Part 13

Interest is the amount paid for the use of capital. From the time of 123 the church fathers in the Middle Ages down to the present-day socialists, interest and the private ownership of productive capital have formed favorite objects of attack. The justification of interest lies in the fact that men prefer present goods to future goods--a bird in the hand is worth two in the bush--and interest is the difference in value between the two at the present moment; it is time value. The justification of private property, on the other hand, lies rather in its expediency than in any inherent and unalterable law of nature. It has developed with civilization and has been, without question, a fundamental cause of material progress. But moderate individualists even, as John Stuart Mill, have attacked the institution of inheritance while leaving the main edifice of private property untouched. They would limit absolutely the amount of bequest or, as President Roosevelt advocated, would use inheritance taxes as a means of breaking up large fortunes.

Profits are the reward which the manager of a business receives for his services in organizing and superintending the business. This share of the social income was the last to be recognized by economists, and its rightfulness is even yet denied by the socialists. They insist that profits are really the earnings of labor which have been withheld from the laborer by the superior skill and economic strength of the capitalist manager; they are institutional robbery, the exploitation of labor. It is not possible to take up the arguments on this point, but it may be said in a word that the manager of business contributes a needed service to the work of society just as truly as the laborer does, and receives his earned reward in the form of profits.

Wages are the reward of labor. It is often assumed that wages are lower than they should be, that the laborer in some way is deprived of a portion of what he has rightfully earned. It is worth while inquiring briefly how the share of labor in the distribution of the 124 social income is determined. Various theories have been developed to explain the distributive process, of which we may notice three. The oldest in point of time and the most pessimistic theory held that wages were fixed by competition and the growth of population at the bare subsistence minimum, a bare starvation level. If by some happy chance wages were raised above this point, then the population would speedily multiply and the increased competition thus brought about among the laborers would depress wages again to the lowest amount sufficient to support a family. Under the name of the “iron law of wages,” this theory is still put forth by the socialists as the explanation--together with the institution of private property--of wages. Historically, however, this theory has happily been proven untrue, as the advance in the standard of living among the working class during the past century testifies. It has now been almost wholly superseded by the so-called productivity theory,[42] which asserts that wages depend upon the productivity of labor; that the laborer gets what he produces, and that this share is assured him by the working out of the competitive process under free competition. If this theory is true, there can be no ethical question raised; if labor is dissatisfied with its share, then it must increase its productive efficiency. As a matter of fact wages have always been high in the United States because labor has been relatively scarce compared with land and capital, and consequently its marginal productivity has been high. The third theory says that wages are a result of bargaining, of competition in the labor market, a question of supply and demand. Under these circumstances it is largely a question of economic strength between labor and capital, and if labor is well-organized, alert, and able to drive a good bargain, then wages will be high; otherwise they will be low. While there is an element of truth in the last theory, the second one seems the truest explanation of 125 general wages; certain it is that no monopoly power of labor, however great, could permanently maintain wages at a level higher than the actual produce of labor. The element of truth in the first theory is that wages can never, for any length of time, fall below the cost of subsistence.

Of more practical interest are questions connected with the personal distribution of wealth. In this connection arise such problems as the increase of large fortunes, the causes of poverty, and similar questions. The boast of our Republic has long been that here opportunity was open to all, that wealth was widely diffused, and that such inequalities of fortune as characterized the nations of the Old World were happily lacking. In the fifty-five years, 1850-1904, the per capita value of all property in the United States exactly quadrupled; how has this increase been distributed? Unfortunately we have no complete statistics on this point, yet reliable estimates by authoritative writers all tell the same story--of great concentration of wealth in the possession of a comparatively few rich families. In 1893 Mr. George K. Holmes concluded from a study of the statistics of farm and home ownership in the United States that “91 per cent of the families of the country own no more than about 29 per cent of the wealth, and 9 per cent of the families own about 71 per cent of the wealth.” A more accurate and satisfactory statement can be drawn from the income-tax returns for Prussia, which tells almost the same story with regard to income. The table on the following page is condensed from an article by Professor A. Wagner:

According to these figures over two-thirds of the persons--heads of families or single adults--had only one-third of the income, while 3½ per cent had another third. Another striking fact shown by the table is the large proportion of persons receiving incomes of less

Distribution of Income in Prussia, 1902 126

==============+============+============ | Per cent | Per cent Income | of persons | of income --------------+------------+------------ Below $214 | 70.7 | 33.0 $214 to $714 | 25.8 | 34.9 Over $714 | 3.5 | 32.1 --------------+------------+------------

than $214 a year, the minimum taxable income. It shows the poverty of the mass of the people as well as the concentration of wealth among the few rich. In the United States, where the natural resources have been so much richer than in Germany, a similar table would probably show a much smaller proportion under the Prussian minimum, but on the other hand it would probably show a greater concentration of income in the hands of a few. Europe has as yet no billionaire. The great fortunes of the United States have been made possible by the unrivaled opportunities for the exploitation of rich natural resources, the appropriation of natural monopolies, and to special privileges and opportunities in manufactures and transportation. The importance of monopoly privileges in the distribution of wealth is well shown by the results of an investigation made in 1892 by the New York Tribune into the sources of the fortunes of millionaires. It was undertaken to show that protection was not the main cause; but while it proved this, it showed clearly that most of them were built up on monopoly. “Of the 4,047 millionaires reported, only 1,125, or 28 per cent, obtained their fortunes in protected industries…. About 78 per cent of the fortunes were derived from permanent monopoly privileges, and only 22 per cent from competitive industries unaided by natural and artificial monopolies…. Furthermore, if the size of fortunes is taken into account it will be found that perhaps 95 per cent of the total values represented by these millionaire fortunes is due to those investments 127 classed as land values and natural monopolies, and to competitive industries aided by such monopolies.”[43] It is essential to the stability of our democratic institutions that all special privileges be absolutely prohibited, and that monopoly be brought under strict government control and regulation. Improper methods of wealth accumulation should certainly be prevented.

The opposite question of poverty has already been discussed and some of the causes of poverty pointed out. It will be sufficient here to try to answer the question which has often been asked: Are the rich growing richer and the poor poorer? Though the first part of the question has just been affirmed, the second part may be denied. The nineteenth century has witnessed a vast improvement in the condition of the laboring man, who has shared in the increasing wealth which he has helped to produce. Wages have steadily increased, the hours of labor have been reduced, and the material well-being of the wage-earner is greater today than it has ever been before. It has more than once been pointed out by writers on this subject that with an equal distribution of wealth no one would be well-to-do, while many others insist that inequality in itself is a desirable thing. Greater diffusion of wealth can come about only by very slow processes, and permanent plenty can be secured only by a great increase in the accumulations of capital and the efficiency of each worker. Any suggested reform, therefore, that would weaken the motives to thrift and industry must be rejected.

XIV. SAVING AND SPENDING.

The goal and purpose of all economic activities is the satisfaction of human wants. The object of production is consumption. We work because we desire and need various things which we can get only if we produce them or earn the money to buy them. In this section we take up some 128 of the problems connected with the rational use or consumption of the wealth which is continually being produced. We have seen something of the conditions under which it is produced, and the manner in which it is distributed; we must now study the not less important subject of its application to human needs and desires. The great question is, how can we get the largest and most rational return for a given expenditure? Before trying to answer this question, it will be helpful to present a summary statement of actual expenditures in different places:

Expenditures for Different Purposes.

===============+========+==========+=========+=========+========= Items | United | New York | Great | Prussia | Average | States | City | Britain | | | 1903 | | | | ---------------+--------+----------+---------+---------+--------- Food | 43.1 | 43.4 | 51.4 | 55.0 | 48.2 Clothing | 13.0 | 10.6 | 18.1 | 18.0 | 14.9 Rent | 18.1 | 19.4 | 13.5 | 12.0 | 15.8 Fuel and light | 5.7 | 5.1 | 3.5 | 5.0 | 4.8 Miscellaneous | 20.1 | 21.5 | 13.5 | 10.0 | 16.3 +--------+----------+---------+---------+--------- Total | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 ---------------+--------+----------+---------+---------+---------

From this table it is seen that practically half of the income of average working-class families is expended for food, and five-sixths of it goes for the bare necessaries. It is therefore of the utmost importance that this be spent wisely. The remaining one-sixth, included here under the head “miscellaneous,” comprises such items as education, care of health, comfort, mental and bodily recreation, etc. It is manifest that this group can be expanded in only one of two ways: either by enlarging the total income, or by economizing on the other items by a wiser and better-ordered expenditure. The former question has already been discussed; here we are concerned only with the latter. Dr. Frederick Engel, a Prussian statistician, laid down certain laws with regard to consumption: as the income of a family increases a smaller percentage is spent for food and a larger 129 percentage for education, health, recreation, etc.; while the percentage spent for clothing, rent, fuel and light remains approximately the same. A higher civilization and culture for the mass of the people can only be secured by expanding the group of culture expenditures. As long as these remain unsatisfied for the ordinary family we cannot claim to have attained our economic goal. The author of a recent study of conditions in New York City, where the cost of living is high, concludes that a “fair living wage for a workingman’s family in New York City should be at least $728 a year, or a steady income of $14 a week.”[44] The actual earnings are certainly below this figure.

One of the problems which has often proved very puzzling is the relation between saving and spending. At what point should one stop spending in order to save? If the satisfaction of our wants is the object of production, why should we save at all? This is the point urged by the author of a specious little book called “The Fallacy of Saving.” The problem can be most easily solved by a more careful analysis of terms. In the popular view, saving involves the withdrawal of goods or money from use, while spending means putting them to immediate use. The spendthrift is proverbially popular. “If the rich do not spend, the poor die of hunger,” said Montesquieu. Saving may take the form of hoarding or withdrawing things from use, but nowadays this is practised only by misers; saving ordinarily takes the form of investment in some productive enterprise, either directly or through a bank. In this way a demand is created for goods just as truly as though the money had been spent for a dinner or a suit of clothes. Saving is spending, but it is spending for the future rather than the present; it usually causes the production of permanent material goods rather than transient or immaterial pleasures. Another cause of the confusion of ideas on this subject is that we always speak of money 130 and thus lose sight of the acts of production and consumption that lie back of the money transfer. We see that money is transferred by spending and think that it increases trade. Consequently, when a prodigal spends his money foolishly, it is excused on the ground that it makes employment and puts money in circulation. We forget that it would have been “put in circulation” just as effectively if he had not spent it, but had placed it in a bank. If we look back of the money transfer, we see that usually there has been a foolish or wasteful expenditure, sometimes an absolute destruction of wealth. A fire which burns down valuable buildings is an absolute social loss, even though employment be given to masons and carpenters in putting them up again.

A third confusion of ideas that exists in the popular mind is due to an over-emphasis of the desirability of work for its own sake. The man who “makes work” is thought to be doing a desirable thing, even though this results from the unnecessary destruction of useful things. Now the real goal of all rational economic endeavor is not production for its own sake, but consumption; not work, but the gratification of wants. Every destruction of durable commodities which lessens the power to gratify wants is a loss to a community and no juggling with words can make it anything else. If it gives employment to labor, that means that the labor has been diverted from the production of other things to which it would have been devoted. Edward Atkinson several years ago calculated that every year fires destroyed property in the United States to the amount $150,000,000.[45] That workmen are employed to reproduce the buildings, etc., can surely not be reckoned as a social gain. There is great danger in a commercial age like ours of forgetting that work is not an end in itself, but simply a means to an end. But it may be argued that unless these men had been given 131 employment of this sort, they would have starved. It is conceivable that during or after a revolution industry would be so interrupted that ordinary employments would not be open. But in ordinary times such a statement is simply an assertion of the fallacious lump-of-labor theory, that there is just so much work to be done and no more. New wants are continually pressing for satisfaction, waiting only for the prior ones to be satisfied before they urge their claims. So soon as the old ones are satisfied, additional employment is provided in meeting the newer desires. The aim of society is to expand continually the circle of gratified desires. As durable goods and agents are accumulated by the process of saving, this becomes increasingly possible in every progressive society. Useless destruction involves sheer waste and cannot be justified on any grounds.

On the other hand, saving is socially necessary in every industrially developed community in order to furnish the requisite capital for the continued production of wealth. Professor Marshall has estimated that every year one-fifth of the wealth of a nation is used up in the processes of manufacture and production; just to keep machines, factories, railroads, and other instruments of production up to the point of efficiency and restore loss and depreciation would therefore require considerable saving. If the nation is to grow wealthier and is to accumulate additional capital, manifestly still more must be saved. This is done in all progressive countries. Saving is carried on by individuals, however, and not by nations, and the motives that lead to it are personal. The most important is probably the desire to provide for wife and children or other relatives; next to that is the wish to lay by sufficient for one’s old age. In our individualistic society, where each family forms an independent unit and is assumed to be self-supporting, it is very desirable that habits of thrift and saving be developed. Both from a social and a personal point of view 132 therefore saving must be approved, though it is undesirable that it should proceed so far as to prevent spending for the gratification of essential present needs.

But what shall we say about expenditures for luxuries? Here the spending is for the gratification of a want, though it may be out of proportion to the results. What shall be our attitude to it? This question is not so easy to answer as the other. Three different schools have given as many answers to the problem of luxury: the first condemns it utterly; the second approves it wholly; and the third takes an intermediate position between the two extremes. Luxury is condemned by the first school from three points of view: as a question of individual morals, it is regarded as debasing and enervating, thus preventing the highest development of the human faculties; as a question of economics it is condemned as wasteful; and as a question of right and justice it is incompatible with an equitable distribution of wealth. It is upon this last point that the opponents of luxury lay the greatest emphasis. As the quantity of existing wealth is insufficient to satisfy even the primal wants of the large majority of our fellow-creatures, we should endeavor to increase this available store as much as we can, and should refrain from drawing upon it in a reckless manner in order to gratify superfluous wants. Furthermore, the productive powers that we can use are, as a matter of fact, limited; and therefore, if the wealthy classes divert a portion of these forces towards the production of articles of luxury, there will be so much the less available for the production of those staple articles that the masses require for their consumption. In the case of a Robinson Crusoe this would be perfectly clear: if he devoted several months to the polishing of a diamond for ornament, he would have to go without a house or other improvements he might have made in that time. Or, if he forced his man Friday to spend half his time polishing 133 diamonds for him, Friday might be compelled to go without sufficient clothing or food or housing. The same thing is true of organized society, only the truth is hidden by the phenomena of exchange. It has been estimated[46] that the annual consumption of wealth in the United States is divided somewhat as follows: necessaries, six billion dollars; luxuries, three and one-half billion (of which $900,000,000 go for liquor and $500,000,000 for tobacco); capitalistic uses, three and three-quarter billion. It is manifest that if the expenditure for luxuries was curtailed or abandoned, there would be more to devote to the other categories.

The opposite school replies to these arguments that luxury is an indispensable stimulus to progress; that really all economic progress is first manifested in the form of a need of luxury, and that luxury therefore is a necessary phase of its development. Since luxury is wholly relative, every want or need is, on its first appearance in the world, regarded as superfluous; first, because no one has hitherto wanted it, and secondly, because its production probably requires a considerable amount of labor, on account of man’s inexperience and the inevitable gropings in the dark that attend all beginnings. The decencies of life today and even the necessities were once regarded as luxuries--chimneys in houses, shoes, forks and knives, linen for the body, bath tubs, etc. If all luxury had always been sternly suppressed when it made its appearance, all the needs that constitute civilization would have been nipped in the bud, and we should still be in the condition of our ancestors of the Stone Age. Civilization depends on the multiplication of wants. Economic progress is a process of converting superfluities into conveniences, and conveniences into necessities.

The attitude taken by practically all economists today is intermediate between these two extremes. Moderate luxury is justified, but lavish 134 and indiscriminate luxury is disapproved of. This justification of luxury rests upon purely economic grounds. In so far as personal consumption is the objective point of production, the prohibition of luxury would act as an impediment to enterprise. If the desire to enjoy luxuries stimulates the productive powers of economically important members of society, it is justifiable as a necessary motive force. The introduction of luxuries and the consequent raising of the standard of living seems often the only way to secure progress. If the mass of the people live on the minimum of cheap food, multiply as long as cheap food is to be had, and spend little for comforts and luxuries, then most of the labor of such a community must be spent in obtaining food for the masses. Such is the condition in India and China. But if a large part of the community has a higher standard of living, it will exercise self-restraint in the increase of its numbers, and the whole level of intelligence and comfort will be raised, as in France or Switzerland or New England. On the other hand, it is urged that “failure on the part of any family to secure the necessaries of life is injurious, not only to it, but to the whole community. Under-consumption means under-nutrition and loss in industrial efficiency. If permitted to continue it must inevitably undermine the standards which make a family self-supporting and self-sufficient and reduce its members to dependency. The general interest requires, therefore, acceptance of the maxim: the consumption of luxuries should be deferred until all are provided with necessaries…. This suggests that no one is justified in spending income for a luxury for himself or his family that will afford less happiness than would the same income spent for someone else.”[47]