Part 12

The economic theory of profit-sharing is that by inducing greater care and diligence on the part of the employe he will himself create the fund from which he is paid. It is claimed by its advocates that it increases both the quantity and the quality of the product and that it promotes greater care of implements and materials, thus reducing the cost at the same time that it increases the output. The classic example of this is the case of the original profit-sharing scheme, the Maison Leclaire, in Paris; the result of the first six years’ experiment was a dividend on wages of $3,753 a year, derived entirely from the increased economy and care of the workers. In some cases, however, the object of the employers is to secure immunity from strikes and other labor disturbances and a greater permanence of the labor force; and participation in profits is conditioned on the men abstaining from joining a trade union, or on uninterrupted service. In these cases the deferred participation plan is used. The advantages claimed for the system are not merely the increase in product already spoken of and the greatest efficiency of the worker, but also the improvement in his material and moral standards, and the promotion of industrial peace by lessening discontent and friction. The main basis for the system, since it is economic and not philanthropic in its nature, must of course be the increase in production brought about by its adoption.

More weighty, however, appear the objections against profit-sharing, which seem to have had sufficient force to cause the failure of a number of ventures in this direction. In the first place, the 112 relation between the increased effort of a single workman and the success of a general business is so remote, especially in our complicated modern industry, that it is unlikely to act as a very powerful stimulus. But even if it should, the savings thus effected might be swept away by the poor business management of the employer. “It is quite possible that the workman who, in the hope of earning ‘bonus to labor,’ has done work 10 per cent in excess of the normal standard, may, even under a liberal scheme, find that, instead of receiving an addition to his normal wages of, say, 7 per cent, the bad management of his employer has reduced his bonus to so low a level that he has to be content with a supplement equivalent to only 2 per cent on his wages, or that, as has been the case in a large proportion of the schemes … no bonus whatever is forthcoming.”[34] It is undesirable to make the earnings of the laborer dependent in any way upon the fluctuations of business or the ability of the employer. The ordinary wage system has at least the merit that the reward of the laborer is made dependent only on his own efforts. The lot of the modern worker is too unstable and employment too unsteady to add a new element of uncertainty in wages. If the laborer has really earned the premium, say labor leaders, why not add it to his wages instead of adopting this roundabout method. The sliding scale, or a system of premiums or bonus payments for increased output, would be better than profit-sharing, and is rapidly spreading.

This leads to the second objection, which is that profit-sharing paralyzes the efforts of the laborers to better their own conditions through trade unions, strikes or other methods. The trade union attitude was vigorously stated by President Gompers of the American Federation of Labor in his testimony before the Industrial Commission[35]:

“There have been few, if any, of these concerns which have been even 113 comparatively fair to their employes…. They made the work harder, longer hours, and when the employes of other concerns in the same line of trade were enjoying increased wages, shorter hours of labor, and other improvements, tending to the material progress of the worker, the employes of the concern where so-called profit-sharing was the system at the end of the year found themselves receiving lower wages for harder work than were those who were not under that beneficent system.” As long as the system is viewed with suspicion by the laborer or used as a weapon in industrial bargaining by employers, the plan is foredoomed to failure. But even were it managed in the proper spirit, it is after all applicable to only a comparatively few industries, those, namely, in which labor makes up the largest part of the cost of production. In most modern industries capital plays such an important role as compared with labor that the field for this plan is comparatively limited.

In the actual practice of profit-sharing there have been many interesting experiments, and not a few failures. It may be said to date from 1842, when M. Leclaire, a Parisian painter and house decorator, introduced it into his business, and has since spread over France and England; it has met with little success in the rest of Europe. In the United States the movement has also been more recent and of smaller proportions. The reason for this is suggested by President Hadley as follows[36]: “Where the laborers under the old wage system are not working up to a high standard of efficiency, there is more chance for the success of profit-sharing. This seems to be the reason why it works better on the Continent than in England, and better in England than in America.” It was estimated in 1900 that there had been in the entire world some 500 experiments in profit-sharing, of which about 400 were still in existence: a more 114 conservative estimate would place the latter number at about 300.

More radical than profit-sharing, which involves only a change in the method of payment of wages, is co-operation, which involves a change of management as well. Its final goal, in the minds of its advocates, is the radical modification if not ultimate abolition of the present wage system. While profit-sharing is paternalistic and is directed to an increase of production, co-operation may be said to be democratic, and to aim at a more equitable distribution. Under this plan the laborers hope to divert to themselves the large amount of profits which they now see going into the possession of their employers. By eliminating the manager or enterpriser they hope to save his profits for themselves. Two different kinds of co-operation are usually distinguished--distributive or consumers’ co-operation, and producers’ co-operation--which we may profitably take up in turn.

Successful consumers’ co-operation may be said to have originated in Great Britain when twenty-eight Rochdale workingmen founded their famous society of Equitable Pioneers. The success and growth of this remarkable experiment, starting with a capital of £28, to a great system of 8,000 members with a capital of £200,000 in 1874, is a most romantic story. It was largely imitated and retail co-operative stores sprang up all over England. In 1864 the English Co-operative Wholesale Society was started, for the purpose of the joint purchase of supplies for the retail co-operative stores on better terms than these could secure singly from ordinary wholesalers. It effected large economies and was successful from the beginning; by 1901 it had a capital of £2,500,000 and acted as purchaser for over 1,000 retail societies. From buying, the society soon passed to making its own goods and now manufactures directly a long list of commodities. In 1868 the Scottish Wholesale Society was inaugurated upon practically the same plan. 115 Consumers’ co-operation has met with considerable success in Europe also. In the United States, however, experiments of this kind have in general had only a brief existence. It is impossible to say how many such societies exist today as no adequate statistics on the subject exist. Trade union stores in New England, the grange stores of the Patrons of Husbandry and later similar ones of the Sovereigns of Industry, and a few sporadic movements since in different parts of the country, show what has been attempted. The reasons for the lack of success in this country are not hard to find. Co-operation requires a willingness to take considerable trouble for small economies, which American workingmen, with their generally high wages, have not yet been willing to take. It also requires a considerable degree of homogeneity in thought and interests on the part of a people, which is naturally less present in the United States with its large admixture of foreign population than in England or the countries of Europe.

The methods of the Rochdale Society will serve as an illustration of the way in which the savings effected by co-operation are distributed among the members. Any one might become a member upon payment of one shilling and was then entitled to trade at the store. The prices charged were those current in the town, but purity of goods was assured; cash payments were an essential feature. At the end of the year the profits were divided among the members in proportion to the amount of their purchases. On the other hand, it may be noted that no attempt was made to, introduce profit-sharing with the employes, who are paid ordinary but good wages only. Other forms of consumers’ co-operation are those which undertake to supply insurance, or credit, like the co-operative insurance companies, banks, and building and loan associations. The latter especially have had considerable success in the United States and have helped many a laborer or man of small 116 means to the ownership of a home.

Producers’ co-operation differs from that just described in that it is a union on the part of laborers to do away with the employer and to secure for themselves the profits. The object of the first is to lower prices for the co-operators as consumers; the object of the second is rather to secure higher prices for themselves as producers by eliminating the profits of the industrial manager. They hope to perform his function by their collective effort, and to manage as well as labor; indeed, by diminishing friction and strikes they even hope to increase the profits. Examples of successful co-operation of this sort are not numerous, as it has great difficulties to contend with. Most of the experiments have failed, though recently it would seem that the movement is making substantial though slow progress, especially in France and England. Most of those in the latter country, however, seem to be of simple industries, as agriculture and dairy-farming. The most notable example of successful productive co-operation in the United States has been furnished by the coopers of Minneapolis, who organized a shop of their own in 1868 and have steadily increased their business since that time. Other instances often cited are the wood-workers in St. Louis and boot and shoe companies in Massachusetts. More recently there has been a considerable extension of co-operative creameries, cheese factories and similar businesses of a simple kind.

The advantages of co-operation are summed up as follows by President Walker.[37] From the laborer’s point of view: “First, to secure for the laboring class that large amount of wealth, which … goes annually in profits to the employer. Second, to secure for the laborer the opportunity to produce independently of the will of an employer…. In addition to these, the political economist beholds in cooperation three sources of advantage. First, co-operation would, 117 by the very terms of the case, do away with strikes…. Second, the workman would be incited to greater industry and to greater carefulness in dealing with materials and with machinery. Third, in no small degree frugality would be encouraged.” To these may be added other advantages, mostly realizable, however, in consumers’ co-operation. Saving in store-room, clerk hire, advertising, book-keeping, etc., is effected, while above all, the practice of cash payments saves all loss from bad debts. The initial success of the Rochdale pioneers was in large part due to the economy in this line, as a system of long credits burdened the retail trade of England at the time they began. In this country the large department stores have introduced this system and have thus been able to give their customers lower prices, and by so much have lessened the motive for consumers’ co-operation. The educative effects of successful co-operation upon the participators in developing habits of thrift, careful management and a knowledge of business principles, is one of the chief advantages of the system. The ultimate ideal of enthusiastic co-operators does not, however, stop short of a mere saving in price. The goal is stated as follows by the Right Relationship League of America, which has several co-operative stores in the Northwest: Consumers’ co-operation is merely the first step which “will lead next to co-operative production, next to public ownership of natural resources and finally to complete industrial and economic equality, social and political right relationship--the Kingdom of God on Earth.”

The defects of co-operation have already been suggested in the account of their failure. In the first place, the importance and need of intelligent and efficient management are usually underrated by workingmen. They are unwilling to pay high salaries and as a consequence lose the best men and secure inefficient service. Co-operation has therefore succeeded best in retail trade where the processes are comparatively simple, or in those branches of production 118 where industry counts for most and management for least. But even if it were possible to secure an efficient and progressive manager for a co-operative shop, it is found very difficult for a man chosen by the workmen to enforce discipline among them. A second disadvantage is the difficulty of securing capital. Where, as in many branches of large-scale manufacturing today, the average investment of capital amounts to more than $1,000 per employe, the impossibility of obtaining this by the contributions of the workers is obvious. Nor are capitalists usually willing to lend to such organizations, as the risks are too great. To meet this difficulty Ferdinand Lassalle, a German socialist, proposed that the state should advance the necessary capital to associations of workmen. But the experience so far with productive co-operation would seem to suggest that the social benefits would not equal the waste of public capital. There is danger also that if successful the co-operative associations would tend to become monopolies; they are profit-seeking societies and would probably not differ materially in their methods from ordinary joint stock enterprises.

It seems impossible, therefore, to expect from co-operation a final solution of the labor problem, such as John Stuart Mill, for instance, hoped for. Where successful, it has succeeded in distributing profits among a larger number of persons than would otherwise have received them. Its educative and moral effects, moreover, in the appeals which it makes to higher motives and to character, are of the highest value. But as an industrial system of enterprise it cannot supplant the present system as long as the manager of industry is needed. Today he performs a useful social service and profits are his pay therefor. If he is to be eliminated, society must first be raised to a higher plane of efficiency, intelligence, and morality. But just because it makes these high demands upon the members of the laboring class, attempts 119 at co-operation should receive all reasonable encouragement.

XIII. PROBLEMS OF DISTRIBUTION.

So far we have discussed for the most part those economic problems that center round the production of wealth, such as the use of natural resources, large-scale production, trusts and monopolies, labor organizations, unemployment, industrial education and co-operation. Now we shall consider briefly a few of the problems that are connected with the distribution of wealth. Professor Blockmar[38] says that the three great problems of economic society are: “First, how to create the largest amount of utilities or wealth; second, how justly to divide this amount; and third, how to make the product minister to the permanent rather than to the transient well-being of society.” The first problem we have already discussed; the second forms the subject of the present section; while the third will be taken up in the next section. Within the last century the center of interest in the practical application of economic principles has decidedly shifted from production to distribution. The earlier writers in economics, as shown in the mercantile lists of the seventeenth and eighteenth centuries, even Adam Smith, were chiefly interested in methods of increasing a nation’s wealth. With the introduction of the factory system and the opening up of vast natural resources by improvements in mining and transportation, the production of wealth has enormously increased, and now the question of the method of its distribution or division is felt to be more pressing.

Under the term distribution two different processes are included, which should be distinguished before going further. The first is called functional distribution, and concerns the distribution of the product of industry or the income of society, among the different factors of production. That is to say, land, labor, capital and 120 managerial ability have contributed in varying degrees to the production of a certain amount of current wealth, and the problem of functional distribution is to ascertain how the net product resulting from these joint efforts is divided. How much goes to rent, how much to wages, how much to interest and how much to profits? The second kind of distribution is the division of the wealth of society among individuals or families; this is personal distribution, and raises the question of poverty and great wealth. In discussing these problems, however, we must remember that wealth production and distribution takes place in modern society under conditions imposed by the social order in which we live; these were defined as competition, private property and personal liberty. If any modifications of the processes of distribution were desired, it would undoubtedly be necessary to alter these fundamental institutions.

John Stuart Mill held that production was governed by natural laws, which could be ascertained and stated, but that distribution was artificial and hence that it was not possible to discover constant and certain laws governing it. Beginning mainly with Mill, the ethical question has been more and more asked as to what share each factor in production ought to get, not merely what he does receive. “Hence the question is rising more and more as to what should be the basis of division, and many proposals have been made. It is proposed that laborers combine to get a larger share. Hence we have trade unions, Knights of Labor, etc. It is proposed that capitalists and landlords give a larger proportion of the produce to the laborers than they are able to secure by mere private struggle. Hence we have proposals for profit-sharing and various charities. It is proposed that laborers combine to be their own capitalists and landlords; hence we have all sorts of co-operative and communistic experiments. It is asserted that the wealthy classes have so much power in their hands that private 121 co-operation cannot succeed in competing against them, and hence it is proposed that all the people, through government (municipal, state, and national), secure all the means of production (capital and land, so far at least as land is used for production), and operate them collectively for the equitable good of all, the people thus being their own employers, capitalists, and landlords. Hence we have municipalism, nationalism, socialism. It is claimed that capitalists and landlords have been able to secure, and are today able to maintain, their large share in distribution, only through the favoritism of the Government. Hence we have proposals for free trade, the single tax,… the extreme proposals of the very great minimizing of the state in individualism, or the abolition of the Government in anarchism.”[39] In view of this very imperfect list it is not too much to say that most of the economic problems that are stirring society today are connected with the distribution of wealth.

The first question that suggests itself in the discussion of functional distribution is as to whether it is actually governed by natural law, so-called. It is observable that the amounts which go to rent, to wages, to interest, and to profits are regularly quite constant. What determines this? The socialists contend that natural distribution is the only just method and insist that the state should regulate this just distribution; they are not clear, however, as to what this natural method is. Henry George uses the same phrase when he says, “the just distribution of wealth is manifestly a natural distribution of wealth, and this is that which gives to him who makes it and secures to him who saves it.” All such statements beg the question for they all turn on the use of the word natural. Many modern economists are inclined to assert that the question of distribution is not an ethical one, not a question of what ought to be but of what 122 is. Thus Professor Tetter says[40]: “Distribution in economics is the seasoned explanation of the way in which the total product of a society is divided among its members. It is a logical question and not an ethical one.” And Professor Clark writes, “There is, in short, a deep-acting natural law at work amid the confusing struggles of the labor market.” It will not be possible, in the brief limits of this section, to take up all the theories as to the way in which this distribution is effected among the claimants to a share of the product, but a few of the more important practical results may be stated. We shall take up the four different factors in turn.

Rent is usually defined as the return for the use of natural objects and agencies. Rent has usually been low in the United States because of the large amount of land and other natural agents available. In general it may be said that when any factor of production is relatively abundant in comparison with the other factors, its share of the product will be small.[41] Henry George, however, argues that as the amount of land is limited and is now practically all taken up, the future will see a constantly increasing demand for land, and hence the landlords will absorb most of the future income of society. This is true of most of land and other natural agents especially in demand, as choice sites in our cities, anthracite coal mines, etc. The practical problem that suggests itself is, do we wish private property in land? The socialists answer no, but the individualists insist that the best use has been and can be made of land only by reducing it to private ownership. In practice, however, even in modern individualistic societies, the absolute and unregulated use of land by the owner is restricted in various ways.