The Vested Interests and the Common Man
by Thorstein Veblen
1919
Chapter 1
The Instability of Knowledge and Belief
As is true of any other point of view that may be
characteristic of any other period of history, so also the modern
point of view is a matter of habit. It is common to the modern
civilised peoples only in so far as these peoples have come
through substantially the same historical experience and have
thereby acquired substantially the same habits of thought and
have fallen into somewhat the same prevalent frame of mind. This
modern point of view, therefore, is limited both in time and
space. It is characteristic of the modern historical era and of
such peoples as lie within the range of that peculiar
civilisation which marks off the modern world from what has gone
before and from what still prevails outside of its range. In
other words, it is a trait of modern Christendom, of Occidental
civilisation as it has run within the past few centuries. This
general statement is not vitiated by the fact that there has been
some slight diffusion of these modern and Western ideas outside
of this range in recent times.
By historical accident it happens that the modern point of
view has reached its maturest formulation and prevails with the
least faltering among the French and English-speaking peoples; so
that these peoples may be said to constitute the center of
diffusion for that system of ideas which is called the modern
point of view. Outward from this broad center the same range of
ideas prevail throughout Christendom, but they prevail with less
singleness of conviction among the peoples who are culturally
more remote from this center; increasingly so with each farther
remove. These others have carried over a larger remainder of the
habits of thought of an earlier age, and have carried them over
in a better state of preservation. It may also be that these
others, or some of them, have acquired habits of thought of a new
order which do not altogether fit into that system of ideas that
is commonly spoken of as the modern point of view. That such is
the case need imply neither praise nor blame. It is only that, by
common usage, these remainders of ancient habits of thought and
these newer preconceptions that do not fit into the framework of
West-European conventional thinking are not ordinarily rated as
intrinsic to the modern point of view. They need not therefore be
less to the purpose as a guide and criterion of human living; it
is only that they are alien to those purposes which are
considered to be of prime consequence in civilised life as it is
guided and tested by the constituent principles of the modern
point of view.
What is spoken of as a point of view is always a composite
affair; some sort of a rounded and balanced system of principles
and standards, which are taken for granted, at least
provisionally, and which serve as a base of reference and
legitimation in all questions of deliberate opinion. So when any
given usage or any line of conduct or belief is seen and approved
from the modern point of view, it comes to the same as saying
that these things are seen and accepted in the light of those
principles which modern men habitually consider to be final and
sufficient. They are principles of right, equity, propriety,
duty, perhaps of knowledge, belief, and taste.
It is evident that these principles and standards of what is
right, good, true, and beautiful, will vary from one age to
another and from one people to another, in response to the
varying conditions of life; inasmuch as these principles are
always of the nature of habit; although the variation will of
course range only within the limits of that human nature that
finds expression in these same principles of right, good, truth,
and beauty. So also, it will be found that something in the way
of a common measure of truth and sufficiency runs through any
such body of principles that are accepted as final and
self-evident at any given time and place, -- in case this
habitual body of principles has reached such a degree of poise
and consistency that they can fairly be said to constitute a
stable point of view. It is only because there is such a degree
of consistency and such a common measure of validity among the
commonly accepted principles of conduct and belief today, that it
is possible to speak intelligently of the modern point of view,
and to contrast it with any other point of view which may have
prevailed earlier or elsewhere, as, e.g., in the Middle Ages or
in Pagan Antiquity.
The Romans were given to saying. Tempora mutantur, and the
Spanish have learned to speak indulgently in the name of
Costumbres del pais. The common law of the English-speaking
peoples does not coincide at all points with what was
indefeasibly right and good in the eyes of the Romans; and still
less do its principles countenance all the vagaries of the Mosaic
code. Yet, each and several, in their due time and institutional
setting, these have all been tried and found valid and have
approved themselves as securely and eternally right and good in
principle.
Evidently these principles, which so are made to serve as
standards of validity in law and custom, knowledge and belief,
are of the nature of canons, established rules, and have the
authority of precedent, prescription. They have been defined by
the attrition of use and wont and disputation, and they are
accepted in a somewhat deliberate manner by common consent, and
are upheld by a deliberate public opinion as to what is right and
seemly. In the popular apprehension, and indeed in the
apprehension of the trained jurists and scholars for the time
being, these constituent principles of the accepted point of view
are "fundamentally and eternally right and good." But this
perpetuity with which they so are habitually invested in the
popular apprehension, in their time, is evidently such a
qualified perpetuity only as belongs to any settled outgrowth of
use and wont. They are of an institutional character and they are
endowed with that degree of perpetuity only that belongs to any
institution. So soon as a marked change of circumstances comes
on, -- a change of a sufficiently profound, enduring and
comprehensive character, such as persistently to cross or to go
beyond those lines of use and wont out of which these settled
principles have emerged, -- then these principles and their
standards of validity and finality must presently undergo a
revision, such as to bring on a new balance of principles,
embodying the habits of thought enforced by a new situation, and
expressing itself in a revised scheme of authoritative use and
wont, law and custom. In the transition from the medieval to the
modern point of view, e. g., there is to be seen such a pervasive
change in men's habitual outlook, answering to the compulsion of
a new range of circumstances which then came to condition the
daily life of the peoples of Christendom. In this mutation of the
habitual outlook, between medieval and modern times, the contrast
is perhaps most neatly shown in the altered standards of
knowledge and belief, rather than in the settled domain of law
and morals. Not that the mutation of habits which then overtook
the Western world need have been less wide or less effectual in
matters of conduct; but the change which has taken effect in
science and philosophy, between the fourteenth century and the
nineteenth, e. g., appears to have been of a more recognizable
character, more easily defined in succinct and convincing terms.
It has also quite generally attracted the attention of those men
who have interested themselves in the course of historical
events, and it has therefore become something of a commonplace in
any standard historical survey of modern civilisation to say that
the scheme of knowledge and belief underwent a visible change
between the Middle Ages and modern times.
It will also be found true that the canons of knowledge and
belief, the principles governing what is fact and what is
credible, are more intimately and intrinsically involved in the
habitual behavior of the human spirit than any factors of human
habit in other bearings. Such is necessarily the case, because
the principles which guide and limit knowledge and belief are the
ways and means by which men take stock of what is to be done and
by which they take thought of how it is to be done. It is by the
use of their habitual canons of knowledge and belief, that men
construct those canons of conduct which serve as guide and
standards in practical life. Men do not pass appraisal on matters
which lie beyond the reach of their knowledge and belief, nor do
they formulate rules to govern the game of life beyond that
limit.
So, congenitally blind persons do not build color schemes;
nor will a man without an "ear for music" become a master of
musical composition. So also, "the medieval mind" took no thought
and made no provision for those later-arisen exigencies of life
and those later-known facts of material science which lay yet
beyond the bounds of its medieval knowledge and belief; but this
"medieval mind" at the same time spent much thought and took many
excellent precautions about things which have now come to be
accounted altogether fanciful, -- things which the maturer
insight, or perhaps the less fertile conceit, of a more
experienced age has disowned as being palpably not in accord with
fact.
That is to say, things which once were convincingly
substantial and demonstrable, according to the best knowledge and
belief of the medieval mind, can now no longer be discerned as
facts, according to those canons of knowledge and belief that are
now doing duty among modern men as conclusive standards of
reality. Not that all persons who are born within modern times
are thereby rendered unable to know and to believe in such
medieval facts, e. g., as horoscopes, or witchcraft, or gentle
birth, or the efficacy of prayer, or the divine right of kings;
but, taken by and large, and in so far as it falls under the
control of the modern point of view, the deliberate consensus of
knowledge and belief now runs to the effect that these and other
imponderables like them no longer belong among ascertained or
ascertainable facts; but that they are on the other hand wholly
illusory conceits, traceable to a mistaken point of view
prevalent in that earlier and cruder age.
The principles governing knowledge and belief at any given
time are primary and pervasive, beyond any others, in that they
underlie all human deliberation and comprise the necessary
elements of all human logic. But it is also to be noted that
these canons of knowledge and belief are more immediately exposed
to revision and correction by experience than the principles of
law and morals. So soon as the conditions of life shift and
change in any appreciable degree, experience will enforce a
revision of the habitual standards of actuality and credibility,
because of the habitual and increasingly obvious failure of what
has before habitually been regarded as an ascertained fact.
Things which, under the ancient canons of knowledge, have
habitually been regarded as known facts, -- as, e. g., witchcraft
or the action of bodies at a distance, -- will under altered
circumstances prove themselves by experience to have only a
supposititious reality.
Any knowledge that runs in such out-worn terms turns out to
be futile, misleading, meaningless; and the habit of imputing
qualities and behavior of this kind to everyday facts will then
fall into disuse, progressively as experience continues to bring
home the futility of all that kind of imputation. And presently
the habit of perceiving that class of qualities and behavior in
the known facts is therefore gradually lost. So also, in due time
the observances and the precautions and provisions embodied in
law and custom for the preservation or the control of these lost
imponderables will also fall into disuse and disappear out of the
scheme of institutions, by way of becoming dead letter or by
abrogation. Particularly will such a loss of belief and insight,
and the consequent loss of those imponderables whose ground has
thereby gone out from under them, take effect with the passing of
generations.
An Imponderable is an article of make-believe which has
become axiomatic by force of settled habit. It can accordingly
cease to be an Imponderable by a course of unsettling habit.
Those elders in whom the ancient habits of faith and insight have
been ingrained, and in whose knowledge and belief the
imponderables in question have therefore had a vital reality,
will presently fall away; and the new generation whose experience
has run on other lines are in a fair way to lose these articles
of faith and in. sight, by disuse. It is a case of obsolescence
by habitual disuse. And the habitual disuse which so allows the
ancient canons of knowledge and belief to fall away, and which
thereby cuts the ground from under the traditional system of law
and custom, is re-enforced by the advancing discipline of a new
order of experience, which exacts an habitual apprehension of
workday facts in terms of a different kind and thereby brings on
a revaluation and revision of the traditional rules governing
human relations. The new terms of workday knowledge and belief,
which do not conform to the ancient canons, go to enforce and
stabilise new canons and standards, of a character alien to the
traditional point of view. It is, in other words, a case of
obsolescence by displacement as well as by habitual disuse.
This unsettling discipline that is brought to bear by workday
experience is chiefly and most immediately the discipline
exercised by the material conditions of life, the exigencies that
beset men in their everyday dealings with the material means of
life; inasmuch as these material facts are insistent and
uncompromising. And the scope and method of knowledge and belief
which is forced on men in their everyday material concerns will
unavoidably, by habitual use, extend to other matters as well; so
as also to affect the scope and method of knowledge and belief in
all that concerns those imponderable facts which lie outside the
immediate range of material experience. It results that, the
further course of in changing habituation, those imponderable
relations, conventions, claims and perquisites, that make up the
time-worn system of law and custom will unavoidably also be
brought under review and will be revised and reorganised in the
light of the same new principles of validity that are found to be
sufficient in dealing with material facts.
Given time and a sufficiently exacting run of experience, and
it will follow necessarily that much the same standards of truth
and finality will come to govern men's knowledge and valuation of
facts throughout; whether the facts in question lie in the domain
of material things or in the domain of those imponderable
conventions and preconceptions that decide what is right and
proper in human intercourse. It follows necessarily, because the
same persons, bent by the same discipline and habituation, take
stock of both and are required to get along with both during the
same lifetime. More or less rigorously the same scope and method
of knowledge and valuation will control the thinking of the same
individuals throughout; at least to the extent that any given
article of faith and usage which is palpably at cross purposes
with this main intellectual bent will soon begin to seem
immaterial and irrelevant and will tend to become obsolete by
neglect.
Such has always been the fate which overtakes any notable
articles of faith and usage that belong to a bygone point of
view. Any established system of law and order will remain
securely stable only on condition that it he kept in line or
brought into line to conform with those canons of validity that
have the vogue for the time being; and the vogue is a matter of
habits of thought ingrained by everyday experience. And the moral
is that any established system of law and custom is due to
undergo a revision of its constituent principles so soon as a new
order of economic life has had time materially to affect the
community's habits of thought. But all the while the changeless
native proclivities of the race will assert themselves in some
measure in any eventual revision of the received institutional
system; and always they will stand ready eventually to break the
ordered scheme of things into a paralytic mass of confusion if it
can not be bent into some passable degree of congruity with the
paramount native needs of life.
What is likely to arrest the attention of any student of the
modern era from the outset is the peculiar character of its
industry and of its intellectual outlook; particularly the scope
and method of modern science and technology. The intellectual
life of modern Europe and its cultural dependencies differs
notably from what has gone before. There is all about it an air
of matter-of-fact both in its technology and in its science;
which culminates in a "mechanistic conception" of all those
things with which scientific inquiry is concerned and in the
light of which many of the dread realities of the Middle Ages
look like superfluous make-believe.
But it has been only during the later decades of the modern
era -- during that time interval that might fairly be called the
post-modern era -- that this mechanistic conception of things has
begun seriously to affect the current system of knowledge and
belief; and it has not hitherto seriously taken effect except in
technology and in the material sciences. So that it has not
hitherto seriously invaded the established scheme of
institutional arrangements, the system of law and custom, which
governs the relations of men to one another and defines their
mutual rights, obligations, advantages and disabilities. But it
should reasonably be expected that this established system of
rights, duties, proprieties and disabilities will also in due
time come in for something in the way of a revision, to bring it
all more nearly into congruity with that matter-of-fact
conception of things that lies at the root of the late-modern
civilisation.
The constituent principles of the established system of law
and custom are of the nature of imponderables, of course; but
they are imponderables which have been conceived and formulated
in terms of a different order from those that are convincing to
the twentieth-century scientists and engineers. Whereas the line
of advance of the scientists and engineers, dominated by their
mechanistic conception of things, appears to be the main line of
march for modern civilisation. It should seem reasonable to
expect, therefore, that the scheme of law and custom will also
fall into line with this mechanistic conception that appears to
mark the apex of growth in modern intellectual life. But hitherto
the "due time" needed for the adjustment has apparently not been
had, or perhaps the experience which drives men in the direction
of a mechanistic conception of all things has not hitherto been
driving them hard enough or unremittingly enough to carry such a
revision of ideas out in the system of law and custom. The modern
point of view in matters of law and custom appears to be somewhat
in arrears, as measured by the later advance in science and
technology.
But just now the attention of thoughtful men centers on
questions of practical concern, questions of law and usage,
brought to a focus by the flagrant miscarriage of that
organisation of Christendom that has brought the War upon the
civilised nations. The paramount question just now is, what to do
to save the civilised nations from irretrievable disaster, and
what further may be accomplished by taking thought so that no
similar epoch of calamities shall be put in train for the next
generation. It is realised that there must be something in the
way of a "reconstruction" of the scheme of things; and it is also
realised, though more dimly, that the reconstruction must be
carried out with a view to the security of life under such
conditions as men will put up with, rather than with a view to
the impeccable preservation of the received scheme of law and
custom. All of which is only saying that the constituent
principles of the modern point of view are to be taken under
advisement, reviewed and -- conceivably -- revised and brought
into line, in so far as these principles are constituent elements
of that received scheme of law and custom that is spoken of as
the status quo. It is the status quo in respect of law and
custom, not in respect of science and technology or of knowledge
and belief, that is to be brought under review. Law and custom,
it is believed, may be revised to meet the requirements of
civilised men's knowledge and belief; but no man of sound mind
hopes to revise the modern system of knowledge and belief so as
to bring it all into conformity with the time-worn scheme of law
and custom of the status quo.
Therefore the bearing of this stabilised modern point of
view, stabilised in the eighteenth century, on these questions of
practical concern is of present interest, -- its practical value
as ground for a reasonably hopeful reconstruction of the
war-shattered scheme of use and wont; its possible serviceability
as a basis of enduring settlement; as well as the share which its
constituent principles have had in the creation of that status
quo out of which this epoch of calamities has been precipitated.
The status quo ante, in which the roots of this growth of
misfortunes and impossibilities are to be found, lies within the
modern era, of course, and it is nowise to be decried as an
alien, or even as an unforeseen, outgrowth of this modern era. By
and large, this eighteenth-century stabilised modern point of
view has governed men's dealings within this era, and its
constituent principles of right and honest living must therefore,
presumptively, be held answerable for the disastrous event of it
all, -- at least to the extent that they have permissively
countenanced the growth of those sinister conditions which have
now ripened into a state of world-wide shame and confusion.
How and how far is this modern point of view, this body of
legal and moral principles established in the eighteenth century,
to be accounted an accessory to this crime? And if it be argued
that this complication of atrocities has come on, not because of
these principles of conduct which are so dear to civilised men
and so blameless in their sight, but only in spite of them; then,
what is the particular weakness or shortcoming inherent in this
body of principles which has allowed such a growth of malignant
conditions to go on and gather head? If the modern point of view,
these settled principles of conduct by which modern men
collectively are actuated in what they will do and in what they
will permit, -- if these canons and standards of clean and honest
living have proved to be a fatal snare; then it becomes an urgent
question: Is it safe, or sane to go into the future by the light
of these same established canons of right, equity, and propriety
that so have been tried and found wanting?
Perhaps the question should rather take the less didactic
form: Will the present experience of calamities induce men to
revise these established principles of conduct, and the
specifications of the code based on them, so effectually as to
guard against any chance of return to the same desperate
situation in the calculable future? Can the discipline of recent
experience and the insight bred by the new order of knowledge and
belief, re-enforced by the shock of the present miscarriage, be
counted on to bring such a revision of these principles of law
and custom as will preclude a return to that status quo ante from
which this miscarriage of civilisation has resulted? The latter
question is more to the point. History teaches that men, taken
collectively, learn by habituation rather than by precept and
reflection; particularly as touches those underlying principles
of truth and validity on which the effectual scheme of law and
custom finally rests.
In the last analysis it resolves itself into a question as to
how and how far the habituation of the recent past, mobilised by
the shock of the present conjuncture, will have affected the
frame of mind of the common man in these civilised countries; for
in the last analysis and with due allowance for a margin of
tolerance it is the frame of mind of the common man that makes
the foundation of society in the modern world; even though the
elder statesmen continue to direct its motions from day to day by
the light of those principles that were found good some time
before yesterday. And the fortunes of the civilised world, for
good or ill, have come to turn on the deeds of commission and of
omission of these advanced peoples among whom the frame of mind
of the common man is the finally conditioning circumstance in
what may safely be done or left undone. The advice and consent of
the common run has latterly come to be indispensable to the
conduct of affairs among civilised men, somewhat in the same
degree in which the community is to be accounted a civilised
people. It is indispensable at least in a permissive way, at
least to the extent that no line of policy can long be pursued
successfully without the permissive tolerance of the common run;
and the margin of tolerance in the case appears to be narrower
the more alert and the more matter-of-fact the frame of mind of
the common man.
Chapter 2
The Stability of Law and Custom
In so far as concerns the present question, that is to say as
regards those standards and principles which underlie the
established system of law and custom, the modern point of view
was stabilised and given a definitive formulation in the
eighteenth century; and in so far as concerns the subsequent
conduct of practical affairs, its constituent principles have
stood over without material change or revision since that time.
So that for practical purposes it is fair to say that the modern
point of view is now some one hundred and fifty years old.
It will not do to say that it is that much behind the times;
because its time-worn standards of truth and validity are a very
material factor in the makeup of "our time." That such is the
case is due in great part to the fact that this body of
principles was stabilised at that time and that they have
therefore stood over intact, in spite of other changes that have
taken place. It is only that the principles which had been tested
and found good under the conditions of life in the modern era up
to that time were at that time held fast, canvassed, defined,
approved, and stabilised by being reduced to documentary form. In
some sense they were then written into the constitution of
civilised society, and they have continued to make up the nucleus
of the document from that time forth; and so they have become
inflexible, after the fashion of written constitutions.
In the sight of those generations who so achieved the
definite acceptance of these enlightened modern principles, and
who finally made good their formal installation in law and usage
as self-balanced canons of human conduct, the principles which
they so arrived at had all the sanction of Natural Law, --
impersonal, dispassionate, indefeasible and immutable;
fundamentally and eternally right and good. That generation of
men held "these truths to be self-evident"; and they have
continued so to be held since that epoch by all those peoples who
make up the effectual body of modern civilisation. And the
backward peoples, those others who have since then been coming
into line and making their claim to a place in the scheme of
modern civilised life, have also successively been accepting and
(passably) assimilating the same enlightened principles of clean
and honest living. Christendom, as a going concern of civilised
peoples, has continued to regulate its affairs by the help of
these principles, which are still held to be a competent
formulation of the aspirations of civilised mankind. So that
these modern principles of the eighteenth century, stabilised in
documentary form a hundred and fifty years ago, have stood over
in immutable perfection until our time,a monument more enduring
than brass.
These principles are of the nature of habits of thought, of
course; and it is the nature of habits of thought forever to
shift and change in response to the changing impact of
experience, since they are creatures of habituation. But inasmuch
as they have once been stabilised in a thoroughly competent
fashion in the eighteenth century, and have been drafted into
finished documentary form, they have been enabled to stand over
unimpaired into the present with all that weight and stability
that a well-devised documentary formulation will give. It is
true, so far as regards the conditions of civilised life during
the interval that has passed since these modern principles of law
and custom took on their settled shape in the eighteenth century,
it has been a period of unexampled change, -- swift, varied,
profound and extensive beyond example. And it follows of
necessity that the principles of conduct which were approved and
stabilised in the eighteenth century, under the driving
exigencies of that age, have not altogether escaped the
complications of changing circumstances. They have at least come
in for some shrewd interpretation in the course of the nineteenth
century. There have been refinements of definition, extensions of
application, scrutiny and exposition of implications, as new
exigencies have arisen and the established canons have been
required to cover unforeseen contingencies; but it has all been
done with the explicit reservation that no material innovation
shall be allowed to touch the legacy of modern principles handed
down from the eighteenth century, and that the vital system of
Natural Rights installed in the eighteenth century must not be
deranged at any point or at any cost.
It is scarcely necessary to describe this modern system of
principles that still continues to govern human intercourse among
the civilised peoples, or to attempt an exposition of its
constituent articles. It is all to be had in exemplary form, ably
incorporated in such familiar documents as the American
Declaration of Independence, the French Declaration of the Rights
of Man, and the American Constitution; and it is all to be found
set forth with all the circumstance of philosophical and juristic
scholarship in the best work of such writers as John Locke.
Montesquieu. Adam Smith, or Blackstone. It has all been
sufficiently canvassed, through all its dips, spurs and angles,
by the most competent authorities, who have brought their best
will and their best abilities to bear on its elucidation at every
point, with full documentation. Besides which, there is no need
of recondite exposition for the present purpose; since all that
is required by the present argument is such a degree of
information on these matters as is familiar to English-speaking
persons by common notoriety.
At the same time it may be to the purpose to call to mind
that this secular profession of faith enters creatively into that
established order of things which has now fallen into a state of
havoc because it does not meet the requirements of the new order.
This eighteenth-century modern plan specifically makes provision
for certain untoward rights, perquisites and disabilities which
have, in the course of time and shifting circumstance, become
incompatible with continued peace on earth and good-will among
men.
There are two main counts included in this modern --
eighteenth-century -- plan, which appear unremittingly to make
for discomfort and dissension under the conditions offered by the
New Order of things: -- National Ambition, and the Vested Rights
of ownership. Neither of the two need be condemned as being
intrinsically mischievous. Indeed, it may be true, as has often
been argued, that both have served a good purpose in their due
time and place; at least there is no need of arguing the
contrary. Both belong in the settled order of civilised life; and
both alike are countenanced by those principles of truth, equity
and validity that go to make up the modern point of view. It is
only that now, as things have been turning during the later one
hundred years, both of these immemorially modern rights of man
have come to yield a net return of hardship and ill-will for all
those peoples who have bound up their fortunes with that kind of
enterprise. The case might be stated to this effect, that the
fault lies not in the nature of these untoward institutions of
national sovereignty and vested rights, nor in those principles
of self-help which underlie them, but only in those latter-day
facts which stubbornly refuse to fall into such lines as these
forms of human enterprise require for their perfect and
beneficent working. The facts, particularly the facts of industry
and science, have outrun these provisions of law and custom; and
so the scheme of things has got out of joint by that much,
through no inherent weakness in the underlying principles of law
and custom. The ancient and honorable principles of self-help are
as sound as ever; it is only that the facts have quite
unwarrantably not remained the same. The fault lies in the
latter-day facts, which have not continued in suitable shape.
Such, in effect, has been the view habitually spoken for by many
thoughtful persons of a conservative turn, who take an interest
in concerting measures for holding fast that which once was good,
in the face of distasteful facts.
The vested right of ownership in all kinds of property has
the sanction of the time-honored principles of individual
self-direction, equal opportunity, free contract, security of
earnings and belongings, self-help, in the simple and honest
meaning of the word. It would be quite bootless to find fault
with these reasonable principles of tolerance and security. Their
definitive acceptance and stabilisation in the eighteenth century
are among the illustrious achievements of Western civilisation;
and their roots lie deep in the native wisdom of mankind. They
are obvious corollaries under the rule of Live and let live, --
an Accidental version of the Golden Rule. Yet in practical effect
those vested rights which rest blamelessly on these reasonable
canons of tolerance and good faith have today become the focus of
vexation and misery in the life of the civilised peoples.
Circumstances have changed to such effect that provisions which
were once framed to uphold a system of neighborly good-will have
now begun to run counter to one another and are working mischief
to the common good.
Any impartial survey of the past one-hundred-fifty years will
show that the constituent principles of this modern point of view
governing the mutual rights and obligations of men within the
civilised nations have held their ground, on the whole, without
material net gain or net loss. It is the ground of Natural
Rights, of self-help and free bargaining. Civil rights and the
perquisites and obligations of ownership have remained
substantially intact over this interval of a hundred and fifty
years, but with some slight advance in the way of Live and let
live at certain points, and some slight retrenchment at other
points. So far as regards the formal stipulations, in law and
custom, the balance of class interests within these countries
has, on the whole, not been seriously disturbed. In this system
of Natural Rights, as it has worked out in practice, the rights
of ownership are paramount; largely because the other personal
rights in the case have come to be a matter of course and so have
ceased to hold men's attention.
So, in the matter of the franchise, e.g., the legal
provisions more nearly meet the popular ideals of the modern
point of view today than ever before. An the other hand the
guiding principles in the case at certain other points have
undergone a certain refinement of interpretation with a view to
greater ease and security for trade and investment; and there
has, in effect, been some slight abridgement of the freedom of
combination and concerted action at any point where an unguarded
exercise of such freedom would hamper trade or curtail the
profits of business, -- for the modern era has turned out to be
an era of business enterprise, dominated by the paramount claims
of trade and investment. In point of formal requirements, these
restrictions imposed on concerted action "in restraint of trade"
fall in equal measure on the vested interests engaged in business
and on the working population engaged in industry. So that the
measures taken to safeguard the natural rights of ownership apply
with equal force to those who own and those who do not. "The
majestic equality of the law forbids the rich as well as the poor
to sleep under bridges or to beg on the street corners." But it
has turned out on trial that the vested interests of business are
not seriously hampered by these restrictions; inasmuch as any
formal restriction on any concerted action between the owners of
such vested interests can always be got around by a formal
coalition of ownership in the shape of a corporation. The
extensive resort to corporate combination of ownership, which is
so marked a feature of the nineteenth century, was not foreseen
and was not taken into account in the eighteenth century, when
the constituent principles of the modern point of view found
their way into the common law. The system of Natural Rights is a
system of personal rights, among which the rights of ownership
are paramount; and among the rights of ownership is the right of
free disposal and security of ownership and of credit
obligations.
The same line of evasion is not available in the same degree
for concerted action between persons who own nothing. Still, in
neither case, neither as regards the owners of the country's
wealth nor as regards the common man, can these restrictions on
personal freedom of action be said to be a serious burden. And
any slight mutilation or abridgement of the rule of self-help in
their economic relations has been offset by an increasingly broad
and liberal construction of the principles of self-direction and
equality among men in their civil capacity and their personal
relations. Indeed, the increasingly exacting temper of the common
man in these countries during this period has made such an
outcome unavoidable. By and large, in its formal vindication of
personal liberty and equality before the law, the modern point of
view has with singular consistency remained intact in the shape
in which its principles were stabilised in the eighteenth
century, in spite of changing circumstances. In point of formal
compliance with their demands, the enlightened ideals of the
eighteenth century are, no doubt, more commonly realised in
practice today than at any earlier period. So that the modern
civilised countries are now, in point of legal form and perhaps
also in practical effect, more nearly a body of ungraded and
masterless men than any earlier generation has known how to be.
In this modern era, as well as elsewhere and in other times,
the circumstances that make for change and reconstruction have
been chiefly the material circumstances of everyday life, --
circumstances affecting the ordinary state of industry and
ordinary intercourse. These material circumstances have changed
notably during the modern era. There has been a progressive
change in the state of the industrial arts, which has materially
altered the scope and method of industry and the conditions under
which men live in all the civilised countries. Accordingly, as a
point of comparison, it will be to the purpose to call to mind
what were the material circumstances, and more particularly the
state of the industrial arts, which underlay and gave character
to the modern point of view at the period when its constituent
principles were found good and worked out as a stable and
articulate system, in the shape in which they have continued to
be held since then.
The material conditions of industry, trade and daily life
during the period of transition and approach to this modern
ground created that frame of mind which we call the modern point
of view and dictated that reconstruction of institutional
arrangements which has been worked out under its guidance.
Therefore the economic situation which so underlay and
conditioned this modern point of view at the period when it was
given its stable form becomes the necessary point of departure
for any argument bearing on the changes that have been going
forward since then, or on any prospective reconstruction that may
be due to follow from these changed conditions in the calculable
future. An this head, the students of history are in a singularly
fortunate position. The whole case is set forth in the works of
Adam Smith, with a comprehension and lucidity which no longer
calls for praise. Beyond all other men Adam Smith is the approved
and faithful spokesman of this modern point of view in all that
concerns the economic situation which it assumes as its material
ground; and his description of the state of civilised society,
trade and industry, as he saw it in his time and as he wished it
to stand over into the future, is to be taken without abatement
as a competent exposition of those material conditions which were
then conceived to underlie civilised society and to dictate the
only sound reconstruction of civil and economic institutions
according to the modern plan.
But like other men. Adam Smith was a creature of his own
time, and what he has to say applies to the state of things as he
saw them. What he describes and inquires into is that state of
things which was to him the "historical present"; which always
signifies the recent past, -- that is to say, the past as it had
come under his observation and as it had shaped his outlook.
As it is conventionally dated, the Industrial Revolution took
effect within Adam Smith's active lifetime, and some of its more
significant beginnings passed immediately under his eyes; indeed,
it is related that he took an active personal interest in at
least one of the epoch-making mechanical inventions from which
the era of the machine industry takes its date. Yet the
Industrial Revolution does not lie within Adam Smith's
"historical present," nor does his system of economic doctrines
make provision for any of its peculiar issues. What he has to say
on the mechanics of industry is conceived in terms derived from
an older order of things than that machine industry which was
beginning to get under way in his own life-time; and all his
illustrative instances and arguments on trade and industry are
also such as would apply to the state of things that was passing,
but they are not drawn with any view to that new order which was
then coming on in the world of business enterprise.
The economic situation contemplated by Adam Smith as the
natural (and ultimate) state of industry and trade in any
enlightened society, conducted on sane and sound lines according
to the natural order of human relations, was of a simple
structure and may be drawn in few lines, -- neglecting such minor
extensions and exceptions as would properly be taken account of
in any exhaustive description. Industry is conceived to be of the
nature of handicraft; not of the nature of mechanical
engineering, such as it has in effect and progressively come to
be since his time. It is described as a matter of workmanlike
labor, "and of the skill, dexterity and judgment with which it is
commonly applied." It is a question of the skilled workman and
his use of tools. Mechanical inventions are "labor-saving
devices," which "facilitate and abridge labor." The material
equipment is the ways and means by manipulation of which the
workman gets his work done. "Capital stock" is spoken of as
savings parsimoniously accumulated out of the past industry of
its owner, or out of the industry of those persons from whom he
has legally acquired it by inheritance or in exchange for the
products of his own labor. Business is of the nature of "petty
trade" and the business man is a "middle man" who is employed for
a livelihood in the distribution of goods to the consumers. Trade
is subsidiary to industry, and money is a vehicle designed to be
used for the distribution of goods. Credit is an expedient of the
needy; a dubious expedient. Profits (including interest) are
justified as a reasonable remuneration for productive work done,
and for the labor-saving use of property derived from the owner's
past labor. The efforts of masters and workmen alike are
conceived to be bent on turning out the largest and most
serviceable output of goods; and prices are competitively
determined by the labor-cost of the goods.
Like other men Adam Smith did not see into the future beyond
what was calculable on the data given by his own historical
present; and in his time that later and greater era of investment
and financial enterprise which has made industry subsidiary to
business was only beginning to get under way and only obscurely
so. So that he was still able to think of commercial enterprise
as a middle-man's traffic in merchandise, subsidiary to a
small-scale industry on the order of handicraft, and due to an
assumed propensity in men "to truck, barter, and exchange one
thing for another." And so much as he could not help seeing of
the new order of business enterprise which was coming in was not
rated by him as a sane outgrowth of that system of Natural
Liberty for which he spoke and about which his best affections
gathered. In all this he was at one with his thoughtful
contemporaries.
That generation of public-spirited men went, perforce, on the
scant data afforded by their own historical present, the economic
situation as they saw it in the perspective and with the
preconceptions of their own time; and to them it was accordingly
plain that when all unreasonable restrictions are taken away,
"the obvious and simple system of natural liberty establishes
itself of its own accord." To this "natural" plan of free
workmanship and free trade all restraint or retardation by
collusion among business men was wholly obnoxious, and all
collusive control of industry or of the market was accordingly
execrated as unnatural and subversive. It is true, there were
even then some appreciable beginnings of coercion and retardation
-- lowering of wages and limitation of output -- by collusion
between owners and employers who should by nature have been
competitive producers of an unrestrained output of goods and
services according to the principles of that modern point of view
which animated Adam Smith and his generation; but coercion and
unearned gain by a combination of ownership, of the now familiar
corporate type, was virtually unknown in his time. So Adam Smith
saw and denounced the dangers of unfair combination between
"masters" for the exploitation of their workmen, but the modern
use of credit and corporation finance for the collective control
of the labor market and the goods market of course does not come
within his horizon and does not engage his attention.
So also Adam Smith knows and denounces the use of protective
tariffs for private gain. That means of pilfering was familiar
enough in his time. But he spends little indignation on the
equally nefarious use of the national establishment for
safe-guarding and augmenting the profits of traders,
concessionaires, investors and creditors in foreign parts at the
cost of the home community. That method of taxing the common man
for the benefit of the vested interests has also grown to more
formidable proportions since his time. The constituent principles
of the modern point of view, as accepted advisedly or by
oversight by Adam Smith and his generation, supply all the
legitimation required for this larcenous use of the national
establishment; but the means of communication were still too
scant, and the larger use of credit was too nearly untried, as
contrasted with what has at a later date gone to make the
commercial ground and incentive of imperialist politics.
Therefore the imperialist policies of public enterprise for
private gain also do not come greatly within the range of Adam
Smith's vision of the future, nor does the "obvious and simple
system" on which he and his generation of thoughtful men take
their stand comprise anything like explicit declarations for or
against this later-matured chicane of the gentlemen-investors who
have been managing the affairs of the civilised nations.
Adam Smith's work and life-time falls in with the high tide
of eighteenth-century insight and understanding, and it marks an
epoch of spiritual achievement and stabilisation in civil
institutions, as well as in those principles of conduct that have
governed economic rights and relations since that date. But it
marks also the beginning of a new order in the state of the
industrial arts as well as in those material sciences which come
directly in touch with the industrial arts and which take their
logical bent from the same range of tangible experience. So it
happens that this modern point of view reached a stable and
symmetrical finality about the same date when the New Order of
experience and insight was beginning to bend men's habits of
thought into lines that run at cross purposes with this same
stabilised point of view. It is in the ways and means of industry
and in the material sciences that the new order of knowledge and
belief first comes into evidence; because it is in this domain of
workday facts that men's experience began about that time to take
a decisive turn at variance with the received canons. A
mechanistic conception of things began to displace those
essentially romantic notions of untrammeled initiative and
rationality that governed the intellectual life of the era of
enlightenment which was then drawing to a close.
It is logically due to follow that the same general
principles of knowledge and validity will presently undergo a
revision of the same character where they have to do with those
imponderable facts of human conduct and those conventions of law
and custom that govern the duties and obligations of men in
society. Here and now as elsewhere and in other times the
stubborn teaching that comes of men's experience with the
tangible facts of industry should confidently be counted on to
make the outcome, so as to bring on a corresponding revision of
what is right and good in that world of make-believe that always
underlies any established system of law and custom. The material
exigencies of the state of industry are unavoidable, and in great
part unbending; and the economic conditions which follow
immediately from these exigencies imposed by the ways and means
of industry are only less uncompromising than the mechanical
facts of industry itself. And the men who live under the rule of
these economic exigencies are constrained to make their peace
with them, to enter into such working arrangements with one
another as these unbending conditions of the state of the
industrial arts will tolerate, and to cast their system of
imponderables on lines which can be understood by the same men
who understand the industrial arts and the system of material
science which underlies the industrial arts. So that, in due
course, the accredited schedule of legal and moral rights,
perquisites and obligations will also presently be brought into
passable consistency with the ways and means whereby the
community gets its living.
But it is also logically to be expected that any revision of
the established rights, obligations, perquisites and vested
interests will trail along behind the change which has taken
effect in the material circumstances of the community and in the
community's knowledge and belief with regard to these material
circumstances; since any such revision of ancient rights and
perquisites will necessarily be consequent upon and conditioned
by that change, and since the axioms of law and custom that
underlie any established schedule of rights and perquisites are
always of the nature of make-believe; and the make-believe is
necessarily built up out of conceptions derived from the
accustomed range of knowledge and belief.
Out-worn axioms of this make-believe order become
superstitions when the scope and method of workday knowledge has
outgrown that particular range of preconceptions out of which
these make-believe axioms are constructed; which comes to saying
that the underlying principles of the system of law and morals
are therewith caught in a process of obsolescence, --
"depreciation by supersession and disuse." By a figure of speech
it might be said that the community's intangible assets embodied
in this particular range of imponderables have shrunk by that
much, through the decay of these imponderables that are no longer
seasonable, and through their displacement by other figments of
the human brain, -- a consensus of brains trained into closer
consonance with the latter-day material conditions of life.
Something of this kind, something in the way of depreciation by
displacement, appears now to be overtaking that system of
imponderables that has been handed down into current law and
custom out of that range of ideas and ideals that had the vogue
before the coming of the machine industry and the material
sciences.
Since the underlying principles of the established order are
of this make-believe character, that is to say, since they are
built up out of the range of conceptions that have habitually
been doing duty as the substance of knowledge and belief in the
past, it follows in the nature of the case that any
reconstruction of institutions will be made only tardily,
reluctantly, and sparingly; inasmuch as settled habits of thought
are given up tardily, reluctantly and sparingly. And this will
particularly be true when the reconstruction of unseasonable
institutions runs counter to a settled and honorable code of
ancient principles and a stubborn array of vested interests, as
in this instance. Such is the promise of the present situation,
and such is also the record of the shift that was once before
made from medieval to modern times. It should be a case of break
or bend.
Chapter 3
The State of the Industrial Arts
The modern point of view, with its constituent principles of
equal opportunity, self-help, and free bargaining, was given its
definitive formulation in the eighteenth century, as a balanced
system of Natural Rights; and it has stood over intact since that
time, and has served as the unquestioned and immutable ground of
public morals and expediency, on which the advocates of
enlightened and liberal policies have always been content to rest
in their case. The truths which it holds to be self-evident and
indefeasible are conceived to be intrinsically bound up in an
over-ruling Order of Nature; in which thoughtful men habitually
believed at that time and in which less thoughtful men have
continued to believe since then. This eighteenth-century order of
nature, in the magic name of which Adam Smith was in the habit of
speaking, was conceived on lines of personal initiative and
activity. It is an order of things in which men were conceived to
be effectually equal in all those respects that are of any
decided consequence, -- in intelligence, working capacity,
initiative, opportunity, and personal worth; in which the
creative factor engaged in industry was the workman, with his
personal skill, dexterity and judgment; in which, it was
believed, the employer ("master") served his own ends and sought
his own gain by consistently serving the needs of creative labor,
and thereby serving the common good; in which the traders
("middle-men") made an honest living by supplying goods to
consumers at a price determined by labor cost, and so serving the
common good.
This characterisation of the "obvious and simple system" that
lies at the root of the liberal ideals may seem too much of a
dream to any person who shuns "the scientific use of the
imagination"; its imponderables may seem to lack that axiomatic
self-sufficiency which one would like to find in the spiritual
foundations of a working system of law and custom. Indeed, the
best of its imponderables are in a fair way now to drop back into
the discard of uncertified make-believe. But in point of
historical fact it appears to have stood the test of time and
use, so far as appears formally on the face of law and custom.
For a hundred years and more it has continued to stand as a
familiar article of faith and aspiration among the advocates of a
Liberal policy in civil and economic affairs; and Adam Smith's
followers -- the economists and publicists of the Liberal
movement -- have spoken for it as being the normal system of
economic life, the "natural state of man," from which the course
of events has been conceived to depart only under pressure of
"disturbing causes," and to which the course of events must be
pruned back at all hazards in the event of any threatened advance
or departure beyond the "natural" bounds set by this working
ideal.
However, the subsequent course of events has shown no
indisposition to depart from this normal system of economic life,
this "natural state of man," on the effectual reality of which
the modern point of view rests its inviolate principles of law
and morals and economic expediency. A new order of things has
been taking effect in the state of the industrial arts and in the
material sciences that lie nearest to that tangible body of
experience out of which the state of the industrial arts is
framed. And the new order of industrial ways and means has been
progressively going out of touch with the essential requirements
of this established scheme of individual self-help and personal
initiative, on the realisation and maintenance of which the best
endeavors of the Liberals have habitually been spent.
Under the new order the first requisite of ordinary
productive industry is no longer the workman and his manual
skill, but rather the mechanical equipment and the standardised
processes in which the mechanical equipment is engaged. And this
latter-day industrial equipment and process embodies not the
manual skill, dexterity and judgment of an individual workman,
but rather the accumulated technological wisdom of the community.
Under the new order of things the mechanical equipment -- the
"industrial plant" -- takes the initiative, sets the pace, and
turns the workman to account in the carrying-on of those
standardised processes of production that embody this mechanistic
state of the industrial arts; very much as the individual
craftsman in his time held the initiative in industry, set the
pace, and made use of his tools according to his own discretion
in the exercise of his personal skill, dexterity and judgment,
under that now obsolescent industrial order which underlies the
eighteenth-century modern point of view, and which still colors
the aspirations of Liberal statesmen and economists, as well as
the standard economic theories.
The workman -- and indeed it is still the skilled workman --
is always indispensable to the due working of this mechanistic
industrial process, of course; very much as the craftsman's
tools, in his time, were indispensable to the work which he had
in hand. But the unit of industrial organization and procedure,
what may be called the "going concern" in production, is now the
outfit of industrial equipment, a works, engaged in a given
standardised mechanical process designed to turn out a given
output of standardised product; it is the plant, or the shop. And
under this new order of industrial methods and values it has
already come to be a commonplace of popular "knowledge and
belief" that the mechanical equipment is the creative factor in
industry, and the "production" of the output is credited to the
plant's working capacity and set down to its account as a going
concern; whereas the other factors engaged, as e.g., workmen and
materials, are counted in as auxiliary factors which are
indispensable but subsidiary -- items of production-cost which
are incorporated in the running expenses of the plant and its
productive process.
Under the new order the going concern in production is the
plant or shop, the works, not the individual workman. The plant
embodies a standardised industrial process. The workman is made
use of according as the needs of the given mechanical process may
require. The time, place, rate, and material conditions of the
work in hand are determined immediately by the mechanically
standardised process in which the given plant is engaged; and
beyond that all these matters are dependent on the exigencies and
manoeuvres of business, largely by way of moderating the rate of
production and keeping the output reasonably short of maximum
capacity. The workman has become subsidiary to the mechanical
equipment, and productive industry has become subservient to
business, in all those countries which have come in for the
latter-day state of the industrial arts, and which so have fallen
under the domination of the price system.
Such is the state of things throughout in those greater
industries that are characteristic of the New Order; and these
greater industries now set the pace and make the standards of
management and valuation for the rest. At the same time these
greater industries of the machine era extend their domination
beyond their own immediate work, and enforce a standardisation of
much the same mechanical character in the community at large; in
the ways and means of living as well as in the ways and means of
work. The effects of their mechanically standardised production,
in the way of goods and services as well as in the similarly
standardised traffic through which these goods and services are
distributed to the consumers, reach out into the everyday life of
all classes; but most immediately and imperatively they reach the
working class of the industrial centers. So they largely set the
pace for the ordinary occupations of the common man even apart
from any employment in the greater mechanical industries. It is
especially the latter-day system of transport and communication
as it works out under the new order highly mechanical and
exactingly scheduled for time, rate and place -- that so controls
and standardises the ordinary life of the common man on
mechanical lines.
The training enforced by this mechanical standardisation,
therefore, is of much the same order throughout the community as
it is within the mechanical industries proper, and it drives to
the same outcome, -- submergence of the personal equation. So
that the workday information and the reasoning by use of which
all men carry on their daily life under the new order is of the
same general character as that information and reasoning which
guides the mechanical engineers; and the unremitting habituation
to its scope and method, its principles of knowledge and belief,
leads headlong to a mechanistic conception of things, ways,
means, ends, and values, whether it is called by that name or
not. The resulting frame of mind is often spoken of as
Materialism. This impersonal character of workday habituation is
particularly to be counted on to take decisive effect wherever
the latter-day scheme of mechanical standardisation takes effect
with all that wide sweep and massive drift with which it now
dominates the larger centers of population.
Since the modern era began, the state of the industrial arts
has been undergoing a change of type. Such as the followers of
Mendel would call a "mutation." And in the course of this
mutation the workman and his part in the conduct of industry have
suffered as great a dislocation as any of the other factors
involved. But it is also to be admitted that the typical
owner-employer of the earlier modern time, such as he stood in
the mind's eye of the eighteenth-century doctrinaires, -- this
traditional owner-employer has also come through the period of
the mutation in a scarcely better state of preservation. At the
period of this stabilisation of principles in the eighteenth
century, he could still truthfully be spoken of as a "master," a
foreman of the shop, and he was then still invested with a large
reminiscence of the master-craftsman, as known in the time of the
craft-gilds. He stood forth in the eighteenth-century argument on
the Natural Order of things as the wise and workmanlike designer
and guide of his workmen's handiwork, and he was then still
presumed to be living in workday contact and communion with them
and to deal with them on an equitable footing of personal
interest.
Such a characterisation of the capitalist-employer who was
doing business at the time of the Industrial Revolution may seem
over-drawn; and there is no need of insisting on its precise
accuracy as a description of eighteenth-century facts. But it
should not be extremely difficult to show that substantially such
a figure of an employer-owner was had in mind by those who then
argued the questions of wages and employment and laid down the
lines on which the employment of labor would be expected to
arrange itself under the untroubled system of natural liberty.
But what is more to the point is that which is beyond question.
In practical fact, almost as fully as in the speculations of the
doctrinaires, the employer of labor in the staple industries of
that time was, in his own person, commonly also the owner of the
establishment in which his hired workmen were employed; and also
-- again in passable accord with the facts -- he was presumed
personally to come to terms with his workmen about wages and
conditions of work. Employment was considered to be a relation of
man to man. That much is explicit in the writings which bear the
date-mark of this modern Liberal point of view; and the same
assumption has continued to stand over as a self-sufficient
premise among the defenders of the free competitive system in
industry, for three or four generations after that period.
But the course of events has gone its own way, and about that
time -- somewhere along in the middle half of the eighteenth
century -- that type of employer began to be displaced in those
staple industries which have since then set the pace and made the
outcome for wages and conditions of work. So soon as the machine
industry began to make headway, the industrial plant increased in
size, and the number of workmen employed in each establishment
grew continually larger; until in the course of time the large
scale of organisation in industry has put any relation of man to
man out of the question between employers and workmen in the
leading industries. Indeed, it is not unusual to find that in an
industrial plant of a large or middling size, a factory, mill,
works, mine, shipyard or railway of the ordinary sort, very few
of the workmen would be able, under oath, to identify their
owner. At the same time, and owing to the same requirements of
large-scale and mechanical organisation, the ownership of the
works has also progressively been changing character; so that
today, in the large and leading industries, the place of the
personal employer-owner is taken by a composite business concern
which represents a combination of owners, no one of whom is
individually responsible for the concern's transactions. So true
is this, that even where the ownership of a given industrial
establishment still vests wholly or mainly in a single person, it
has commonly been found expedient to throw the ownership into the
corporate form, with limited liability.
The personal employer-owner has virtually disappeared from
the great industries. His place is now filled by a list of
corporation securities and a staff of corporation officials and
employees who exercise a limited discretion. The personal note is
no longer to be had in the wage relation, except in those
backward, obscure and subsidiary industries in which the
mechanical reorganisation of the new order has not taken effect.
So, even that contractual arrangement which defines the workman's
relation to the establishment in which he is employed, and to the
anonymous corporate ownership by which he is employed, now takes
the shape of a statistical reckoning, in which virtually no trace
of the relation of man to man is to be found. Yet the principles
of the modern point of view governing this contractual relation,
in current law and custom, are drawn on the assumption that wages
and conditions of work are arranged for by free bargaining
between man and man on a footing of personal understanding and
equal opportunity.
That the facts of the New Order have in this way departed
from the ground on which the constituent principles of the modern
point of view are based, and on which therefore the votaries of
the established system take their stand, -- this state of things
can not be charged to anyone's personal account and made a
subject of recrimination. In fact, it is not a case for personal
discretion and responsibility in detail, but rather for concerted
action looking to some practicable working arrangement.
The personal equation is no longer a material factor in the
situation. Ownership, too, has been caught in the net of the New
Order and has been depersonalised to a degree beyond what would
have been conceivable a hundred years ago, especially so far as
it has to do with the use of material resources and man power in
the greater industries. Ownership has been "denatured" by the
course of events; so that it no longer carries its earlier duties
and responsibilities. It used to be true that personally
responsible discretion in all details was the chief and abiding
power conferred by ownership; but wherever it has to do with the
machine industry and large-scale organisation, ownership now has
virtually lost this essential part of its ordinary functions. It
has taken the shape of an absentee ownership of anonymous
corporate capital, and in the ordinary management of this
corporate capital the greater proportion of the owners have no
voice.
This impersonal corporate capital, which is taking the place
of the personal employer-owner of earlier times, is the outcome
of a mutation of the scheme of things in business enterprise,
scarcely less profound than the change which has overtaken the
material equipment in the shift from handicraft methods to the
machine technology. In practical fact today, corporate capital is
the capitalised earning capacity of the corporation considered as
a going business concern; and the ownership of this capital
therefore foots up to a claim on the earnings of the corporation.
Corporate capital of this kind is impersonal in more than one
sense: it may be transferred piecemeal from one owner to another
without visibly affecting the management or the rating of the
concern whose securities change hands in this way; and the
personal identity of the owner of any given block of this capital
need not be known even to the concern itself, to its
administrative officers, or to those persons whose daily work and
needs are bound up with the daily transactions of the concern.
For most purposes and as regards the greater proportion of the
investors who in this way own the corporation's capital, these
owners are, in effect, anonymous creditors, whose sole effectual
relation to the enter prise is that of a fixed "overhead charge"
on its operations. Such is the case even in point of form as
regards the investors in corporate bonds and preferred stock. The
ordinary investor is, in effect, an anonymous pensioner on the
enterprise; his relation to industry is in the nature of a
liability, and his share in the conduct of this industry is much
like the share which the Old Man of the Sea once had in the
promenades of Sinbad.
No doubt, any reasonably skilful economist any certified
accountant of economic theory -- could successfully question the
goodness of this characterisation of corporate capital. It is, in
fact, not such a description as is commonly met with in those
theories of ownership and investment that trace back to the
formal definitions of Ricardo and Adam Smith. Nor is this
description of latter-day facts here set down as a formal
definition of corporate capital and its uses; nor is it designed
to fit into that traditional scheme of conceptions that still
holds the attention of the certified economists. Its aim is the
less ambitious one of describing, in a loose and informal way,
what is the nature and uses of this corporate capital and its
ownership, in the apprehension of the common man out of doors. He
is not so familiar with the recondite wisdom of the past, or with
subtle definitions, other than the latter-day subtleties of the
market, the crop season, the blast-furnace and refinery, the
internal-combustion engine, and such like hard and fast matters
with which he is required to get along from day to day. The
purpose here is only to bring out, without undue precision, what
these interesting phenomena of capital, investment, fixed
charges, and the like, may be expected to foot up to in terms of
tangible performance, in the unschooled reflections of the common
man, who always comes in as "the party of the second part" in all
these manoeuvres of corporation finance. He commonly has no more
than a slender and sliding grasp of those honorable principles of
certified make-believe that distinguish the modern point of view
in all that relates to property and its uses; but he has had the
benefit of some exacting experience in the ways of the new order
and its standards of reckoning. By consequence of much untempered
experience the common man is beginning to see these things in the
glaring though fitful light of that mechanistic conception that
rates men and things on grounds of tangible performance, --
without much afterthought. As seen in this light, and without
much afterthought, very much of the established system of
obligations, earnings, perquisites and emoluments, appears to
rest on a network of make-believe. Now, it may be deplorable,
perhaps inexcusable, that the New Order in industry should
engender habits of thought of this unprofitable kind; but then,
after all, regrets and excuses do not make the outcome, and with
sufficient reason attention today centers on the outcome.
To the common man who has taken to reckoning in terms of
tangible performance, in terms of man power and material
resources, these returns on investment that rest on productive
enterprise as an overhead charge are beginning to look like
unearned income. Indeed, the same unsympathetic preconception has
lately come in for a degree of official recognition. High
officials who are presumed to speak with authority, discretion
and an unbiassed mind have lately spoken of incomes from
investments as "unearned incomes," and have even entertained a
project for subjecting such incomes to a differential rate of
taxation above what should fairly be imposed on "earned incomes,"
All this may, of course, be nothing more than an unseasonable
lapse of circumspection on the part of the officials, who have
otherwise, on the whole, consistently lived up to the best
traditions of commercial sagacity; and a safe and sane
legislature has also canvassed the matter and solemnly disallowed
any such invidious distinction between earned and unearned
incomes. Still, this passing recognition of unearned incomes is
scarcely less significant for being unguarded; and the occurrence
lends a certain timeliness to any inquiry into the source and
nature of that net product of industry out of which any fixed
overhead charges of this kind are drawn.
To come to an understanding of the source and origin of this
margin of disposable revenue that goes to the earnings of
corporate capital, it is necessary to come to an understanding of
the industrial system out of which the disposable margin of
revenue arises. Productive industry yields a margin of net
product over cost, counting cost in terms of man power and
material resources; and under the established rule of self-help
and free bargaining as it works out in corporation finance, this
margin of net product has come to rest upon productive industry
as an overhead charge payable to anonymous outsiders who own the
corporation securities.
There need be no question of the equity of this arrangement,
as between the men at work in the industries and the
beneficiaries to whom the overhead charge is payable. At least
there is no intention here to question the equity of it, or to
defend the arrangement against any question that may be brought.
It is also to be remarked that the whole arrangement has this
appearance of gratuitous handicap and hardship only when it is
looked at from the crude ground level of tangible performance.
When seen in the dry light of the old and honest principles of
self-help and equal opportunity, as understood by the substantial
and well-meaning citizens, it all casts no shadow of iniquity or
inexpediency.
So, without prejudice to any ulterior question which may be
harbored by one and another, the question which is here had in
mind is quite simply as to the production of this disposable
margin of net product over human cost. And to pass muster today,
any attempted answer will be required to meet that exacting and
often inconvenient insistence on palpable fact which is of the
essence of the new order of knowledge and belief. It is necessary
to reach an understanding of these things in terms of tangible
performance, in such terms as are germane to that new order of
knowledge and belief out of which the perplexity arises, rather
than in those terms of equitable imputation that lie at the root
of the certified economic doctrines and of corporation finance.
These relevant facts are neither particularly obscure nor
particularly elusive; only, they have had little attention in the
argument of economists and politicians. Still less in the
speculations of the captains of finance. The partition of incomes
has always been more easily understood by these
practically-minded persons, and it is also a more engrossing
subject of argumentation than the production of goods. This would
be particularly true for these economists and politicians, who
are imbued with that legalistic spirit which pervades the modern
point of view and all its votaries.
But it is known to all, even to the most safely guarded
persons who do not come in contact with industry or production,
or even with the products of the staple industries, that industry
at large will always turn out something in the way of a net
margin of product over human cost, -- over human effort and
necessary consumption. It holds true as far back as the records
have anything to say. It is evidently a question of the
productivity of the industrial arts. Men at work turn out a net
product because they know how and are interested in doing it; and
their output is limited by the industrial methods which they have
the use of. But the output is limited in such a way that it
always exceeds the cost by more or less, barring accident. By and
large, throughout past time the industrial arts have been gaining
in efficiency, and the ordinary margin of net product over cost
has consequently gone on widening. This is much of the meaning of
"an advance in the industrial arts."
In an earlier time, by law and custom, the net margin of
product habitually went to a master class, so-called, as the
"earnings" or the due emoluments of their mastery over those
industrious classes who carried forward and gave effect to the
state of the industrial arts as known in their time. By virtue of
their mastery and its incorporation in the institutions of the
time, they had an equitable, and effectual, vested interest in
the net product of the community's industry; and by virtue of the
same settled principles of law and custom it was for them to see
to the due consumption of any such net product above cost. In
later times, and particularly in modern times and in the
civilised countries, those immemorial principles of privilege
equitably vested in the master class have fallen into discredit
as being not sufficiently grounded in fact; so that mastery and
servitude are disallowed and have disappeared from the range of
legitimate institutions. The enlightened principles of self-help
and personal equality do not tolerate these things. However, they
do tolerate free income from investments. Indeed, the most
consistent and most reputable votaries of the modern point of
view commonly subsist on such income.
Ever since these enlightened principles of the modern point
of view were first installed in the eighteenth century as the
self-evident rule of reason in civilised life, the industrial
arts have also continued to gain in productive efficiency, at an
ever-accelerated rate of gain; so that today the industrial
methods of the machine era are highly productive, beyond any
earlier state of the industrial arts or anything that is known
outside the range of this new order of industry. The output of
this industrial system yields a wider margin of net product over
cost than has ever been obtainable by any other or earlier known
method of work. It consequently affords ground for an uncommonly
substantial vested interest in this disposable net margin.
But the industrial system of the new order will work at the
high rate of efficiency of which it is capable, only under
suitable conditions. It is a comprehensive system of
interdependent working parts, organised on a large scale and with
an exacting articulation of parts, -- works, mills, railways,
shipping, groups and lines of industrial establishments, all
working together on a somewhat delicately balanced plan of mutual
give and take. No one member or section of this system is a
self-sufficient industrial enterprise, even if it is true that no
one member is strictly dependent on any other one. Indeed, no one
member or section, group or line of industrial establishments, in
this industrial universe of the new order, is a productive factor
at all, except as it fits into and duly gives and takes its share
in the work of the system as a whole. Such exceptions to this
rule of interlocking processes as may appear on first
examination, are likely to prove exceptions in appearance only.
They are chiefly the backward trades and occupations which have
not had the benefit of the Industrial Revolution and do not
belong under the new, mechanistic order of industry; or they are
trades, occupations and works devoted to the consumption of goods
or to the maintenance of the rules governing the distribution and
consumption of wealth, as, for instance, banking, menial service,
police service and the apparatus of the law, the learned
professions and the fine arts.
It is also of the essence of this industrial system and its
technology that it necessarily involves the industrial community
as a whole, its working population and its material resources;
and the measure of its successful operation is determined by the
effectual team-work of its constituent parts. And the industrial
system of the new order is drawn on a large scale and rests on a
comprehensive specialisation of processes and standardisation of
output; so that the "community" which is required for the
necessary team-work is necessarily a large community; larger than
the total population and resources that would have served the
like purpose under any earlier state of the industrial arts, at
the same time that the needed coordination of processes is also
wider and more delicately balanced than ever before. Indeed, the
"industrial community" of the new order is always and necessarily
larger than any existing national unit. The ramification of give
and take under the new industrial system invariably overlaps the
national frontiers, among all those peoples who occupy what would
be called an "advanced" place in industry. The system, and
therefore the industrial community engaged in team-work under
this system, is drawn on cosmopolitan or international lines,
both in respect of the body of technological knowledge which is
turned to account and in respect of the range and volume of
materials necessary to be used according to this new order in
productive industry.
Evidently the total output of product turned out under this
industrial system, the "annual production," to use Adam Smith's
phrase, or the "annual dividend," to use a phrase taken from
later usage, -- this total output is the output of the total
community working together as a balanced organisation of
industrial forces engaged in a moving equilibrium of production.
No part or fraction of the community is a productive factor in
its own right and taken by itself, since no work can be done by
any segment of the community in isolation from the rest; no one
plant or works would be a producer in the absence of all the
rest. The total product is the product of the total community's
work; or rather it is the product of the work of that fraction of
the people who are employed in productive work, which is not
quite the same thing, since there is much work spent on the
consumption of goods, and on ways and means for such consumption,
as well as on their production.
Indeed, it is by no means certain that there is not more
time, strain and ingenuity spent on the consumption of goods than
on their production. Apart from sports, menial service,
fashionable dress and equipage, pet animals and mandatory social
amenities, there would also have to be included under the ways
and means of consumption virtually all that goes into
salesmanship and advertising. Virtually all of these things have
to do with the organised consumption of goods; and virtually all
are therefore to be written off as waste motion, so far as
regards their effect on the net productive efficiency of the
industrial community, or of the industrial system whose tissues
are consumed in enterprise of that kind. The amount which is to
be written off as consumptive waste in this way is approximately
the same as the net margin of product over cost; and according to
the enlightened principles of self-help and equal opportunity, as
these principles work out under the new order of industry, it is
for the investors to take care of this consumptive waste and to
see that no unconsumed residue is left over to cumber the market
and produce a glut.
Evidently, too, the amount of the annual production depends
on the state of the industrial arts which the working population
has the use of for the time being; which is in the main a matter
of technological knowledge and popular education. So that the
question of productivity and net productivity may be stated in
general terms to the following effect: The possible or potential
productive capacity of any given community, having the disposal
of a given complement of man power and material resources, is a
matter of the state of the industrial arts, the technological
knowledge, which the community has the use of. This sets the
limit, determines the "maximum" production of which the community
is capable. The actual production in such a community will then
be determined by the extent to which the available technological
efficiency is turned to account; which is regulated in part by
the intelligence, or "education," of the working population, and
in greater part by market conditions which decide how large a
product it will be profitable for the business men to turn out.
The net product is the amount by which this actual production
exceeds its own cost, as counted in terms of subsistence, and
including the cost of the necessary mechanical equipment; this
net product will then approximately coincide with the annual
keep, the cost of maintenance and replacement, of the investors
or owners of capitalised property who are not engaged in
productive industry; and who are on this account sometimes spoken
of as the "kept classes," Indeed, it would seem that the number
and average cost per capita of the kept classes, communibus
annis, affords something of a rough measure of the net product
habitually derived from the community's annual production.
The state of the industrial arts, therefore, is the
indispensable conditioning circumstance which determines the
productive capacity of any given community; and this is true in a
peculiar degree under this new order of industry, in which the
industrial arts have reached an unexampled development. The same
decisive factor may also be described as "the community's joint
stock of technological knowledge." This common stock of
technological knowledge decides what will be the ordinary ways
and means of industry, and so it decides what will be the
character and volume of the output of product which a given man
power is capable of turning out. Evidently no man power and no
working population can turn out any annual product without the
use of something in the way of technological knowledge, that is
to say some state of the industrial arts. The working community
is a productive factor only by virtue of, and only up to the
limit set by, the state of the industrial arts which it has the
use of. The contrast of industrial Japan or of industrial Germany
before the middle of the nineteenth century and after the close
of the century will serve for illustration; that is to say before
and after those peoples had come in for the use of the technology
of the machine era. The disposable excess of the yearly product
over cost is a matter of the efficiency of the available state of
technological knowledge, and of the measure in which the working
population is put in a position to make use of it. These, of
course, are obvious facts, which it should scarcely be necessary
to recite, except that they are habitually overlooked, perhaps
because they are obvious.
The Industrial Revolution of the eighteenth century was a
revolution in the state of the industrial arts, of course; it was
a mutation of character in the common stock of technological
knowledge held and used by the industrial population of the
civilised countries from that time forward. The shift from the
older to the new order of industry was of such a nature as to
call for the use of an extensive equipment of mechanical
apparatus, progressively more and more extensive as the change to
the machine technology went on; and at the same time the
disposable margin of product above cost also progressively went
on increasing with each further increase of the community's joint
stock of technological knowledge.
This body of technological knowledge, the state of the
industrial arts, of course has always continued to be held as a
joint stock. Indeed this joint stock of technology is the
substance of the community's civilisation on the industrial side,
and therefore it constitutes the substantial core of that
civilisation. Like any other phase or element of the cultural
heritage, it is a joint possession of the community, so far as
concerns its custody, exercise, increase and transmission; but it
has turned out, under the peculiar circumstances that condition
the use of this technology among these civilised peoples, that
its ownership or usufruct has come to be effectually vested in a
relatively small number of persons. Unforeseen and undesigned,
the mechanical circumstances of the new order in industry have
reversed the practical effects of the common law in respect of
self-help, equal opportunity and free bargaining. The mechanics
of the case has worked out this result by cutting away the ground
on which those principles were based at the time of their
acceptance and installation.
The machine technology requires for its working a large and
specialised mechanical apparatus, an ever increasingly large and
increasingly elaborate material equipment. So also it requires a
large and diversified supply of material resources, both in raw
materials and in the way of motive power. It is only on condition
that these requirements are met in some passable fashion that
this industrial system will work at all, and it is only as these
requirements are freely met that the machine industry will work
at a high efficiency. At the same time the settled principles of
law and usage and public policy handed down from the eighteenth
century have in effect decided, and continue to decide, that all
material wealth is, rightly, to be held in private ownership, and
is to be made use of only subject to the unhampered discretion of
the legally rightful owner. Meantime the highly productive state
of the industrial arts embodied in the technological knowledge of
the new order can be turned to account only by use of this
material equipment and these natural resources which continue to
be held in private ownership. From which it follows that these
material means of industry, and the state of the industrial arts
which these material means are to serve, can be turned to
productive use only so far and on such conditions as the rightful
owners of the material equipment and resources may choose to
impose; which enables the owners of this indispensable material
wealth, in effect, to take over the use of these industrial arts
for their own sole profit. So that the usufruct of the
community's technological knowledge has come to vest in the
owners of such material wealth as is held in sufficiently large
blocks for the purpose.
Therefore, by award of the settled principles of equity and
self-help embodied in the modern point of view, as stabilised in
the eighteenth century, the owners of the community's material
resources -- that is to say the investors in industrial business
-- have in effect become "seized and possessed of" the
community's joint stock of technological knowledge and
efficiency. Not that this accumulated knowledge of industrial
forces and processes has passed into the intellectual keeping of
the investors and been assimilated into their mentality, even to
the extent of a reasonably scanty modicum. It remains true, of
course, that the investors, owners, kept classes, or whatever
designation is preferred, are quite exceptionally ignorant of all
that mechanics of industry whose usufruct is vested in them; they
are, in effect, fully occupied with other things, and their
knowledge of industry ordinarily does not, and need not, extend
to any rudiments of technology or industrial process. It is not
as intelligent persons, but only as owners of material ways and
means, as vested interests, that they come into the case. The
exceptions to this rule are only sufficiently numerous to call
attention to themselves as exceptions.
As an intellectual achievement and as a working force the
state of the industrial arts continues, of course, to be held
jointly in and by the community at large; but equitable title to
its usufruct has, in effect, passed to the owners of the
indispensable material means of industry. Though not hitherto by
formal specification and legal provision, their assets include,
in effect, the state of the industrial arts as well as the
mechanical appliances and the materials without which these
industrial arts are of no effect. It is true, a little something,
and indeed more than a little, has been done toward the due legal
recognition of the investor's usufruct of the community's
technological efficiency, in the recognition of vested interests
and intangible assets as articles of private property defensible
at law. But on the whole, and until a relatively recent date, the
investors' tenure of this usufruct has been allowed to rest
informally on their control of the community's material assets.
Still, the outlook now appears to be that something further may
presently be done toward a more secure and unambiguous tenure of
this usufruct, by suitable legal decisions bearing on the
inviolability of vested interests and intangible assets. The
outcome is, in effect, that these owners have equitably become
the sole legitimate beneficiaries of the possible margin of
product above cost.
These are also simple facts and patent, and should seem
sufficiently obvious without argument. They have also been
explained at some length elsewhere. But this recital of what
should already be commonplace information seems necessary here
for the sake of a more perspicuous continuity in the present
argument. To many persons, perhaps to the greater proportion of
those unpropertied persons that are often spoken of collectively
as "the common man," the state of things which has just been
outlined may seem untoward. And further reflection on the
character and prospective consequences of this arrangement is
likely to add something more to the common man's apprehension of
hardship and insecurity to come. Therefore it may be well to
recall that this state of things has been brought to pass not by
the failure of those principles of equity and self-help that lie
at the root of it all, but rather by the eminently unyielding
stability and sufficiency of these principles under new
conditions. It is not due to any inherent weakness or shiftiness
in these principles of law and custom; which have faithfully
remained the same as ever, and which all men admit were good and
sound at the period of their installation. But it is beginning to
appear now, after the event, that the inclusion of unrestricted
ownership among those rights and perquisites which were allowed
to stand over when the transition was made to the modern point of
view is likely to prove inexpedient in the further course of
growth and change.
Unrestricted ownership of property, with inheritance, free
contract, and self-help, is believed to have been highly
expedient as well as eminently equitable under the circumstances
which conditioned civilised life at the period when the civilised
world made up its mind to that effect. And the discrepancy which
has come in evidence in this later time is traceable to the fact
that other things have not remained the same. The odious outcome
has been made by disturbing causes, not by these enlightened
principles of honest living. Security and unlimited discretion in
the rights of ownership were once rightly made much of as a
simple and obvious safeguard of self-direction and self-help for
the common man; whereas, in the event, under a new order of
circumstances, it all promises to be nothing better than a means
of assured defeat and vexation for the common man.
Chapter 4
Free Income
Industry of the modern sort -- mechanical, specialised,
standardised, drawn on a large scale -- is highly productive.
When this industrial system of the new order is not hindered by
outside control it will yield a very large net return of output
over cost, -- counting cost in terms of man power and necessary
consumption; so large, indeed, that the cost of what is
necessarily consumed in productive work, in the way of materials,
mechanical appliances, and subsistence of the workmen, is
inconsiderable by comparison. The same thing may be described by
saying that the necessary consumption of subsistence and
industrial plant amounts to but an inconsiderable deduction from
the gross output of industry at any time. So inordinately
productive is this familiar new order of industry that in
ordinary times it is forever in danger of running into excesses
and turning out an output in excess of what the market -- that is
to say the business situation -- will tolerate. There is constant
danger of "overproduction," So that there is commonly a large
volume of man power unemployed and an appreciable proportion of
the industrial plant lying idle or half idle. It is quite
unusual, perhaps altogether out of the question, to let all or
nearly all the available plant and man power run at full capacity
even for a limited time.
It is, of course, impossible to say how large the net
aggregate product over cost would be -- counting the product in
percentages of the necessary cost -- in case this industrial
system were allowed to work at full capacity and with free use of
all the available technological knowledge. There is no safe
ground for an estimate, for such a thing has never been tried,
and no near approach to such a state of things is to be looked
for under the existing circumstances of ownership and control.
Even under the most favorable conditions of brisk times the
business situation will not permit it. There will at least always
be an indefinitely large allowance to be reckoned for work and
substance expended on salesmanship, advertising, and competitive
management designed to increase sales. This line of expenditures
is a necessary part of businesslike management, although it
contributes nothing to the output of goods, and in that sense it
is to be counted as a necessary deduction from the net productive
capacity of the industrial system as it runs. It would also be
extremely difficult to make allowance for this deduction, since
much of it is not recognised as such by the men in charge and
does not appear on their books under any special descriptive
heading. In one way and another, and for divers and various
reasons, the net production of goods serviceable for human use
falls considerably short of the gross output, and the gross
output is always short of the productive capacity of the
available plant and man power.
Still, taken as it goes, with whatever handicap of these
various kinds is to be allowed for, it remains patently true that
the net product greatly exceeds the cost. So much so that
whatever is required for the replacement of the material
equipment consumed in production, plus "reasonable returns" on
this equipment, commonly amounts to no more than a fraction of
the total output. The resulting margin of excess product over
cost plus reasonable returns on the material equipment is due to
the high productive efficiency of the current state of the
industrial arts and is the source of that free income which gives
rise to intangible assets. The distinction between tangible
assets and intangible is not a hard and fast one, of course, but
the difference is sufficiently broad and sufficiently well
understood for use in the present connection, so long as no pains
is taken to confuse these terms with needless technical verbiage.
To avoid debate and digression, it may be remarked that
"reasonable returns" is also here used in the ordinary sense of
the expression, without further definition, as being sufficiently
understood and precise enough for the argument. The play of
motives and transactions by which a rough common measure of
reasonable returns has been arrived at is taken for granted. A
detailed examination of all that matter would involve an extended
digression, and nothing would be gained for the argument.
According to the traditional view, which was handed on from the
period before the coming of corporation finance, and which still
stands over as an article of common belief in the certified
economic theories, "capital" represents the material equipment,
valued at its cost, together with funds in hand required as a
"working capital" to provide materials and a labor force. On this
view, corporation securities are taken to cover ownership of the
plant and the needed working capital; and there has been a
slow-dying prejudice against admitting that anything less
tangible than these items should properly be included in the
corporate capitalisation and made a basis on which to issue
corporate securities. Hence that stubborn popular prejudice
against "watered stock" which corporation finance had to contend
with all through the latter half of the nineteenth century.
"Watered stock" is now virtually a forgotten issue. Corporation
finance has disposed of the quarrel by discontinuing the relevant
facts.
There is still a recognised distinction between tangible
assets and intangible; but it has come to be recognised in
corporation practice that the only reasonable basis of
capitalisation for any assets, tangible or intangible, is the
earning-capacity which they represent. And the amount of capital
is a question of capitalisation of the available assets. So that,
if the material equipment, e.g., is duly capitalised on its
earning-capacity, any question as to its being "watered" is no
longer worth pursuing; since stock can be said to be "watered"
only by comparison with the cost of the assets which it covers,
not in relation to its earning-capacity. The latter point is
taken care of by the stock quotations of the market. On the other
hand, intangible assets neither have now nor ever have had any
other basis than capitalisation of earning capacity, and any
question of "water" in their case is consequently quite idle.
Intangible assets will not hold water.
Corporation finance is one of the outgrowths of the New
Order. And one of the effects wrought by corporation finance is a
blurring of the distinction between tangible assets and
intangible; inasmuch as both are now habitually determined by a
capitalisation of earning-capacity, rather than by their
ascertained cost, and it is difficult, if not impossible, to draw
a hard and fast line between that part of a concern's
earning-capacity which is properly to be assigned to its plant
and that which is due to its control of the market. Still, an
intelligible distinction is maintained in common usage, between
tangible assets and intangible, even if the distinction is
somewhat uncertain in detail; and such a distinction is
convenient, so long as too sharp a contrast between the two is
not insisted on.
The earning-capacity of the tangible assets is presumed to
represent the productive capacity of the plant, considered as a
mechanical apparatus engaged in an industrial process for the
production of goods or services; it is presumed to rest on the
market value of the mechanical output of the plant. The plant is
a productive factor because and in so far as it turns to
practical account the state of the industrial arts now in use, --
the community's joint stock of technological knowledge. So soon,
or so far, as the plant and its management falls short of meeting
the ordinary requirements of this current state of the industrial
arts, and fails to make use of such technological knowledge as is
commonly employed, the whole works ceases by that much to be a
productive factor. The productive efficiency, and the productive
value, of any given item of industrial equipment is measured by
its effective use of the technological knowledge current in the
community for the time being. So also, the productive value of
any given body of natural resources land, raw materials, motive
power -- is strictly dependent on the degree in which it fits
into the industrial system as it runs.
This dependence of productive value on conformity to and use
of the state of the industrial arts is constantly shown in the
case of land and similar natural resources, by the fluctuation of
rental values. Land and other resources will be more valuable the
more suitable they are for present and prospective use. The like
is true for the mechanical equipment, perhaps in a more
pronounced degree. Industrial plant, e.g., is always liable to
depreciation by obsolescence in case the state of the industrial
arts changes in such a way that the method of work embodied in
the particular article of equipment is displaced by new and more
suitable methods, more suitable under the altered circumstances.
In such a case, which is of very frequent occurrence under the
new order of industry, any given plant, machine, or similar
contrivance may lose all its value as a means of production. And
so also, on the other hand, a given plant, as, for instance, a
given railway system or dock, may acquire additional productive
value through changes in the industrial system which make it more
suitable for present use.
Evidently the chief, or at least the indispensable, element
of productive efficiency in any item of industrial equipment or
resources is the use which it makes of the available
technological knowledge; and evidently, too, its earning-capacity
as a productive factor depends strictly on the same fact, -- the
usufruct of the state of the industrial arts. And all the while
the state of the industrial arts, which the industrial equipment
so turns to account for the benefit of its owner, continues to be
a joint stock of industrial knowledge and proficiency
accumulated, held, exercised, increased and transmitted by the
community at large; and all the while the owner of the equipment
is some person who has contributed no more than his per-capita
quota to this state of the industrial arts out of which his
earnings arise. Indeed the chances are that the owner has
contributed less than his per-capita quota, if anything, to that
common fund of knowledge on the product of which he draws by
virtue of his ownership, because he is likely to be fully
occupied with other things, -- such things as lucrative business
transactions, e.g., or the decent consumption of superfluities.
And at this point the difference between tangible assets and
intangible comes in sight, or at least the ground of the habitual
distinction between the two. Tangible assets, it appears, are
such assets as represent the earning-capacity of any mechanically
productive property; whereas intangible assets represent assured
income which can not be assigned to any specific material factor
as its productive source. Intangible assets are the capitalised
value of income not otherwise accounted for. Such income arises
out of business relations rather than out of industry; it is
derived from advantages of salesmanship, rather than from
productive work; it represents no contribution to the output of
goods and services, but only an effectual claim to a share in the
"annual dividend," -- on grounds which appear to be legally
honest, but which can not be stated in terms of mechanical cause
and effect, or of productive efficiency, or indeed in any terms
that involve notions of physical dimensions or of mechanical
action.
When the theoreticians explain and justify these returns that
go to adroit salesmanship, or "managerial ability," as it is also
called, it invariably turns but that the grounds assigned for it
are of the nature of figures of speech -- metaphor or analogy.
Not that these standard theoretical explanations are to be set
aside as faulty, inadequate or incomplete; their great volume and
sincerity forbids that. It is rather that they are to be accepted
as a faithful account of an insubstantial fact in insubstantial
terms. And they are probably as good an account of the equitable
distribution of free income as the principles of the modern point
of view will tolerate.
But while intangible assets represent income which accrues
out of certain immaterial relations between their owners and the
industrial system, and while this income is accordingly not a
return for mechanically productive work done, it still remains
true, of course, that such income is drawn from the annual
product of industry, and that its productive source is therefore
the same as that of the returns on tangible assets. The material
source of both is the same; and it is only that the basis on
which the income is claimed is not the same for both. It is not a
difference in respect of the ways and means by which they are
created, but only in respect of the ways and means by which these
two classes of income are intercepted and secured by the
beneficiaries to whom they accrue. The returns on tangible assets
are assumed to be a return for the productive use of the plant;
returns on intangible assets are a return for the exercise of
certain immaterial relations involved in the ownership and
control of industry and trade.
Best known by name among intangible assets is the ancient
rubric of "good-will," technically so called; which has stood
over from before the coming of the new order in business
enterprise. This has long been considered the original type-form
of intangible assets as a class. By ancient usage the term
denotes a customary preferential advantage in trade; it is not
designed to describe a body of benevolent sentiments. Good-will
has long been known, discussed and allowed for as a legitimate,
ordinary and valuable immaterial possession of men engaged in
mercantile enterprise of all kinds. It has been held to be a
product of exemplary courtesy and fair dealing with customers,
due to turning out goods or services of an invariably sound
quality and honest measure, and indeed due to the conspicuous
practice of the ordinary Christian virtues, but chiefly to common
honesty. Similarly valuable, and of a similarly immaterial
nature, is the possession of a trade-secret, a trade-mark, a
patent-right, a franchise, any statutory monopoly, or a monopoly
secured by effectually cornering the supply or the market for any
given line of goods or services. From any one of these a
profitable advantage may be derived, and they have therefore a
market value. They afford their possessor a preferential gain, as
against his competitors or as against the general body of
customers which the state of the industrial arts and the
organisation of business throws in his way. After the analogy of
good-will, it has been usual to trace any such special run of
free income to the profitable use of a special advantage in the
market, which is then appraised as a valuable means of gain and
comes to figure as an asset of its possessor. But all this goes
to explain how these benefits go to these beneficiaries; it does
not account for the fact that there is produced a net output of
product available for free distribution to these persons.
These supernumerary and preferential gains, "excess profits,"
or whatever words may best describe this class of free income,
may be well deserved by these beneficiaries, or they may not. The
income in question is, in any case, not created by the good
deserts of the beneficiaries, however meritorious their conduct
may be. Honesty may conceivably be the best policy in mercantile
pursuits, and it may also greatly serve the convenience of any
community in which an honest merchant is found; yet honest
dealing, strictly speaking, is an agency of conservation rather
than of creation. A trade-secret may also be profitable to the
concern which has the use of it, and the special process which it
covers may be especially productive; but the same article of
technological knowledge would doubtless contribute more to the
total productivity of industry if it were shared freely by the
industrial community at large. Such technological knowledge is an
agency of production, but it is the monopoly of it that is
profitable to its possessor as a special source of gain. The like
applies to patent-rights, of course. Whereas monopolies of the
usual kind, which control any given line of industry by charter,
conspiracy, or combination of ownership, derive their special
gains from their ability to restrain trade, limit the output of
goods or services, and so "maintain prices."
Intangible assets of this familiar kind are very common among
the business concerns of the new order, particularly among the
larger and more prosperous of them, and they afford a rough
measure of the ability of these concerns profitably to restrict
production. The very large aggregate value of such assets
indicates how imperative it is for the conduct of industrial
business under the new order to restrict output within reasonable
limits, and at the same time how profitable it is to be able to
prevent the excessively high productive capacity of modern
industry from outrunning the needs of profitable business. For
the prosperity of business it is necessary to keep the output
within reasonable limits; that is to say, within such limits as
will serve to maintain reasonably profitable prices; that is to
say, such prices as will yield the largest obtainable net return
to the concerns engaged in the business. In this connection, and
under the existing conditions of investment and credit,
"reasonable returns" means the same thing as "the largest
practicable net returns." It all foots up to an application of
the familiar principle of "charging what the traffic will bear";
for in the matter of profitable business there is no reasonable
limit short of the maximum. In business, the best price is always
good enough; but, so also, nothing short of the best price is
good enough. Buy cheap and sell dear.
Intangibles of this kind, which represent a "conscientious
withdrawal of efficiency," an effectual control of the rate or
volume of output, are altogether the most common of immaterial
assets, and they make up altogether the largest class of
intangibles and the most considerable body of immaterial wealth
owned. Land values are of much the same nature as these corporate
assets which represent capitalised restriction of output, in that
the land values, too, rest mostly on the owner's ability to
withhold his property from productive use, and so to drive a
profitable bargain. Rent is also a case of charging what the
traffic will bear; and rental values should properly be classed
with these intangible assets of the larger corporations, which
are due to their effectual control of the rate and volume of
production. And apart from the rental values of land, which are
also in the nature of monopoly values, it is doubtful if the
total material wealth in any of the civilised countries will
nearly equal the total amount of this immaterial wealth that is
owned by the country's business men and the investors for whom
they do business. Which evidently comes to much the same as
saying that something more than one-half of the net product of
the country's industry goes to those persons in whom the existing
state of law and custom vests a plenary power to hinder
production.
It is doubtful if the total of this immaterial wealth exceeds
the total material wealth in the advanced industrial countries;
although it is at least highly probable that such is the case,
particularly in the richer and more enlightened of these
countries; as, e. g., in America or the United Kingdom, where the
principles of self-help and free bargain have consistently had
the benefit of a liberal -- that is a broad -- construction and
an unbending application. The evidence in the case is not to be
had in such unambiguous shape as to carry conviction, for the
distinction between tangible assets and intangible is not
consistently maintained or made a matter of record. So, e.g., it
is not unusual to find that corporation bonds -- railroad or
industrial -- which secure their owner a free income and are
carried as an overhead charge by the corporation, are at the same
time a lien on the corporation's real property; which in turn is
likely to be of less value than the corporation's total
liabilities. Evidently the case is sufficiently confusing,
considered as a problem in the economic theory of capital, but it
offers no particular difficulty when considered as a proposition
in corporation finance.
There is another curious question that will also have to be
left as a moot question, in the absence of more specific
information than that which is yet available; more a question of
idle curiosity, perhaps, than of substantial consequence. How
nearly is it likely that the total gains which accrue to these
prosperous business concerns and their investors from their
conscientious withdrawal of efficiency will equal the total loss
suffered by the community as a whole from the incidental
reduction of the output? Net production is kept down in order to
get a profitable price for the output; but it is not certain
whether the net production has to be lowered by as much or more
than the resulting increased gain which this businesslike
strategy brings to the businesslike strategists. The strategic
curtailment of net production below productive capacity is net
loss to the community as a whole, including both the business men
and their customers; the gains which go to these business
concerns in this way are net loss to the community as a whole,
exclusive of the business concerns and their investors. The
resulting question is, therefore, not whether the rest of the
community loses as much as the business men gain, -- that goes
without saying, since the gains of the business men in the case
are paid over to them by the rest of the community in the
enhanced (or maintained) price of the products, but rather it is
a question whether the rest of the community, the common man,
loses twice as much as the business concerns and their investors
gain.
The whole case has some analogy with the phenomena of
blackmail, ransom, and any similar enterprise that aims to get
something for nothing; although it is carefully to be noted that
its analogy with these illegitimate forms of gainful enterprise
must, of course, not be taken to cast any shadow of suspicion on
the legitimacy of all the businesslike sabotage that underlies
this immaterial corporate capital and its earning-capacity. In
the case of blackmail, ransom, and such like illegal traffic in
extortion, it is known that the net loss suffered by the loser
and the gainer together exceeds the net gain which accrues to the
beneficiary, by as much as the cost of enforcement plus the
incidental inconvenience to both parties to the transaction. At
the same time, the beneficiary's subsequent employment and
consumption of his "ill-gotten gains," as they are sometimes
called, whether he consumes them in riotous living or in the
further pursuit of the same profitable line of traffic, -- all
this, it is believed, does not in any degree benefit the rest of
the community. As seen in the perspective of the common good,
such enterprise in extortion is believed to be quite wastefully
disserviceable.
Now, this analogy may be taken for what it is worth;
"Analogies do not run on all-fours." But when seen in the same
perspective, the question of loss and gain involved in the case
of these intangible assets and their earning-capacity falls into
something like this shape: Does the total net loss suffered by
the community at large, exclusive of the owners of these
intangibles, exceed two-hundred percent of the returns which go
to these owners? or, Do these intangibles cost the community more
than twice what they are worth to the owners? -- the loss to the
community being represented by the sum of the overhead burden
carried on account of these intangibles plus the necessary
curtailment of production involved in maintaining profitable
prices. The overhead burden is paid out of the net annual
production, after the net annual production has been reduced by
so much as may be necessary to "maintain prices at a reasonably
profitable figure."
A few years ago any ordinarily observant person would
doubtless have answered this question in the negative, probably
without hesitation. So also, any ordinarily intelligent votary of
the established order, as, e.g., a corporation lawyer, a
commercial trade journal, or a trade-union official, would
doubtless, at that period, have talked down such a question out
of hand, as being fantastically preposterous. That would have
been before the war experience began to throw light into the dark
places of business enterprise as conducted under the new order of
industry. Today (October, 1918) -- it is to be admitted with such
emotion as may come to hand -- this question is one which can be
entertained quite seriously, in the light of experience. In the
recent past, as matters have stood up to the outbreak of the war,
the ordinary rate of production in the essential industries under
businesslike management has habitually and by deliberate
contrivance fallen greatly short of productive capacity. This is
an article of information which the experience of the war has
shifted from the rubric of "Interesting if True" to that of
"Common Notoriety."
The question as to how much this "incapacity by advisement"
has commonly amounted to may be attempted somewhat after this
fashion. Today, under compulsion of patriotic devotion, fear,
shame and bitter need, and under the unprecedentedly shrewd
surveillance of public officers bent on maximum production, the
great essential industries controlled by the vested interests
may, one with another, be considered to approach -- perhaps even
conceivably to exceed -- a fifty-percent efficiency; as counted
on the basis of what should ordinarily be accomplished by use of
an equally costly equipment having the disposal of an equally
large and efficient labor force and equally good natural
resources, in case the organisation were designed and managed
with an eye single to turning out a serviceable product, instead
of, as usual, being managed with an eye single to private gain in
terms of price.
To the spokesmen of "business as usual" this rating of
current production under the pressure of war needs may seem
extravagantly low; whereas, to the experts in industrial
engineering, who are in the habit of arguing in terms of material
cost and mechanical output, it will seem extravagantly high.
Publicly, and concessively, this latter class will speak of a 25
percent efficiency; in private and confidentially they appear
disposed to say that the rating should be nearer to 10 percent
than 25. To avoid any appearance of an ungenerous bias, then,
present actual production in these essential industries may be
placed at something approaching 50 percent of what should be
their normal productive capacity in the absence of a businesslike
control looking to "reasonable profits." It is necessary at this
point to call to mind that the state of the industrial arts under
the new order is highly productive, -- beyond example.
This state of the case, that production in the essential
industries presumably does not exceed 50 percent of the normal
productive capacity, even when driven under the jealous eye of
public officers vested with power to act, is presumably due in
great part to the fact that these officers, too, are capable
business men; that their past training and present bent is such
as has been given them by long, exacting and successful
experience in the businesslike management of industry; that their
horizon and perspective in all that concerns industry are limited
by the frame of mind that is native to the countinghouse. They,
too, have learned how to think of industry and its administration
in terms of profit on investment, and, indeed, in no other terms;
that being as near as their daily work has allowed them to take
stock of the ways and means of industry. So that they are still
guided, in some considerable part, by considerations of what is
decent, equitable and prudent in the sight of conservative
business men; and this bias necessarily g |