

by mechanical circumstances of the industrial process or of the

market. The standardization of life under the old regime was of a

conventional character, not of a mechanical kind such as is

visible in the more recent development. And this conventional

standardization was gradually losing force.

The movement of opinion on natural-rights ground converged to

an insistence on the system of natural liberty, so called. But

this insistence on natural liberty did not contemplate the

abrogation of all conventional prescription. "The simple and

obvious system of natural liberty" meant freedom from restraint

on any other prescriptive ground than that afforded by the rights

of ownership. In its economic bearing the system of natural

liberty meant a system of free pecuniary contract. "Liberty does

not mean license;" which in economic terms would be transcribed.

"The natural freedom of the individual must not traverse the

prescriptive rights of property." Property rights being included

among natural rights, they had the indefeasibility which attaches

to natural rights. Natural liberty prescribes freedom to buy and

sell, limited only by the equal freedom of others to buy and

sell; with the obvious corollary that there must be no

interference with others' buying and selling, except by means of

buying and selling.

This principle of natural (pecuniary) liberty has found its

most unmitigated acceptance in America, and has here taken the

firmest hold on the legal mind. Nowhere else has the sacredness

of pecuniary obligations so permeated the common sense of the

community, and nowhere does pecuniary obligation come so near

being the only form of obligation that has the unqualified

sanction of current common sense. Here, as nowhere else, do

obligations and claims of the most diverse kinds, domestic,

social, and civil, tend to take the pecuniary form and admit of

being fully discharged on a monetary valuation. To a greater

extent than elsewhere public esteem is awarded to artists,

actors, preachers, writers, scientists, officials, in some rough

proportion to the sums paid for their work.

American civil rights have taken an extreme form, with

relatively great stress on the inviolability of pecuniary

relations, due to the peculiar circumstances under which the

American community has grown up. The pioneers, especially in that

North-Atlantic seaboard community that has been chiefly effective

in shaping American traditions, brought with them a somewhat

high-wrought variant of the English preconception in favor of

individual discretion, and this tradition they put in practice

under circumstances peculiarly favorable to a bold development.

They brought little of the remnants of that prescriptive code

that once bound the handicraft system, and the conditions of life

in the colonies did not foster a new growth of conventional

regulations circumscribing private initiative. America is the

native habitat of the self-made man, and the self-made man is a

pecuniary organism.(3*)

Presently, when occasion arose, the metaphysics of natural

liberty, pecuniary and other, was embodied in set form in

constitutional enactments. It is therefore involved in a more

authentic form and with more incisive force in the legal

structure of this community than in that of any other. Freedom of

contract is the fundamental tenet of the legal creed, so to

speak, inviolable and inalienable; and within the province of law

and equity no one has competence to penetrate behind this first

premise or to question the merits of the natural rights

metaphysics on which it rests. The only principle (attested habit

of thought) which may contest its primacy in civil matters is a

vague "general welfare" clause; and even this can effectively

contest its claims only under exceptional circumstances. Under

the application of any general welfare clause the presumption is

and always must be that the principle of free contract be left

intact so far as the circumstances of the case permit. The

citizen may not be deprived of life, liberty, or property without

due process of law, and the due process proceeds on the premise

that property rights are inviolable. In its bearing upon the

economic relations between individuals this comes to mean, in

effect, not only that one individual or group of individuals may

not legally bring any other than pecuniary pressure to bear upon

another individual or group, but also that pecuniary pressure

cannot be barred.

Now, through gradual change of the economic situation, this

conventional principle of unmitigated and inalienable freedom of

contract began to grow obsolete from about the time when it was

fairly installed; obsolescent, of course, not in point of law,

but in point of fact. Since about the time when this new

conventional standardization of the scheme of economic life in

terms of free contract reached its mature development, in the

eighteenth century,(4*) a new standardizing force, that of the

machine process, has invaded the field.(5*) The standardization

and the constraint of the system of machine industry differs from

what went before it in that it has had no conventional

recognition, no metaphysical authentication. It has not become a

legal fact. Therefore it neither need nor can be taken account of

by the legal mind. It is a new fact which fits into the framework

neither of the ancient system of prescriptive usage nor of the

later system of free personal initiative. It does not exist de

jure, but only de facto. Belonging neither to the defunct system

nor to the current legal system, since it neither institutes nor

traverses a "natural right," it is, as within the cognizance of

the law, non-existent. It is, perhaps, actual, with a gross,

material actuality; but it is not real, with a legal,

metaphysically competent reality. Such coercion as it may exert,

or as may be exercised through its means, therefore, is, in point

of legal reality, no coercion.

Where physical impossibility to fulfil the terms of a

contract arises out of the concatenation of industrial processes,

this physical impossibility may be pleaded as invalidating the

terms of the contract. But the pecuniary pressure of price or

subsistence which the sequence and interdependence of industrial

processes may bring to bear has no standing as such in law or

equity; it can reach the cognizance of the law only indirectly,

through gross defection of one of the contracting parties, in

those cases where the pressure is severe enough to result in

insolvency, sickness, or death. The material necessities of a

group of workmen or consumers, enforced by the specialization and

concatenation of industrial processes, is, therefore, not

competent to set aside, or indeed to qualify, the natural freedom

of the owners of these processes to let work go on or not, as the

outlook for profits may decide. Profits is a business

proposition, livelihood is not.(6*)

Under the current de facto standardization of economic life

enforced by the machine industry, it may frequently happen that

an individual or a group, e.g., of workmen, has not a de facto

power of free contract. A given workman's livelihood can perhaps,

practically, be found only on acceptance of one specific contract

offered, perhaps not at all. But the coercion which in this way

bears upon his choice through the standardization of industrial

procedure is neither assault and battery nor breach of contract,

and it is, therefore, not repugnant to the principles of natural

liberty. Through controlling the processes of industry in which

alone, practically, given workmen can find their livelihood, the

owners of these processes may bring pecuniary pressure to bear

upon the choice of the workmen; but since the rights of property

which enforce such pressure are not repugnant to the principles

of natural liberty, neither is such pecuniary pressure repugnant

to the law, the case is therefore outside the scope of the law.

The converse case, where the workmen take similar advantage of

their employers to bring them to terms, is similarly outside the

scope of the common law, - supposing, of course, that there has

in neither case been a surrender of individual liberty, a breach

of contract, theft, a resort to violence, or threats of violence.

So long as there is no overt attempt on life, liberty of the

person, or the liberty to buy and sell, the law cannot intervene,

unless it be in a precautionary way to prevent prospective

violation of personal or property rights.

The "natural," conventional freedom of contract is sacred and

inalienable. De facto freedom of choice is a matter about which

the law and the courts are not competent to inquire. By force of

the concatenation of industrial processes and the dependence of

men's comfort or subsistence upon the orderly working of these

processes, the exercise of the rights of ownership in the

interests of business may traverse the de facto necessities of a

group or class; it may even traverse the needs of the community

at large, as, e.g., in the conceivable case of an advisedly

instituted coal famine; but since these necessities, of comfort

or of livelihood, cannot be formulated in terms of the natural

freedom of contract, they can, in the nature of the case, give

rise to no cognizable grievance and find no legal remedy.

The discrepancy between law and fact in the matter of

industrial freedom has had repeated illustration in the court

decisions on disputes between bodies of workmen and their

employers or owners. These decisions commonly fall out in favor

of the employers or owners; that is to say, they go to uphold

property rights and the rights of free contract. The courts have

been somewhat broadly taken to task by a certain class of

observers for alleged partiality to the owners' side in this

class of litigation. It has also been pointed out by faultfinders

that the higher courts decide, on the whole, more uniformly in

favor of the employer-owner than the lower ones, and especially

more so than the juries in those cases where juries have found

occasion to pass on the law of the case. The like is true as

regards suits for damages arising out of injuries sustained by

workmen, and so involving the question of the employer's

liability. Even a casual scrutiny of the decisions, however, will

show that in most cases the decision of the court, whether on the

merits of the case or on the constitutionality of the legal

provisions involved,(7*) is well grounded on the metaphysical

basis of natural liberty. That is to say in other words, the

decisions will be found on the side of the maintenance of

fundamental law and order, "law and order" having, of course,

reference to the inalienable rights of ownership and contract. As

should fairly be expected, the higher courts, who are presumably

in more intimate touch with the principles of jurisprudence,

being more arduously trained and more thoroughly grounded in the

law at the same time that they have also presumably a larger

endowment of legal acumen, - these higher courts speak more

unequivocally for the metaphysical principles and apply them with

a surer and firmer touch. In the view of these higher adepts of

the law, free contract is so inalienable a natural right of man

that not even a statutory enactment will enable a workman to

forego its exercise and its responsibility. By metaphysical

necessity its exercise attaches to the individual so indefeasibly

that it cannot constitutionally be delegated to collective

action, whether legislative or corporate.(8*) This extreme

consequence of the principle of natural liberty has at times

aroused indignation in the vulgar; but their grasp of legal

principles is at fault. The more closely the logical sequence is

followed up, the more convincingly does the legitimacy of such a

decision stand out.

In comparing the decisions of the higher courts with those of

the lower they contrast most signally with the decisions rendered

by juries in the lower tribunals. While this contrast has a

significance in another connection, it casts no shadow on the

legality of the decisions of the courts of higher instance. The

juries, in great measure, speak for the strained sympathies of

the vulgar, which are a matter somewhat apart from the

foundations of law and order.(9*)

Popular sentiment, then, does not at all uniformly bear out

these decisions of the courts in disputes between property rights

and naked mankind, especially not in the more rigorous

enforcement of the principle of free contract. This discrepancy

serves to show that the vulgar, the laity, from whose numbers the

juries are drawn, have not an adequate sense of the principles

that lie at the root of the law; which may be due in part to

their not realizing how essential a foundation of law, order, and

common welfare these principles of natural liberty are. The

visible disparity in the distribution of property may make those

classes who have little property envious of the wealthy members,

and so make them lose interest in the maintenance of the rights

of property. But apart from this, the discipline of daily life,

from which the common-sense notions of the vulgar are in good

part derived, is no longer in full accord with the natural-rights

conceptions handed down from the eighteenth century. In other

words, the conceptions of natural rights on which the common law

rests embody a technically competent formulation of the

deliverances of that body of common sense which was inculcated by

the discipline of everyday life in the eighteenth century, before

the advent of the current situation; whereas the discipline of

everyday life under the current technological and business

situation inculcates a body of common-sense views somewhat at

variance with the received natural-rights notions.

There is apparently something of a divergence between the

received notions on this head and the deliverances of latter-day

common sense. The divergence is neither well defined nor

consistent. The latter-day attitude toward questions of the kind

involved is vague, chiefly negative or critical, and apparently

fluctuating; but after all there is a somewhat persistent

divergence, which may even be said to have a systematic

character, so far as it goes. It runs in the direction of a

(partial and vacillating) disavowal or distrust of the

metaphysics of free contract, and even of natural liberty

generally. This uncertainty of allegiance to the received

foundations of law and order prevails in unequal degrees among

the various classes of the community, being apparently largest

and most outspoken among the workmen of the industrial towns, and

being, on the whole, less noticeable among the propertied and

professional classes and the rural population. The peculiar class

distribution of this disintegration of received convictions, as

well as its connection with modern industrial conditions, will be

taken up again presently in another connection.

The state, that is to say, the government, was once an

organization for the control of affairs in the interest of

princely or dynastic ends. In internal affairs statecraft was

occupied with questions of the dynastic succession, the endeavors

and intrigues of the political magnates, fiscal administration

directed to finding adequate support for the princely power, and

the like. In external politics the objective end was dynastic

prestige and security, military success, and the like. Such is

still in part the end of political endeavor in those countries,

as, e.g., Germany, Austria, or Italy, where the transition to a

constitutional government has not been completed. But since the

advent of constitutional government and parliamentary

representation, business ends have taken the lead of dynastic

ends in statecraft, very much in the same measure as the

transition to constitutional methods has been effectually carried

through. A constitutional government is a business government. It

is particularly through the business expedient of parliamentary

voting on the budget that any constitutional executive, e.g., is

kept within constitutional bounds; and the budget is voted with a

main view to its expediency for business ends. The expediency of

business enterprise is not questioned, whereas the expediency of

an increase of princely power and dignity, with the incidental

costs, may be questioned.

Modern governmental policies, looking as they do to the

furthering of business interests as their chief care, are of a

"mercantile" complexion. They aim to foster trade, as did the

mercantile policies of the sixteenth and seventeenth centuries,

although since "trade" has come to include much else than foreign

commerce, the modern policies look to business in the more

comprehensive sense which the term now necessarily has. But these

modern mercantile policies, with their tariffs, treaties,

interstate commerce regulations, and maxims prohibiting all

"restraint of trade," are after all not of the same nature as the

mercantile policies of the old French and German statesmen, which

they superficially resemble. The old "mercantile system," as it

prevailed on the Continent of Europe, was conceived in the

interest of the prince, the furthering of commercial advantage

being a means to princely power and dignity. (10*) The modern

mercantilism under constitutional rule, on the other hand, looks

to the prince or to the government as a means to the end of

commercial gain. With the transition to constitutional rule and

methods, the discretion and autonomy in the case has passed from

the hands of the prince into those of the business men, and the

interests of the business men have superseded those of the crown.

Representative government means, chiefly, representation of

business interests. The government commonly works in the interest

of the business men with a fairly consistent singleness of

purpose. And in its solicitude for the business men's interests

it is borne out by current public sentiment, for there is a

naive, unquestioning persuasion abroad among the body of the

people to the effect that, in some occult way, the material

interests of the populace coincide with the pecuniary interests

of those business men who live within the scope of the same set

of governmental contrivances. This persuasion is an article of

popular metaphysics, in that it rests on an uncritically assumed

solidarity of interests, rather than on an insight into the

relation of business enterprise to the material welfare of those

classes who are not primarily business men. This persuasion is

particularly secure among the more conservative portion of the

community, the business men, superior and subordinate, together

with the professional classes, as contrasted with those vulgar

portions of the community who are tainted with socialistic or

anarchistic notions. But since the conservative element comprises

the citizens of substance and weight, and indeed the effective

majority of law-abiding citizens, it follows that, with the

sanction of the great body of the people, even including those

who have no pecuniary interests to serve in the matter,

constitutional government has, in the main, become a department

of the business organization and is guided by the advice of the

business men. The government has, of course, much else to do

besides administering the general affairs of the business

community; but in most of its work, even in what is not

ostensibly directed to business ends, it is under the

surveillance of the business interests. It seldom happens, if at

all, that the government of a civilized nation will persist in a

course of action detrimental or not ostensibly subservient to the

interests of the more conspicuous body of the community's

business men. The degree in which a government fails to adapt its

policy to these business exigencies is the measure of its

senility.

The ground of sentiment on which rests the popular approval

of a government for business ends may be summed up under two

heads : patriotism and property. Both of these terms stand for

institutional facts that have come down out of a past which

differed substantially from the present situation. The substance

of both is of the nature of unreasoning sentiment, in the sense

that both are insisted on as a matter of course, as

self-legitimating grounds of action which, it is felt, not only

give expedient rules of conduct, but admit of no question as to

their ulterior consequences or their value for the life-purposes

of the community. The former of these fundamental institutional

habits of thought (perhaps better, habits of mind) runs back to

the discipline of early barbarism, through the feudal days of

fealty to the earlier days of clan life and clannish animosity.

It has therefore the deep-rooted strength given by an extremely

protracted discipline of predation and servitude. Under modern

conditions it is to be rated as essentially an institutional

survival, so ingrained in the populace as to make any appeal to

it secure of a response irrespective of the material merits of

the contention in whose behalf the appeal is made.(11*)

By force of this happy knack of clannish fancy the common man

is enabled to feel that he has some sort of metaphysical share in

the gains which accrue to the business men who are citizens of

the same "commonwealth"; so that whatever policy furthers the

commercial gains of those business men whose domicile is within

the national boundaries is felt to be beneficial to all the rest

of the population.(12*)

The second institutional support of business politics, viz.

property, is similarly an outgrowth of the discipline of the

past, and similarly, though perhaps in a less degree, out of

touch with the discipline of the more recent cultural situation.

In the form in which it prevails in the current popular animus,

the principle of ownership comes down from the days of handicraft

industry and petty trade, as pointed out above. As it is of less

ancient and less unbroken descent, so it seems also to be a less

secure cultural heritage than the sense of patriotic solidarity.

It says that the ownership of property is the material foundation

of human wellbeing, and that this natural right of ownership is

sacred, after the manner in which individual life, and more

especially national life, is sacred. The habits of life and

thought inculcated by joint work under the manorial system and by

joint rules under the handicraft system have apparently

contributed much to the notion of a solidarity of economic

interests, having given the notion such a degree of consistency

as has enabled it to persist in the face of a visible discrepancy

of interests in later, capitalistic times. Under this current,

business regime, business gains are the basis of individual

wealth, and the (pseudo) notion of joint acquisition has taken

the place of the manorial notion of joint work. The institutional

animus of ownership, as it took shape under the discipline of

early modern handicraft, awards the ownership of property to the

workman who has produced it. By a dialectical conversion of the

terms, this metaphysical dictum is made to fit the circumstances

of later competitive business by construing acquisition of

property to mean production of wealth; so that a business man is

looked upon as the putative producer of whatever wealth he

acquires. By force of this sophistication the acquisition of

property by any person is held to be, not only expedient for the

owner, but meritorious as an action serving the common good.

Failure to bargain shrewdly or to accumulate more goods than one

has produced by the work of one's own hands is looked upon with a

feeling of annoyance, as a neglect, not only of opportunity, but

of duty. The pecuniary conscience commonly does not, of course,

go to quixotic lengths in a public spirited insistence on

everybody's acquiring more than an aliquot part of the aggregate

wealth on hand, but it is felt that he best serves the common

good who, other things equal, diverts the larger share of the

aggregate wealth to his own possession. His acquiring a

defensible title to it makes him the putative producer of it.

The natural-rights basis of ownership is by this paralogism

preserved intact, and the common man is enabled to feel that the

business men in the community add to the aggregate wealth at

least as much as they acquire a title to; and the successful

business men are at least as well persuaded that such is their

relation to the aggregate wealth and to the material well-being

of the community at large. So that both the business men whose

gains are sought to be enhanced by business politics and the

populace by whose means the business gains are secured work

together in good faith towards a well-advised business end, - the

accumulation of wealth in the hands of those men who are skilled

in pecuniary matters.(13*)

The manner in which business interests work out in government

policy may be shown by following up their bearing upon one phase

of this policy. An extreme expression of business politics, and

at the same time a characteristic trait of the higher levels of

national life in Christendom, is the current policy of war and

armaments. Modern business is competitive, emulative, and the

direction of business enterprise is in the hands of men who are

single-minded in their competitive conduct of affairs. They

neither are inclined, nor will business competition permit them,

to neglect or overlook any expedient that may further their own

advantage or hinder the advantage of their rivals. Under the

modern situation, as it has taken shape since the industrial

revolution,(14*) business competition has become international,

covering the range of what is called the world market. In this

international competition the machinery and policy of the state

are in a peculiar degree drawn into the service of the larger

business interests; so that, both in commerce and industrial

enterprise, the business men of one nation are pitted against

those of another and swing the forces of the state, legislative,

diplomatic, and military, against one another in the strategic

game of pecuniary advantage. The business interests domiciled

within the scope of a given government fall into a loose

organization in the form of what might be called a tacit ring or

syndicate, proceeding on a general understanding that they will

stand together as against outside business interests. The nearest

approach to an explicit plan and organization of such a business

ring is the modern political party, with its platform, tacit and

avowed. Parties differ in their detail aims, but those parties

that have more than a transient existence and superficial effect

stand for different lines of business policy, agreeing all the

while in so far that they all aim to further what they each claim

to be the best, largest, most enduring business interests of the

community. The ring(15*) of business interests which secures the

broadest approval from popular sentiment is, under constitutional

methods, put in charge of the government establishment. This

popular approval may be secured on the ground of a sound business

platform or (in part) on some ground extraneous to business

policy proper, such as a wave of national animosity, a popular

candidate, a large grain crop, etc. But the only secure basis of

an enduring party tenure of the government machinery is a

business policy which falls in with the interests or the

prejudices of the effective majority.

In international competition the ultima ratio is, as ever,

warlike force, whether the issue be between princes of the grace

of God or princes of ownership. It is a favorite maxim of modern

politics that trade follows the flag. This is the business man's

valuation of national policy and of the ends of national life. So

stated, the maxim probably inverts the sequence of facts, but it

is none the less a fair expression of the close relation there is

between business endeavor and the modern military policies.

Diplomacy, if it is to be effective for whatever end, must be

backed by a show of force and of a readiness to use it. The

definitive argument of those who speak for armaments (in England

and America) is that the maintenance of business interests

requires the backing of arms. On the Continent of Europe this

argument commonly comes second, while patriotic fancy and

animosity take the first place.

Armaments serve trade not only in the making of general terms

of purchase and sale between the business men of civilized

countries, but they are similarly useful in extending and

maintaining business enterprise and privileges in the outlying

regions of the earth. The advanced nations of Christendom are

proselyters, and there are certain valuable perquisites that come

to the business men of those proselyting nations who advance the

frontiers of the pecuniary culture among the backward

populations. There is commonly a handsome margin of profit in

doing business with these, pecuniarily unregenerate, populations,

particularly when the traffic is adequately backed with force.

But, also commonly, these peoples do not enter willingly into

lasting business relations with civilized mankind. It is

therefore necessary, for the purposes of trade and culture, that

they be firmly held up to such civilized rules of conduct as will

make trade easy and lucrative. To this end armament is

indispensable.

But in the portioning out of the trade perquisites that fall

to the proselyters any business community is in danger of being

overreached by alien civilizing powers. No recourse but force is

finally available in disputes of this kind, in which the aim of

the disputants is to take advantage of one another as far as they

can. A warlike front is therefore necessary, and armaments and

warlike demonstrations have come to be a part of the regular

apparatus of business, so far as business is concerned with the

world market.

In so far as it is guided by the exigencies of trade, the

objective end of warlike endeavor is the peace and security

necessary to an orderly development of business. International

business relations, it is well said, make for peace; in the

sense, of course, that they enforce the pacification of

recalcitrant barbarians and lead to contention between civilized

nations for a revision of the peace terms. When a modern

government goes to war for trade purposes, it does so with a view

to reestablishing peace on terms more lucrative to its business

men.(16*)

The above inquiry into the nature and causes of the wars of

nations has resulted in little else than a recital of

commonplaces; the facts and their connection are matters of

common notoriety, and probably no one would hazard a question of

the sight and obvious inferences drawn in the course of the

recital. The excuse for this discursive review of the motives and

aims of a war policy is that it gives a basis for an outlook on

the present and immediate future of business enterprise.(17*)

The experience of Continental Europe in the matter of

armaments during the last half-century, and of all the greater

nations during the last two decades, argues that when warlike

emulation between states of somewhat comparable force has once

got under way it assumes a cumulative character; so that a scale

of expenditure for armaments which would at the outset have

seemed absurdly impossible comes presently to be accepted as a

matter of course. Hitherto the cumulative augmentation of war

expenditures and of war animus shows no sign of slackening. One

after another, the states that have offered some show of

peaceable inclinations have been drawn into the international

game of competitive armaments, as they have one after another

become ambitious to push the enterprises of their business men in

the international markets. An armament is serviceable only if it

is relatively large; its absolute magnitude is a matter of no

particular consequence for competitive politics. It is its

comparative size that counts. Hence the greater the several

armaments, the greater the political need of greater armaments,

and the prompter the resentment of injuries and the livelier the

felt need of offending and of taking offence. A progressively

larger proportion of the nation's forces are withdrawn from

industry and devoted to warlike ends. In this cumulative

diversion of effort to warlike ends a point is presently reached

beyond which the question of armament is no longer, What amount

of warlike expenditure is needed to extend or maintain business

traffic? but rather, What amount will the nation's resources

bear? But the progression does not stop at that point; witness

the case of Italy, France, and Germany, where the war drain has

visibly impaired the industrial efficiency of the several nations

concerned, but where the burden still goes on growing, with no

stopping-place in sight. England and, more particularly, America

are not so near exhaustion, because they have larger resources to

draw on as well as a culture and a population more efficient for

industrial work. But there is no evident reason why these two

should not likewise enter on a policy of emulative exhaustion,

and so sacrifice their aggregate industrial and business interest

to the furtherance of the "great game."

The question may suggest itself, Why should not the business

community, who have a large discretion in international politics

and whose aggregate gains are cut into by excessive war

expenditures, call a halt when the critical point is reached?

There is more than one reason for their failure to do so. War and

preoccupation with warlike enterprise breed a warlike animus in

the community, as well as a habit of arbitrary, autocratic rule

on the part of those in authority and an unquestioning,

enthusiastic subservience on the part of the subjects. National

animosity and national pride demand more and more of military

standing, at the same time that the growing official class needs

increasing emoluments and a larger field of employment and

display. The cultural effects of the discipline of warfare and

armament are much the same whether it is undertaken for drastic

or for business ends; in either case it takes on a dynastic

complexion and breeds the temperament, ideals, and institutional

habits proper to a drastic system of politics. The farther it

goes the more it comes to make use of business interests as a

means rather than an end, as, e.g., in modern Germany, France,

and Italy, and in the Continental states of the sixteenth and

seventeenth centuries. The crown, court, bureaucracy, military

establishment, and nobility, under whatever designations,

gradually come to their own again in such a situation, and

affairs again come to turn on questions of the maintenance and

dignity of these superior elements of the population.(18*) The

objective end of protracted warlike endeavor necessarily shifts

from business advantage to dynastic ascendancy and courtly honor.

Business interests fall to the position of fiscal ways and means,

and business traffic becomes subservient to higher ends, with a

fair chance of ultimate exhaustion or collapse through the

bankruptcy of the state.

Business enterprise is an individual matter, not a collective

one. So long as the individual business man sees a proximate gain

for himself in meeting the demands for war funds and materials to

maintain the courtly and official establishments that go with

military politics, it is not in the nature of the business man to

draw back. It is always his profits, not his livelihood, that is

involved; the question which touches his profits is the relative

gainfulness of alternative lines of investment open to him. So

long as the pecuniary inducements held out by the state, in

bidding for funds or supplies, overbalance the inducements

offered by alternative lines of employment, the business men will

supply these demands, regardless of what the ulterior substantial

outcome of such a course may be in the end. Funds and business

enterprise are now of so pronounced an international or

cosmopolitan character that any business man may, even without

fully appreciating the fact, lend his aid to the fisc of a

hostile power as readily as to a friendly power or to the home

government; whereby an equable and comprehensive exhaustion of

the several communities involved in the concert of nations is

greatly facilitated. Barring accidents and untoward cultural

agencies from outside of politics, business, or religion, there

is nothing in the logic of the modern situation that should stop

the cumulative war expenditures short of industrial collapse and

consequent national bankruptcy, such as terminated the carnival

of war and politics that ran its course on the Continent in the

sixteenth and seventeenth centuries.(19*)

NOTES:

1. Ashley, Economic History and Theory, bk. II, especially ch.

III.

2. See Chapter IV above.

3. Cf. e.g., Ashley, "The Economic Atmosphere of America" in

Surveys, Historical and Economic, pp. 405 et seq.

4. This date is true for England. For America the discipline

favorable to the growth of the natural-liberty dogma lasted

nearly a century longer. In America the new, modern,

technological and business era can scarcely be said to have set

in in good vigor until the period of the Civil War. Hence, with a

longer and later training, the preconceptions of natural liberty

are fresher and more tenacious in America. For the Continental

peoples the case is different again. With them the modern

technological and business situation is of approximately the same

date as in America, but their training up to the date of the

transition to the modern situation was in a much less degree a

training in individual initiative, free scattered industry, and

petty trade. The Continental peoples for the most part made a

somewhat abrupt transition after the middle of the nineteenth

century from a stale and dilapidated system of guild and

feudalistic prescriptions to the (for them) exotic system of

modern technology and business principles.

5. See Chapter II above and Chapter IX below.

6. Under the system of handicraft and petty trade the converse

was true. Livelihood was the fundamental norm of business

regulations; profits had but a secondary standing, if any.

7. E.g., as to employer's liability for accidents or unsanitary

premises, the safeguarding of machinery, age limit of labourers

or hour limit of working time, etc.

8. E.g. where a workman's accepting employment on machinery which

is not safeguarded as the law requires is construed as an

exercise of the indefeasible right of free contract on his part,

which thereby exempts the employer from liability for eventual

accidents.

In point of legal principle the reluctance to allow or

recognize limited liability in joint stock companies, in the

English practice prior to the Companies Acts, was of much the

same nature as the current reluctance to allow an alienation or

abridgment of a workman's individual reSpOnsibility for the terms

of his employment and the consequences following from it. It was

felt that a pecuniary liability was a personal matter, of which

the person was not competent to divest himself under that system

of mutual rights and duties in which the members of the community

were bound together. Impersonal, collective, and limited

liability won its way, as against the system of natural liberty,

in this field by sheer force of business expediency. In a

conflict of principles between the main proposition and one of

its corollaries, the corollary won because the facts had outgrown

the primary implication of the main proposition.

9. The common law is of course a formulation of the deliverances

of common sense on the points which it touches. But common law,

as well as common sense, being a formulation of habits of

thought, is necessarily an outgrowth of past rather than of

present circumstances, - in this case the circumstances of the

eighteenth century, whereas the sympathies of the vulgar, as they

appear in jury decisions, are largely the outcome of those modern

experiences that are at increasing variance with the foundations

of the common law.

It may be remarked by the way that, while the charge of

partiality or corruption, often heard as against these higher

tribunals, may in a few scattering instances be founded, that is

after all not much to the point as regards practical

consequences. The greater number of the courts, indeed virtually

the entire judiciary, are no doubt above substantial suspicion in

the premises. And after all, if they were not incorruptible, - if

the common run of the tribunals were corruptly working in the

interest of the employers or owners, - that need not seriously

affect the outcome as regards the general tenor of the decisions

handed down. If they are corrupt or biassed, they will decide in

favor of the owners, who can afford to pay, and they will be

under the necessity of finding plausible reasons in law for so

doing. Such reason can be found only in the metaphysical natural

rights basis of the law; and if it can be found by the help of

such legal ratiocination, then it is a valid ground of decision,

that being the peculiar merit of metaphysical grounds of

decision. On the other hand, if the court is a "learned, upright

judge," he will look for the grounds of decision in the same

place and find them in the same shape. Necessarily so, since the

point in dispute is almost invariably a question of the legal

rights of property as against the material requirements of

comfort or of livelihood; and the rights of property are the

foundation of modern law and order, while the requirements of

comfort or livelihood passed out of the scope of the law on the

abrogation of the outworn system of mandatory prescriptions

governing industrial and trade relations in early modern times.

Since the disputes in question rarely if ever arise out of a

breach of contract on the part of the employer-owner, the

decision can ordinarily, in the nature of the case, not go

against him, inasmuch as the foundation of economic law and order

is the freedom and inviolability of pecuniary contracts. It

should, in fact, be nearly a matter of indifference to the

"popular" side of this class of litigation whether the courts are

corrupt or not. The question has little else than a speculative

interest. In the nature of the case the owner alone has,

ordinarily, any standing in court. All of which argues that there

are probably very few courts that are in any degree corrupt or

biassed, so far as touches litigation of this class. Efforts to

corrupt them would be a work of supererogation, besides being

immoral.

10. This is not true in nearly the same degree for the mercantile

policies of England, even in early modern times. In English

policy, under the inchoate constitutional system of the

mercantilist era, the ulterior (avowed) end is always the

(business) advantage of the "commonwealth." The prince comes in

rather as second than as first claimant on the solicitude of the

mercantilist statesman.

11. The line of descent of the preconception of patriotism or

chauvinism, as it finds expression in this lively sense of

pecuniary solidarity, may be outlined as follows: Under the clan

(gentile or tribal) system out of which the West-European peoples

passed into the regime of feudal Christendom, a given group stood

together in a union of offence and defence, warlike and economic,

on the basis of a putative blood relationship. When the manor or

the (essentially servile) mark came to replace the clan group as

the economic and civil unit, the bond of putative blood

relationship persisted in a slightly modified form and force, the

incidence of the sense of solidarity, the "consciousness of

kind," then shifting to the new group unit, with allegiance

centring on the feudal head of the group, instead of, as

formerly, on the senior line of putative descent. When the state

came forward in medieval and early modern times and took over the

powers and prerogatives of the head of the manor or the feudal

lord, it took over also the incidence of this sense of

allegiance, and the sense of solidarity came to cover the larger

group of the nation which had succeeded to the autonomy of the

manor. Where the line of institutional descent runs through the

industrial town, with guild, handicraft, and local government,

the transient features of the growth are superficially different

but in effect much the same. The discipline of warfare, which

kept up the practice of joint action and had the appearance of

joint enterprise, served to keep the sense of patriotic

solidarity firm and vigorous and enabled it to cover other

interests as well as the princely enterprise of warfare and

state-making. Wherever unbroken peace prevailed for an

appreciable period, so as to affect the growth of traditions, the

sense of national solidarity showed symptoms of slackening. For

purposes of economic solidarity the commonwealth is conceived

after the manner of an overgrown manor. It figures as such, e.g.,

in English mercantilist writings of the sixteenth to the

eighteenth century, as well as in the patriotic trade politics of

the present.

12. In passing it may be remarked that the fact of this sense of

solidarity being an anachronism must not be taken as implying

anything for or against the substantial merits of such a frame of

mind.

13. The two complementary sentiments-patriotism and pecuniary

solidarity - are found in unequal measure among the several

nations of Christendom. The disparity in this respect corresponds

roughly with a disparity in past national experience. The

Continental peoples, e.g., have, on the whole, a readier and

fuller, more unequivocal, patriotic conviction, as they have also

had a longer, more severe, and later discipline in the fealty

that goes with a system of dynastic warfare and graded servitude;

whereas the English-speaking peoples are animated with a more

secure conviction that money value is the chief end of serious

endeavor and that business solvency is the final attribute of

manhood. But in either case the outcome is the primacy of

business in the counsels of nations, and its empire is none the

less secure for its resting more on one or the other of these two

supports.

14. For England the last half of the eighteenth century, for

Continental Europe and America the last half of the nineteenth.

In colonial commerce the date for both England and the Continent

is much earlier.

15. "Ring" is here used as a designation of this loose

organization of business interests for the guidance of policy,

without implying criticism of the ring or of its aims and

methods.

16. Armaments and large military and naval establishments have

also a secondary attraction, of a more intimate kind, for

enterprising business men, in that they afford opportunities for

transactions of a peculiarly lucrative character. One of the

parties (the government official) concerned in such transactions

has less than the usual incentive to drive a close bargain. His

own private gain and loss is not immediately involved, so that he

is less given to petty huckstering and close surveillance of the

execution of the contracts made. What adds force to this

consideration is the fact that military and naval establishments

habitually are what the vulgar would call corrupt. The pecuniary

interest of the officials does not coincide with that of the

establishment There is an appreciable "margin of error" which a

sagacious business man may turn to account.

The great business interests are the more inclined to look

kindly on an extension of warlike enterprise and armaments, since

the pecuniary advantages inure to them, while the pecuniary

burden falls chiefly on the rest of the community. It is, to say

the least, highly improbable that the business gains which accrue

from a well-conducted foreign policy ever, in modern times, equal

the cost at which they are secured; but that consideration

scarcely enters, since the costs are not paid out of business

gains, but out of the industry of the rest of the people. The

people, however, are animated with an uncritical persuasion that

they have some sort of a residuary share in these gains, and that

this residuary share in some manner exceeds the whole of the

gains secured.

17. See Chapter X. above.

18. Cf. Hobson, Imperialism, pt. I, ch. VII, pt. II, ch. I, and

VII.

19. On the relation of business to warlike expenditure in the

sixteenth and seventeenth centuries, cf., Ehrenberg, Zeitalter

der Fugger.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter 9

The Cultural Incidence of the Machine Process

So far as regards the non-mechanical factors of culture, such

as religion, politics, and even business enterprise, the present

is in a very large degree comparable with the scheme of things

that prevailed on the Continent of Europe in the seventeenth

century. And so far as the working of these cultural factors is

undisturbed by forces that were not present in the older days,

they should logically again work out in such a situation as came

to prevail in Central Europe in the course of the eighteenth

century. The modern situation, of course, is drawn on a larger

scale; but that is due to the intrusion of a new technology, a

different "state of the industrial arts," and not to a

substantially altered range of religious, political, or business

conceptions. The pitch of squalor that characterized vulgar life

in the busier Continental countries at the close of the great era

of politics could probably not be reached again, but that again,

is due, not to these spiritual factors of cultural growth, but to

the altered state of the industrial arts. The factor in the

modern situation that is alien to the ancient regime is the

machine technology, with its many and wide ramifications.

Business conceptions and business methods were present in

vigorous growth in Central Europe in the sixteenth and

seventeenth centuries, as they had been in South Europe from a

slightly earlier date; although the large sweep of business

enterprise is not had until a later date, being conditioned by

the machine technology. Business methods and the apparatus of

business traffic develop very promptly whenever and wherever the

situation calls for them; such is the teaching of economic

history.(1*) There is nothing recondite about them, little that

has to be acquired by a protracted, cumulative experience running

over many generations, such as is involved in technological

development. This business development in earlier modern times,

together with the accumulations of funded wealth that came of

this business enterprise, ran their course to a finish in

Continental Europe, leaving no basis for a new start. The new

start from which the current situation takes its rise, in Europe

and elsewhere, was given to the Continental peoples by the

English, ready-made, in the so-called Industrial Revolution. The

natural-rights metaphysics, to which the eventual breakdown of

the old Continental system owed its specific character, came also

from the English.(2*)

In point of blood and cultural descent the population of

Great Britain did not differ materially from their neighbors

across the Channel or across the North Sea.(3*) But from the

beginning of the modern cultural era Great Britain stood outside

of the general European situation, by force of its physical

isolation. So that during the modern era, down to the close of

the eighteenth century, the British community was in the position

of an interested third party rather than a participant in the

political concert of Europe. The era of "statemaking," so called,

is an era in which England interferes, but is, on the whole, not

greatly interfered with, so far as her own home affairs are

concerned. England, and presently Great Britain, being reduced to

law and order under one crown and living in a condition of

isolation and (relatively) of internal peace, the cultural growth

of that country took a relatively peaceable direction. The

dominant note of everyday life was industry and trade, not

dynastic politics and war. This national experience gave as its

outcome constitutional government and the modern industrial

technology, together with the animus and the point of view of the

modern materialistic science. The point of departure for the more

recent, current situation, therefore, is a twofold one: (1) the

British peaceable variant of the Western culture has contributed

constitutional methods and natural rights, together with the

machine technology brought in under the head of the "industrial

revolution"; and (2) there are the patriotic ideals and

animosities left as a residue of the warlike political traffic in

Continental Europe.

Since the new departure, made on the basis of natural rights

and modern industrial and scientific methods, the complex of

nations and of international relations is a single, not a twofold

one. The stage over which affairs, political, industrial and

cultural, run their course is no longer Continental or British,

but cosmopolitan, comprising all civilized communities and all

civilized interests. So that there is not now, as there was in

the sixteenth and seventeenth centuries, an isolation hospital

for technology, science, and civil rights, set apart from the

general current of cultural development. Whatever the forces at

work in the modern situation may eventually bring to pass,

therefore, the outcome must touch all communities in the same way

and in approximately the same degree. If the outcome is dynastic

politics and armament again played to a finish in popular

squalor, aristocratic virtues, and universal bankruptcy, there

will be no peaceable community of matter-of-fact mechanics and

shopkeepers left in reserve from which to make a new cultural and

industrial start. The modern technology has, in a manner, cut

away the ground out of which it first grew and from which it

gathered force to reshape the course of history. It has made it

impossible for any community to stand peaceably outside of the

great complex of nations.

But within the comprehensive situation of to-day there is

this new factor, the machine process. In an earlier chapter (II)

the technological character of this machine process has been set

forth at some length. The machine process pervades the modern

life and dominates it in a mechanical sense. Its dominance is

seen in the enforcement of precise mechanical measurements and

adjustment and the reduction of all manner of things, purposes

and acts, necessities, conveniences, and amenities of life, to

standard units. The bearing of this sweeping mechanical

standardization upon business traffic is a large part of the

subject-matter of the foregoing chapters. The point of immediate

interest here is the further bearing of the machine process upon

the growth of culture, - the disciplinary effect which this

movement for standardization and mechanical equivalence has upon

the human material.

This discipline falls more immediately on the workmen engaged

in the mechanical industries, and only less immediately on the

rest of the community which lives in contact with this sweeping

machine process. Wherever the machine process extends, it sets

the pace for the workmen, great and small. The pace is set, not

wholly by the particular processes in the details of which the

given workman is immediately engaged, but in some degree by the

more comprehensive process at large into which the given detail

process fits. It is no longer simply that the individual workman

makes use of one or more mechanical contrivances for effecting

certain results. Such used to be his office in the earlier phases

of the use of machines, and the work which he now has in hand

still has much of that character. But such a characterization of

the workman's part in industry misses the peculiarly modern

feature of the case. He now does this work as a factor involved

in a mechanical process whose movement controls his motions. It

remains true, of course, as it always has been true, that he is

the intelligent agent concerned in the process, while the

machine, furnace, roadway, or retort are inanimate structures

devised by man and subject to the workman's supervision. But the

process comprises him and his intelligent motions, and it is by

virtue of his necessarily taking an intelligent part in what is

going forward that the mechanical process has its chief effect

upon him. The process standardizes his supervision and guidance

of the machine. Mechanically speaking, the machine is not his to

do with it as his fancy may suggest. His place is to take thought

of the machine and its work in terms given him by the process

that is going forward. His thinking in the premises is reduced to

standard units of gauge and grade. If he fails of the precise

measure, by more or less, the exigencies of the process check the

aberration and drive home the absolute need of conformity.

There results a standardization of the workman's intellectual

life in terms of mechanical process, which is more unmitigated

and precise the more comprehensive and consummate the industrial

process in which he plays a part. This must not be taken to mean

that such work need lower the degree of intelligence of the

workman. No doubt the contrary is nearer the truth. He is a more

efficient workman the more intelligent he is, and the discipline

of the machine process ordinarily increases his efficiency even

for work in a different line from that by which the discipline is

given. But the intelligence required and inculcated in the

machine industry is of a peculiar character. The machine process

is a severe and insistent disciplinarian in point of

intelligence. It requires close and unremitting thought, but it

is thought which runs in standard terms of quantitative

precision. Broadly, other intelligence on the part of the workman

is useless; or it is even worse than useless, for a habit of

thinking in other than quantitative terms blurs the workman's

quantitative apprehension of the facts with which he has to

do.(4*)

In so far as he is a rightly gifted and fully disciplined

workman, the final term of his habitual thinking is mechanical

efficiency, understanding "mechanical" in the sense in which it

is used above. But mechanical efficiency is a matter of precisely

adjusted cause and effect. What the discipline of the machine

industry inculcates, therefore, in the habits of life and of

thought of the workman, is regularity of sequence and mechanical

precision; and the intellectual outcome is an habitual resort to

terms of measurable cause and effect, together with a relative

neglect and disparagement of such exercise of the intellectual

faculties as does not run on these lines.

Of course, in no case and with no class does the discipline

of the machine process mould the habits of life and of thought

fully into its own image. There is present in the human nature of

all classes too large a residue of the propensities and aptitudes

carried over from the past and working to a different result. The

machine's regime has been of too short duration, strict as its

discipline may be, and the body of inherited traits and

traditions is too comprehensive and consistent to admit of

anything more than a remote approach to such a consummation.

The machine process compels a more or less unremitting

attention to phenomena of an impersonal character and to

sequences and correlations not dependent for their force upon

human predilection nor created by habit and custom. The machine

throws out anthropomorphic habits of thought. It compels the

adaptation of the workman to his work, rather than the adaptation

of the work to the workman. The machine technology rests on a

knowledge of impersonal, material cause and effect, not on the

dexterity, diligence, or personal force of the workman, still

less on the habits and propensities of the workman's superiors.

Within the range of this machine-guided work, and within the

range of modern life so far as it is guided by the machine

process, the course of things is given mechanically,

impersonally, and the resultant discipline is a discipline in the

handling of impersonal facts for mechanical effect. It inculcates

thinking in terms of opaque, impersonal cause and effect, to the

neglect of those norms of validity that rest on usage and on the

conventional standards handed down by usage. Usage counts for

little in shaping the processes of work of this kind or in

shaping the modes of thought induced by work of this kind.

The machine process gives no insight into questions of good

and evil, merit and demerit, except in point of material

causation, nor into the foundations or the constraining force of

law and order, except such mechanically enforced law and order as

may be stated in terms of pressure, temperature, velocity,

tensile strength, etc.(5*) The machine technology takes no

cognizance of conventionally established rules of precedence; it

knows neither manners nor breeding and can make no use of any of

the attributes of worth. Its scheme of knowledge and of inference

is based on the laws of material causation, not on those of

immemorial custom, authenticity, or authoritative enactment. Its

metaphysical basis is the law of cause and effect, which in the

thinking of its adepts has displaced even the law of sufficient

reason.(6*)

The range of conventional truths, or of institutional

legacies, which it traverses is very comprehensive, being,

indeed, all-inclusive. It is but little more in accord with the

newer, eighteenth century conventional truths of natural rights,

natural liberty, natural law, or natural religion, than with the

older norms of the true, the beautiful, and the good which these

displaced. Anthropomorphism, under whatever disguise, is of no

use and of no force here.

The discipline exercised by the mechanical occupations, in so

far as it is in question here, is a discipline of the habits of

thought. It is, therefore, as processes of thought, methods of

apperception, and sequences of reasoning, that these occupations

are of interest for the present purpose; it is as such that they

have whatever cultural value belongs to them. They have such a

value, therefore, somewhat in proportion as they tax the mental

faculties of those employed; and the largest effects are to be

looked for among those industrial classes who are required to

comprehend and guide the processes, rather than among those who

serve merely as mechanical auxiliaries of the machine process.

Not that the latter are exempt from the machine's discipline, but

it falls upon them blindly and enforces an uncritical acceptance

of opaque results, rather than a theoretical insight into the

causal sequences which make up the machine process. The higher

degree of training in such matter-of-fact habits of thought is

accordingly to be looked for among the higher ranks of skied

mechanics, and perhaps still more decisively among those who

stand in an engineering or supervisory relation to the processes.

It counts more forcibly and farthest among those who are required

to exercise what may be called a mechanical discretion in the

guidance of the industrial processes, who, as one might say, are

required to administer the laws of causal sequence that run

through material phenomena, who therefore must learn to think in

the terms in which the machine processes work.(7*) The

metaphysical ground, the assumptions, on which such thinking

proceeds must be such as will hold good for the sequence of

material phenomena; that is to say, it is the metaphysical

assumptions of modern material science, - the law of cause and

effect, cumulative causation, conservation of energy, persistence

of quantity, or whatever phrase be chosen to cover the concept.

The men occupied with the modern material sciences are,

accordingly, for the purpose in hand, in somewhat the same case

as the higher ranks of those employed in mechanical industry.(8*)

Leaving aside the archaic vocations of war, politics,

fashion, and religion, the employments in which men are engaged

may be distinguished as pecuniary or business employments on the

one hand, and industrial or mechanical employments on the other

hand.(9*) In earlier times, and indeed until an uncertain point

in the nineteenth century, such a distinction between employments

would not to any great extent have coincided with a difference

between occupations. But gradually, as time has passed and

production for a market has come to be the rule in industry,

there has Supervened a differentiation of occupations, or a

division of labor, whereby one class of men have taken over the

work of purchase and sale and of husbanding a store of

accumulated values. Concomitantly, of course, the rest, who may,

for lack of means or of pecuniary aptitude, have been less well

fitted for pecuniary pursuits, have been relieved of the cares of

business and have with increasing specialization given their

attention to the mechanical processes involved in this production

for a market. In this way the distinction between pecuniary and

industrial activities or employments has come to coincide more

and more nearly with a difference between occupations. Not that

the specialization has even yet gone so far as to exempt any

class from all pecuniary care;(10*) for even those whose daily

occupation is mechanical work still habitually bargain with their

employers for their wages and with others for their supplies. So

that none of the active classes in modern life is fully exempt

from pecuniary work.

But the need of attention to pecuniary matters is less and

less exacting, even in the matter of wages and supplies. The

scale of wages, for instance, is, for the body of workmen, and

also for what may be called the engineering force, becoming more

and more a matter of routine, thereby lessening at least the

constancy with which occasions for detail bargaining in this

respect recur. So also as regards the purchase of consumable

goods. In the cities and industrial towns, particularly, the

supplying of the means of subsistence has, in great part, become

a matter of routine. Retail prices are in an increasing degree

fixed by the seller, and in great measure fixed in an impersonal

way. This occurs in a particularly evident and instructive way in

the practice of the department stores, where the seller fixes the

price, and comes in contact with the buyer only through the

intervention of a salesman who has no discretion as to the terms

of sale. The change that has taken place and that is still going

on in this respect is sufficiently striking on comparison with

the past in any industrial community, or with the present in any

of those communities which we are in the habit of calling

"industrially backward."

Conversely, as regards the men in the pecuniary occupations,

the business men. Their exemption from taking thought of

mechanical facts and processes is likewise only relative. Even

those business men whose business is in a peculiar degree remote

from the handling of tools or goods, and from the oversight of

mechanical processes, as, for example, bankers, lawyers, brokers,

and the like, have still, at the best, to take some cognizance of

the mechanical apparatus of everyday life; they are at least

compelled to take some thought of what may be called the

mechanics of consumption. Whereas those business men whose

business is more immediately concerned with industry commonly

have some knowledge and take some thought of the processes of

industry; to some appreciable extent they habitually think in

mechanical terms. Their cogitations may habitually run to

pecuniary conclusions, and the test to which the force and

validity of their reasoning is brought may habitually be the

pecuniary outcome; the beginning and end of their more serious

thinking is of a pecuniary kind, but it always takes in some

general features of the mechanical process along the way. Their

exemption from mechanical thinking, from thinking in terms of

cause and effect, is, therefore, materially qualified.

But after all qualifications have been made, the fact still

is apparent that the everyday life of those classes which are

engaged in business differs materially in the respect cited from

the life of the classes engaged in industry proper. There is an

appreciable and widening difference between the habits of life of

the two classes; and this carries with it a widening difference

in the discipline to which the two classes are subjected. It

induces a difference in the habits of thought and the habitual

grounds and methods of reasoning resorted to by each class. There

results a difference in the point of view, in the facts dwelt

upon, in the methods of argument, in the grounds of validity

appealed to; and this difference gains in magnitude and

consistency as the differentiation of occupations goes on. So

that the two classes come to have an increasing difficulty in

understanding one another and appreciating one another' s

convictions, ideals, capacities, and shortcomings.

The ultimate ground of validity for the thinking of the

business classes is the natural-rights ground of property, - a

conventional, anthropomorphic fact having an institutional

validity, rather than a matter-of-fact validity such as can be

formulated in terms of material cause and effect; while the

classes engaged in the machine industry are habitually occupied

with matters of causal sequence, which do not lend themselves to

statement in anthropomorphic terms of natural rights and which

afford no guidance in questions of institutional right and wrong,

or of conventional reason and consequence. Arguments which

proceed on material cause and effect cannot be met with arguments

from conventional precedent or dialectically sufficient reason,

and conversely.

The thinking required by the pecuniary occupations proceeds

on grounds of conventionality, whereas that involved in the

industrial occupations runs, in the main, on grounds of

mechanical sequence or causation, to the neglect of

conventionality. The institution (habit of thought) of ownership

or property is a conventional fact; and the logic of pecuniary

thinking- that is to say, of thinking on matters of ownership -

is a working out of the implications of this postulate, this

concept of ownership or property. The characteristic habits of

thought given by such work are habits of recourse to conventional

grounds of finality or validity, to anthropomorphism, to

explanations of phenomena in terms of human relation, discretion,

authenticity, and choice. The final ground of certainty in

inquiries on this natural-rights plane is always a ground of

authenticity, of precedent, or accepted decision. The argument is

an argument de jure, not de facto, and the training given lends

facility and certainty in the pursuit of de jure distinctions and

generalizations, rather than in the pursuit or the assimilation

of a de facto knowledge of impersonal phenomena. The end of such

reasoning is the interpretation of new facts in terms of

accredited precedents, rather than a revision of the knowledge

drawn from past experience in the matter-of-fact light of new

phenomena. The endeavor is to make facts conform to law, not to

make the law or general rule conform to facts. The bent so given

favors the acceptance of the general, abstract, custom-made rule

as something real with a reality superior to the reality of

impersonal, non-conventional facts. Such training gives reach and

subtlety in metaphysical argument and in what is known as the

"practical" management of affairs; it gives executive or

administrative efficiency, so-called, as distinguished from

mechanical work. "Practical" efficiency means the ability to turn

facts to account for the purposes of the accepted conventions, to

give a large effect to the situation in terms of the pecuniary

conventions in force.(11*)

The spiritual attitude given by this training in reasoning de

jure, from pecuniary premises to pecuniary conclusions, is

necessarily conservative. This species of reasoning assumes the

validity of the conventionally established postulates, and is

consequently unable to take a sceptical attitude toward these

postulates or toward the institutions in which these postulates

are embodied. It may lead to scepticism touching other, older,

institutions that are at variance with its own (natural-rights)

postulates, but its scepticism cannot touch the natural-rights

ground on which it rests its own case. In the same manner, of

course, the thinking which runs in material causal sequence

cannot take a sceptical attitude toward its fundamental

postulate, the law of cause and effect; but since reasoning on

this materialistic basis does not visibly go to uphold the

received institutions, the attitude given by the discipline of

the machine technology cannot, for the present, be called a

conservative attitude.

The business classes are conservative, on the whole, but such

a conservative bent is, of course, not peculiar to them. These

occupations are not the only ones whose reasoning prevailingly

moves on a conventional plane. Indeed, the intellectual activity

of other classes, such as soldiers, politicians, the clergy, and

men of fashion, moves on a plane of still older conventions; so

that if the training given by business employments is to be

characterized as conservative, that given by these other, more

archaic employments should be called reactionary.(12*) Extreme

conventionalization means extreme conservatism. Conservatism

means the maintenance of conventions already in force. On this

head, therefore, the discipline of modern business life may be

said simply to retain something of the complexion which marks the

life of the higher barbarian culture, at the same time that it

has not retained the disciplinary force of the barbarian culture

in so high a state of preservation as some of the other

occupations just named.

The discipline of the modern industrial employments is

relatively free from the bias of conventionality, but the

difference between the mechanical and the business occupations in

this respect is a difference of degree. It is not simply that

conventional standards of certainty fall into abeyance for lack

of exercise, among the industrial classes. The positive

discipline exercised by their work in good part runs counter to

the habit of thinking in conventional, anthropomorphic terms,

whether the conventionality is that of natural rights or any

other. And in respect of this positive training away from

conventional norms, there is a large divergence between the

several lines of industrial employment. In proportion as a given

line of employment has more of the character of a machine process

and less of the character of handicraft, the matter-of-fact

training which it gives is more pronounced. In a sense more

intimate than the inventors of the phrase seem to have

appreciated, the machine has become the master of the man who

works with it and an arbiter in the cultural fortunes of the

community into whose life it has entered.

The intellectual and spiritual training of the machine in

modern life, therefore, is very far-reaching. It leaves but a

small proportion of the community untouched; but while its

constraint is ramified throughout the body of the population, and

constrains virtually all classes at some points in their daily

life, it falls with the most direct, intimate, and unmitigated

impact upon the skilled mechanical classes, for these have no

respite from its mastery, whether they are at work or at play.

The ubiquitous presence of the machine, with its spiritual

concomitant - workday ideals and scepticism of what is only

conventionally valid is the unequivocal mark of the Western

culture of to-day as contrasted with the culture of other times

and places. It pervades all classes and strata in a varying

degree, but on an average in a greater degree than at any time in

the past, and most potently in the advanced industrial

communities and in the classes immediately in contact with the

mechanical occupations.(13*) As the comprehensive mechanical

organization of the material side of life has gone on, a

heightening of this cultural effect throughout the community has

also supervened, and with a farther and faster movement in the

same direction a farther accentuation of this "modern" complexion

of culture is fairly to be looked for, unless some remedy be

found. And as the concomitant differentiation and specialization

of occupations goes on, a still more unmitigated discipline falls

upon ever widening classes of the population, resulting in an

ever weakening sense of conviction, allegiance, or piety toward

the received institutions.

It is a matter of common notoriety that the modern industrial

populations are improvident in a high degree and are apparently

incapable of taking care of the pecuniary details of their own

life. This applies, not only to factory hands, but also to the

general class of highly skilled mechanics, inventors,

technological experts. The rule does not hold in any hard and

fast way, but it holds with such generality as may fairly be

looked for. The present factory population may be compared in

this respect with the class of handicraftsmen whom they have

displaced, as also with the farming population of the present

time, especially the class of small proprietary farmers. The

failure of the modern industrial classes on this head is not due

to scantier opportunities for saving, whether they are compared

with the earlier handicraftsmen or with the modern farmer or

peasant; nor is it due to a lack of general intelligence, for a

comparison in point of intelligence falls out in favor of the

modern industrial workmen. This improvidence is commonly

discussed in terms of deprecation, and there is much preaching of

thrift and steady habits. But the preaching has no appreciable

effect. The trouble seems to be of the nature of habit rather

than of reasoned conviction. Other causes may partially explain

this improvidence, but the inquiry is at least pertinent how far

the absence of property and thrift among them may be traceable to

the relative absence of pecuniary training and to the presence of

a discipline which is at variance with habits of thrift.

Mere exemption from pecuniary training is not competent alone

to explain the patent thriftlessness of modern workmen; the more

so since this exemption is but partial and relative. Also, the

thriftless classes commonly have an envious appreciation of

pecuniary advantages. It is rather the composite effect of

exemption from pecuniary training and certain positive

requirements of modern life. Among these positive requirements is

what has been called the canon of conspicuous waste. Under modern

conditions a free expenditure in consumable goods is a condition

requisite to good repute.(14*) This conduces to immediate

consumption rather than to saving. What is perhaps still more

decisive against thrift on the part of workmen is the fact that

the modern large organization of industry requires a high degree

of mobility on the part of employees. It requires, in fact, that

the labor force and the labor units be mobile, interchangeable,

distributable, after the same impersonal fashion as the

mechanical contrivances engaged are movable and distributable.

The working population is required to be standardized, movable,

and interchangeable in much the same impersonal manner as the raw

or halfwrought materials of industry. From which it follows that

the modern workman cannot advantageously own a home. By force of

this latter feature of the case he is discouraged from investing

his savings in real property, or, indeed, in any of the

impediments of living. And the savings-bank account, it may be

added, offers no adequate substitute, as an incentive to thrift,

in the place of such property as a dwelling-place, which is

tangibly and usefully under the owner's hand and persistently

requires maintenance and improvement.

The conditions of life imposed upon the working population by

the machine industry discourage thrift. But after allowance has

been made for this almost physical restraint upon the aquisition

of property by the working classes, something is apparently left

over, to be ascribed to the moral effect of the machine

technology. The industrial classes appear to be losing the

instinct of individual ownership. The acquisition of property is

ceasing to appeal to them as a natural, self-evident source of

comfort and strength. The natural right of property no longer

means so much to them as it once did.

A like weakening of the natural-rights animus is visible at

another point in the current frame of mind of these classes. The

growth of trade-unionism and of what is called the trade-union

spirit is a concomitant of industry organized after the manner of

a machine process. Historically this growth begins, virtually,

with the industrial revolution, coming in sporadically, loosely,

tentatively, with no precise assignable date, very much as the

revolution does. England is the land of its genesis, its "area of

characterization," and the place where it has reached its fullest

degree of specification and its largest force; just as England is

the country in which the modern machine industry took its rise

and in which it has had the longest and most consistent life and

growth. In this matter other countries are followers of the

British lead and apparently borrowers of British precedents and

working concepts. Still, the history of the trade-union movement

in other countries seems to say that the working classes

elsewhere have not advisedly borrowed ideals and methods of

organization from their British congeners so much as they have

been pushed into the same general attitude and line of conduct by

the same general line of exigencies and experiences.

Particularly, experience seems to say that it is not feasible to

introduce the trade-union spirit or the trade-union rules into

any community until the machine industry has had time extensively

to standardize the scheme of work and of life for the working

classes on mechanical lines. Workmen do not take to full-blown

trade-union ideals abruptly on the introduction of those modern

business methods which make trade-union action advisable for the

working class. A certain interval elapses between the time when

business conditions first make trade-union action feasible, as a

business proposition, and the time when the body of workmen are

ready to act in the spirit of trade-unionism and along the lines

which the union animus presently accepts as normal for men in the

mechanically organized industries. An interval of discipline in

the ways of the mechanically standardized industry, more or less

protracted and severe, seems necessary to bring such a proportion

of the workmen into line as will give a consensus of sentiment

and opinion favorable to trade-union action.

The pervading characteristic of the trade-union animus is the

denial of the received natural-rights dogmas wherever the

mechanical standardization of modern industry traverses the

working of these received natural rights. Recent court decisions

in America, as well as decisions in analogous cases in England at

that earlier period when the British development was at about the

same stage of maturity as the current American situation, testify

unequivocally that the common run of trade-union action is at

variance with the natural-rights foundation of the common law.

Trade-unionism denies individual freedom of contract to the

workman, as well as free discretion to the employer to carry on

his business as may suit his own ends. Many pious phrases have

been invented to disguise this iconoclastic trend of trade-union

aims and endeavors; but the courts, standing on a secure and

familiar natural-rights footing, have commonly made short work of

the shifty sophistications which trade-union advocates have

offered for their consideration. They have struck at the root of

the matter in declaring trade-union regulations inimical to the

natural rights of workman and employer alike, in that they hamper

individual liberty and act in restraint of trade. The

regulations, therefore, violate that system of law and order

which rests on natural rights, although they may be enforced by

that de facto law and order which is embodied in the mechanical

standardization of the industrial processes.

Trade-unionism is an outgrowth of relatively late industrial

conditions and has come on gradually as an adaptation of old

methods and working arrangements carried over from the days of

handicraft and petty trade. It is a movement to adapt, construe,

recast, earlier working arrangements with as little lesion to

received preconceptions as the new exigencies and the habits of

thought bred by them will permit. It is, on its face, an endeavor

of compromise between received notions of what "naturally" ought

to be in matters of industrial business, on the one hand, and

what the new exigencies of industry demand and what the new

animus of the workman will tolerate, on the other hand.

Trade-unionism is therefore to be taken as a somewhat mitigated

expression of what the mechanical standardization of industry

inculcates. Hitherto the movement has shown a fairly

uninterrupted growth, not only in the numbers of its membership,

but in the range and scope of its aims as well; and hitherto it

has reached no halting-place in its tentative, shifty, but ever

widening crusade of iconoclasm against the received body of

natural rights. The latest, maturest expressions of

trade-unionism are, on the whole, the most extreme, in so far as

they are directed against the natural rights of property and

pecuniary contract.

The nature of the compromise offered by trade-unionism is

shown by a schedule of its demands: collective bargaining for

wages and employment; arbitration of differences between owners

and workmen; standard rates of wages; normal working day, with

penalized regulation of hours for men, women, and children;

penalized regulation of sanitary and safety appliances; mutual

insurance of workmen, to cover accident, disability, and

unemployment. In all of this the aim of unionism seldom goes the

length of overtly disputing the merits of any given article of

natural-rights dogma. It only endeavors to cut into these

articles, in point of fact, at points where the dogmas patently

traverse the conditions of life imposed on the workmen by the

modern industrial system or where they traverse the consensus of

sentiment that is coming to prevail among these workmen.

When unionism takes an attitude of overt hostility to the

natural-rights institutions of property and free contract, it

ceases to be unionism simply and passes over into something else,

which may be called socialism for want of a better term. Such an

extreme iconoclastic position, which would overtly assert the

mechanical standardization of industry as against the common-law

standardization of business, seems to be the logical outcome to

which the trade-union animus tends, and to which some approach

has latterly been made by more than one trade-unionist body, but

which is, on the whole, yet in the future, if, indeed, it is to

be reached at all. On the whole, the later expressions go farther

in this direction than the earlier; and the animus of the

leaders, as well as of the more wide-awake body of unionist

workmen, appears to go farther than their official utterances.

A detail of trade-union history may be cited in illustration

of their attitude toward the natural-rights principles that

underlie modern business relations. As is well known,

trade-unions have somewhat consistently avoided pecuniary

responsibility for the actions of their members or officials.

They avoid incorporation. Practically an employer has had no

recourse in case he suffers from a failure on the part of his

union workmen to live up to the terms of an agreement made with

the union. In English practice this exemption from pecuniary

responsibility has acquired much of the force of law, and indeed

was supposed to have gained the countenance of statutory

enactment, until, within the past few months, the so-called Taff

Vale decision of the House of Lords reversed the views which had

come to prevail on this head. This decision, by the most

conservative tribunal of the British nation, is too recent to

permit its consequences for trade-unionism to be appreciated. But

it seems fair to expect that the question which the decision

brings home to the unions will be, How is this court-made

pecuniary responsibility to be evaded? not, How is it to be lived

up to? Patently,(15*) the decision is unexceptionable under

common law rules; but, also patently,(16*) it broadly traverses

trade-union practice and is wholly alien to the attitude of the

trade-unionists.(17*)

The animus shown by the trade-unionists in this shirking of

pecuniary responsibility is characteristic of their attitude

toward common law rules. The unions and their methods of work are

essentially extra-legal. It is only reluctantly, as defendants if

at all, that unions are accustomed to appear in court. When they

make a move for statutory enactment, as for the enforcement of a

normal day or of sanitary and safeguarding regulations, it is

prevailingly to criminal law that they turn.

To all this it might, of course, be said that the workmen who

make up the trade-union element take the course indicated simply

because their selfish interest urges them to this course; that

their common necessities and common weakness constrains them to

stand together and to act collectively in dealing with their

employers; while the fact that their demands have no standing in

court constrains them to seek their ends by extra-legal means of

coercion. But this objection is little else than another way of

saying that the exigencies forced upon the workmen by the

mechanically standardized industrial system are extra-legal

exigencies - exigencies which do not run in business terms and

therefore are not amenable to the natural-rights principles of

property and contract that underlie business relations; that they

can therefore not be met on common law ground; and that they

therefore compel the workmen to see them from another point of

view and seek to dispose of them by an appeal to other principles

than those afforded by the common law standpoint. That is to say,

in other words, these exigencies which compel the trade-unionists

to take thought of their case in other terms than those afforded

by existing legal institutions are the means whereby the

discipline of the machine industry is enforced and made effective

for recasting the habits of thought of the workmen. The harsh

discipline of these exigencies of livelihood drives home the new

point of view and holds the workmen consistently to it. But that

is not all that the mechanical standardization of industry does

in the case; it also furnishes the new terms in which the revised

scheme of economic life takes form. The revision of the scheme

aimed at by trade-union action runs, not in terms of natural

liberty, individual property rights, individual discretion, but

in terms of standardized livelihood and mechanical necessity, -

it is formulated, not in terms of business expediency, but in

terms of industrial, technological standard units and standard

relations.

The above presentation of the case of trade-unionism is of

course somewhat schematic, as such a meagre, incidental

discussion necessarily must be. It takes account only of those

features of trade-unionism which characteristically mark it off

from that business scheme of things with which it Comes in

conflict. There are, of course, many survivals, pecuniary and

others, in the current body of trade-union demands, and much of

the trade-union argument is carried on in business terms. The

crudities and iniquities of the trade-union campaign are

sufficiently many and notorious to require no rehearsal here.

These crudities and iniquities commonly bulk large in the eyes of

critics who pass an opinion on trade-unionism from the

natural-rights point of view; and, indeed, they may deserve all

the disparaging attention that is given them. Trade-unionism does

not fit into the natural-rights scheme of right and honest

living; but therein, in great part, lies its cultural

significance. It is of the essence of the case that the new aims,

ideals, and expedients do not fit into the received institutional

structure; and that the classes who move in trade-unions are,

however crudely and blindly, endeavoring, under the compulsion of

the machine process, to construct an institutional scheme on the

lines imposed by the new exigencies given by the machine process.

The point primarily had in view in entering on this

characterization of trade-unionism was that under the discipline

of the mechanically standardized industry certain natural rights,

particularly, those of property and free contract, are in a

degree falling into abeyance among those classes who are most

immediately subjected to this discipline. It may be added that

other classes also, to an uncertain extent, sympathize with the

trade-unionists and are affected with a similar (mild and

equivocal) distrust of the principles of natural liberty. When

distrust of business principles rises to such a pitch as to

become intolerant of all pecuniary institutions, and leads to a

demand for the abrogation of property rights rather than a

limitation of them, it is spoken of as "socialism" or

"anarchism." This socialistic disaffection is widespread among

the advanced industrial peoples. No other cultural phenomenon is

so threatening to the received economic and political structure;

none is so unprecedented or so perplexing for practical men of

affairs to deal with. The immediate point of danger in the

socialistic disaffection is a growing disloyalty to the

natural-rights institution of property, but this is backed by a

similar failure of regard for other articles of the institutional

furniture handed down from the past. The classes affected with

socialistic vagaries protest against the existing economic

organization, but they are not necessarily averse to a somewhat

rigorous economic organization on new lines of their own

choosing. They demand an Organization on industrial as contrasted

with business lines. Their sense of economic solidarity does not

seem to be defective, indeed it seems to many of their critics to

be unnecessarily pronounced; but it runs on lines of industrial

coherence and mechanical constraint, not on lines given by

pecuniary conjunctures and conventional principles of economic

right and wrong.

There is little agreement among socialists as to a programme

for the future. Their constructive proposals are ill-defined and

inconsistent and almost entirely negative. The negative character

of the socialistic propaganda has been made a point of

disparagement by its critics, perhaps justly. But their

predilection for shifty iconoclasm, as well as the vagueness and

inconsistency of their constructive proposals, are in the present

connection to be taken as evidence that the attitude of the

socialists cannot be expressed in positive terms given by the

institutions at present in force. It may also be evidence of the

untenability of the socialistic ideals; but the merits of the

socialist contentions do not concern the present inquiry. The

question here is as to the nature and causes of the socialist

disaffection; it does not concern the profounder and more

delicate point, as to the validity of the socialist contentions.

Current socialism is an animus of dissent from received

traditions. The degree and the direction of this dissent varies

greatly, but it is, within the socialist scheme of thought,

agreed that the institutional forms of the past are unfit for the

work of the future.(18*)

The socialistic disaffection has been set down to envy, class

hatred, discontent with their own lot by comparison with that of

others, and to a mistaken view of their own interests. This

criticism may be well enough as far as it goes, but it does not

touch socialism in those respects in which it differs from other

movements into which this range of motives enters; that is to

say, it touches, not the specific traits of socialism, but the

common features of popular discontent. History shows many such

movements of discontent, pushed on by real or fancied privation

and iniquity; and past experience recorded in history should lead

us to expect that, under the guidance of such motives and such

reasoning as is currently imputed to the socialists by their

conservative critics, the malcontents would demand a

redistribution of property, a reorganization of ownership on such

new lines as would favor the discontented classes. But such is

not the trend of socialistic thinking. It looks to the

disappearance of property rights rather than their

redistribution. The entire range of doctrines covered by the

theory of distribution in the received economics is essentially

(and characteristically) neglected by the modern socialist

speculations.(19*)

The perplexity of those who protest against a supposedly

imminent socialistic subversion of property rights is of a

twofold kind: (1) The absence of proprietary rights is

incomprehensible, and a living together in society without

defined ownership of the means of living is held to be

impracticable; ownership of goods, in the apprehension of the

conservative critics, is involved in the presence of goods. (2)

Ownership of the means of living is an inalienable right of man,

ethically inevitable; the cancelment of property rights is felt

to violate a fundamental principle of morals. All this, of

course, proceeds on the assumption that the institution of

ownership cannot be abrogated, as being an elemental function of

human nature and an integral factor in the order of things in

which human life belongs.

To the modern socialist all this is coming to be less and

less convincing. In this respect there is a fairly well marked

progressive change in the attitude of the professed socialists.

Their position is progressively less capable of being formulated

as a business proposition; their demands are progressively more

difficult to state in the form of a pecuniary claim. The claim to

the full product of labor, which once filled a large place in

socialistic clamors and had a great carrying force during the

earlier three-quarters of the nineteenth century, has gradually

fallen into abeyance, both with the agitators and the adherents

of the propaganda, during the last generation. To-day this claim

is an afterthought in the advocate's presentation of socialism,

more frequently than it is a point of departure for the argument,

and it is made more of by the proselytes, who have carried the

metaphysics of it over from the current common sense of the

business community, than by the socialists of confirmed standing.

The claim to the full product is an article of natural-rights

dogma, and as such it is a reminiscence of the institutional

situation from which socialism departs, rather than a feature of

the prospective situation to which socialistic sentiment looks.

The like obsolescence of the sense of equity in ownership is

visible in the attitude taken by strikers in the large,

mechanically organized industries, outside of the ranks of avowed

socialism. These strikers are less and less deterred by

considerations of vested rights, property rights, owner's

interests, and the like. The principle that a man may do what he

will with his own is losing its binding force with large classes

in the community, apparently because the spiritual ground on

which rests the notion of "his own" is being cut away by the

latter-day experience of these classes. Abridgment of proprietary

discretion, confiscation of proprietary rights, is growing

gradually less repugnant to the industrial populace; and the

question of indemnity for eventual loss is more and more falling

into neglect. With the socialistic element the question is not,

what shall be done in the way of readjustment of property claims,

but what is to be done to abolish them.(20*)

The question of equity or inequity in the distribution of

wealth presumes the validity of ownership rights on some basis or

other, or at least it presumes the validity of some basis on

which the claims of ownership may be discussed. Ownership is the

major premise of any argument as to the equity of distribution,

and it is this major premise that is being forgotten by the

classes among whom socialistic sentiment is gaining. Equity in

this connection seems not to belong in the repertory of socialist

concepts. It is at this point - the point of a common ground of

argument- that the discrepancy occurs which stands in the way,

not only of an eventual agreement between the socialists and

their conservative critics, but even of their meeting one

another's reasoning with any substantial effect. In the equipment

of common-sense ideas on the basis of which the conservatives

reason on this matter, there is included the conventional article

of ownership, as a prime fact; in the common-sense basis of

socialistic thinking this conventional premise has no secure

place. There is, therefore, a discrepancy in respect of the

metaphysics underlying the knowledge and reasoning of the two

parties to the controversy, and the outlook for a common

understanding is accordingly vain. No substantial agreement upon

a point of knowledge or conviction is possible between persons

who proceed from disparate preconceptions.

Still the conservative reformers and the iconoclasts have a

good deal in common. The prevalent habit of mind of both classes

is a hybrid product of conventional principles and matter-of-fact

insight. But these two contrasted grounds of opinion and

aspiration are present in unequal degrees in the two contrasted

classes; in the conservatives the conventional grounds of

finality dominate and bear down the matter-of-fact knowledge of

things, while the converse is true of the iconoclasts. Contrasted

with earlier times and other cultural regions the consensus, the

general drift, of the modern Western culture as a whole is of an

iconoclastic character; while the class contrast here in question

lies only within the range of this Western cultural consensus. As

one or the other of the two contrasted proclivities - recourse to

conventional precedents and recourse to matter-of-fact insight -

gains and overbalances the other, the general cultural movement

will drift toward a more conservative (archaic), conventional

position or toward a more iconoclastic, materialistic position.

During modern times the cultural drift has set in the latter

direction. With due but not large exceptions, the effective body

of the modern population has been growing more matter-of-fact in

their thinking, less romantic, less idealistic in their

aspirations, less bound by metaphysical considerations in their

view of human relations, less mannerly, less devout.

The discrepancy between the conservatives and the iconoclasts

need not be taken to mean that the two contrasted classes are

moving in opposite directions, nor even in widely divergent

directions. Neither class can properly be said to be

reactionary.(21*) Taken generally, both wings have been moving in

the direction of a more impersonal, more matter-of-fact, less

conventional point of view. In this composite cultural growth the

matter-of-fact habit of mind has on the whole been gaining at the

expense of the conventional, and the conventional premises that

have been retained have also come to bear more of a

matter-of-fact character, - as, e.g., in the supersession of

feudalistic or theocratic principles of law by natural rights. So

that the position for which the effective body of conservatives

now stand is not in substance a very archaic one. It is a more

matter-of-fact position, less closely bound by authentic

conventions, than the position effectively occupied by the

iconoclastic wing a hundred years ago.

Throughout the mod ern cultural complex there is a somewhat

variable, scattering shifting of ground to a more matter-of-fact

basis. The direction of spiritual growth or change is much the

same throughout the general body of the population; but the rate

of change, the rate at which matter-of-fact ideals are

superseding ideals of conventional authenticity, is not the same

for all classes. Hence the class discrepancy here spoken of. The

coefficient of change is so much larger in the vulgar, industrial

classes as progressively to widen the cultural interval between

them and the conservatives in the respect which is here in

question. And the resulting discrepancy of institutional aims and

ideals may have none the less serious consequences for being due

to a differential rate of movement rather than to a divergent

cultural trend.

In this differential rate of movement the departure from the

ancient landmarks has now gone so far (or is reaching such a

point) among the socialistic vulgar as to place their th inking

substantially on a plane of material matter of fact, particularly

as regards economic institutions. Whereas in the conservative

classes the change is not yet large enough to take them off the

plane of received conventional truth, particularly as regards

economic institutions and such social questions as are of an

economic complexion. In the case of the former this change in

habit of mind has been so considerable as, in effect, to

constitute a change in kind; crude matter of fact has come to be

the dominant note of their attitude, and conventional

authenticity has been relegated to a subsidiary place; that is to

say, the change is of a revolutionary character. In the case of

the conservative classes, so far as touches the institutional

notions here under inquiry, the corresponding change has not yet

gone so far as to amount to a change in kind; it is not of a

revolutionary nature. The views current among the respectable

classes on these matters still, in effect, run on the ancient

levels on which were built up the pecuniary institutions about

which the controversy circles. For the present there need be no

apprehension that the more respectable classes will reach a

mature revolutionary frame of mind. The discipline of their daily

life does not, on the whole, favor such a result.

This, in substance, is also the view taken by the socialistic

revolutionaries, particularly by those that are of Marxian

antecedents. It is a point of conviction with them, though not

wholly of reasoned conviction, that the socialistic movement is,

in the nature of the case, a proletarian movement, in which the

respectable, that is to say the pecuniarily competent, classes

can have no organic part even if they try. It is held, in effect,

that the well-to-do are, by force of their economic

circumstances, incapable of assimilating the socialist ideas. The

argument here set forth may serve to enforce this view, but with

a difference. Instead of contrasting the well-to-do with the

indigent, the line of demarcation between those available for the

socialist propaganda and those not so available is rather to be

drawn between the classes employed in the industrial and those

employed in the pecuniary occupations. It is a question not so

much of possessions as of employments; not of relative wealth,

but of work. It is a question of work because it is a question of

habits of thought, and work shapes the habits of thought. The

socialists themselves construe the distinction to be a

distinction in respect of habits of thought; and habits of

thought are made by habits of life rather than by a legal

relation to accumulated goods. This legal relation may count

materially in shaping the animus of the several economic classes;

but it appears not to be competent of itself to explain the

limitations observable in the spread of socialistic sentiment.

The socialistic disaffection shows a curious tendency to

overrun certain classes and to miss certain others. The men in

the skilled mechanical trades are peculiarly liable to it, while

at the extreme of immunity is probably the profession of the law.

Bankers and other like classes of business men, together with

clergymen and politicians, are also to be held free of serious

aspersion; similarly, the great body of the rural population are

immune, including the population of the country towns, and in an

eminent degree the small farmers of the remoter country

districts;(22*) so also the delinquent classes of the cities and

the populace of half-civilized and barbarous countries. The body

of unskilled laborers, especially those not associated with the

men in the skilled mechanical trades, are not seriously affected.

The centres of socialistic disaffection are the more important

industrial towns, and the effective nucleus of the socialistic

malcontents is made up of the more intelligent body of workmen in

the highly organized and specialized industries. Not that

socialism does not spread in virulent form outside this narrow

range, but at a farther remove from the centre of dispersion it

appears rather sporadically and uncertainly, while within this

field it is fairly endemic. As regards the educated classes,

socialistic views are particularly likely to crop out among the

men in the material sciences.

The advocates of the new creed have made little headway among

the rural classes of Europe, whether peasant farmers or farm

laborers. The rural proletariat has hitherto proved virtually

impermeable.(23*) The discipline of their daily life leaves their

spirit undisturbed on the plane of conventionality and

anthropomorphism, and the changes to which they aspire lie within

the scope of the conventionalities which have grown out of these

circumstances of their life and which express the habit of mind

enforced by these circumstances.

Without claiming that this explanation is competent to cover

the case of socialism in all its bearings, it may be pointed out

that this socialistic bias has effectively spread among the

people only within the last quarter of a century, which is also

approximately the period since which the machine process and the

mechanical standardization of industry has reached its fuller

development, both as regards the extent of its field and as

regards the extent of its technological requirements; that it is

found in vigorous growth only in those communities and

particularly among those classes whose life is closely regulated

by the machine technology; and that the discipline of this

machine technology is peculiarly designed to inculcate such

iconoclastic habits of thought as come to a head in the

socialistic bias. Socialism, in so far as the term means the

subversion of the economic foundations of modern culture, occurs

only sporadically and dubiously outside the limits, in time and

space, of the discipline of the machine technology. While among

those classes whose everyday life schools them to do their

habitual serious thinking in terms of material cause and effect,

the preconceptions of ownership are apparently becoming

obsolescent through disuse and through supersession by other

methods of apprehending things.(24*)

But the machine technology not only trains the work men into

materialistic iconoclasm, it has also a selective effect. Persons

endowed with propensities and aptitudes of a materialistic,

matter-of-fact kind are drafted into the mechanical employments,

and such are also peculiarly available socialistic material.

Aptitude for the matter-of-fact work of the machine technology

means, in a general way, ineptitude for an uncritical acceptance

of institutional truths, It is probable, therefore, that the

apparent facility with which the mechanical employments (and the

material sciences) induce a socialistic or iconoclastic bent is

to be set down in part to the fact that the human material in

these employments is picked material, peculiarly amenable to this

discipline. There is a sifting of the working classes, whereby

the socialistic and mechanically capable are roughly segregated

out from the rest and subjected to the iconoclastic discipline of

the mechanical employments and matter-of-fact thinking; while the

residue, which is on the whole made up of the persons that are

relatively least capable of revolutionary socialism, is at the

same time less exposed to the discipline that might fit them for

the socialistic movement. This sifting is, of course, a rough

one, and leaves many exceptions both ways.

In the light of this consideration, then, it is to be noted:

(1) that the dominance of the machine process in modern industry

is not so potent a factor for the inculcation of socialistic

notions - it does not so irresistibly shape men's habit of mind

in the socialistic sense - as the first survey of the facts would

suggest; and (2) that the differentiation of occupations involved

in modern industrial methods selectively bunches the socialistic

elements together, and so heightens their sense of class

solidarity and acts to accentuate their bias, gives consistency

to their ideals, and induces that boldness of conviction and

action which is to be had only in a compact body of men.

But in either case, whether the visible outcome is chiefly

due to their selective or to their disciplinary effect, the

bearing of the industrial occupations upon the growth of

socialism seems equally close and undeniable. The two modes of

influence seem to converge to the outcome indicated above, and

for the purpose of the present inquiry a detailed tracing out of

the two strands of sequence in the case neither can nor need be

undertaken.(25*)

With such generality as commonly holds in statements of this

kind, it may be said that the modern socialistic disaffection is

loosely bound up with the machine industry - spreading where this

industry spreads and flourishing where this industry gives the

dominant note of life. The correlation between the two phenomena

is of such a kind as to leave no doubt that they are causally

connected; which means either that the machine industry, directly

or indirectly, gives rise to socialism, or that the two are

expressions of the same complex of causes. The former statement

probably expresses the truth of the case in great part, but the

latter need not therefore be false. Wherever and in so far as the

increase and diffusion of knowledge has made the machine process

and the mechanical technology the tone-giving factor in men's

scheme of thought, there modern socialistic iconoclasm follows by

easy consequence.

The socialistic bias primarily touches economic institutions

proper. But that is not the whole of it. When the term is used

without modifying phrase it carries a certain implication

touching other than primarily economic matters. The political

bias of this unmitigated socialism is always radically

democratic, to the extent that these socialists are in a high

degree intolerant of any monarchical, aristocratic, or other

prescriptive government. The state is doomed in the socialistic

view.(26*) The socialist antagonism to the state takes various

forms and goes to varying degrees of intemperance, but it is

consistently negative. Except in their destructively hostile

attitude to existing political organizations, the socialists have

nothing consistent to offer on the head of political

institutions, less, indeed, latterly than in the earlier days of

the propaganda. There seems to be a growing shiftlessness of

opinion on this head; one gets the impression that the sense of

the socialist malcontents, as near as it may be permissible to

use that word in this connection, is that the community can best

get along without political institutions.

There is a like departure from the ancient norms touching

domestic relations. This is not confined to those portions of the

community that avowedly affect socialistic views, although it

has, on the whole, gone farthest among the classes among whom the

socialistic views prevail. There is a visible weakening of the

family ties, a disintegration of the conventions of household

life, throughout large classes. The defection is even felt, by

sensitive and solicitous persons, to be of such grave proportions

as to threaten the foundations of domestic life and morality.

This disintegration of the family ties shows itself most

alarmingly among the socialistic classes, with whom it all wears

such an air of unconcern as argues that in this respect they are

incorrigible. To these the conventional form of the household has

in good part ceased to appeal as something sacred. It is no

longer one of their secure spiritual assets.

What appears to be in jeopardy, should this socialistic

defection gain ground, is the headship of the male in the

household economy. The family, as it has come down from the

medieval past, under the shelter of the church, is of a

patriarchal constitution, at least in theory. The man has been

vested with discretionary control in domestic affairs. In the

earlier days his discretion was very direct and full, comprising

corporal coercion. Utterly, after and so far as mastery and

servitude have passed off the field and natural rights have come

to rule, this direct coercive control has been superseded by a

pecuniary discretion; so that the male head of the household is

alone competent to exercise a proprietary control of household

affairs. This latter-day conventional headship of the man is now

in its turn beginning to lose the respect of a good share of the

populace. The disintegration of the patriarchal tradition has

gone farthest among those industrial classes who are at the same

time inclined to socialistic views.

At this point in the institutional structure, as well as at

other points where the industrial classes are giving evidence of

a loss of spiritual ground, there is little indication of a

constructive movement toward any specific arrangement to take the

place of the institution whose existence is threatened. There is

a loosening of the bonds, a weakening of conviction as to the

full truth and beauty of the received domestic institutions,

without much of a consensus as to what is to be done about it, if

anything. In this, as at other junctures of a similar kind, the

mechanically employed classes, trained to matter-of-fact habits

of thought, show a notable lack of spontaneity in the

construction of new myths or conventions as well as in the

reconstruction of the old.

All this disintegration of the spiritual foundations of our

domestic institutions spreads with the most telling effect,

because most heedlessly, among the population of the industrial

towns. But it spreads also outside the limits of the industrial

classes; for the habits of life and of thought inculcated by the

machine technology are not limited to them, even if these classes

are the ones who suffer most and most severely from the machine

discipline. The disintegration shows itself, in varying degree,

in all modern industrial communities, and it is visible somewhat

in proportion as the community is modem and industrial. The

machine is a leveller, a vulgarizer, whose end seems to be the

extirpation of all that is respectable, noble, and dignified in

human intercourse and ideals.

What happens within the narrow range of the institutions of

domestic life repeats itself in substance in the larger field of

national life and ideals. Fealty to a superior installed by law

or custom suffers under the discipline of a life which, as

regards its most formative exigencies, is not guided by

conventional grounds of validity. And the transmuted form of

fealty called patriotism is in much the same insecure case. The

new ground of class solidarity and antagonism, for which these

extreme spokesmen of the industrial regime stand, is neither

ecclesiastic, dynastic, territorial, nor linguistic; it is

industrial and materialistic. But in their attitude of

heedlessness toward the dynastic and national conventions the

socialists are merely the extreme exponents of the spirit of the

age in the modern industrial communities.

So, again, as regards the religious life. Men trained by the

mechanical occupations to materialistic, industrial habits of

thought are beset with a growing inability to appreciate, or even

to apprehend, the meaning of religious appeals that proceed on

the old-fashioned grounds of metaphysical validity. The

consolations of a personal relation (of subservience) to a

supernatural master do not appeal to men whose habit of life is

shaped by a familiarity with the relations of impersonal cause

and effect, rather than by relations of personal dominance and

fealty. It does not come as a matter of course for such men to

give the catechism's answer to the question, What is the chief

end of man? Nor do they instinctively feel themselves to be

sinners by virtue of a congenital, hereditary taint or obliquity.

Indeed, they can only with great difficulty be seriously

persuaded that they are sinners at all. They are in danger of

losing the point of view of sin. The relation of status or fealty

involved in the concept of sin is becoming alien to their habit

of mind. They are therefore slow to realize that their past life

has violated such a relation of fealty, on the one hand, and that

it is of vital consequence to reestablish such a relation of

status by a work of salvation or redemption. The kindly

ministrations of the church and the clergy grate on the

sensibilities of men so trained, as being so much ado about

nothing. The machine, their master, is no respecter of persons

and knows neither morality nor dignity nor prescriptive right,

divine or human; its teaching is training them into insensibility

of the whole range of concepts on which these ministrations

proceed.(27*)

Not alone in the direction of growth given to vulgar

sentiment and to the vulgar insight into facts is the

matter-of-fact discipline of the machine technology apparent, but

also in the scope and method of that scientific knowledge that

has had the vogue since the advent of the machine industry.

Scientific inquiry is directed to a different end and carried out

under the guidance of a different range of principles or

preconceptions in the modern industrial communities than in

earlier days or in cultural centres lying outside the machine's

dominion. Modern science is single-minded in its pursuit of

impersonal relations of causal sequence in the phenomena with

which it is occupied.

The line of descent of this matter-of-fact modern science is

essentially British, as is that of the machine technology and of

the characteristically modern civil and political institutions.

It is true, beginnings of the modern scientific movement were

made in Italy in the days of the Renaissance, and Central Europe

had its share in the enlightenment; but these early modern

risings of the scientific spirit presently ran into the sand,

when war, politics, and religion reasserted their sway in the

south of Europe. Similar tentative stirrings of matter-of-fact

thought were had in Spain and France before and during the early

phases of the state-making era; but here, again, war and politics

rendered these onsets nearly nugatory, so that the intellectual

output was more speculation than science. In the Low Countries

something similar holds true, with a larger qualification. The

British community made a later and slower start, coming out of

barbarism at a later date and with a heavier handicap of physical

obstructions. But being, relatively, sheltered from war and

politics, the British were able to take up the fund of scientific

gains made by the South-European men of workday insight, to turn

it to account and to carry it over the era of state-making and so

prepare the way for the modern scientific, technological era.

Of course, nothing but the most meagre and sketchiest outline

of this matter is practicable in this place, and even that only

in its relation to the machine industry during the past one

hundred years or so. What is said above of the British lead in

modern science may perhaps be questioned, and it is not necessary

for the present purpose to insist on its truth; but so much seems

beyond hazard as that the lead in the material sciences lay with

the British through the early machine age, and that the

provenance of this modern scientific research to-day does not

extend, in any pronounced degree, beyond those communities that

lie within the area of the modern machine industry.

In time and space the prevalence of the modern materialistic

science is roughly extensive with that of the machine process. It

is, no doubt, related to it both as cause and as effect; but that

its relation to modern industry is more that of effect than cause

seems at least broadly suggested by the decay which presently

overtook scientific research, e.g., in the south of Europe when

those peoples turned their attention from material to spiritual

and political affairs.(28*)

What is of immediate interest is the change that has come

over the scope and method of scientific research since the

dominance of the machine process, in comparison with what

preceded the coming of the machine age. The beginnings of modern

science are older than the industrial revolution; the principles

of scientific research (causal explanation and exact measurement)

antedate the regime of the machine process. But a change has

taken place in the postulates and animus of scientific research

since modern science first began, and this change in the

postulates of scientific knowledge is related to the growth of

the machine technology.

It is unnecessary here to hark back to that scholastic

science or philosophy that served as an intellectual expression

of the ecclesiastical and political culture of the Middle Ages.

Its character, as compared with later science, is sufficiently

notorious. By the change from scholastic knowledge to modern

science, to the extent to which the change was carried through,

the principle (habit of mind) of adequate cause was substituted

for that of sufficient reason. The law of causation as it is

found at work, in the maturer science of the eighteenth and early

nineteenth centuries, comprises two distinguishable postulates:

(1) equality (quantitative equivalence) of cause and effect; and

(2) similarity (qualitative equivalence) of cause and effect. The

former may, without forcing it, be referred to commercial

accountancy as its analogue in practical life and as the probable

cultural ground out of which the habit of insisting on an

inviolable quantitative equivalence gathered consistency. The

ascendancy of the latter seems in a similar manner to be

referable to the prevalence of handicraft as its cultural ground.

Stated negatively, it asserts that nothing appears in the effect

but what was contained in the cause, in a manner which suggests

the rule that nothing appears in the product of handicraft but

what was present in the skill of the artificer. "Natural causes,"

which are made much of in this middle period of modern science,

are conceived to work according to certain "natural laws." These

natural laws, laws of the "normal course" of things, are felt to

tend to a rational end and to have something of a coercive force.

So that Nature makes no mistakes, Nature does nothing in vain,

Nature takes the most economical course to its end, Nature makes

no jumps, etc. Under this law of natural causation every effect

must have a cause which resembles it in the particular respect

which claims the inquirer's attention. Among other consequences

of this view it follows that, since the details as well as the

whole of the material universe are construed to show adaptation

to a preconceived end, this "natural order" of things must be the

outcome of preexistent design residing in the "first cause,"

which is postulated by virtue of this imputed design and is

designated the "Great Artificer." There is an element of conation

in this original modern postulate of cause and effect. The shadow

of the artificer, with his intelligence and manual skill, is

forever in the background of the concepts of natural law. The

"cause" dealt with in a given case is not thought of as an

effect; and the effect is treated as a finality, not as a phase

of a complex sequence of causation. When such a sequence is under

inquiry; as in the earlier, pre-Darwinian theories of evolution,

it is not handled as a cumulative sequence whose character may

blindly change from better to worse, or conversely, at any point;

but rather as an unfolding of a certain prime cause in which is

contained, implicitly, all that presently appears in explicit

form.

In the conception of the causal relation as it may be seen at

work a hundred years ago, cause and effect are felt to stand over

against one another, so that the cause controls, determines the

effect by transmitting its own character to it. The cause is the

producer, the effect the product. Relatively little emphasis or

interest falls upon the process out of which the product emerges;

the interest being centred upon the latter and its relation to

the efficient cause out of which it has come. The theories

constructed under the guidance of this conception are

generalizations as to an equivalence between the producing cause

and the effect-product. The cause "makes" the effect, in much the

same sense as the craftsman is apprehended to make the article on

which he is engaged. There is a felt distinction between the

cause and the environing circumstances, much as there is between

the workman on the one hand and his tools and materials on the

other hand. The intervening process is simply the manner of

functioning of the efficient cause, much as the workman's work is

the functioning of the workman in the interval between the

inception and the completion of the product. The effect is

subsequent to the cause, as the workman's product is subsequent

to and consequent upon his putting forth his productive

efficiency. It is a relation of before and after, in which the

process comes in for attention as covering and accounting for the

time interval which, in analogy with workmanlike endeavor, is

required for the functioning of the efficient cause.(29*)

But as time passes and habituation to the exigencies of the

machine technology gains in range and consistency, the

quasi-personal, handicraft conception of causation decays, -

first and most notably in those material, inorganic sciences that

stand in the closest relation to the mechanical technology, but

presently also in the organic sciences, and even in the moral

sciences. The machine technology is a mechanical or material

process, and requires the attention to be centred upon this

process and the exigencies of the process. In such a process no

one factor stands out as unequivocally the efficient cause in the

case, whose personal character, so to speak, is transfused into

the product, and to whose workings the rest of the complex of

causes are related only as subsidiary or conditioning

circumstances. To the technologist the process comes necessarily

to count, not simply as the interval of functioning of an initial

efficient cause, but as the substantial fact that engages his

attention. He learns to think in terms of the process, rather

than in terms of a productive cause and a product between which

the process intervenes in such a manner as to afford a transition

from one to the other. The process is always complex; always a

delicately balanced interplay of forces that work blindly,

insensibly, heedlessly; in which any appreciable deviation may

forthwith count in a cumulative manner, the further consequences

of which stand in no organic relation to the purpose for which

the process has been set going. The prime efficient cause falls,

relatively, into the background and yields precedence to the

process as the point of technological interest.

This machine technology, with its accompanying discipline in

mechanical adaptations and object-lessons, came on gradually and

rose to a dominating place in the cultural environment during the

closing years of the eighteenth and the course of the nineteenth

century; and as fast as men learned to think in terms of

technological process, they went on at an. accelerated pace in

the further invention of mechanical processes, so that from that

time the progress of inventions has been of a cumulative

character and has cumulatively heightened the disciplinary force

of the machine process. This early technological advance, of

course, took place in the British community, where the machine

process first gained headway and where the discipline of a

prevalent machine industry inculcated thinking in terms of the

machine process. So also it was in the British community that

modern science fell into the lines marked out by technological

thinking and began to formulate its theories in terms of process

rather than in terms of prime causes and the like. While

something of this kind is noticeable relatively early in some of

the inorganic sciences, as, e.g., Geology, the striking and

decisive move in this direction was taken toward the middle of

the century by Darwin and his contemporaries.(30*) Without much

preliminary exposition and without feeing himself to be out of

touch with his contemporaries, Darwin set to work to explain

species in terms of the process out of which they have arisen,

rather than out of the prime cause to which the distinction

between them may be due.(31*) Denying nothing as to the

substantial services of the Great Artificer in the development of

species, he simply and naively left Him out of the scheme,

because, as being a personal factor, He could not be stated and

handled in terms of process. So Darwin offered a tentative

account of the descent of man, without recourse to divine or

human directive endeavor and without inquiry as to whence man

ultimately came and why, or as to what fortune would ultimately

overtake him. His inquiry characteristically confines itself to

the process of cumulative change. His results, as well as his

specific determination of the factors at work in this process of

cumulative change, have been questioned; perhaps they are open to

all the criticisms levelled against them as well as to a few more

not yet thought of; but the scope and method given to scientific

inquiry by Darwin and the generation whose spokesman he is has

substantially not been questioned, except by that diminishing

contingent of the faithful who by force of special training or by

native gift are not amenable to the discipline of the machine

process. The characteristically modern science does not inquire

about prime causes, design in nature, desirability of effects,

ultimate results, or eschatological consequences.

Of the two postulates of earlier modern science, - the

quantitative equivalence and the qualitative equivalence of cause

and effect, - the former has come practically to signify the

balanced articulation of the process of cumulative change; the

endeavor of the Positivists to erect this canon of quantitative

equivalence into the sole canon of scientific truth, and so to

reduce scientific theory to a system of accountancy, having

failed. The latter thesis, that like causes produce like effects,

or that the effect is, in some sense, of the same character as

the cause, has fallen into decay as holding true only in such

tenuously general terms as to leave it without particular force.

The scientists are learning more and more consistently to think

in the opaque, impersonal terms of strains, mechanical

structures, displacement, and the like; terms which are

convertible into the working drawings and specifications of the

mechanical engineer.

The older preconceptions are, of course, not wholly

eliminated from the intellectual apparatus of scientific research

and generalization. The cultural situation whose discipline gives

the outcome is made up of inherited traditional notions at least

as much as of the notions brought in by the machine process. Even

among the scientific adepts there has been no complete break with

the past; necessarily not, since they are, after all, creatures

of their own generation. Many of them, but more especially those

who are engaged in upholding the authentic results of scientific

research, are somewhat prone to make much of the definitive

results achieved, rather than of the process of research in which

these results are provisional appliances of work. And many of

these, together. with the great part of those well-meaning

persons who exploit the sciences for purposes of edification,

such as clergymen and naturalistic myth-makers, still personify

the process of cause and effect and find in it a well-advised

meliorative trend. But that work of research which effectually

extends the borders of scientific knowledge is nearly all done

under the guidance of highly impersonal, mechanical, morally and

aesthetically colorless conceptions of causal sequence. And this

scientific work is carried out only in those communities which

are in due contact with the modern mechanically organized

industrial system, - only under the shadow of the machine

technology.

In the nature of the case the cultural growth dominated by

the machine industry is of a sceptical, matter-of-fact

complexion, materialistic, unmoral, unpatriotic, undevout. The

growth of habits of thought, in the industrial regions and

centres particularly, runs in this direction; but hitherto there

has enough of the ancient norms of Western Christendom remained

intact to make a very respectable protest against that

deterioration of the cultural tissues which the ferment of the

machine industry unremittingly pushes on. The machine discipline.

however, touches wider and wider circles of the population, and

touches them in an increasingly intimate and coercive manner. In

the nature of the case, therefore, the resistance opposed to this

cultural trend given by the machine discipline on grounds of

received conventions weakens with the passage of time. The spread

of materialistic, matter-of-fact preconceptions takes place at a

cumulatively accelerating rate, except in so far as some other

cultural factor, alien to the machine discipline, comes in to

inhibit its spread and keep its disintegrating influence within

bounds.

NOTES:

1. The perfected system of business principles rests on the

historical basis of free institutions, and so presumes a

protracted historical growth of these institutions; but a highly

efficient, though less perfect, business system was worked out in

a relatively short time by the South and Central European peoples

in early modern times on the basis of a less consummate system of

rights. - Cf. Ehrenberg, Zeitalter der Fugger; Sombart,

Kapitalismus, vol. II. ch. VIII, XIV, XV.

2. See Chapter IV, above.

3. Cf. Keane, Man, Past and Present, ch. XIV; W.Z. Ripley, Races

of Europe; Lapouge, L'Aryen; Montelius, Les temps prehistoriques

en Bubde, etc.; Andreas Hansen, Menneskesloegtens Aelde.

4. If, e.g., he takes to myth making and personifies the machine

or the process and imputes and benevolence to the mechanical

applications, after the manner of current nursery tales and

pulpit oratory, he is sure to go wrong.

5. Such expressions as "good and ill," "merit and demerit," "law

and order," when applied to technological facts or to the outcome

of material seience, are evidently only metaphorical expressions,

borrowed from older usage and serviceable only as figures of

speech.

6. Tarde, Psychologic Economique, vol. I. pp. 122-131, offers a

characterization of the psychology of modern work, contrasting,

among other things, the work of the machine workman with that of

the handicraftsman in respect of its psychological requirements

and effects. It may be taken as a temperate formulation of the

cent commonplaces on this topic, and seems to be fairly wide of

the mark.

7. For something more than a hundred years past this change in

the habits of thought of the workman has been commonly spoken of

as a deterioration or numbing of his intelligence. But that seems

too sweeping a characterization of the change brought on by

habituation to machine work. It is safe to say that such

habituation brings a change in the workman's habits of thought, -

in the direction, method, and content of his thinking, -

heightening his intelligence for some purposes and lowering it

for certain others. No doubt, on the whole, the machine's

discipline lowers the intelligence of the workman for such

purposes as were rated high as marks of intelligence before the

coming of the machine, but it appears likewise to heighten his

intelligence for such purposes as have been brought to the front

by the machine. If he is by nature scantily endowed with the

aptitudes that would make him think effectively in terms of the

machine process, if he has intellectual capacity for other things

and not for this, then the mining of the machine may fairly be

said to lower his intelligence, since it hiders the full

development of the only capacities of which he is possessed. The

resulting difference in intellectual training is a difference in

kind and direction, not necessarily in degree. Cf. Schmoller,

Grundriss der Volkswirtschaftslehre, vol. I. secs. 85-86, 132;

Hobson, Evolution of Modern Capitalism, ch. IX. secs. 4 and 5;

Cooke Taylor, Modern Factory System, pp. 434-435; Sidney and

Beatrice Webb, Industrial Democrocy, e.g. pp. 327 et seq.; K. Th.

Reinhold, Arbeit und Werkzeug, ch. X. (particularly pp. 190-198)

and ch. XI (particularly pp. 221-240).

8. Cf. J.C. Sutherland, "The Engineering Mind" Popular Science

Monthly, January 1903, pp. 254-256.

9. Cf. "Industrial and Pecuniary Employments" especially pp.

198-218.

10. As G.F. Steffen has described it: "Those who hire out their

labor power or their capital or their land to the entrepreneurs

are as a rule not absolutely passive as seen from the point of

view of business enterprise. They are not simply inanimate

implements in the hands of the entrepreneurs. They are,

enterprising implements, (foretagaade verktyg) who surrender

their undertaking functions only to the extent designated in the

contract with the entrepreneur." - Ekonomisk Tidskrift, vol. V.

p. 256.

11. Cf., on the other hand, Reinhold, Arbeit und Werkzeug, ch.

XII and XIV, where double dealing is confused with workmanship,

very much after the manner familiar to readers of expositions of

the "wages of superintendence," but more broadly and ingeniously

than usual.

12. Individual exceptions are, of course, to be found in all

classes, but there is, after all, a more or less consistent,

prevalent class attitude. As is well known, clergymen, lawyers,

soldiers, civil servants, and the like, are popularly held to be

of a conservative, if not reactionary temper. This vulgar

apprehension may be faulty in detail, and especially it may be

too sweeping in its generalizations; but there are, after all,

few persons not belonging to these classes who will not

immediately recognize that this vulgar appraisement of them rests

on substantial grounds, even though the appraisement may need

qualification. So, also, a conservative animus is seen to pervade

all classes more generally in earlier times or on more archaic

levels of culture than our own. At the same time, in those early

days and in the more archaic cultural regions, the structure of

conventionally accepted truths and the body of accredited

spiritual or extra-material facts are more comprehensive and

rigid, and the thinking on all topics is more consistently held

to tests of authenticity as contrasted with tests of sense

perception. On the whole, the number and variety of things that

are fundamentally and eternally true and good increase as one

goes outward from the modern West-European cultural centres into

the earlier barbarian past or into the remoter barbarian present.

13. See Chapter II above.

14. Cf. Theory of the Leisure Class, especially ch. IV and V.

15. As, e.g., Mr W.G.S. Adams cogently points out in a recent

number of the Journal of Political Ecomnomy (December 1902).

16. As Mr. Webb shows (Industrial Democracy, 1902, pp.

xxivxxxvi).

17. The historical explanation of this House of Lords reversal of

trade-union practice is probably to be found in the conservative,

or rather reactionary, trend given to British sentiment by the

imperialist policy of the last two or three decades, accentuated

by the experiences of the Boer War. The Boer War seems to mark a

turning-point in the growth of sentiment and institutions. Since

the seventies the imperialist interest, that is to say, the

dynastic interest, has been coming into the foreground among the

interests that engage the attention of the British community. It

seems now to have definitively gained the first place, and may be

expected in the immediate future to dominate British policy both

at home and abroad. Concomitantly, it may be remarked, the

British community has been slowing down, if not losing ground, in

industrial animus, technological efficiency, and scientific

spirit. Cf. Hobson, Imperialism, part II ch. I and III.

18. All this applies to anarchism as well as to socialism;

similarly to several minor categories of dissentients. In their

negative proposals the socialists and anarchists are fairly

agreed. It is in the metaphysical postulates of their protest and

in their constructive aims that they part company. Of the two,

the socialists are more widely out of touch with the established

order. They are also more hopelessly negative and destructive in

their ideals, as seen from the standpoint of the established

order. This applies to the later socialists rather than to the

earlier, and it applies, of course, only to the lower-class,

"democratic" socialists, not to the so-called state and Christian

socialists.

Anarchism proceeds on natural-rights ground, and is

accordingly in touch with the postulates of the existing property

arrangements to that extent. It is a more unmitigated working out

of the same postulates. It is a system of "natural liberty"

unqualified to the extent even of not admitting prescriptive

ownership. Its basis is a (divinely instituted) order of nature,

the keynote of which is an inalienable freedom and equality of

the individual, quite in the eighteenth-century spirit. It is in

this sense an offshoot of the Romantic school of thought.

Anarchism is a de jure seheme, which takes no account of

mechanical exigencies but rests its case altogether on

anthropomorphic postulates of natural rights. It is, from the

natural-rights standpoint, substantially sound, though

senselessly extreme.

What may be called the normal socialism, socialism of the

later, more dangerous, and more perplexing, kind, does not build

on the received metaphysical basis of the "natural order." It

demands a reconstruction of the social fabric, but it does not

know on what lines the reconstruction is to be carried out. The

natural rights of the individual are not accepted as the standard

(except by certain large bodies of neophytes, especially rural

American, who are carrying under socialist mottoes the burden of

animosities and preconceptions that once made populism), but

nothing definite is put in the place of this outworn standard.

The socialists of the line, in so far as there is any consensus

among them, profess that the mechanical exigencies of the

industrial system must decide what the social structure is to be,

but beyond this vague generality they have little to offer. And

this mechanical standardization can manifestly afford no basis

for legislation on civil rights. Indeed, it is difficult to see

how any seheme of civil rights, much or little, can find a place

in a sociallstic reorganization.

19. The "scientific socialism" of Marx and Engels as promulgated

during the third quarter of the nineteenth century was not of

this negative character. It was a product of Hegelianism blended

with the conceptions of natural rights, its chief count being the

"claim to the full product of labor." This socialism never made

serious inroads among the working classes outside of Germany -

the home of Hegelianism. Even in that country the most vigorous

growth of socialistic sentiment came after Hegelianism had begun

to yield to Darwinian methods of thought, and this later growth

has been progressively less Marxian and less positive. Marxism is

now little more than a pro forma confession of faith. Avowed

socialism is practically taking on the character described above,

except so far as it has grown opportunist and has sought

affiliation with the liberal democratic movement and the

reformers.

20. Where members of the well-to-do classes avow socialistic

sentiments and ideals it commonly turns out to be a merely

humanitarian aspiration for a more "equitable" redistribution of

wealth, a readjustment of the seheme of ownership with some

improved safeguarding of the "reasonable" property claims of all

members of the community. What "socialist" reform commonly means

to this contingent of well-to-do irregulars is some seheme of

equal rights of ownership for all. Whereas to socialists of the

line equal rights of ownership is as idle a proposition as an

equal right of citizens to sell their votes. Instead of a reform

of ownership the socialists contemplate the traceless

disappearance of ownership.

21. Unless it be in the latest extremes of conservatism, such as

is shown in the recent of dynastic politics in Germany, Tory

policy in England, and predatory political ideals in America.

22. Socialistic notions are apprently making some inroads among

the rural population of the American prairie region, where a

mechanically organized and standardized method of farming

prevails, with a large use of mechanical appliances.

23. So striking has been the failure of the German socialists,

for instance, in their attempts upon the integrity of the farming

community, that they have latterly changed their tactics, and

instead of attempting to convert the peasants to a full

socialistic programme, they have turned to measures of

compromise, in which the characteristic and revolutionary

features of the socialistic programme are softened beyond

recognition, if not suppressed. The habits of life, and therefore

the habits of thought, of the peasant farmers move on the ancient

leveis of handicraft, pecuniary management, personal consequence,

and preseriptive custom.

24. If this account of the class limitation of the socialist bias

is accepted, it has an immediate bearing upon a question which is

latterly engaging the attention of the advocates of socialism.

The question is as to the part played by propertyless office

employees and by the business men whom the modern consolidations

of business reduce to the position of salaried managers and

superintendents. With a faith prompted by their own hopes rather

than by observed facts or by the logic of events, the spokesmen

for socialism are strongly inclined to claim this "business

proletariat" as a contingent which the course of economic

development is bound to throw into the socialist camp. The facts

do not in any appreciable degree countenance such an expectation.

The unpropertied classes employed in business do not take to

socialistic vagaries with such alacrity as should inspire a

confident hope in the advocates of socialism or a serious

apprehension in those who stand for law and order. Tbis

pecuniarily disfranchised business population, in its revulsion

against unassimilated facts, turns rather to some excursion into

pragmatic romance, such as Social Settlements, Prohibition, Clean

Politics, Single Tax, Arts and Crafts, Neighborhood Guilds,

Institutional Church, Christian Science, New Thought, or some

such cultural thimblerig. The work of the captain of industry in

curtailing the range of individual discretion in business and in

reducing the lesser undertakers to the rank of clerks and

subalterns need not be looked upon as unavoidably furthering the

spread of the socialistic bias, except in so far as the change

results in throwing the men affected by it out of the pecuniary

or business occupations and subjecting them to the discipline of

the mechanical industry. At the most, apparently, the change from

an independent to a dependent business life serves to weaken the

men's interest in the question of property; it does not appear

that it throws them into an attitude of substantial distrust or

iconoclasm. Their interest in this particular institution

slackens through the loss of that emulative motive on which

pecuniary endeavor proceeds, but their faith in its intrinsic

fitness is not thereby shaken, nor are they thrown into the tanks

of the chronic dissentients. The training given by their life

continues prevailingly to run on conventional grounds; that is to

say, on grounds of legal relation, solvency, and the like.

Accountants and office employees are nearly as couservative as

clergymen and lawyers, and their being so is apparently due to

the fact that their experience runs on much the same ground of

conventional finality.

25. Connected with this apparent selective action which the modem

specialization of occupations exerts, there is a further, and at

first sight more singular, point of disparity between the

socialists and the conservatives; and this difference has also a

curious correlation with the distribution of the machine

industry. In a degree, - slight and uncertain, perhaps, but

searcely to be mistaken, - the socialists and the conservatives

are apparently of different racial antecedents. It has been seen

above that the propaganda is most vital and widespread in the

industrial towns, as contrasted with the agricultural country.

But if the researches of such students as Ammon, Ripley, Lapouge,

Closson, and others that might be named, are taken at their face

value, it appears that the towns differ perceptibly from the open

country in point of race; and that the migration from the country

into the industrial towns has a selective effect of such a kind

that a larger proportion of one racial stock than of another

resorts to the towns. The towns, in those countries where data

are available, show a larger admixture of the dolicho-blond stock

than the open country. This seems to argue that the dolicho-blond

stock, or the racial mixture of the towns in which there is a

relatively large admixture of the dolicho-blond, is perceptibly

more efficient in the machine industries, more readily inclined

to think in materialistic terms, more given to radical

innovation, less bound by convention and prescription. This

generalization is strengthened by the fact that the more

dolicho-blond regions are also, on the whole, more socialistic

than those in which this element is less in evidence. At the same

time they are industrially in advance of the latter in the matter

of machine industry; and they are also Protestant (irreligious)

rather than Catholic.

26. This, of course, does not hold for the inoffensive

pseudo-socialistic diversions set afoot by various well-meaning

politicians and clergmen, known by various qualifying

designations, such as "State," "Christian," "Catholic," etc., and

desired to act as correctives of the socialistic distemper.

27. The cultural era of Natural Rights, Natural Liberty, and

Natural Religion reduced God to the rank of a "Great Artificer,"

and the machine technology is, in turn, relegating Him to that

fringe of minor employments and those outlying industrial regions

to which the handicraftsmen have been retired.

28. There is a similar suggestion in the relative (slight but

perceptible) decline of scientific animus in England since the

English community has turned its attention and aspirations to

imperialistic feats of prowess more than to industrial matters.

29. Compare, however, Sombart, Kapitalismus, especially vol. I.

ch. VIII and XV. Sombart finds the modern seientific concept of

cause and effect to be essentially an outcome of the discipline

of accountancy enforced by business traffic. So that he makes

business enterprise rather than mechanical industry accountable

for the rise of modern science and for the matter-of-fact

character which distinguishes this science. In this view there

is, no doubt, a large and valuable element of truth. To the end

of a mathematical formulation of causal phenomena as well as a

tenacious grasp of the principle of quantitative equivalence, the

accountancy enfoxed by the petty trade of early modern times, as

well as by commercial traffic proper, appears to have given the

most effective training. In so far as this element of

quantitative equivalence, simply, has dominated the growth of

science, it has given, as its most perfect product, Positivism.

Positivism flourished at its best and freest in France, where the

modern economic culture was commercial rather than mechanical.

And when the machine discipline seriously invaded France,

Positivism languished and died. But modern seience is not a

calculus simply. It deals not with calculations of quantitative

equivalence only, but with efficient causes, active relations,

creative foxes. The concept of efficient cause is not a

derivative of accountancy, nor is it formed in the image of

accountancy. But this generic concept of efficient cause, the

kinetic concept, antedates Positivism and has outlived it. In its

earlier (eighteenth-century) phase this concept shows close

relationship with the notion of workmanship, in its later

(nineteenth-century) use it has much in common with the notion of

mechanical efficiency.

30. Darwin, of course, does not stand alone. He is the great

exponent of a mass movement which involves a shifting of the

point of view and of the point of interest in seientific research

and speculation.

31. This is the substance of Darwin's advance over Lamarck, for

instance.

The Theory of Business Enterprise

by Thorstein Veblen

1904

Chapter 10

The Natural Decay of Business Enterprise

Broadly, the machine discipline acts to disintegrate the

institutional heritage, of all degrees of antiquity and

authenticity - whether it be the institutions that embody the

principles of natural liberty or those that comprise the residue

of more archaic principles of conduct still current in civilized

life. It thereby cuts away that ground of law and order on which

business enterprise is founded. The further cultural bearing of

this disintegration of the received order is no doubt

sufficiently serious and far-reaching, but it does not directly

concern the present inquiry. It comes in question here only in so

far as such a deterioration of the general cultural tissues

involves a setback to the continued vigor of business enterprise.

But the future of business enterprise is bound up with the future

of civilization, since the cultural scheme is, after all, a

single one, comprising many interlocking elements, no one of

which can be greatly disturbed without disturbing the working of

all the rest.

In its bearing on the question in hand, the "social problem"

at large presents this singular situation. The growth of business

enterprise rests on the machine technology as its material

foundation. The machine industry is indispensable to it; it

cannot get along without the machine process, But the discipline

of the machine process cuts away the spiritual, institutional

foundations of business enterprise; the machine industry is

incompatible with its continued growth; it cannot, in the long

run, get along with the machine process. In their struggle

against the cultural effects of the machine process, therefore,

business principles cannot win in the long run; since an

effectual mutilation or inhibition of the machine system would

gradually push business enterprise to the wall; whereas with a

free growth of the machine system business principles would

presently fall into abeyance.

The institutional basis of business enterprise the system of

natural rights - appears to be a peculiarly instable affair.

There is no way of retaining it under changing circumstances, and

there is no way of returning to it after circumstances have

changed. It is a hybrid growth, a blend of personal freedom and

equality on the one hand and of prescriptive rights on the other

hand. The institutions and points of law under the natural-rights

scheme appear to be of an essentially provisional character.

There is relatively great flexibility and possibility of growth

and change; natural rights are singularly insecure under any

change of circumstances. The maxim is well approved that eternal

vigilance is the price of (natural) liberty. When, as now, this

system is endangered by socialistic or anarchistic disaffection

there is no recourse that will carry the institutional apparatus

back to a secure natural-rights basis. The system of natural

liberty was the product of a peaceful regime of handicraft and

petty trade; but continued peace and industry presently carried

the cultural growth beyond the phase of natural rights by giving

rise to the machine process and the large business; and these are

breaking down the structure of natural rights by making these

rights nugatory on the one hand and by cutting away the spiritual

foundations of them on the other hand. Natural rights being a

by-product of peaceful industry, they cannot be reinstated by a

recourse to warlike habits and a coercive government, since

warlike habits and coercion are alien to the natural-rights

spirit. Nor can they be reinstated by a recourse to settled peace

and freedom, since an era of settled peace and freedom would push

on the dominance of the machine process and the large business,

which break down the system of natural liberty.

When the question is cast up as to what will come of this

conflict of institutional forces - called the Social Problem - it

is commonly made a question of remedies: What can be done to save

civilized mankind from the vulgarization and disintegration

wrought by the machine industry?

Now, business enterprise and the machine process are the two

prime movers in modern culture; and the only recourse that holds

a promise of being effective, therefore, is a recourse to the

workings of business traffic. And this is a question, not of what

is conceivably, ideally, idyllically possible for the business

community to do if they will take thought and act advisedly and

concertedly toward a chosen cultural outcome, but of what is the

probable cultural outcome to be achieved through business traffic

carried on for business ends, not for cultural ends. It is a

question not of what ought to be done, but of what is to take

place.

Persons who are solicitous for the cultural future commonly

turn to speculative advice as to what ought to be done toward

holding fast that which is good in the cultural heritage, and

what ought further to be done to increase the talent that has

been intrusted to this generation. The practical remedy offered

is commonly some proposal for palliative measures, some appeal to

philanthropic, aesthetic, or religious sentiment, some endeavor

to conjure with the name of one or another of the epiphenomena of

modern culture. Something must be done, it is conceived, and this

something takes the shape of charity organizations, clubs and

societies for social "purity", for amusement, education, and

manual training of the indigent classes, for colonization of the

poor, for popularization of churches, for clean politics, for

cultural missionary work by social settlements, and the like.

These remedial measures whereby it is proposed to save or to

rehabilitate certain praiseworthy but obsolescent habits of life

and of thought are, all and several, beside the point so far as

touches the question in hand. Not that it is hereby intended to

cast a slur on these meritorious endeavors to save mankind by

treating symptoms. The symptoms treated are no doubt evil, as

they are said to be; or if they are not evil, the merits of that

particular question do not concern the present inquiry. The

endeavors in question are beside the point in that they do not

fall into the shape of a business proposition. They are, on the

whole, not so profitable a line of investment as certain other

ventures that are open to modern enterprise. Hence, if they

traverse the course of business enterprise and of industrial

exigencies, they are nugatory, being in the same class with the

labor of Sisyphus; whereas if they coincide in effect with the

line along which business and industrial exigencies move, they

are a work of supererogation, except so far as they may be

conceived to accelerate a change that is already under way.

Nothing can deflect the sweep of business enterprise, unless it

be an outgrowth of this enterprise itself or of the industrial

means by which business enterprise works.

Nothing can serve as a corrective of the cultural trend given

by the machine discipline except what can be put in the form of a

business proposition. The question of neutralizing the untoward

effects of the machine discipline resolves itself into a question

as to the cultural work and consequences of business enterprise,

and of the cultural value of business principles in so far as

they guide such human endeavor as lies outside the range of

business enterprise proper. It is not a question of what ought to

be done, but of what is the course laid out by business

principles; the discretion rests with the business men, not with

the moralists, and the business men's discretion is bounded by

the exigencies of business enterprise. Even the business men

cannot allow themselves to play fast and loose with business

principles in response to a call from humanitarian motives. The

question, therefore, remains, on the whole, a question of what

the business men may be expected to do for cultural growth on the

motive of profits.

Something they are doing, as others are, from motives of

benevolence, with a well-advised endeavor to maintain the

cultural gains of the past and to make the way of life smoother

for mankind in the future. But the more secure and substantial

results to be looked for in this direction are those that follow

incidentally, as byproducts of business enterprise, because these

are not dependent on the vagaries of personal preference, tastes,

and prejudices, but rest on a broad institutional basis.

The effects of business enterprise upon the habits and temper

of the people, and so upon institutional growth, are chiefly of

the nature of sequelae, It has already been noted that the

discipline of business employments is of a conservative nature,

tending to sustain the conventions that rest on natural-rights

dogma, because these employments train the men engaged in them to

think in terms of natural rights. It is unnecessary to return to

this topic here, except to notice that, in its severer, more

unmitigated form, this discipline in pecuniary habits of thought

falls on a gradually lessening proportion of the population. The

absolute number of business men, counting principals and

subordinates, is, of course, not decreasing, The number of men in

business pursuits, in proportion to the population, is also

apparently not decreasing; but within the business employments a

larger proportion are occupied with office routine, and so are

withdrawn from the more effectual training given by business

management proper. If such a decrease occurs in any country, it

is almost certainly not to be found in any other country than

America.

This business discipline is somewhat closely limited both in

scope and range. (1) It acts to conserve, or to rehabilitate, a

certain restricted line of institutional habits of thought, viz.

those preconceptions of natural rights which have to do with

property. What it conserves, therefore, is the bourgeois virtues

of solvency, thrift, and dissimulation. The nobler and more

spectacular aristocratic virtues, with their correlative

institutional furniture, are not in any sensible degree fortified

by the habits of business life. Business life does not further

the growth of manner and breeding, pride of Caste, punctilios of

"honor," or even religious fervor. (2) The salutary discipline of

business life touches the bulk of the population, the working

classes, in a progressively less intimate and less exacting

manner. It can, therefore, not serve to correct or even greatly

to mitigate the matter-of-fact bias given these classes by the

discipline of the machine process.

As a direct disciplinary factor the machine process holds

over the business employments, in that it touches larger classes

of the community and inculcates its characteristic habits of

thought more unremittingly, And any return to more archaic

methods of industry, such as is sometimes advocated on artistic

grounds, seems hopeless, since business interests do not

countenance a discontinuance of machine methods, The machine

methods that are corrupting the hearts and manners of the workmen

are profitable to the business men, and that fact seems to be

decisive on the point. A direct, advised return to handicraft, or

any similar discontinuance of the machine industry, is out of the

question; although something in the way of a partial return to

more primitive methods of industry need not be impracticable as a

remote and indirect consequence of the working of business

enterprise.

The indirect or incidental cultural bearing of business

principles and business practice is wide-reaching and forceful.

Business principles have a peculiar hold upon the affections of

the people as something intrinsically right and good. They are

therefore drawn on for guidance and conviction even in concerns

that are not conceived to be primarily business concerns. So,

e.g., they have permeated the educational system, thoroughly and

intimately. Their presence, as an element of common sense, in the

counsels of the "educators" shows itself in a naive insistence on

the "practical" whenever the scheme of instruction is under

advisement. "Practical" means useful for private gain. Any new

departure in public instruction, whether in the public schools or

in private endowed establishments, is scrutinized with this test

in mind; which results in a progressive, though not wholly

consistent, narrowing of instruction to such learning as is

designed to give a ready application of results rather than a

systematic organization of knowledge. The primary test is

usefulness for getting an income. The secondary test, practically

applied where latitude is allowed in the way of "culture"

studies, is the aptness of the instruction in question to fit the

learners for spending income in a decorous manner. Hence

quasi-scholarly accomplishments. Much of the current controversy

as to the inclusion or exclusion of one thing and another from

the current curriculum of secondary and higher schools might be

reduced to terms of one or the other of these two purposes

without doing violence to the arguments put forth and with a

great gain in conciseness and lucidity.

There is also a large resort to business methods in the

conduct of the schools; with the result that a system of

scholastic accountancy is enforced both as regards the work of

the teachers and the progress of the pupils; whence follows a

mechanical routine, with mechanical tests of competency in all

directions. This lowers the value of the instruction for purposes

of intellectual initiative and a reasoned grasp of the

subject-matter. This class of erudition is rather a hindrance

than a help to habits of thinking. It conduces to conviction

rather than to inquiry, and is therefore a conservative factor.

In the endowed schools there is, moreover, an increasing

introduction of business men and business methods into the

personnel and the administrative work. This is necessarily so

since these schools are competitors for students and endowments.

The policy of these schools necessarily takes on some thing of

the complexion of competitive business; which throws the emphasis

on those features of school life that will best attract students

and donors. The features which count most directly in these

directions are not the same as would count most effectively

toward the avowed ends of these schools. The standards which it

is found Operative to live up to are not the highest standards of

scholarly work. Courtesy as well as expediency inclines these

schools to cultivate such appearances and such opinions as may be

expected to find favor with men of wealth. These men of wealth

are business men, for the most part elderly men, who are, as is

well known, prevailingly of a conservative temper in all cultural

matters, and more especially as touches those institutions that

bear on business affairs.

A more far-reaching department of the educational system,

though not technically rated as such, is the periodical press,

both newspapers and magazines. This is a field of business

enterprise, and business principles may be expected to work more

consistently and to a more unqualified result in this field than

in the school system, where these principles come in

incidentally.

The current periodical press, whether ephemeral or other, is

a vehicle for advertisements. This is its raison d'etre, as a

business proposition, and this decides the lines of its

management without material qualification. Exceptions to the rule

are official and minor propagandist periodicals, and, in an

uncertain measure, scientific journals. The profits of

publication come from the sale of advertising space. The direct

returns from sales and subscriptions are now a matter of wholly

secondary consequence. Publishers of periodicals, of all grades

of transiency, aim to make their product as salable as may he, in

order to pass their advertising pages under the eyes of as many

readers as may be. The larger the circulation the greater, other

things equal, the market value of the advertising space. The

highest product of this development is the class of American

newspapers called "independent." These in particular - and they

are followed at no great interval by the rest edit all items of

news, comment, or gossip with a view to what the news ought to be

and what opinions ought to be expressed on passing events.(1*)

The first duty of an editor is to gauge the sentiments of his

readers, and then tell them what they like to believe. By this

means he maintains or increases the circulation. His second duty

is to see that nothing is said in the news items or editorials

which may discountenance any claims or announcements made by his

advertisers, discredit their standing or good faith, or expose

any weakness or deception in any business venture that is or may

become a valuable advertiser. By this means he increases the

advertising value of his circulation.(2*) The net result is that

both the news columns and the editorial columns are commonly

meretricious in a high degree.

Systematic insincerity on the part of the ostensible

purveyors of information and leaders of opinion may be deplored

by persons who stickle for truth and pin their hopes of social

salvation on the spread of accurate information. But the ulterior

cultural effect of the insincerity which is in this way required

by the business situation may, of course, as well be salutary as

the reverse. Indeed, the effect is quite as likely to be

salutary, if "salutary" be taken to mean favorable to the

maintenance of the established order, since the insincerity is

guided by a wish to avoid any lesion of the received

preconceptions and prejudices. The insincerity of the newspapers

and magazines seems, on the whole, to be of a conservative trend.

The periodical press is not only a purveyor of news,

opinions, and admonitions; it also supplies the greater part of

the literature currently read. And in this part of its work the

same underlying business principles are in force. The endeavor is

to increase the circulation at any cost that will result in an

increased net return from the sale of the advertising space. The

literary output of the magazines is of use for carrying the

advertising pages, and as a matter of business, as seen from the

standpoint of the business man's interest, that is its only use.

The standards of excellence that govern this periodical

literature seem fairly to be formulated as follows: (1) In each

given case it must conform to the tastes and the most ready

comprehension of the social strata which the particular

periodical is designed to reach; (2) it should conduce to a

quickened interest in the various lines of services and

commodities offered in the advertising pages, and should direct

the attention of readers along such lines of investment and

expenditure as may benefit the large advertisers particularly. At

least it must in no way hamper the purposes of the advertisers.

Nothing should go in a popular magazine which would cast a

sinister shadow over any form of business venture that advertises

or might be induced to advertise.(3*)

Taken in the aggregate, the literary output is desired to

meet the tastes of that large body of people who are in the habit

of buying freely. The successful magazine writers are those who

follow the taste of the class to whom they speak, in any

aberration (fad, mannerism, or misapprehension) and in any

shortcoming of insight or force which may beset that class. They

must also conform to the fancies and prejudices of this class as

regards the ideals - artistic, moral, religious, or social - for

which they speak. The class to which the successful periodicals

turn, and which gives tone to periodical literature, is that

great body of people who are in moderately easy circumstances.

Culturally this means the respectable middle class (largely the

dependent business class) of various shades of conservatism,

affectation, and snobbery. (4*)

On the whole, the literature provided in this way and to this

end seems to run on a line of slightly more pronounced

conservatism and affectation than the average sentiment of the

readers appealed to. This is true for the following reason.

Readers who are less conservative and less patient of

affectations, snobbery, and illiberality than the average are in

the position of doubters and dissentients. They are less

confident in their convictions of what is right and good in all

matters, and are also not unwilling to make condescending

allowances for those who are less "advanced," and who must be

humored since they know no better; whereas those who rest

undoubting in the more conservative views and a more intolerant

affectation of gentility are readier, because more naive, in

their rejection of whatever does not fully conform to their

habits of thought.

So it comes about that the periodical literature is, on the

whole, somewhat more scrupulously devout in tone, somewhat more

given to laud and dilate upon the traffic of the upper leisure

class and to carry on the discussion in the terms and tone

imputed to that class, somewhat more prone to speak deprecatingly

of the vulgar innovations of modern culture, than the average of

the readers to whom it is addressed. The trend of its teaching,

therefore, is, on the whole, conservative and conciliatory. It is

also under the necessity of adapting itself to a moderately low

average of intelligence and information; since on this head,

again, it is those who possess intelligence and information that

are readiest to make allowances; they are, indeed, mildly

flattered to do so, besides being the only ones who can. It is a

prime requisite to conciliate a large body of readers.

This latter characteristic is particularly evident in the

didactic portion of the periodical literature. This didactic

literature, running on discussions of a quasi-artistic and

quasi-scientific character, is, by force of the business

exigencies of the case, de signed to favor the sensibilities of

the weaker among its readers by adroitly suggesting that the

readers are already possessed of the substance of what purports

to be taught and need only be fortified with certain general

results. There follows a great spread of quasi-technical terms

and fanciful conceits. The sophisticated animal stories and the

half-mythical narratives of industrial processes which now have

the vogue illustrate the results achieved in this direction.

The literary output issued under the surveillance of the

advertising office is excellent in workmanship and deficient in

intelligence and substantial originality. What is encouraged and

cultivated is adroitness of style and a piquant presentation of

commonplaces. Harmlessness, not to say pointlessness, and an

edifying, gossipy optimism are the substantial characteristics,

which persist through all ephemeral mutations of style, manner,

and subject-matter.

Business enterprise, therefore, it is believed, gives a

salutary bent to periodical literature. It conduces mildly to the

maintenance of archaic ideals and philistine affectations, and

inculcates the crasser forms of patriotic, sportsmanlike, and

spendthrift aspirations.

The largest and most promising factor of cultural discipline

- most promising as a corrective of iconoclastic vagaries - over

which business principles rule is national politics. The purposes

and the material effects of business politics have already been

spoken of above, but in the present connection their incidental,

disciplinary effects are no less important. Business interests

urge an aggressive national policy and business men direct it.

Such a policy is warlike as well as patriotic. The direct

cultural value of a warlike business policy is unequivocal. It

makes for a conservative animus on the part of the populace.

During war time, and within the military organization at all

times, under martial law, civil rights are in abeyance; and the

more warfare and armament the more abeyance. Military training is

a training in ceremonial precedence, arbitrary command, and

unquestioning obedience. A military organization is essentially a

servile organization. Insubordination is the deadly sin. The more

consistent and the more comprehensive this military training, the

more effectually will the members of the community be trained

into habits of subordination and away from that growing

propensity to make light of personal authority that is the chief

infirmity of democracy. This applies first and most decidedly, of

course, to the soldiery, but it applies only in a less degree to

the rest of the population. They learn to think in warlike terms

of rank, authority, and subordination, and so grow progressively

more patient of encroachments upon their civil rights. Witness

the change that has latterly been going on in the temper of the

German people.(5*)

The modern warlike policies are entered upon for the sake of

peace, with a view to the orderly pursuit of business. In their

initial motive they differ from the warlike dynastic politics of

the sixteenth, seventeenth, and eighteenth centuries. But the

disciplinary effects of warlike pursuits and of warlike

preoccupations are much the same what ever may be their initial

motive or ulterior aim. The end sought in the one case was

warlike mastery and high repute in the matter of ceremonial

precedence; in the other, the modern case, it is pecuniary

mastery and high repute in the matter of commercial solvency. But

in both cases alike the pomp and circumstance of war and

armaments, and the sensational appeals to patriotic pride and

animosity made by victories, defeats, or comparisons of military

and naval strength, act to rehabilitate lost ideals and weakened

convictions of the chauvinistic or dynastic order. At the same

stroke they direct the popular interest to other, nobler,

institutionally less hazardous matters than the unequal

distribution of wealth or of creature comforts. Warlike and

patriotic preoccupations fortify the barbarian virtues of

subordination and prescriptive authority. Habituation to a

warlike, predatory scheme of life is the strongest disciplinary

factor that can be brought to counteract the vulgarization of

modern life wrought by peaceful industry and the machine process,

and to rehabilitate the decaying sense of status and differential

dignity. Warfare, with the stress on subordination and mastery

and the insistence on gradations of dignity and honor incident to

a militant organization, has always proved an effective school in

barbarian methods of thought.

In this direction, evidently, lies the hope of a corrective

for "social unrest" and similar disorders of civilized life.

There can, indeed, be no serious question but that a consistent

return to the ancient virtues of allegiance, piety, servility,

graded dignity, class prerogative, and prescriptive authority

would greatly conduce to popular content and to the facie

management of affairs. Such is the promise held out by a

strenuous national policy.

The reversional trend given by warlike experience and warlike

preoccupations, it is plain, does not set backward to the regime

of natural liberty. Modern business principles and the modern

scheme of civil rights and constitutional government rest on

natural-rights ground. But the system of natural rights is a

halfway house. The warlike culture takes back to a more archaic

situation that preceded the scheme of natural rights, viz. the

system of absolute government, dynastic politics, devolution of

rights and honors, ecclesiastical authority, and popular

submission and squalor. It makes not for a reinstatement of the

Natural Rights of Man but for a reversion to the Grace of God.

The barbarian virtues of fealty and patriotism run on

national or dynastic exploit and aggrandizement, and these

archaic virtues are not dead. In those modern communities whose

hearts beat with the pulsations of the world-market they find

expression in an enthusiasm for the commercial aggrandizement of

the nation's business men, But when once the policy of warlike

enterprise has been entered upon for business ends, these loyal

affections gradually shift from the business interests to the

warlike and dynastic interests, as witness the history of

imperialism in Germany and England. The eventual outcome should

be a rehabilitation of the ancient patriotic animosity and

dynastic loyalty, to the relative neglect of business interests.

This may easily be carried so far as to sacrifice the profits of

the business men to the exigencies of the higher politics.(6*)

The disciplinary effect of war and armaments and imperialist

politics is complicated with a selective effect. War not only

affords a salutary training, but it also acts to eliminate

certain elements of the population. The work of campaigning and

military tenure, such as is carried on by England, America, or

the other civilizing powers, lies, in large part, in the low

latitudes, where the European races do not find a favorable

habitat. The low latitudes are particularly unwholesome for that

dolicho-blond racial stock that seems to be the chief bearer of

the machine industry. It results that the viability and the

natural increase of the soldiery is perceptibly lowered. The

service in the low latitudes, as contrasted with Europe, for

instance, is an extrahazardous occupation. The death rate,

indeed, exceeds the birth rate. But in the more advanced

industrial communities, of which the English and American are

typical, the service is a volunteer service; which means that

those who go to the wars seek this employment by their own

choice. That is to say, the human material so drawn off is

automatically selected on the basis of a peculiar spiritual

fitness for this predatory employment; they are, on the whole, of

a more malevolent and vagabond temper, have more of the ancient

barbarian animus, than those who are left at home to carry on the

work of the home community and propagate the home population. And

since the troops and ships are officered by the younger sons of

the conservative leisure class and by the buccaneering scions of

the class of professional politicians, a natural election of the

same character takes effect also as regards the officers. There

results a gradual selective elimination of that old-fashioned

element of the population that is by temperament best suited for

the old-fashioned institutional system of status and servile

organization.(7*)

This selective elimination of conservative elements would in

the long run leave each succeeding generation of the community

less predatory and less emulative in temper, less well endowed

for carrying on its life under the servile institutions proper to

a militant regime. But, for the present and the nearer future,

there can be little doubt but that this selective shaping of the

community's animus is greatly outweighed by the contrary trend

given by the discipline of warlike preoccupations. What helps to

keep the balance in favor of the reversional trend is the

cultural leaven carried back into the home community by the

veterans. These presumptive past masters in the archaic virtues

keep themselves well in the public eye and serve as exemplars to

the impressionable members of the community, particularly to the

less mature.(8*)

The net outcome of the latter-day return to warlike

enterprise is, no doubt, securely to be rated as fostering a

reversion to national ideals of servile status and to

institutions of a despotic character. On the whole and for the

present, it makes for conservatism, ultimately for reversion.

The quest of profits leads to a predatory national policy.

The resulting large fortunes call for a massive government

apparatus to secure the accumulations, on the one hand, and for

large and conspicuous opportunities to spend the resulting

income, on the other hand; which means a militant, coercive home

administration and something in the way of an imperial court life

a dynastic fountain of honor and a courtly bureau of ceremonial

amenities. Such an ideal is not simply a moralist's day-dream; it

is a sound business proposition, in that it lies on the line of

policy along which the business interests are moving in their own

behalf. If national (that is to say dynastic) ambitions and

warlike aims, achievements, spectacles, and discipline be given a

large place in the community's life, together with the

concomitant coercive police surveillance, then there is a fair

hope that the disintegrating trend of the machine discipline may

be corrected. The regime of status, fealty, prerogative, and

arbitrary command would guide the institutional growth back into

the archaic conventional ways and give the cultural structure

something of that secure dignity and stability which it had

before the times, not only of socialistic vapors, but of natural

rights as well. Then, too, the rest of the spiritual furniture of

the ancient regime shall presumably he reinstated; materialistic

scepticism may yield the ground to a romantic philosophy, and the

populace and the scientists alike may regain something of that

devoutness and faith in preternatural agencies which they have

recently been losing. As the discipline of prowess again comes to

its own, conviction and contentment with whatever is authentic

may return to distracted Christendom, and may once more give

something of a sacramental serenity to men's outlook on the

present and the future.

But authenticity and sacramental dignity belong neither with

the machine technology, nor with modern science, nor with

business traffic. In so far as the aggressive politics and the

aristocratic ideals currently furthered by the business community

are worked out freely, their logical outcome is an abatement of

those cultural features that distinguish modem times from what

went before, including a decline of business enterprise

itself.(9*)

How imminent such a consummation is to be accounted is a

question of how far the unbusinesslike and unscientific

discipline brought in by aggressive politics may be expected to

prevail over the discipline of the machine industry. It is

difficult to believe that the machine technology and the pursuit

of the material sciences will be definitively superseded, for the

reason, among others, that any community which loses these

elements of its culture thereby loses that brute material force

that gives it strength against its rivals. And it is equally

difficult to imagine how any one of the communities of

Christendom can avoid entering the funnel of business and

dynastic politics, and so running through the process whereby the

materialistic animus is eliminated. Which of the two antagonistic

factors may prove the stronger in the long run is something of a

blind guess; but the calculable future seems to belong to the one

or the other. It seems possible to say this much, that the full

dominion of business enterprise is necessarily a transitory

dominion. It stands to lose in the end whether the one or the

other of the two divergent cultural tendencies wins, because it

is incompatible with the ascendancy of either.

NOTES:

1. "Ought", is of course here used to denote business expediency,

not moral restraint.

2. As a side line, which affords play for the staff's creative

talent, whatever is exceptionally sensational at the same time

that it is harmless to the advertisers' interests should, in

newspaper slang be "played up".

3. Business enterprises that are not notable advertisers may be

roundly eken to task, as, e.g., the Standard Oil Company or the

American Sugar Refining Company; and, indeed, it may be shrewd

management to abuse these concerns, since such abuse redounds to

the periodical's reputation for popular sympathy and

independence.

4. "Snobbery" is here used without disrespect, as a convenient

term to denote the element of strain involved in the quest of

gentility on the Part of persons whose accustomed social sending

is less high or less authentic than their aspirations.

5. Cf., e.g., Maurice Lair, l'Imperialism allemand, especially

ch. II and III. The like change of sentiment is visible in the

British community. Cf. Hobson, Imperialism, especially pt II, ch.

I and III.

6. Cf., e.g., Hobson, Imperialism, p. II, chap. VII.

7. The selective effect of warfare, both ancient and modern, has

been discussed by various writers. Protracted wars Or a warlike

policy always have some such effect, no doubt, and in old times

this has shown itself to be a serious cultural factor. It is

commonly regarded that the selection results in an elimination of

the "best" human material. Perhaps the most cogent spokesman for

this view is D.S. Jordan, The Blood of the Nation. The "best" in

this case must be taken to mean the best for the prupose, not

necessarily for other purposes. In such a case as the Chinese or

the Jewish peoples, e.g., a very long-continued, though not in

both cases a close, selective elimination of the peace-dturbing

elements has left a residue that is highly efficient ("good") in

certain directions, but not good war material. The case of the

North-European peoples, however, in the present juncture is

somewhat different from these. Racially, the most efficient war

material among them seems to be those elements that contain an

appreciable admixture of the dolicho-blond stock. These elements

at the same time are apparently, on the whole, also the ones most

generally endowed with industrial initiative and a large,

aptitude for the machine technology and scientific research.

Selective elinination by war and military tenure in the case of

these peoples should, therefore, apparently lower both their

fighting capacity and their industrial and intellectual capacity;

so that, by force of this double and cumulative effect, the

resulting national decline should in their case be comprehensive

and relatively precipitate.

8. With the complement of archaic virtues that invests these

adepts there is also associated a fair complement of those more

elemental vices that are growing obsolete in the peaceable

civilized communities. Such debaucheries, extravagances of

cruelty, and general superfluity of naughtiness as are nameless

or impossible in civil life are blameless matters of course in

the service. In the nature of the case they are inseparable from

the service. The service commonly leaves the veterans physical,

intellectual, and moral invalids (as witness the records of the

Pension Office). But these less handsome concomitants of the

service should scarcely be made a point of reproach to those

brave men whose devotion to the flag and the business interests

has led them by the paths of disease and depravity. Nor are the

accumulated vices to be lightly condemned, since their weight

also falls on the conservative side; being archaic and

authenticated, their cultural bearing is, on the whole, salutary.

9. See Chapter VIII, pp. 347-350.

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