The Theory of Business Enterprise
by Thorstein Veblen
1904
Preface
In respect to its point of departure, the following inquiry
into the nature, causes, utility, and further drift of business
enterprise differs from other discussions of the same general
range of facts. Any unfamiliar conclusions are due to this choice
of a point of view, rather than to any peculiarity in the facts,
articles of theory, or method of argument employed. The point of
view is that given by the business man's work, -- the aims,
motives, and means that condition current business traffic. This
choice of a point of view is itself given by the current economic
situation, in that the situation plainly is primarily a business
situation.
A much more extended and detailed examination of the
ramifications and consequences of business enterprise and
business principles would feasible, and should give interesting
results. It might conceivably lead to something of a revision
(modernization) of more than one point in the current body of
economic doctrines. But it should apparently prove more
particulary interesting if it were followed up at large in the
bearing of this modern force upon cultural growth, apart from
what is of immediate economic interest. This cultural bearing of
business enterprise, however, belongs rather in the field of the
sociologist than in that of the professed economist; so that the
present inquiry, in its later chapters, sins rather by exceeding
the legitimate bounds of economic discussion on this head than by
falling short of them. In extenuation of this fault it is said
that the features of general culture touched upon in these
chapters bear too intimately on the economic situation proper to
admit their being left entirely on one side.
Of the chapters included in the volume, the fifth, on Loan
Credit, is taken without substantial change, from Volume IV of
the Decennial Publications of the University of Chicago, where it
appears as a monograph.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter One
Introductory
The material framework of modern civilization is the industrial
system, and the directing force which animates this framework is
business enterprise. To a greater extent than any other known
phase of culture, modern Christendom takes its complexion from
its economic organization. This modern economic organization is
the "Capitalistic System" or "Modern Industrial System," so
called. Its characteristic features, and at the same time the
forces by virtue of which it dominates modern culture, are the
machine process and investment for a profit.
The scope and method of modern industry are given by the
machine. This may not seem to hold true for all industries,
perhaps not for the greater part of industry as rated by the bulk
of the output or by the aggregate volume of labor expended. But
it holds true to such an extent and in such a pervasive manner
that a modern industrial community cannot go on except by the
help of the accepted mechanical appliances and processes. The
machine industries -- those portions of the industrial system in
which the machine process is paramount -- are in a dominant
position; they set the pace for the rest of the industrial
system. In this sense the present is the age of the machine
process. This dominance of the machine process in industry marks
off the present industrial situation from all else of its kind.
In a like sense the present is the age of business
enterprise. Not that all industrial activity is carried on by the
rule of investment for profits, but an effective majority of the
industrial forces are organized on that basis. There are many
items of great volume and consequence that do not fall within the
immediate score of these business principles. The housewife's
work, e.g., as well as some appreciable portion of the work on
farms and in some handicrafts, can scarcely be classed as
business enterprise. But those elements in the industrial world
that take the initiative and exert a far-reaching coercive
guidance in matters of industry go to their work with a view to
profits on investment, and are guided by the principles and
exigencies of business. The business man, especially the business
man of wide and authoritative discretion, has become a
controlling force in industry, because, through the mechanism of
investments and markets, he controls the plants and processes,
and these set the pace and determine the direction of movement
for the rest. His control in those portions of the field that are
not immediately under his hand is, no doubt, somewhat loose and
uncertain; but in the long run his discretion is in great measure
decisive even for these outlying portions of the field, for he is
the only large self-directing economic factor. His control of the
motions of other men is not strict, for they are not under
coercion from him except through the coercion exercised by the
exigencies of the situation in which their lives are cast; but as
near as it may be said of any human power in modern times, the
large business man controls the exigencies of life under which
the community lives. Hence, upon him and his fortunes centres the
abiding interest of civilized mankind.
For a theoretical inquiry into the course of civilized
life as it runs in the immediate present, therefore, aud as it is
running into the proximate future, no single factor in the
cultural situation has an importance equal to that of the
business man and his work.
This of course applies with peculiar force to an inquiry
into the economic life of a modem community. In so far as the
theorist aims to explain the specifically modern economic
phenomena, his line of approach must be from the businessman's
standpoint, since it is from that standpoint that the course of
these phenomena is directed. A theory of the modern economic
situation must be primarily a theory of business traffic, with
its motives, aims, methods, and effects.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter Two
The Machine Process
In its bearing on modern life and modern business, the
"machine process" means something more comprehensive and less
external than a mere aggregate of mechanical appliances for the
mediation of human labor. It means that, but it means something
more than that. The civil engineer, the mechanical engineer, the
navigator, the mining expert, the industrial chemist and
mineralogist, the electrician, -- the work of all these falls
within the lines of the modern machine process, as well as the
work of the inventor who devises the appliances of the process
and that of the mechanician who puts the inventions into effect
and oversees their working. The scope of the process is larger
than the machine.(1*) In those branches of industry in which
machine methods have been introduced, many agencies which are not
to be classed as mechanical appliances, simply, have been drawn
into the process, and have become integral factors in it.
Chemical properties of minerals, e.g., are counted on in the
carrying out of metallurgical processes with much the same
certainty and calculable effect as are the motions of those
mechanical appliances by whose use the minerals are handled. The
sequence of the process involves both the one and the other, both
the apparatus and the materials, in such intimate interaction
that the process cannot be spoken of simply as an action of the
apparatus upon the materials. It is not simply that the apparatus
reshapes the materials; the materials reshape themselves by the
help of the apparatus. Similarly in such other processes as the
refining of petroleum, oil, or sugar; in the work of the
industrial chemical laboratories; in the use of wind, water, or
electricity, etc.
Wherever manual dexterity, the rule of thumb, and the
fortuitous conjunctures of the seasons have been supplanted by a
reasoned procedure on the basis of a systematic knowledge of the
forces employed, there the mechanical industry is to be found,
even in the absence of intricate mechanical contrivances. It is a
question of the character of the process rater than a question of
the complexity of the contrivances employed. Chemical,
agricultural, and animal industries, as carried on by the
characteristically modern methods and in due touch with the
market, are to be included in the modern complex of mechanical
industry.(2*)
No one of the mechanical processes carried on by the use of
a given outfit of appliances is independent of other processes
going on elsewhere. Each draws upon and presupposes the proper
working of many other processes of a similarly mechanical
character. None of the processes in the mechanical industries is
self-sufficing. Each follows some and precedes other processes in
an endless sequence, into which each fits and to the requirements
of which each must adapt its own working. The whole concert of
industrial operations is to be taken as a machine process, made
up of interlocking detail processes, rather than as a
multiplicity of mechanical appliances each doing its particular
work in severalty. This comprehensive industrial process draws
into its scope and turns to account all branches of knowledge
that have to do with the material sciences, and the whole makes a
more or less delicately balanced complex of sub-processes.(3*)
Looked at in this way the industrial process shows two
well-marked general characteristics: (a) the running maintenance
of interstitial adjustments between the several sub-processes or
branches of industry, wherever in their working they touch one
another in the sequence of industrial elaboration; and (b) an
unremitting requirement of quantitative precision, accuracy in
point of time and sequence, in the proper inclusion and exclusion
of forces affecting the outcome, in the magnitude of the various
physical characteristics (weight, size, density, hardness,
tensile strength, elasticity, temperature, chemical reaction,
actinic sensitiveness, etc.) of the materials handled as well as
of the appliances employed. This requirement of mechanical
accuracy and nice adaptation to specific uses has led to a
gradual pervading enforcement of uniformity to a reduction to
staple grades and staple character in the materials handled, and
to a thorough standardizing of tools and units of measurement.
Standard physical measurements are of the essence of the
machine's regime.(4*)
The modern industrial communities show an unprecedented
uniformity and precise equivalence in legally adopted weights and
measures. Something of this kind would be brought about by the
needs of commerce, even without the urgency given to the movement
for uniformity by the requirements of the machine industry. But
within the industrial field the movement for standardization has
outrun the urging of commercial needs, and has penetrated every
corner of the mechanical industries. The specifically commercial
need of uniformity in weights and measures of merchantable goods
and in monetary units has not carried standardization in these
items to the extent to which the mechanical need of the
industrial process has carried out a sweeping standardization in
the means by which the machine process works, as well as in the
products which it turns out.
As a matter of course, tools and the various structural
materials used are made of standard sizes, shapes, and gauges.
When the dimensions, in fractions of an inch or in millimetres,
and the weight, in fractions of a pound or in grammes, are given,
the expert foreman or workman, confidently and without
reflection, infers the rest of what need be known of the uses to
which any given item that passes under his hand may be turned.
The adjustment and adaptation of part to part and of process to
process has passed out of the category of craftsmanlike skill
into the category of mechanical standardization. Hence, perhaps,
the greatest, most wide-reaching gain in productive celerity and
efficiency through modern methods, and hence the largest saving
of labor in modern industry.
Tools, mechanical appliances and movements, and structural
materials are scheduled by certain conventional scales and
gauges; and modern industry has little use for, and can make
little use of, what does not conform to the standard. What is not
competently standardized calls for too much of craftsmanlike
skill, reflection, and individual elaboration, and is therefore
not available for economical use in the processes. Irregularity,
departure from standard measurements in any of the measurable
facts, is of itself a fault in any item that is to find a use in
the industrial process, for it brings delay, it detracts from its
ready usability in the nicely adjusted process into which it is
to go; and a delay at any point means a more or less far-reaching
and intolerable retardation of the comprehensive industrial
process at large. Irregularity in products intended for
industrial use carries a penalty to the nonconforming producer
which urges him to fall into line and submit to the required
standardization.
The materials and moving forces of industry are undergoing a
like reduction to staple kinds, styles, grades, and gauge.(5*)
Even such forces as would seem at first sight not to lend
themselves to standardization, either in their production or
their use, are subjected to uniform scales of measurement; as,
e.g., water-power, steam, electricity, and human labor. The
latter is perhaps the least amenable to standardization, but, for
all that, it is bargained for, delivered, and turned to account
on schedules of time, speed, and intensity which are continually
sought to be reduced to a more precise measurement and a more
sweeping uniformity.
The like is true of the finished products. Modern consumers
in great part supply their wants with commodities that conform to
certain staple specifications of size, weight, and grade. The
consumer (that is to say the vulgar consumer) furnishes his hose,
his table, and his person with supplies of standard weight and
measure, and he can to an appreciable degree specify his needs
and his consumption in the notation of the standard gauge. As
regards the mass of civilized mankind, the idiosyncrasies of the
individual consumers are required to conform to the uniform
gradations imposed upon consumable goods by the comprehensive
mechanical processes of industry. "Local color" it is said, is
falling into abeyance in modern life, and where it is still found
it tends to assert itself in units of the standard gauge.
From this mechanical standardization of consumable goods it
follows, on the one hand, that the demand for goods settles upon
certain defined lines of production which handle certain
materials of definite grade, in certain, somewhat invariable
forms and proportions; which leads to well-defined methods and
measurements in the processes of production, shortening the
average period of "ripening" that intervenes between the first
raw stage of the product and its finished shape, and reducing the
aggregate stock of goods necessary to be carried for the supply
of current wants, whether in the raw or in the finished form.(6*)
Standardization means economy at nearly all points of the process
of supplying goods, and at the same time it means certainty and
expedition at neatly all points in the business operations
involved in meeting current wants. Besides this, the
standardization of goods means that the interdependence of
industrial processes is reduced to more definite terms than
before the mechanical standardization came to its present degree
of elaborateness and rigor. The margin of admissible variation,
in time, place, form, and amount, is narrowed. Materials, to
answer the needs of standardized industry, must be drawn from
certain standard sources at a definite rate of supply. Hence any
given detail industry depends closely on receiving its supplies
from certain, relatively few, industrial establishments whose
work belongs earlier in the process of elaboration. And it ma
similarly depend on certain other, closely defined, industrial
establishments for a vent of its own specialization and
standardization product.(7*) It may likewise depend in a strict
manner on special means of transportation.(8*)
Machine production leads to a standardization of services
as well as of goods. So, for instance, the modern means of
communication and the system into which these means are organized
are also of the nature of a mechanical process, and in this
mechanical process of service and intercourse the life of all
civilized men is more or less intimately involved. To make
effective use of the modern system of communication in any way or
all of its ramifications (streets, railways, steamship lines,
telephone, telegraph, postal service, etc.), men are required to
adapt their needs and their motions to the exigencies of the
process whereby this civilized method of intercourse is carried
into effect. The service is standardized, and therefore the use
of it is standardized also. Schedules of time, place, and
circumstance rule throughout. The scheme of everyday life must be
arranged with a strict regard to the exigencies of the process
whereby this range of human needs is served, if full advantage is
to be taken of this system of intercourse, which means that, in
so far, one's plans and projects must be conceived and worked out
in terms of those standard units which the system imposes.
For the population of the towns and cities, at least, much
the same rule holds true of the distribution of consumable goods.
So, also, amusements and diversions, much of the current
amenities of life, are organized into a more or less sweeping
process to which those who would benefit by the advantages
offered must adapt their schedule of wants and the disposition of
their time and effort. The frequency, duration, intensity, grade,
and sequence are not, in the main, matters for the free
discretion of the individuals who participate. Throughout the
scheme of life of that portion of mankind that clusters about the
centres of modern culture the industrial process makes itself
felt and enforces a degree of conformity to the canon of accurate
quantitative measurement. There comes to prevail a degree of
standardization and precise mechanical adjustment of the details
of everyday life, which presumes a facile and unbroken working of
all those processes that minister to these standardized human
wants.
As a result of this superinduced mechanical regularity of
life, the livelihood of individuals is, over large areas,
affected in an approximately uniform manner by any incident which
at all seriously affects the industrial process at any point.(9*)
As was noted above, each industrial unit, represented by a
given industrial "plant", stands in close relations of
interdependence with other industrial processes going forward
elsewhere, near or far away, from which it receives supplies --
materials, apparatus, and the like -- and to which it turns over
its output of products and waste, or on which it depends for
auxiliary work, such as transportation. The resulting
concatenation of industries has been noticed by most modern
writers. It is commonly discussed under the head of the division
of labor. Evidently the prevalent standardization of industrial
means, methods, and products greatly increases the reach of this
concatenation of industries, at the same time that it enforces a
close conformity in point of time, volume and character of the
product, whether the product is goods or services.(10*)
By virtue of this concatenation of processes the modern
industrial system at large bears the character of a
comprehensive, balanced mechanical process. In order to an
efficient working of this industrial process at large, the
various constituent sub-processes must work in due coordination
throughout the whole. Any degree of maladjustment in the
interstitial coordination of this industrial process at large in
some degree hinders its working. Similarity, any given detail
process or any industrial plant will do its work to full
advantage only when due adjustment is had between its work and
the work done by the rest. The higher the degree of development
reached by a given industrial community, the more comprehensive
and urgent becomes this requirement of interstitial adjustment.
And the more fully a given industry has taken on the character of
a mechanical process, and the more extensively and closely it is
correlated in its work with other industries that precede or
follow it in the sequence of elaboration, the more urgent, other
things equal, is the need of maintaining the proper working
relations with these other industries, the greater is the
industrial detriment suffered from any derangement of the
accustomed working relations, and the greater is the industrial
gain to be derived from a closer adaptation and a more facile
method of readjustment in the event of a disturbance, -- the
greater is also the chance for an effectual disturbance of
industry at the particular point. This mechanical concatenation
of industrial processes makes for solidarity in the
administration of any group of related industries, and more
remotely it makes for solidarity in the management of the entire
industrial traffic of the community.
A disturbance at any point, whereby any given branch of
industry fails to do its share in the work of the system at
large, immediately affects the neighbouring or related branches
which come before or after it in the sequence, and is transmitted
through their derangement to the remoter portions of the system.
The disturbance is rarely confined to the single plant or the
single line of production first affected, but spreads in some
measure to the rest. A disturbance at any given point brings more
or less derangement to the industrial process at large. So that
any maladjustment of the system involves a larger waste than
simply the disabling of one or two members in the complex
industrial structure.
So much is clear, that the keeping of the balance in the
comprehensive machine process of industry is a matter of the
gravest urgency if the productive mechanism is to proceed with
its work in an efficient manner, so as to avoid idleness, waste,
and hardship. The management of the various industrial plants and
processes in due correlation with all the rest, and the
supervision of the interstitial adjustments of the system, are
commonly conceived to be a work of greater consequence to the
community's well-being than any of the detail work involved in
carrying on a given process of production. This work of
interstitial adjustment, and in great part also the more
immediate supervision of the various industrial processes, have
become urgent only since the advent of the machine industry and
in proportion as the machine industry has advanced in compass and
consistency.
It is by business transactions that the balance of working
relations between the several industrial units is maintained or
restored, adjusted and readjusted, and it is on the same basis
and by the same method that the affairs of each industrial unit
are regulated. The relations in which any independent industrial
concern stands to its employees, as well as to other concerns,
are always reducible to pecuniary terms. It is at this point that
the business man comes into the industrial process as a decisive
factor. The organization of the several industries as well as the
interstitial adjustments and discrepancies of the industrial
process at large are of the nature of pecuniary transactions and
obligations. It therefore rests with the business men to make or
mar the running adjustments of industry. The larger and more
close-knit and more delicately balanced the industrial system,
and the larger the constituent units, the larger and more
far-reaching will be the effect of each business move in the
field.
NOTES:
1. Cf. Cooke Taylor, Modern Factory System, pp. 74-77.
2. Even in work that lies so near the fortuities of animate
nature as dairying, stock-breeding, and the improvement of crop
plants, a determinate, reasoned routine replaces the rule of
thumb. By mechanical control of his materials the dairyman, e.g.,
selectively determines the rate and kind of the biological
processes that change his raw material into finished product. The
stock-breeder's aim is to reduce the details of the laws of
heredity, as they apply within his field, to such definite terms
as will afford him a technologically accurate routine of
breeding, and then to apply this technological breeding process
to the production of such varieties of stock as will, with the
nearest approach to mechanical exactness and expedition, turn the
raw materials of field and meadow into certain specified kinds
and grades of finished product. The like is true of the
plant-breeders. Agricultural experiment stations and bureaus, in
all civilized countries, are laboratories working toward an
effective technological control of biological factors, with a
view to eliminating fortuitous, disserviceable, and useless
elements from the processes of agricultural production, and so
reducing these processes to a calculable, expeditious, and
wasteless routine.
3. Cf. Sombart, Moderne Kapitalismus, vol. II, ch. III.
4. Twelfth Census (U.S.): "Manufactures," pt. I, p. xxxvi.
5.. E.g., lumber, coal, paper, wool and cotton, grain, leather,
cattle for the packing houses. All these and many others are to
an increasing extent spoken for, delivered, and disposed of under
well-defined staple grades as to quality and dimensions, weight
and efficiency.
6. Well shown in the case of wheat and flour; but the like is
true as regards the stocks of other commodities carried by
producers, jobbers, retailers, and consumers.
7. Well illustrated by the interdependence of the various
branches of iron and steel production.
8. As seen, e.g., in the dependence of oil production or oil
refining on the pipe lines and their management, or in the
dependence of the prairie farmers on the railway lines, etc.
9. It may be noted in this connection, on the one hand, that a
population which is in no degree habituated to the modern
industrial process is unable to adapt its mode of life to the
requirements of this method of supplying human wants, and so can
derive but little benefit, and possibly great discomfort, from a
forcible intrusion of the machine industry; as, for instance,
many of the outlying barbarian peoples with whom the Western
industrial culture is now enforcing a close contact. On the other
hand, it is also true that even the most adequately trained
modern community, among whom the machine industry is best at
home, does not respond with fruitless alacrity to the demands and
opportunities which this system holds out. The adaptation of
habits of life and of ideals and aspirations to the exigencies of
the machine process is not nearly complete, nor does the
untrained man instinctively fall into line with it. Even the
best-trained, severely disciplined man of the industrial towns
has his seasons of recalcitrancy.
10. The dependence of one process upon the working of the others
is sometimes very strict, as, for instance, in the various
industries occupied with iron, including the extraction and
handling of the ore and other raw materials. In other cases the
correlation is less strict, or even very slight, as, e.g., that
between the newspaper industry and lumbering, through the
wood-pulp industry, the chief component of the modern newspaper
being wood-pulp.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter Three
Business Enterprise
The motive of business is pecuniary gain, the method is
essentially purchase and sale. The aim and usual outcome is an
accumulation of wealth.(1*) Men whose aim is not increase of
possessions do not go into business, particularly not on an
independent footing.
How these motives and methods of business work out in the
traffic of commercial enterprise proper - in mercantile and
banking business does not concern the present inquiry, except so
far as these branches of business affect the course of industrial
business in the stricter sense of the term. Nor is it necessary
were to describe the details of business routine, whether in the
mercantile pursuits or in the conduct of an industrial concern.
The point of the inquiry is that characteristically modern
business that is coextensive with the machine process described
above and is occupied with the large mechanical industry. The aim
is a theory of such business enterprise in outline sufficiently
full to show in what manner business methods and business
principles, in conjunction with the mechanical industry,
influence the modern cultural situation. To save space and
tedium, therefore, features of business traffic that are not of a
broad character and not peculiar to this modern situation are
left on one side, as being already sufficiently familiar for the
purpose in hand.
In early modern times, before the regime of the machine
industry set in, business enterprise on any appreciable scale
commonly took the form of commercial business - some form of
merchandising or banking. Shipping was the only considerable line
of business which involved an investment in or management of
extensive mechanical appliances and processes, comparable with
the facts of the modern mechanical industry.(2*) And shipping was
commonly combined with merchandising. But even the shipping trade
of earlier times had much of a fortuitous character, in this
respect resembling agriculture or any other industry in which
wind and, weather greatly affect the outcome. The fortunes of men
in shipping were on a more precarious footing than to-day, and
the successful outcome of their ventures was less a matter of
shrewd foresight and daily pecuniary strategy than are the
affairs of the modern large business concerns in transportation
or the foreign trade. Under these circumstances the work of the
business man was rather to take advantage of the conjunctures
offered by the course of the seasons and the fluctuations of
demand and supply than to adapt the course of affairs to his own
ends. The large business man was more of a speculative buyer and
seller and less of a financiering strategist than he has since
become.
Since the advent of the machine age the situation has
changed. The methods of business have, of course, not changed
fundamentally, whatever may be true of the methods of industry;
for they are, as they had been, conditioned by the facts of
ownership. But instead of investing in the goods as they pass
between producer and consumer, as the merchant does, the business
man now invests in the processes of industry; and instead of
staking his values on the dimly foreseen conjunctures of the
seasons and the act of God, he turns to the conjunctures arising
from the interplay of the industrial processes, which are in
great measure under the control of business men.
So long as the machine processes were but slightly developed,
scattered, relatively isolated, and independent of one another
industrially, and so long as they were carried on on a small
scale for a relatively narrow market, so long the management of
them was conditioned by circumstances in many respects similar to
those which conditioned the English domestic industry of the
eighteenth century. It was under the conditions of this inchoate
phase of the machine age that the earlier generation of
economists worked out their theory of the business man's part in
industry. It was then still true, in great measure, that the
undertaker was the owner of the industrial equipment, and that he
kept an immediate oversight of the mechanical processes as well
as of the pecuniary transactions in which his enterprise was
engaged; and it was also true, with relatively infrequent
exceptions, that an unsophisticated productive efficiency was the
prime element of business success.(3*) A further feature of that
precapitalistic business situation is that business, whether
handicraft or trade, was customarily managed with a view to
earning a livelihood rather than with a view to profits on
investment.(4*)
In proportion as the machine industry gained ground, and as
the modern concatenation of industrial processes and of markets
developed, the conjunctures of business grew more varied and of
larger scope at the same time that they became more amenable to
shrewd manipulation. The pecuniary side of the enterprise came to
require more unremitting attention, as the chances for gain or
loss through business relatIons simply, aside from mere
industrial efficiency, grew greater in number and magnitude. The
same circumstances also provoked a spirit of business enterprise,
and brought on a systematic investment for gain. With a fuller
development of the modern closeknit and comprehensive industrIal
system, the point of chief attention for the business man has
shifted from the old-fashioned surveillance and regulation of a
given industrial process, with which his livelihood was once
bound up, to an alert redistribution of investments from less to
more gainful ventures,(5*) and to a strategic control of the
conjunctures of business through shrewd investments and
coalitions with other business men.
As shown above, the modern industrial system is a
concatenation of processes which has much of the character of a
single, comprehensive, balanced mechanical process. A disturbance
of the balance at any point means a differential advantage (or
disadvantage) to one or more of the owners of the sub-processes
between which the disturbance falls; and it may also frequently
mean gain or loss to many remoter members in the concatenation of
processes, for the balance throughout the sequence is a delicate
one, and the transmission of a disturbance often goes far. It may
even take on a cumulative character, and may thereby seriously
cripple or accelerate branches of industry that are out of direct
touch with those members of the concatenation upon which the
initial disturbance falls. Such is the case, for instance, in an
industrial crisis, when an apparently slIght initial disturbance
may become the occasion of a widespread derangement. And such, on
the other hand, is also the case when some favorable condition
abruptly supervenes in a given industry, as, e.g., when a sudden
demand for war stores starts a wave of prosperity by force of a
large and lucrative demand for the products of certain
industries, and these in turn draw on their neighbors in the
sequence, and so transmit a wave of business activity.
The keeping of the industrial balance, therefore, and
adjusting the several industrial processes to one another's work
and needs, is a matter of grave and far-reaching consequence in
any modern community, as has already been shown. Now, the means
by which this balance is kept is business transactions, and the
men in whose keeping it lies are the business men. The channel by
which disturbances are transmitted from member to member of the
comprehensive industrial system is the business relations between
the several members of the system; and, under the modern
conditions of ownership, disturbances, favorable or unfavorable,
in the field of industry are transmitted by nothing but these
business relations. Hard times or prosperity spread through the
system by means of business relations, and are in their primary
expression phenomena of the business situation simply. It is only
secondarily that the disturbances in question show themselves as
alterations in the character or magnitude of the mechanical
processes involved. Industry is carried on for the sake of
business, and not conversely; and the progress and activity of
industry are conditioned by the outlook of the market, which
means the presumptive chance of business profits.
All this is a matter of course which it may seem simply
tedious to recite.(6*) But its consequences for the theory of
business make it necessary to keep the nature of this connection
between business and industry in mind. The adjustments of
industry take place through the mediation of pecuniary
transactions, and these transactions take place at the hands of
the business men and are carried on by them for business ends,
not for industrial ends in the narrower meaning of the phrase.
The economic welfare of the community at large is best served
by a facile and uninterrupted interplay of the various processes
which make up the industrial system at large; but the pecuniary
interests of the business men in whose hands lies the discretion
in the matter are not necessarily best served by an unbroken
maintenance of the industrial balance. Especially is this true as
regards those greater business men whose interests are very
extensive. The pecuniary operations of these latter are of large
scope, and their fortunes commonly are not permanently bound up
with the smooth working of a given Sub-process in the industrial
system. Their fortunes are rather related to the larger
conjunctures of the industrial system as a whole, the
interstitial adjustments, Or to conjunctures affecting large
ramifications of the system. Nor is it at all uniformly to their
interest to enhance the smooth working of the industrial system
at large in so far as they are related to it. Gain may come to
them from a given disturbance of the system whether the
disturbance makes for heightened facility or for widespread
hardship, very much as a speculator in grain futures may be
either a bull or a bear. To the business man who aims at a
differential gain arising out of interstitial adjustments or
disturbances of the industrial system, it is not a material
question whether his operations have an immediate furthering or
hindering effect upon the system at large. The end is pecuniary
gain, the means is disturbance of the industrial system, - except
so far as the gain is sought by the old-fashioned method of
permanent investment in some one industrial or commercial plant,
a case which is for the present left on one side as not bearing
on the point immediately in hand.(7*) The point immediately in
question is the part which the business man plays in what are
here called the interstitial adjustments of the industrial
system; and so far as touches his transactions in this field it
is, by and large, a matter of indifference to him whether his
traffic affects the system advantageously or disastrously. His
gains (or losses) are related to the magnitude of the
disturbances that take place, rather than to their. bearing upon
the welfare of the community.
The outcome of this management of industrial affairs through
pecuniary transactions, therefore, has been to dissociate the
interests of those men who exercise the discretion from the
interests of the community. This is true in a peculiar degree and
increasingly since the fuller development of the machine industry
has brought about a closeknit and wide-reaching articulation of
industrial processes, and has at the same time given rise to a
class of pecuniary experts whose business is the strategic
management of the interstitial relations of the system. Broadly,
this class of business men, in so far as they have no ulterior
strategic ends to serve, have an interest in making the
disturbances of the system large and frequent, since it is in the
conjunctures of change that their gain emerges. Qualifications of
this proposition may be needed, and it will be necessary to
return to this point presently.
It is, as a business proposition, a matter of indifference to
the man of large affairs whether the disturbances which his
transactions set up in the industrial system help or hinder the
system at large, except in so far as he has ulterior strategic
ends to serve. But most of the modern captains of industry have
such ulterior ends, and of the greater ones among them this is
peculiarly true. Indeed, it is this work of far-reaching business
strategy that gives them full title to the designation, "Captains
of Industry." This large business strategy is the most admirable
trait of the great business men who with force and insight swing
the fortunes of civilized mankind. And due qualification is
accordingly to be entered in the broad statement made above. The
captain's strategy is commonly directed to gaining control of
some large portion of the industrial system. When such control
has been achieved, it may be to his interest to make and maintain
business conditions which shall facilitate the smooth and
efficient working of what has come under his control, in case he
continues to hold a large interest in it as an investor; for,
other things equal, the gains from what has come under his hands
permanently in the way of industrial plant are greater the higher
and more uninterrupted its industrial efficiency.
An appreciable portion of the larger transactions in railway
and "industrial" properties, e.g., are carried out with a view to
the permanent ownership of the properties by the business men
into whose hands they pass. But also in a large proportion of
these transactions the business men's endeavors are directed to a
temporary control of the properties in order to close out at an
advance or to gain some indirect advantage; that is to say, the
transactions have a strategic purpose. The business man aims to
gain control of a given block of industrial equipment - as, e.g.,
given railway lines or iron mills that are strategically
important - as a basis for further transactions out of which gain
is expected. In such a case his efforts are directed, not to
maintaining the permanent efficiency of the industrial equipment,
but to influencing the tone of the market for the time being, the
apprehensions of other large operators, or the transient faith of
investors.(8*) His interest in the particular block of industrial
equipment is, then, altogether transient, and while it lasts it
is of a factitious character.
The exigencies of this business of interstitial disturbance
decide that in the common run of cases the proximate aim of the
business man is to upset or block the industrial process at some
one or more points. His strategy is commonly directed against
other business interests and his ends are commonly accomplished
by the help of some form of pecuniary coercion. This is not
uniformly true, but it seems to be true in appreciably more than
half of the transactions in question. In general, transactions
which aim to bring a coalition of industrial plants or processes
under the control of a given business man are directed to making
it difficult for the plants or processes in question to be
carried on in severalty by their previous owners or managers.(9*)
It is commonly a struggle between rival business men, and more
often than not the outcome of the struggle depends on which side
can inflict or endure the greater pecuniary damage. And pecuniary
damage in such a case not uncommonly involves a setback to the
industrial plants concerned and a derangement, more or less
extensive, of the industrial system at large.
The work of the greater modern business men, in so far as
they have to do with the ordering of the scheme of industrial
life, is of this strategic character. The dispositions which they
make are business transactions, "deals," as they are called in
the business jargon borrowed from gaming slang. These do not
always involve coercion of the opposing interests; it is not
always necessary to "put a man in a hole" before he is willing to
"come in on" a "deal." It may often be that the several parties
whose business interests touch one another will each see his
interest in reaching an amicable and speedy arrangement; but the
interval that elapses between the time when a given "deal" is
seen to be advantageous to one of the parties concerned and the
time when the terms are finally arranged is commonly occupied
with business manoeuvres on both or all sides, intended to "bring
the others to terms." In so playing for position and endeavoring
to secure the largest advantage possible, the manager of such a
campaign of reorganization not infrequently aims to "freeze out"
a rival or to put a rival's industrial enterprise under suspicion
of insolvency and "unsound methods," at the same time that he
"puts up a bluff" and manages his own concern with a view to a
transient effect on the opinions of the business community. Where
these endeavors occur, directed to a transient derangement of a
rival's business or to a transient, perhaps specious, exhibition
of industrial capacity and earning power on the part of one's own
concern, they are commonly detrimental to the industrial system
at large; they act temporarily to lower the aggregate
serviceability of the comprehensive industrial process within
which their effects run, and to make the livelihood and the peace
of mind of those involved in these industries more precarious
than they would be in the absence of such disturbances. If one is
to believe any appreciable proportion of what passes current as
information on this head, in print and by word of mouth, business
men whose work is not simply routine constantly give some
attention to manoeuvring of this kind and to the discovery of new
opportunities for putting their competitors at a disadvantage.
This seems to apply in a peculiar degree, if not chiefly, to
those classes of business men whose operations have to do with
railways and the class of securities called "industrials." Taking
the industrial process as a whole, it is safe to say that at no
time is it free from derangements of this character in any of the
main branches of modern industry. This chronic state of
perturbation is incident to the management of industry by
business methods and is unavoidable under existing conditions. So
soon as the machine industry had developed to large proportions,
it became unavoidable, in the nature of the case, that the
business men in whose hands lies the conduct of affairs should
play at cross-purposes and endeavor to derange industry. But
chronic perturbation is so much a matter of course and prevails
with so rare interruptions, that, being the normal state of
affairs, it does not attract particular notice.
In current discussion of business, indeed ever since the
relation of business men to the industrial system has seriously
engaged the attention of economists, the point to which attention
has chiefly been directed is the business man's work as an
organizer of comprehensive industrial processes. During the later
decades of the nineteenth century, particularly, has much
interest centred, as there has been much provocation for its
doing, on the formation of large industrial consolidations; and
the evident good effects of this work in the way of heightened
serviceability and economies of production are pointed to as the
chief and characteristic end of this work of reorganization. So
obvious are these good results and so well and widely has the
matter been expounded, theoretically, that it is not only
permissible, but it is a point of conscience, to shorten this
tale by passing over these good effects as a matter of common
notoriety. But there are other features of the case, less
obtrusive and less attractive to the theoreticians, which need
more detailed attention than they have commonly received.
The circumstances which condition the work of consolidation
in industry and which decide whether a given move in the
direction of a closer and wider organization of industrial
processes will be practicable and will result in economies of
production, -- these circumstances are of a mechanical nature.
They are facts of the comprehensive machine process. The
conditions favorable to industrial consolidation on these grounds
are not created by the business men. They are matters of "the
state of industrial arts," and are the outcome of the work of
those men who are engaged in the industrial employments rather
than of those who are occupied with business affairs. The
inventors, engineers, experts, or whatever name be applied to the
comprehensive class that does the intellectual work involved in
the modern machine industry, must prepare the way for the man of
pecuniary affairs by making possible and pitting in evidence the
economies and other advantages that will follow from a
prospective consolidation.
But it is not enough that the business man should see a
chance to effect economies of production and to heighten the
efficiency of. industry by a new combination. Conditions
favorable to consolidation on these grounds must be visible to
him before he can make the decisive business arrangements; but
these conditions, taken by themselves, do not move him. The
motives of the business man are pecuniary motives, inducements in
the way of pecuniary gain to him or to the business enterprise
with which he is identified. The end of his endeavors is, not
simply to effect an industrially advantageous consolidation, but
to effect it under such circumstances of ownership as will give
him control of large business forces or bring him the largest
possible gain. The ulterior end sought is an increase of
ownership, not industrial serviceability. His aim is to contrive
a consolidation in which he will be at an advantage, and to
effect it on the terms most favorable to his own interest.
But it is not commonly evident at the outset what are the
most favorable terms that he can get in his dealings with other
business men whose interests are touched by the proposed
consolidation, or who are ambitious to effect some similar
consolidation of the same or of competing industrial elements for
their own profit. It rarely happens that the interests of the
business men whom the prospective consolidation touches all
converge to a coalition on the same basis and under the same
management. The consequence is negotiation and delay. It commonly
also happens that some of the business men affected see their
advantage in staving off the coalition until a time more
propitious to their own interest, or until those who have the
work of consolidation in hand can be brought to compound with
them for the withdrawal of whatever obstruction they are able to
offer.(10*) Such a coalition involves a loss of independent
standing, or even a loss of occupation, to many of the business
men interested in the deal. If a prospective industrial
consolidation is of such scope as to require the concurrence or
consent of many business interests, among which no one is very
decidedly preponderant in pecuniary strength or in strategic
position, a long time will be consumed in the negotiations and
strategy necessary to define the terms on which the several
business interests will consent to come in and the degree of
solidarity and central control to which they will submit.
It is notorious, beyond the need of specific citation, that
the great business coalitions and industrial combinations which
have characterized the situation of the last few years have
commonly been the outcome of a long-drawn struggle, in which the
industrial ends, as contrasted with business ends, have not been
seriously considered, and in which great shrewdness and tenacity
have commonly been shown in the staving off of a settlement for
years in the hope of more advantageous terms. The like is true as
regards further coalitions, further consolidations of industrial
processes which have not been effectcd, but which are known to be
feasible and desirable so far as regards the mechanical
circumstances of the case. The difficulties in the way are
difficulties of ownership, of business interest, not of
mechanical feasibility.
These negotiations and much of the strategy that leads up to
a business consolidation are of the nature of derangements of
industry, after the manner spoken of above. So that business
interests and manoeuvres commonly delay consolidations,
combinations, correlations of the several plants and processes,
for some appreciable time after such measures have become
patently advisable on industrial grounds. In the meantime the
negotiators are working at cross-purposes and endeavoring to put
their rivals in as disadvantageous a light as may be, with the
result that there is chronic derangement, duplication, and
misdirected growth of the industrial equipment while the strategy
is going forward, and expensive maladjustment to he overcome when
the negotiations are brought to a close.(11*)
Serviceability, industrial advisability, is not the decisive
point. The decisive point is business expediency and business
pressure. In the normal course of business touching this matter
of industrial consolidation, therefore, the captain of industry
works against, as well as for, a new and more efficient
organization. He inhibits as well as furthers the higher
organization of industry.(12*) Broadly, it may be said that
industrial consolidations and the working arrangements made for
the more economical utilization of resources and mechanical
contrivances are allowed to go into effect only after they are
long overdue.
In current economic theory the business man is spoken of
under the name of "entrepreneur" or "undertaker," and his
function is held to be the coordinating of industrial processes
with a view to economics of production and heightened
serviceability. The soundness of this view need not be
questioned. It has a great sentimental value and is useful in
many ways. There is also a modicum of truth in it as an account
of facts. In common with other men, the business man is moved by
ideals of serviceability and an aspiration to make the way of
life easier for his fellows. Like other men, he has something of
the instinct of workmanship. No doubt such aspirations move the
great business man less urgently than many others, who are, on
that account, less successful in business affairs. Motives of
this kind detract from business efficiency, and an undue yielding
to them on the part of business men is to be deprecated as an
infirmity. Still, throughout men's dealing with one another and
with the interests of the community there runs a sense of equity,
fair dealing, and workmanlike integrity; and in an uncertain
degree this bent discountenances gain that is got at an undue
cost to others, or without rendering some colorable equivalent.
Business men are also, in a measure, guided by the ambition to
effect a creditable improvement in the industrial processes which
their business traffic touches. These sentimental factors in
business exercise something of a constraint, varying greatly from
one person to another, but not measurable in its aggregate
results. The careers of most of the illustrious business men show
the presence of some salutary constraint of this kind. Not
infrequently an excessive sensitiveness of this kind leads to a
withdrawal from business, or from certain forms of business which
may appeal to a vivid fancy as peculiarly dishonest or peculiarly
detrimental to the community.(13*) Such grounds of action, and
perhaps others equally genial and equally unbusinesslike, would
probably be discovered by a detailed scrutiny of any large
business deal. Probably in many cases the business strategist,
infected with this human infirmity, reaches an agreement with his
rivals and his neighbors in the industrial system without
exacting the last concession that a ruthless business strategy
might entitle him to. The result is, probably, a speedier
conclusion and a smoother working of the large coalitions than
would follow from the unmitigated sway of business
principles.(14*)
But the sentiment which in this way acts in constraint of
business traffic proceeds on such grounds of equity and fair
dealing as are afforded by current business ethics; it acts
within the range of business principles, not in contravention of
them; it acts as a conventional restraint upon pecuniary
advantage, not in abrogation of it. This code of business ethics
consists, after all, of mitigations of the maxim, Caveat emptor.
It touches primarily the dealings of man with man, and only less
directly and less searchingly inculcates temperance and
circumspection as regards the ulterior interests of the community
at large. Where this moral need of a balance between the services
rendered the community and the gain derived from a given business
transaction asserts itself at all, the balance is commonly sought
to be maintained in some sort of pecuniary terms; but pecuniary
terms afford only a very inadequate measure of serviceability to
the community.
Great and many are the items of service to be set down to the
business man's account in connection with the organization of the
industrial system, but when all is said, it is still to be kept
in mind that his work in the correlation of industrial processes
is chiefly of a permissive kind. His furtherance of industry is
at the second remove, and is chiefly of a negative character. In
his capacity as business man he does not go creatively into the
work of perfecting mechanical processes and turning the means at
hand to new or larger uses. That is the work of the men who have
in hand the devising and oversight of mechanical processes. The
men in industry must first create the mechanical possibility of
such new and more efficient methods and correlations, before the
business man sees the chance, makes the necessary business
arrangements, and gives general directions that the contemplated
industrial advance shall go into effect. The period between the
time of earliest practicability and the effectual completion of a
given consolidation in industry marks the interval by which the
business man retards the advance of industry. Against this are to
be offset the cases, comparatively slight and infrequent, where
the business men in control push the advance of industry into new
fields and prompt the men concerned with the mechanics of the
case to experiment and exploration in new fields of mechanical
process.
When the recital is made, therefore, of how the large
consolidations take place at the initiative of the business men
who are in control, it should be added that the fact of their
being in control precludes industrial correlations from taking
place except by their advice and consent. The industrial system
is organized on business principles and for pecuniary ends. The
business man is at the centre; he holds the discretion and he
exercises it freely, and his choice falls out now On one side,
now on the other. The retardation as well as the advance is to be
set down to his account.
As regards the economies in cost of production effected by
these consolidations, there is a further characteristic feature
to be noted, a feature of some significance for any theory of
modern business. In great measure the saving effected is a saving
of the costs of business management and of the competitive costs
of marketing products and services, rather than a saving in the
prime costs of production. The heightened facility and efficiency
of the new and larger business combinations primarily affect the
expenses of office work and sales, and it is in great part only
indirectly that this curtailment and consolidation of business
management has an effect upon the methods and aims of industry
proper. It touches the pecuniary processes immediately, and the
mechanical processes indirectly and in an uncertain degree. It is
of the nature of a partial neutralization of the wastes due to
the presence of pecuniary motives and business management, - for
the business management involves waste wherever a greater number
of men or transactions are involved than are necessary to the
effective direction of the mechanical processes employed. The
amount of "business" that has to be transacted per unit of
product is much greater where the various related industrial
processes are managed in severalty than where several of them are
brought under one business management. A pecuniary discretion has
to be exercised at every point of contact or transition, where
the process or its product touches or passes the boundary between
different spheres of ownership. Business transactions have to do
with ownership and changes of ownership. The greater the
parcelment in point of ownership, the greater the amount of
business work that has to be done in connection with a given
output of goods or services, and the slower, less facile, and
less accurate on the whole, is the work. This applies both to the
work of bargain and contract, wherein pecuniary initiative and
discretion are chiefly exercised, and to the routine work of
accounting, and of gathering and applying information and
misinformation.
The standardization of industrial processes, products,
services, and consumers, spoken of in an earlier chapter, very
materially facilitates the business man's work in reorganizing
business enterprises on a larger scale; particularly does this
standardization serve his ends by permitting a uniform routine in
accounting, invoices, contracts, etc., and so admitting a large
central accounting system, with homogeneous ramifications, such
as will give a competent conspectus of the pecuniary situation of
the enterprise at any given time.
The great, at the present stage of development perhaps the
greatest, opportunity for saving by consolidation, in the common
run of cases, is afforded by the ubiquitous and in a sense
excessive presence of business enterprise in the economic system.
It is in doing away with unnecessary business transactions and
industrially futile manoeuvring on the part of independent firms
that the promoter of combinations finds his most telling
opportunity. So that it is scarcely an over-statement to say that
probably the largest, assuredly the securest and most
unquestionable, service rendered by the great modern captains of
industry is this curtailment of the business to be done, this
sweeping retirement of business men as a class from the service
and the definitive cancelment of opportunities for private
enterprise.
So long as related industrial units are under different
business managements, they are, by the nature of the case, at
cross-purposes, and business consolidation remedies this untoward
feature of the industrial system by eliminating the peCuniary
element from the interstices of the system as far as may be. The
interstitial adjustments of the industrial system at large are in
this way withdrawn from the discretion of rival business men, and
the work of pecuniary management previously involved is in large
part dispensed with, with the result that there is a saving of
work and an avoidance of that systematic mutual hindrance that
characterizes the competitive management of industry. To the
community at large the work of pecuniary management, it appears,
is less serviceable the more there is of it. The heroic role of
the captain of industry is that of a deliverer from an excess of
business management. It is a casting out of business men by the
chief of business men.(15*)
The theory of business enterprise sketched above applies to
such business as is occupied with the interstitial adjustments of
the system of industries. This work of keeping and of disturbing
the interstitial adjustments does not look immediately to the
output of goods as its source of gain, but to the alterations of
values involved in disturbances of the balance, and to the
achievement of a more favorable business situation for some of
the enterprises engaged. This work lies in the middle, between
commercial enterprise proper, on the one hand, and industrial
enterprise in the stricter sense, on the other hand. It is
directed to the acquisition of gain through taking advantage of
those conjunctures of business that arise out of the
concatenation of processes in the industrial system.
In a similar manner commercial business may be said to be
occupied with conjunctures that arise out of the circumstances of
the industrial system at large, but not originating in the
mechanical exigencies of the industrial processes. The
conjunctures of commercial business proper are in the main
fortuitous, in so far that they are commonly not initiated by the
business men engaged in these commercial pursuits. Commercial
business, simply as such, does not aim to guide the course of
industry.
On the other hand, the large business enterprise spoken of
above initiates changes in industrial organization and seeks its
gain in large part through such alterations of value levels as
take place on its own initiative. These alterations of the value
levels, of course, have their effect upon the output of goods and
upon the material welfare of the community; but the effect which
they have in this way is only incidental to the quest of profits.
But apart from this remoter and larger guidance of the course
of industry, the business men also, and more persistently and
pervasively, exercise a guidance over the course of industry in
detail. The production of goods and services is carried on for
gain, and the output of goods is controlled by business men with
a view to gain. Commonly, in ordinary routine business, the gains
come from this output of goods and services. By the sale of the
output the business man in industry "realizes" his gains. To
"realize" means to convert salable goods into money values. The
sale is the last step in the process and the end of the business
man's endeavor.(16*) When he has disposed of the output, and so
has converted his holdings of consumable articles into money
values, his gains are as nearly secure and definitive as the
circumstances of modern life admit. It is in terms of price that
he keeps his accounts, and in the same terms he computes his
output of products. The vital point of production with him is the
vendibility of the output, its convertibility into money values,
not its serviceability for the needs of mankind. A modicum of
serviceability, for some purpose or other, the output must have
if it is to be salable. But it does not follow that the highest
serviceability gives the largest gains to the business man in
terms of money, nor does it follow that the output need in all
cases have other than a factitious serviceability. There is, on
the one hand, such a possibility as overstocking the market with
any given line of goods, to the detriment of the business man
concerned, but not necessarily to the immediate disadvantage of
the body of consumers. And there are, on the other hand, certain
lines of industry, such as many advertising enterprises, the
output of which may be highly effective for its purpose but of
quite equivocal use to the community. Many well-known and
prosperous enterprises which advertise and sell patent medicines
and other proprietary articles might be cited in proof.
In the older days, when handicraft was the rule of the
industrial system, the personal contact between the producer and
his customer was somewhat close and lasting. Under these
circumstances the factor of personal esteem and disesteem had a
considerable play in controlling the purveyors of goods and
services. This factor of personal contact counted in two
divergent ways: (1) producers were careful of their reputation
for workmanship, even apart from the gains which such a
reputation might bring; and (2) a degree of irritation and
ill-will would arise in many cases, leading to petty trade
quarrels and discriminations on other grounds than the gains to
be got, at the same time that the detail character of dealings
between producer and consumer admitted a degree of petty knavery
and huckstering that is no longer practicable in the current
large-scale business dealings. Of these two divergent effects
resulting from close personal relations between producer and
consumer; the former seems on the whole to have been of
preponderant consequence. Under the system of handicraft and
neighborhood industry, the adage that "Honesty is the best
policy" seems on the whole to have been accepted and to have been
true. This adage has come down from the days before the machine's
regime and before modern business enterprise. Under modern
circumstances, where industry is carried on on a large scale, the
discretionary head of an industrial enterprise is commonly
removed from all personal contact with the body of customers for
whom the industrial process under his control purveys goods or
services. The mitigating effect which personal contact may have
in dealings between man and man is therefore in great measure
eliminated. The whole takes on something of an impersonal
character. One can with an easier conscience and with less of a
sense of meanness take advantage of the necessities of people
whom one knows of only as an indiscriminate aggregate of
consumers. Particularly is this true when, as frequently happens
in the modern situation, this body of consumers belongs in the
main to another, inferior class, so that personal contact and
cognizance of them is not only not contemplated, but is in a
sense impossible. Equity, in excess of the formal modicum
specified by law, does not so readily assert its claims where the
relations between the parties are remote and impersonal as where
one is dealing with one's necessitous neighbors who live on the
same social plane. Under these circumstances the adage cited
above loses much of its axiomatic force. Business management has
a chance to proceed on a temperate and sagacious calculation of
profit and loss, untroubled by sentimental considerations of
human kindness or irritation or of honesty.
The broad principle which guides producers and merchants,
large and small, in fixing the prices at which they offer their
wares and services is what is known in the language of the
railroads as "charging what the traffic will bear."(17*) Where a
given enterprise has a strict monopoly of the supply of a given
article or of a given class of services this principle applies in
the unqualified form in which it has been understood among those
who discuss railway charges. But where the monopoly is less
strict, where there are competitors, there the competition that
has to be met is one of the factors to be taken account of in
determining what the traffic will bear; competition may even
become the most serious factor in the case if the enterprise in
question has little or none of the character of a monopoly. But
it is very doubtful if there are any successful business ventures
within the range of the modern industries from which the monopoly
element is wholly absent.(18*) They are, at any rate, few and not
of great magnitude. And the endeavor of all such enterprises that
look to a permanent continuance of their business is to establish
as much of a monopoly as may be. Such a monopoly position may be
a legally established one, or one due to location or the control
of natural resources, or it may be a monopoly of a less definite
character resting on custom and prestige (good-will). This latter
class of monopolies are not commonly classed as such; although in
character and degree the advantage which they give is very much
the same as that due to a differential advantage in location or
in the command of resources. The end sought by the systematic
advertising of the larger business concerns is such a monopoly of
custom and prestige. This form of monopoly is sometimes of great
value, and is frequently sold under the name of good-will,
trademarks, brands, etc. Instances are known where such
monopolies of custom, prestige, prejudice, have been sold at
prices running up into the millions.(19*)
The great end of consistent advertising is to establish such
differential monopolies resting on popular conviction. And the
advertiser is successful in this endeavor to establish a
profitable popular conviction, somewhat in proportion as he
correctly apprehends the manner in which a popular conviction on
any given topic is built up.(20*) The cost, as well as the
pecuniary value and the magnitude, of this organized fabrication
of popular convictions is indicated by such statements as that
the proprietors of a certain well-known household remedy, reputed
among medical authorities to be of entirely dubious value, have
for a series of years found their profits in spending several
million dollars annually in advertisements. This case is by no
means unique.
It has been said,(21*) no doubt in good faith and certainly
with some reason, that advertising as currently carried on gives
the body of consumers valuable information and guidance as to the
ways and means whereby their wants can be satisfied and their
purchasing power can be best utilized. To the extent to which
this holds true, advertising is a service to the community. But
there is a large reservation to be made on this head. Advertising
is competitive; the greater part of it aims to divert purchases,
etc., from one channel to another channel of the same general
class.(22*) And to the extent to which the efforts of advertising
in all its branches are spent on this competitive disturbance of
trade, they are, on the whole, of slight if any immediate service
to the community. Such advertising, however, is indispensable to
most branches of modern industry; but the necessity of most of
the advertising is not due to its serving the needs of the
community nor to any aggregate advantage accruing to the concerts
which advertise, but to the fact that a business concern which
falls short in advertising fails to get its share of trade. Each
concert must advertise, chiefly because the others do. The
aggregate expenditure that could advantageously be put into
advertising in the absence of competition would undoubtedly be
but an inconsiderable fraction of what is actually incurred, and
necessarily incurred under existing circumstances.(23*)
Not all advertising is wholly competitive, or at least it is
not always obviously so. In proportion as an enterprise has
secured a monopoly position, its advertising loses the air of
competitive selling and takes on the character of information
designed to increase the use of its output independently. But
such an increase implies a redistribution of consumption on the
part of the customers.(24*) So that the element of competitive
selling is after all not absent in these cases, but takes the
form of competition between different classes of wares instead of
competitive selling of different brands of the same class of
wares.
Attention is here called to this matter of advertising and
the necessity of it in modern competitive business for the light
which it throws on "cost of production" in the modern system,
where the process of production is under the control of business
men and is carried on for business ends. Competitive advertising
is an unavoidable item in the aggregate costs of industry. It
does not add to the serviceability of the output, except it be
incidentally and unintentionally. What it aims at is the sale of
the output, and it is for this purpose that it is useful. It
gives vendibility, which is useful to the seller, but has no
utility to the last buyer. Its ubiquitous presence in the costs
of any business enterprise that has to do with the production of
goods for the market enforces the statement that the "cost of
production" of commodities under the modern business system is
cost incurred with a view to vendibility, not with a view to
serviceability of the goods for human use.
There is, of course, much else that goes into the cost of
competitive selling, besides the expenses of advertising,
although advertising may be the largest and most unequivocal item
to be set down to that account. A great part of the work done by
merchants and their staff of employees, both wholesale and
retail, as well as by sales-agents not exclusively connected with
any one mercantile house, belongs under the same head. Just how
large a share of the costs of the distribution of goods fairly
belongs under the rubric of competitive selling can of course not
be made out. It is largest, on the whole, in the case of
consumable goods marketed in finished form for the consumer, but
there is more or less of it throughout. The goods turned out on a
large scale by the modern industrial processes, on the whole,
carry a larger portion of such competitive costs than the goods
still produced by the old-fashioned detail methods of handicraft
and household industry; although this distinction does not hold
hard and fast. In some extreme cases the cost of competitive
selling may amount to more than ninety per cent. of the total
cost of the goods when they reach the consumer. In other lines of
business, commonly occupied with the production of staple goods,
this constituent of cost may perhaps fall below ten per cent of
the total. Where the average, for the price of finished goods
delivered to the consumers, may lie would be a hazardous
guess.(25*)
It is evident that the gains which accrue from this business
of competitive selling and buying bear no determinable relation
to the services which the work in question may render the
community. If a comparison may be hazarded between two unknown
and indeterminate quantities, it may perhaps be said that the
gains from competitive selling bear something more of a stable
relation to the service rendered than do the gains derived from
speculative transactions or from the financiering operations of
the great captains of industry. It seems at least safe to say
that the converse will not hold true. Gains and services seem
more widely out of touch in the case of the large-scale
financiering work. Not that the work of the large business men in
reorganizing and consolidating the industrial process is of
slight consequence; but as a general proposition, the amount of
the business man's gains from any given transaction of this
latter class bear no traceable relation to any benefit which the
community may derive from the transaction.(26*)
As to the wages paid to the men engaged in the routine of
competitive selling, as salesmen, buyers, accountants, and the
like, - much the same holds true of them as of the income of the
business men who carry on the business on their own initiative.
Their employers pay the wages of these persons, not because their
work is productive of benefit to the community, but because it
brings a gain to the employers. The point to which the work is
directed is profitable sales, and the wages are in some
proportion to the efficiency of this work as counted in terms of
heightened vendibility.
The like holds true for the work and pay of the force of
workmen engaged in the industrial processes under business
management. It holds, in a measure, of all modern industry that
produces for the market, but it holds true, in an eminent degree,
of those lines of industry that are more fully under the guidance
of modern business methods. These are most closely in touch with
the market and are most consistently guided by considerations of
vendibility. They are also, on the whole, more commonly carried
on by hired labor, and the wages paid are competitively adjusted
on grounds of the vendibility of the product. The brute
serviceability of the output of these industries may be a large
factor in its vendibility, perhaps the largest factor; but the
fact remains that the end sought by the business men in control
is a profitable sale, and the wages are paid as a means to that
end, not to the end that the way of life may be smoother for. the
ultimate consumer of the goods produced.(27*)
The outcome of this recital, then, is that wherever and in so
far as business ends and methods dominate modern industry the
relation between the usefulness of the work (for other purposes
than pecuniary gain) and the remuneration of it is remote and
uncertain to such a degree that no attempt at formulating such a
relation is worth while. This is eminently and obviously true of
the work and gains of business men, in whatever lines of business
they are engaged. This follows as a necessary consequence of the
nature of business management.
Work that is, on the whole, useless or detrimental to the
community at large may be as gainful to the business man and to
the workmen whom he employs as work that contributes
substantially to the aggregate livelihood. This seems to be
peculiarly true of the bolder flights of business enterprise. In
so far as its results are not detrimental to human life at large,
such unproductive work directed to securing an income may seem to
be an idle matter in which the rest of the community has no
substantial interests. Such is not the case. In so far as the
gains of these unproductive occupations are of a substantial
character, they come out of the aggregate product of the other
occupations in which the various classes of the community engage.
The aggregate profits of the business, whatever its character,
are drawn from the aggregate output of goods and services; and
whatever goes to the maintenance of the profits of those who
contribute nothing substantial to the output is, of course,
deducted from the income of the others, whose work tells
substantially.
There are, therefore, limits to the growth of the
industrially parasitic lines of business just spoken of. A
disproportionate growth of parasitic industries, such as most
advertising and much of the other efforts that go into
competitive selling, as well as warlike expenditure and other
industries directed to turning out goods for conspicuously
wasteful consumption, would lower the effective vitality of the
community to such a degree as to jeopardize its chances of
advance or even its life. The limits which the circumstances of
life impose in this respect are of a selective character, in the
last resort. A persistent excess of parasitic and wasteful
efforts over productive industry must bring on a decline. But
owing to the very high productive efficiency of the modern
mechanical industry, the margin available for wasteful
occupations and wasteful expenditures is very great. The
requirements of the aggregate livelihood are so far short of the
possible output of goods by modern methods as to leave a very
wide margin for waste and parasitic income. So that instances of
such a decline, due to industrial exhaustion, drawn from the
history of any earlier phase of economic life, carry no
well-defined lesson as to what a modern industrial community may
allow itself in this respect.
While it is in the nature of things unavoidable that the
management of industry by modern business methods should involve
a large misdirection of effort and a very large waste of goods
and services, it is also true that the aims and ideals to which
this manner of economic life gives effect act forcibly to offset
all this incidental futility. These pecuniary aims and ideals
have a very great effect, for instance, in making men work hard
and unremittingly, so that on this ground alone the business
system probably compensates for any wastes involved in its
working. There seems, therefore, to be no tenable ground for
thinking that the working of the modern business system involves
a curtailment of the community's livelihood. It makes up for its
wastefulness by the added strain which it throws upon those
engaged in the productive work.
NOTES:
1. The ulterior ground of efforts directed to the accumulation of
wealth is discussed at some length in the Theory of the Leisure
Class, ch. II. and V, and the economic bearing of the business
man's work is treated in a paper on "Industrial and Pecuniary
Employments," in the Proceedings of the thirteenth annual meeting
of the American Economic Association. Cf. also Marshall,
Principles of Economics (3d ed.), bk. I. ch. III, bk. IV. ch.
XII, bk. V. ch. IV, bk. VII. ch. VII and VIII; Bagehot, Economic
Studies, especially pp. 53 et seq.; Walker, Wages Question, ch.
XIV; and more especially Sombart, Moderne Kapitalismus, vol. I.
ch. I, VIII, XIV, XV; Marx, Kapital, bk. I. ch. IV; Schmoller,
Grundriss, bk. II. ch. VII.
2. It is significant that joint-stock methods of organization and
management -- that is to say, impersonally capitalistic methods
-- are traceable, for their origin and early formulation, to the
shipping companies of early modern times. Cf. K. Lehmann, Die
geschichtliche Entwickelung des Aktienrechts bis zum Code de
Commerce. The like view is spoken for by Ehrenberg, Zeitglter der
Fugger; see vol. II. pp. 325 et seq.
3. Cf. Cantillon, Essai sur le Commerce, 1e partie, ch. III, VI,
IX, XIV, XV, Wealth of Nations, bk. I; Bucher, Enstehung der
Volks wirtschaft (3d ed.), ch. IV and V; Sombart, Kapitalismus,
Vol. I bk. I.
4. Sombart, vol. I. ch. IV-VIII; Ashley, Economic History and
Theory, bk. II, ch. VI, especially pp. 389-397.
5. Cf. Marshall, Principles of Economics, on the "Law of
Substitution," e.g. bk. VI. ch. I. The law of substitution
implies freedom of investment and applies fully only in so far as
the investor in question is not permanently identified with a
given industrial plant or even with a given line of industry. It
requires great facility in shifting from one to another point of
investment. It is therefore only as the business situation has
approached the modern form that the law of substitution has come
to be of considerable importance to economic theory; for a theory
of business, such as business was in mediaeval and early modern
times, this law need scarcely have been formulated.
6. See Sombart, Kapitalismus, vol. 1. chap. VIII.
7. It is chiefly the passive owner of stock and the like that
holds permanently to a given enterprise, under the fully
developed modem business conditions. The active business man of
the larger sort is not in this way bound to the glebe of the
given business concern.
8. Cf. testimony of J.B. Dill, Report of the Industrial
Commission, vol. I. pp. 1078, 1080-1085; "Digest of Evidence,"
p., 77. also testimony of various witnesses on stock speculation
and corporate management, and particularly the special report to
the Commission, on "Securities of Industrial Combinations and
Railroads," vol. XIII., especially pp. 920-922.
9. The history of the formation of any one of the great
industrial coalitions of modem times will show how great and
indispensable a factor in the large business is the invention and
organization of difficulties desired to force rival enterprises
to come to terms. E.g. the manoeuvres preliminary to the
formation of the United States Steel Corporation, particularly
the movements of the Carnegie Company, show how this works on a
large scale. Cf. E.S. Meade, Trust Finance, pp. 204-217. Report
of the Industrial Commission, vol. XIII., "Review of Evidence,"
pp. v-vii, with the testimony relating to this topic. The
pressure which brings about a new adjustment (coalition) is
commonly spoken of as "excessive competition."
10. Cf., e.g., the accounts of the formation of the United States
Steel Corporation or the Shipbuilding Company.
11. Witness the rate wars and the duplications of inefficient
track and terminal equipment among the railways, and the similar
duplications in the iron and steel industry. The system of
railway terminals in Chicago, e.g., is an illuminated
object-lesson of systematic ineptitude.
12. The splendid reach of this inhibitory work of the captain of
industry, as well as of his aggressive work of consolidation, is
well shown, for instance, in the history and present position of
the railway industry in America. It is and has for a long term of
years been obvious that a very comprehensive unification or
consolidation, in respect of the mechanical work to be done by
the railway system, is eminently desirable and feasible, -
consolidation of a scope not only equalling, but far out
reaching, the coalitions which have lately been effected or
attempted. There is no hazard in venturing the assertion that
several hundreds of men who are engaged in the mechanical work of
railroading, in one capacity and another, are conversant with
feasible plans for economizing work and improving the service by
more comprehensive and closer correlation of the work; and it is
equally obvious that nothing but the diverging interests of the
business men concerned hinders these closer and larger feasible
correlations from being put into effect. It is easily within the
mark to say that the delay which railway consolidation has
suffered up to the present, from business exigencies as distinct
from the mechanical circumstances of the case, amounts to an
average of at least twenty years. Ever since railroading began in
this country there has been going on a process of reluctant
consolidation, in which the movements of the business men in
control have tardily followed up the opportunities for economy
and efficient service which the railroad industry has offered.
And their latest and boldest achievements along this line, as
seen from the standpoint of mechanical advisability, have been
foregone conclusions since a date so far in the past as to be
forgotten, and taken at their best they fall short to-day by not
less than some fifty per cent. of their opportunities. Cf. Report
of the Industrial Commission, vol. XIX., "Transportation,"
especially pp. 304-348.
Like other competitive business, but more particularly such
business as has to do with the interstitial adjustments of the
industrial system, the business of railway consolidation is of
the nature of a game, in which the end sought by the players is
their own pecuniary gain and to which the industrial
serviceability of the outcome is incidental only. This is
recognized by popular opinion and is made much of by popular
agitators, who take the view that when once the game between the
competing business interests has been played to a finish, in the
definitive coalition of the competitors under one management,
then the game will go on as a somewhat one-sided conflict between
the resulting monopoly and the community at large.
So again, as a further illustration, it is and from the
outset has been evident that the iron-ore beds of northern
Wisconsin, Michigan, and Minnesota ought, industrially speaking,
to have been worked as one collective enterprise. There are also
none but business reasons why practically all the ore beds and
iron and steel works in the country are not worked as one
collective enterprise. It is equally evident that such
correlations of work as are permitted by the business coalitions
already effected in this field have resulted in a great economy
of production, and that the failure to carry these coalitions
farther means an annual waste running up into the millions. Both
the economies so effected and the waste so incurred are to be set
down to the account of the business manners who have gone so far
and have failed to go farther. The like is obvious as regards
many other branches of industry and groups of industries.
13. Illustrative instances will readily suggest themselves. Many
a business man turns by preference to something less dubious than
the distilling of whiskey or the sale of deleterious household
remedies. They prefer not to use deletrious adulterants, even
within the limits of the law. They will rather use wool than
shoddy at the same price. The officials of a railway commonly
prefer to avoid wrecks and manslaughter, even if there is no
pecuniary advantage in choosing the more humane course. More than
that, it will be found true that the more prosperous of the
craft, especially, take pride and pains to make the service of
their roads or the output of their mills as efficient, not simply
as the pecuniary advantage of the concern demands, but as the
best pecuniary results will admit. Instances are perhaps not
frequent, but they are also not altogether exceptional, where a
prosperous captain of industry will go out of his way to heighten
the serviceability of his industry even to a degree that is of
doubtful pecuniary expediency for himself. Such aberrations are,
of course, not large; and if they are persisted in to any very
appreciable extent the result is, of course, disastrous to the
enterprise. The enterprise in such a case falls out of the
category of business management and falls under the imputation of
philanthropy.
14. The captains of the first class necessari1y are relatively
exempt from these unbusinesslike scruples.
15. See Report of the Industrial Commission. vol. I., Testimony
of J.W. Gates, pp. 1029-1039; S. Dodd, pp. 1049-1050; N.B.
Rogers, p. 1068; vol. XIII, C.M. Schwab, pp. 451, 459, H.B.
Butler, p. 490; L.R. Hopkins, pp. 346, 347; A.S. White, pp. 254,
256.
16. Cf. Marx, Kapital, bk. I, pt. II.
17. The economic principle of "charging what the traffic will
bear" is discussed with great care and elaboration by R. T. Ely,
Monopolies and Trusts, ch. III, "The Law of Monopoly Price." Cf.,
for illustration of the practical working of this principle,
testimony of C.M. Schwab, Report of the Industrial Commission,
vol. XIII. pp. 453-455.
18. "Monopoly" is here used in that looser sense which it has
colloquially, not in the strict sense of an exclusive control of
the supply, as employed, e g., by Mr Ely in the volume cited
above. This usage is the more excusable since Mr. Ely finds that
a "monopoly" in the strict sense of the definition practically
does not occur in fact. Cf. Jenks, The Trust Problem, ch. IV.
19. E.g. the prestige value of Ivory Soap.
20. Cf. W.D. Scott, The Theory of Advertising; J. L. Mahin, The
Commercial Value of Advertising, pp. 4-6, 12-13, 15; E.
Fogg-Meade, "The Place of Advertising in Modern Business,"
Journal of Political Economy, March 1901; Sombart, vol. II. ch.
XX-XXI; G. Tarde, Psychologie Economique, vol. I. pp. 187-190.
The writing and designing of advertisements (letterpress,
display, and illustrations) has grown into a distinct calling; so
that the work of a skilled writer of advertisements compares not
unfavorably, in point of lucrativeness, with that of the avowed
writers of popular fiction.
The psychological principles of advertising may be formulated
somewhat as follows: A declaration of fact, made in the form and
with the incidents of taste and expression to which a person is
accustomed, will be accepted as authentic and will be acted upon
if occasion arises, in so far as it does not conflict with
opinions already accepted. The acceptance of an opinion seems to
be almost entirely a passive matter. The presumption remains in
favor of an opinion that has once been accepted, and an
appreciable burden of proof falls on the negative. A competent
formulation of opinion on a given point is the chief factor in
gaining adherents to that opinion, and a reiteration of the
statement is the chief factor in carrying conviction. The truth
of such a formulation is a matter of secondary consequence, but a
wide and patent departure from known fact generally weakens its
persuasive effect. The aim of the advertiser is to arrest
attention and then present his statement in such a manner that it
is easily assimilated into the habits of thought of the person
whose conviction is to be influenced. When this is effectually
done a reversal of the conviction so established is a matter of
considerable difficulty. The tenacity of a view once accepted in
this way is evidenced, for instance, by the endless number and
variety of testimonials to the merits of well-advertised but
notoriously worthless household remedies and the like.
So acute an observer as Mr Sombart is still able to hold the
opinion that "auf Schwindel ist dauerud noch nie ein Unternehmen
begrundet worden" (Kopitalismus, vol. II. p. 376). Mr Sombart has
not made acquaintance with the adventures of Elijah the Restorer,
nor is he conversant with American patent-medicine enterprise.
With Mr. Sombart's view may be contrasted that of Mr L.F. Ward,
an observer of equally large outlook and acumen:
"The law of mind as it operates in society as an aid to
competition and in the interest of the individual is essentially
immoral. It rests primarily on the principle of deception. It is
an extension to other human beings of the method applied to the
animal world by which the latter was subjected to man. This
method was that of the ambush and the snare. Its ruling principle
was cunning. Its object was to deceive, circumvent, ensnare, and
capture. Low animal cunning was succeeded by more refined kinds
of cunning. The more important of these go by the names of
business shrewdness, strategy, and diplomacy, none of which
differ from ordinary cunning in anything but the degree of
adroitness by which the victim is outwitted. In this way social
life is completely honeycombed with deception." "The Psychologic
Basis of Social Economics," Ann. of Am. Acad., vol. III. pp. 83
84 [475-476].
21. Fogg-Meade, "Place of Advertising in Modern Business," pp.
218, 224-236.
22. Advertising and other like expedients for the sale of goods
aim at changes in the "substitution values" of the goods in
question, not at an enhancement of the aggregate utilities of the
available output of goods.
23. Cf. Jenks, The Trust Problem, pp. 21-28; Report of the
Industrial Commission, vol. XIX. pp. 611-612.
24. Cf. Bohm-Bawerk, Positive Theory of Capital, bk. III, ch. V,
VII-IX, on the value of alternative and complementary goods.
25. Where competitive selling makes up a large proportion of the
aggregate final cost of the marketed product, this fact is likely
to show itself in an exceptionally large proportion of good-will
in the capitalization of the concerns engaged in the given line
of business; as, e.g., the American Chicle Company.
26. Cf. Ed. Hahn, Die Wirtschaft der Welt am Ausgang des XIX
Jahrhunderts. - "In unserem heutigen Wirtsehaftsleben ist der
Gewinn durch den Zuwachs der Produktion, mit dem fruhere
Jahrhunderte rechneten, ganz und gar zuruckgedrangt, er ist
unwesentlich geworden."
27. It might, therefore, be feasible to set up a theory to the
effect that wages are competitively proportioned to the
vendibility of the product; but there is no cogent ground for
saying that the wages in any department of industry, under a
business regime, are proportioned to the utility which the output
has to any one else than the employer who sells it. When it is
further taken into account that the vendibility of the product in
very many lines of production depends chiefly on the wastefulness
of the goods (cf. Theory of the Leisure Class, ch. V), the
divergence between the usefulness of the work and the wages paid
for it seems wide enough to throw the whole question of an
equivalence between work and pay out of theoretical
consideration. Cf., however, Clark, The Distribution of Wealth,
especially ch. VII. and XXII.
The Theory of Business Enterprise
by Thorstein Veblen
1904
Chapter 4
Business Principles
The physical basis of modern business traffic is the machine
process, as described in Chapter II. It is essentially a modern
fact, - late and yet in its early stages of growth, especially as
regards its wider sweep in the organization of the industrial
system. The spiritual ground of business enterprise, on the other
hand, is given by the institution of ownership. "Business
principles" are corollaries under the main proposition of
ownership; they are principles of property, - pecuniary
principles. These principles are of older date than the machine
industry, although their full development belongs within the
machine era. As the machine process conditions the growth and
scope of industry, and as its discipline inculcates habits of
thought suitable to the industrial technology, so the exigencies
of ownership condition the growth and aims of business, and the
discipline of ownership and its management inculcates views and
principles (habits of thought) suitable to the work of business
traffic.
The discipline of the machine process enforces a
standardization of conduct and of knowledge in terms of
quantitative precision, and inculcates a habit of apprehending
and explaining facts in terms of material cause and effect. It
involves a valuation of facts, things, relations, and even
personal capacity, in terms of force. Its metaphysics is
materialism and its point of view is that of causal sequence.(1*)
Such a habit of mind conduces to industrial efficiency, and the
wide prevalence of such a habit is indispensable to a high degree
of industrial efficiency under modern conditions. This habit of
mind prevails most widely and with least faltering in those
communities that have achieved great things in the machine
industry, being both a cause and an effect of the machine
process.
Other norms of standardization, more or less alien to this
one, and other grounds for the valuation of facts, have prevailed
elsewhere, as well as in the earlier phases of the Western
culture. Much of this older standardization still stands over, in
varying degrees of vigor or decay, in that current scheme of
knowledge and conduct that now characterizes the Western culture.
Many of these ancient norms of thought which have come down from
the discipline of remote and relatively primitive phases of the
cultural past are still strong in the affections of men, although
most of them have lost greatly in their power of constraint. They
no longer bind men's convictions as they once did. They are
losing their axiomatic character. They are no longer self-evident
or self-legitimating to modern common sense, as they once were to
the common sense of an earlier time.
These ancient norms differ from the modern norms given by the
machine in that they rest on conventional, ultimately sentimental
grounds; they are of a putative nature. Such are, e.g., the
principles of (primitive) blood relationship, clan solidarity,
paternal descent, Levitical cleanness, divine guidance,
allegiance, nationality. In their time and under the
circumstances which favored their growth these were, all and
several, powerful factors in controlling human conduct and
shaping the course of events. In their time each of these
institutional norms served as a definitive ground of
authentication for such facts as fell under its particular scope,
and the scope of each was very wide in the day of its best vigor.
As time has brought change of circumstances, the facts of life
have gradually escaped from the constraint of these ancient
principles; so that the dominion which they now hold over the
life of civilized men is relatively slight and shifty.
It is among these transmitted institutional habits of thought
that the ownership of property belongs. It rests on the like
general basis of use and wont. The binding relation of property
to its owner is of a conventional, putative character. But while
these other conventional norms cited above are in their decline,
this younger one of the inherited institutions stands forth
without apology and shows no apprehension of being crowded into
the background of sentimental reminiscence.
In absolute terms the institution of ownership is ancient, no
doubt; but it is young compared with blood-relationship, the
state, or the immortal gods. Especially is it true that its
fuller development is relatively late. Not until a comparatively
late date in West European history has ownership come to be
emancipated from all restrictions of a non-pecuniary character
and to stand in a wholly impersonal position, without admixture
of personal responsibility or class prerogative.(2*) Freedom and
inviolability of contract has not until recently been the
unbroken rule. Indeed, it has not even yet been accepted without
qualification and extended to all items owned. There still are
impediments in the way of certain transfers and certain
contracts, and there are exemptions in favor of property held by
certain privileged persons, and especially by certain sacred
corporations. This applies particularly to the more backward
peoples; but nowhere is the "cash nexus" free from all admixture
of alien elements. Ownership is not all-pervading and
all-dominant, but it pervades and dominates the affairs of
civilized peoples more freely and widely than any other single
ground of action, and more than it has ever done before. The
range and number of relations and duties that are habitually
disposed of on a pecuniary footing are greater than in the past,
and a pecuniary settlement is final to a degree unknown in the
past. The pecuniary norm has invaded the domain of the older
institutions, such as blood-relationship, citizenship, or the
church, so that obligations belonging under the one or the other
of these may now be assessed and fulfilled in terms of a money
payment, although the notion of a pecuniary liquidation seems to
have been wholly remote from the range of ideas - habits of
thought - on which these relations and duties were originally
based.
This is not the place for research into the origin and the
primitive phases of ownership, nor even for inquiry into the
views of property current in the early days of the Western
culture. But the views current on this head at present - the
principles which guide men's thinking and roughly define the
right limits of discretion in pecuniary matters - this
common-sense apprehension of what are the proper limits, rights,
and responsibilities of ownership, is an outgrowth of the
traditions, experiences, and speculations of past generations.
Therefore some notice of the character of these traditional views
and the circumstances out of which they have arisen in the recent
past is necessary to an understanding of the part which they play
in modern life.(3*) The theory of property professed at a given
time and in a given cultural region shows what is the habitual
attitude of men, for the time being, on questions of ownership;
for any theory that gains widespread and uncritical acceptance
must carry a competent formulation of the deliverances of common
sense on the matter with which it deals. Otherwise it will not be
generally accepted. And such a commonplace view is in its turn an
outcome of protracted experience on the part of the community.
The modern theories of property run back to Locke,(4*) or to
some source which for the present purpose is equivalent to Locke;
who, on this as on other institutional questions, has been proved
by the test of time to be a competent spokesman for modern
culture in these premises. A detailed examination of how the
matter stood in the theoretical respect before Locke, and whence,
and by what process of selection and digestion, Locke derived his
views, would lead too far afield. The theory is sufficiently
familiar, for in substance it is, and for the better part of two
centuries has been, held as an article of common sense by nearly
all men who have spoken for the institution of property, with the
exception of some few and late doubters.(5*)
This modern European, common-sense theory says that ownership
is a "Natural Right." What a man has made, whatsoever "he hath
mixed his labor with," that he has thereby made his property. It
is his to do with it as he will. He has extended to the object of
his labor that discretionary control which in the nature of
things he of right exercises over the motions of his own person.
It is his in the nature of things by virtue of his having made
it. "Thus labor, in the beginning, gave a right of property." The
personal force, the functional efficiency of the workman shaping
material facts to human use, is in this doctrine accepted as the
definitive, axiomatic ground of ownership; behind this the
argument does not penetrate, except it be to trace the workman's
creative efficiency back to its ulterior source in the creative
efficiency of the Deity, the "Great Artificer." With the early
spokesmen of natural rights, whether they speak for ownership or
for other natural rights, it is customary to rest the case
finally on the creator's discretionary dispositions and
workmanlike efficiency. But the reference of natural rights back
to the choice and creative work of the Deity has, even in Locke,
an air of being in some degree perfunctory; and later in the
life-history of the natural-rights doctrine it falls into
abeyance; whereas the central tenet, that ownership is a natural
right resting on the productive work and the discretionary choice
of the owner, gradually rises superior to criticism and gathers
axiomatic certitude. The Creator presently, in the course of the
eighteenth century, drops out of the theory of ownership.
It may be worth while to indicate how this ultimate ground of
ownership, as conceived by modern common sense, differs from the
ground on which rights of the like class were habitually felt to
rest in mediaeval times. Customary authority was the proximate
ground to which rights, powers, and privileges were then
habitually referred. It was felt that if a clear case of
devolution from a superior could be made out, the right claimed
was thereby established; and any claim which could not be brought
to rest on such an act, or constructive act, of devolution was
felt to be in a precarious case. The superior from whom rights,
whether of ownership or otherwise, devolved held his powers by a
tenure of prowess fortified by usage; the inferior upon whom
given rights and powers devolved held what fell to his lot by a
tenure of service and fealty sanctioned by use and wont. The
relation was essentially a personal one, a relation of status, of
authority and subservience. Hereditary standing gave a
presumption of ownership, rather than conversely. In the last
resort the chain of devolution by virtue of which all rights and
powers of the common man pertained to him was to be traced back
through a sequence of superiors to the highest, sovereign secular
authority, through whom in turn it ran back to God. But neither
in the case of the temporal sovereign nor in that of the divine
sovereign was it felt that their competence to delegate or
devolve powers and rights rested on a workmanlike or creative
efficiency. It was not so much by virtue of His office as creator
as it was by virtue of His office as suzerain that the Deity was
felt to be the source and arbiter of human rights and duties. In
the course of cultural change, as the medieval range of ideas and
of circumstances begins to take on a more modern complexion,
God's creative relation to mundane affairs is referred to with
growing frequency and insistence in discussions of all questions
of this class; but for the purpose in hand His creative relation
to human rights does not supersede His relation of sovereignty
until the modern era is well begun. It may be said that God's
tenure of office in the medieval conception of things was a
tenure by prowess, and men, of high and low degree, held their
rights and powers of Him by a servile tenure. Ownership in this
scheme was a stewardship. It was a stewardship proximately under
the discretion of a secular lord, more remotely under the
discretion of the divine Overlord. And the question then pressing
for an answer when a point of competency or legitimacy was raised
in respect of any given human arrangement or institution was not,
What hath God wrought? but, What hath God ordained?
This medieval range of conceptions first began to break down
and give place to modern notions in Italy, in the Renaissance.
But it was in the English-speaking communities that the range of
ideas upon which rests the modern concept of natural rights first
gathered form and reached a competent expression. This holds true
with respect to the modern doctrines of natural rights as
contrasted with the corresponding ancient doctrines. The
characteristically modern traits of the doctrine of natural
rights are of English derivation. This is peculiarly true as
regards the natural right of ownership. The material, historical
basis of this English right of ownership, considered as a habit
of thought, is given by the modern economic factors of handicraft
and trade, in contrast with the medieval institutions of status
and prowess. England, as contrasted with the Continent, during
modern times rapidly substituted the occupation of the merchant
and the ubiquitous free artisan as the tone-giving factors of her
everyday life, in place of the prince, the soldier, and the
priest. With this change in the dominant interests of everyday
life came a corresponding change in the discipline given by the
habits of everyday life, which shows itself in the growth of a
new range of ideas as to the meaning of human life and a new
ground of finality for human institutions. New axioms of right
and truth supplant the old as new habits of thought supersede the
old.
This process of substitution, as a struggle between rival
concepts of finality in political theory, reached a dramatic
climax in the revolution of 1688. As a battle of axioms the
transition comes to a head in the controversy between John Locke
and Sir Robert Filmer. Filmer was the last effective spokesman of
the medieval axiom of devolution. Locke's tracing of natural
rights, the right of property among the rest, back to the
workmanlike performance of the Creator, marks the form in which,
at the point of transition, the modern view pays its respects to
the superseded axiom of devolution and takes leave of it.
The scope given to the right of ownership in later modern
times is an outgrowth of the exigencies of mercantile traffic, of
the prevalence of purchase and sale in a "money economy." The
habits of thought enforced by these exigencies and by the
ubiquitous and ever recurring resort to purchase and sale decide
that ownership must naturally, normally, be absolute ownership,
with free and unqualified discretion in the use and disposal of
the things owned. Social expediency may require particular
limitations of this full discretion, but such limitations are
felt to be exceptional derogations from the "natural" scope of
the owner's discretion.
On the other hand, the metaphysical ground of this right of
ownership, the ultimate fact by virtue of which such a
discretionary right vests in the owner, is his assumed creative
efficiency as a workman; he embodies the work of his brain and
hand in a useful object, - primarily, it is held, for his own
personal use, and, by further derivation, for the use of any
other person to whose use he sees fit to transfer it. The
workman's force, ingenuity, and dexterity was the ultimate
economic factor, - ultimate in a manner patent to the common
sense of a generation habituated to the system of handicraft, how
ever doubtful such a view may appear in the eyes of a generation
in whose apprehension the workman is no longer the prime mover
nor the sole, or even chief, efficient factor in the industrial
process. The free workman, master of his own motions and with
discretion as to what he would turn his efforts to, if to
anything, had by Locke's time become an habitual fact in the life
of the English community to such a degree that free labor, of the
character of handicraft, was accepted uncritically as the
fundamental factor in all human economy, and as the presumptive
original fact in industry and in the struggle for wealth. So
settled did this habit of thought become that no question was
entertained as to the truth of the assumption.
It became a principle of the natural order of things that
free labor is the original source of wealth and the basis of
ownership. In point of historical fact, no doubt, such was not
the pedigree of modern industry or modern ownership; but the
serene, undoubting assumption of Locke and his generation only
stands out the more strongly and unequivocally for this its
discrepancy with fact. It is all the more evidently a competent
expression of the trend which English common sense was following
at this time, since this doctrine of a "natural" right of
property based on productive labor carries all before it, in the
face of the facts. In this matter English thought, or rather
English common sense, has led; and the advanced Continental
peoples have followed the English lead as the form of economic
organization exemplified by the English-speaking communities has
come to prevail among these Continental peoples.
Such a concept belongs to the regime of handicraft and petty
trade, and it is from, or through, the era of handicraft that it
has come down to the present.(6*) It fits into the scheme of
handicraft, and it is less fully in consonance with the facts of
life in any other situation than that of handicraft. Associated
with the system of handicraft, as its correlate, was the system
of petty trade; and as the differentiation of occupations was
carried to a high degree, purchase and sale came to prevail very
generally, and the community acquired a commercial complexion and
commercial habits of thought. Under these circumstances the
natural right of ownership came to comprise an extreme freedom
and facility in the disposal of property. The whole sequence of
growth of this natural right is, of course, to be taken in
connection with the general growth of individual rights that
culminated in the eighteenth-century system of Natural Liberty.
How far the English economic development is to be accounted the
chief or fundamental factor in the general growth of natural
rights is a question that cannot be taken up here. The outcome,
so far as it immediately touches the present topic, was that by
the time of the industrial revolution a fairly consistent
standardization of economic life had been reached in terms of
workmanship and price. The writings of Adam Smith and his
contemporaries bear witness to this. And this eighteenth-century
standardization stands over as the dominant economic institution
of later times.(7*) Such, in outline, seem to be the historical
antecedents and the spiritual basis of the modern institution of
property, and therefore of business enterprise as it prevails in
the present.(8*)
This sketch of the genesis of the modern institution of
property and of modern business principles may seem dubious to
those who are inclined to give it a more substantial character
than that of a habit of thought, - that is to say, those who
still adhere to the doctrine of natural rights with something of
the eighteenth-century naivete. But whatever may be accepted as
the ulterior grounds of that cultural movement which culminated
in the system of Natural Liberty, it is plain that the industrial
and commercial experience of western Europe, and primarily of
England, from the fifteenth to the eighteenth century, had much
to do with the outcome of the movement in so far as natural
liberty touches economic matters. It is as an outcome of this
recently past phase of economic development that we have
incorporated in the law, equity, and common sense of to-day,
these peculiarly free and final property rights and obligations,
that is to say, those peculiar principles that control current
business and industry. We owe to the eighteenth century a very
full discretIon and free swing in all pecunIary matters. It has
given freedom of contract, together with security and ease of
credit engagements, whereby the competitive order of business has
been definitively installed.(9*)
The subject-matter about which this modern pecuniary
discretion turns, with all its freedom and inviolability of
contract, is money values. Accordingly there underlies all
pecuniary contracts. an assumption that the unIt of money value
does not vary. Inviolability of contracts involves this
assumption. It is accepted unquestioningly as a point of
departure in all business transactions. In the making and
enforcement of contracts it is a fundamental point of law and
usage that money does not vary.(10*) Capitalization as well as
contracts are made in its terms, and the plans of the business
men who control industry look to the money unit as the stable
ground of all their transactions. Notoriously, business men are
jealous of any attempt to change the value or lessen the
stability of the money unit, which goes to show how essential a
principle in business traffic is the putative invariability of
the money unit.(11*)
Usage fortified by law decides that when prices vary the
variation is held to occur in the value of the vendible
commodities, not in the value of the money unit, since money is
the standard of value. There is, of course, no intention here to
question the position, familiar to all economists, that
fluctuations in the course of prices may as well be due to
variation on the part of the money metals as to a variation on
the part of the articles whose prices fluctuate. In so far as the
distinction so made between variations in the one or the other
member of a value ratio has a meaning - which it is not always
clear that it has - it does not touch the argument. It is a
matter of common notoriety, which has also had the benefit of
reiterated statistical proof, that, as measured, for instance, in
terms of livelihood or of labor, the value of money has varied
incontinently throughout the course of history.
But in the routine of business throughout the nineteenth
century the assumed stability of the money unit has served as an
axiomatic principle, in spite of facts which have from time to
time shown the falsity of that assumption.(12*)
The all-dominating issue in business is the question of gain
and loss. Gain and loss is a question of accounting, and the
accounts are kept in terms of the money unit, not in terms of
livelihood, nor in terms of the serviceability of the goods, nor
in terms of the mechanical efficiency of the industrial or
commercial plant. For business purposes, and so far as the
business man habitually looks into the matter, the last term of
all transactions is their outcome in money values. The base line
of every enterprise is a line of capitalization in money values.
In current business practice, variations from this base line are
necessarily rated as variations on the part of the other factors
in the case, not as variations of the base line. The business man
judges of events from the standpoint of ownership, and ownership
runs in terms of money.(13*)
Investments are made for profit, and industrial plants and
processes are capitalized on the basis of their profit-yielding
capacity. In the accepted scheme of things among business men,
profits are included as intrinsic to the conduct of business. So
that, in place of the presumption in favor of a simple pecuniary
stability of wealth, such as prevails in the rating of
possessions outside of business traffic, there prevails within
the range of business traffic the presumption that there must in
the natural course of things be a stable and orderly increase of
the property invested. Under no economic system earlier than the
advent of the machine industry does profit on investment seem to
have been accounted a normal or unquestionably legitimate source
of gain. Under the agrarian-manorial regime of the Middle Ages it
was not felt that the wealth of the large owners must, as a
matter of course, increase by virtue of the continued employment
of what they already had in hand - whatever may be the historical
fact as regards the increase of wealth in their hands.
Particularly, it was not the sense of the men of that time that
wealth so employed must increase at any stated, "ordinary" rate
per time unit. Similarly as regards other traffic in those days,
even as regards mercantile ventures. Gain from investment was
felt to be a fortuitous matter, not reducible to a stated rate.
This is reflected, e.g., in the tenacious protests against the
taking or paying of interest and in the ingenious sophistries by
which the payment of interest was defended or explained away.
Only under more settled commercial relations during the era of
handicraft did the payment of interest gradually come to be
accepted into full legitimacy. But even then gains from other
business employments than mercantile traffic were apparently
viewed as an increase due to productive labor rather than as a
profit on investment.(14*) In industrial pursuits, as distinct
from mercantile traffic proper, profits apparently come to figure
as a regular and ordinary incident only when the industries come
to be carried on on a mercantile basis by relatively large
employers working with hired labor.
This orderly increase is, of course, taken account of in
terms of the money unit. The "ordinary" rate of profits in
business is looked upon as a matter of course by the body of
business men. It is part of their common-sense view of affairs,
and is therefore a normal phenomenon.(15*) Gain, they feel, is
normal, being the purpose of all their endeavors; whereas a loss
or a shrinkage in the values invested is felt to be an untoward
accident which does not belong in the normal course of business,
and which requires particular explanation. The normality, or
matter-of-course character, of profits in the modern view is well
shown by the position of those classical economists who are
inclined to include "ordinary profits" in the cost of production
of goods.
The precise meaning of "ordinary profits" need not detain the
argument. It may mean net average profits, or it may mean
something else. The phrase is sufficiently intelligible to the
business community to permit the business men to use it without
definition and to rest their reasoning about business affairs on
it as a secure and stable concept; and it is this commonplace
resort to the term that is the point of interest here.
At any given time and place there is an accepted ordinary
rate of profits, more or less closely defined, which, it is felt,
should accrue to any legitimate and ordinarily judicious business
venture. However shifty the definition of this rate of profits
may be, in concrete, objective terms, it is felt by the men of
affairs to be of so substantial and consistent a character that
they habitually capitalize the property engaged in any given
business venture on the basis of this ordinary rate of profits.
Due regard being had to any special advantages and drawbacks of
the individual case, any given business venture or plant is
capitalized at such a multiple of its earning-capacity as the
current ordinary rate of profits will warrant.(16*)
Proceeding on the common-sense view built up out of this
range of habits of thought with respect to normal profits and
price phenomena, the business community holds that times are
ordinary or normal so long as the accepted or reasonable rate of
profits accrues on the accustomed capitalization; whereas times
are good or brisk if the rate of gain is accelerated, and hard or
dull if profits decline. This is the meaning of the phrases,
"brisk times" and "dull times," as currently used in any business
community.
Under the exigencies of the quest of profits, as conditioned
by the larger industry and the more sweeping business
organization of the last few decades, the question of capital in
business has increasingly become a question of capitalization on
the basis of earning-capacity, rather than a question of the
magnitude of the industrial plant or the cost of production of
the appliances of industry. |