Chapter 3

Observe that this is not in the slightest the conclusion of the orthodox economists. Every man, they said, gets what he actually makes, or, by exchange, those things which exactly correspond to it as regards the cost of making them--which have, to use the key-word of the theory, the same value. Let us take a very simple example. If I go fishing with a net which I have myself constructed out of fibers and sticks, and if I catch a fish and if I then roast the fish over a fire which I have made without so much as the intervention of a lucifer match, then it is I and I alone who have "produced" the roast fish. That is plain enough. But what if I catch the fish by using a hired boat and a hired net, or by buying worms as bait from some one who has dug them? Or what if I do not fish at all, but get my roast fish by paying for it a part of the wages I receive for working in a saw mill? Here are a new set of relationships. How much of the fish is "produced" by each of the people concerned? And what part of my wages ought I to pay in return for the part of the fish that I buy?

Here opens up, very evidently, a perfect labyrinth of complexity. But it was the labyrinth for which the earlier economist held, so he thought, the thread. No matter how dark the passage, he still clung tight to it. And his thread was his "fundamental equation of value" whereby each thing and everything is sold (or tends to be sold) under free competition for exactly its cost of production. There it was; as simple as A. B. C.; making the cost of everything proportional to the cost of everything else, and in itself natural and just; explaining and justifying the variations of wages and salaries on what seems a stern basis of fact. Here is your selling price as a starting point. Given that, you can see at once the reason for the wages paid and the full measure of the payment. To pay more is impossible. To pay less is to invite a competition that will force the payment of more. Or take, if you like, the wages as the starting point: there you are again,--simplicity itself: the selling price will exactly and nicely correspond to cost. True, a part of the cost concerned will be represented not by wages, but by cost of materials; but these, on analysis, dissolve into past wages. Hence the whole process and its explanation revolves around this simple fundamental equation that selling value equals the cost of production.

This was the central part of the economic structure. It was the keystone of the arch. If it holds, all holds. Knock it out and the whole edifice falls into fragments.

A technical student of the schools would digress here, to the great confusion of the reader, into a discussion of the controversy in the economic cloister between the rival schools of economists as to whether cost governs value or value governs cost. The point needs no discussion here, but just such fleeting passing mention as may indicate that the writer is well and wearily conversant with it.

The fundamental equation of the economist, then, is that the value of everything is proportionate to its cost. It requires no little hardihood to say that this proposition is a fallacy. It lays one open at once, most illogically, to the charge of being a socialist. In sober truth it might as well lay one open to the charge of being an ornithologist. I will not, therefore, say that the proposition that the value of everything equals the cost of production is false. I will say that it is _true_; in fact, that is just as true as that two and two make four: exactly as true as that, but let it be noted most profoundly, _only as true as that_. In other words, it is a truism, mere equation in terms, telling nothing whatever. When I say that two and two make four I find, after deep thought, that I have really said _nothing_, or nothing that was not already said at the moment I defined two and defined four. The new statement that two and two make four adds nothing. So with the majestic equation of the cost of production. It means, as far as social application goes, as far as any moral significance or bearing on social reform and the social outlook goes, _absolutely nothing_. It is not in itself fallacious; how could it be? But all the social inferences drawn from it are absolute, complete and malicious fallacies.

Any socialist who says this, is quite right. Where he goes wrong is when he tries to build up as truth a set of inferences more fallacious and more malicious still.

But the central economic doctrine of cost can not be shaken by mere denunciation. Let us examine it and see what is the matter with it. We restate the equation.

_Under perfectly free competition the value or selling price of everything equals, or is perpetually tending to equal, the cost of its production._ This is the proposition itself, and the inferences derived from it are that there is a "natural price" of everything, and that all "natural prices" are proportionate to cost and to one another; that all wages, apart from temporary fluctuations, are derived from, and limited by, the natural prices paid for the things made: that all payments for the use of capital (interest) are similarly derived and similarly limited; and that consequently the whole economic arrangement, by giving to each person exactly and precisely the fruit of his own labor, conforms exactly to social justice.

Now the trouble with the main proposition just quoted is that each side of the equation is used as the measure of the other. In order to show what natural price is, we add up all the wages that have been paid, and declare that to be the cost and then say that the cost governs the price. Then if we are asked why are wages what they are, we turn the argument backward and say that since the selling price is so and so the wages that can be paid out of it only amount to such and such. This explains nothing. It is a mere argument in a circle. It is as if one tried to explain why one blade of a pair of scissors is four inches long by saying that it has to be the same length as the other. This is quite true of either blade if one takes the length of the other for granted, but as applied to the explanation of the length of the scissors it is worse than meaningless.

This reasoning may seem to many persons mere casuistry, mere sophistical juggling with words. After all, they say, there is such a thing as relative cost, relative difficulty of making things, a difference which rests upon a physical basis. To make one thing requires a lot of labor and trouble and much skill: to make another thing requires very little labor and no skill out of the common. Here then is your basis of value, obvious and beyond argument. A primitive savage makes a bow and arrow in a day: it takes him a fortnight to make a bark canoe. On that fact rests the exchange value between the two. The relative quantity of labor embodied in each object is the basis of its value.

This line of reasoning has a very convincing sound. It appears in nearly every book on economic theory from Adam Smith and Ricardo till to-day. "Labor alone," wrote Smith, "never varying in its own value is above the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared."

But the idea that _quantity of labor governs_ value will not stand examination for a moment. What is _quantity_ of labor and how is it measured? As long as we draw our illustrations from primitive life where one man's work is much the same as another's and where all operations are simple, we seem easily able to measure and compare. One day is the same as another and one man about as capable as his fellow. But in the complexity of modern industrial life such a calculation no longer applies: the differences of skill, of native ingenuity, and technical preparation become enormous. The hour's work of a common laborer is not the same thing as the hour's work of a watchmaker mending a watch, or of an engineer directing the building of a bridge, or of an architect drawing a plan. There is no way of reducing these hours to a common basis. We may think, if we like, that the quantity of labor _ought_ to be the basis of value and exchange. Such is always the dream of the socialist. But on a closer view it is shattered like any other dream. For we have, alas, no means of finding out what the quantity of labor is and how it can be measured. We cannot measure it in terms of time. We have no calculus for comparing relative amounts of skill and energy. We can not measure it by the amount of its contribution to the product, for that is the very matter that we want to discover.

What the economist does is to slip out of the difficulty altogether by begging the whole question. He deliberately measures the quantity of labor _by what is paid for it_. Skilled labor is worth, let us say, three times as much as common labor; and brain work, speaking broadly, is worth several times as much again. Hence by adding up all the wages and salaries paid we get something that seems to indicate the total quantity of labor, measured not simply in time, but with an allowance for skill and technical competency. By describing this allowance as a coefficient we can give our statement a false air of mathematical certainty and so muddle up the essential question that the truth is lost from sight like a pea under a thimble. Now you see it and now you don't. The thing is, in fact, a mere piece of intellectual conjuring. The conjurer has slipped the phrase, "quantity of labor," up his sleeve, and when it reappears it has turned into "the expense of hiring labor." This is a quite different thing. But as both conceptions are related somehow to the idea of cost, the substitution is never discovered.

On this false basis a vast structure is erected. All prices, provided that competition is free, are made to appear as the necessary result of natural forces. They are "natural" or "normal" prices. All wages are explained, and low wages are exonerated, on what seems to be an undeniable ground of fact. They are what they are. You may wish them otherwise, but they are not. As a philanthropist, you may feel sorry that a humble laborer should work through a long day to receive two dollars, but as an economist you console yourself with the reflection that that is all he produces. You may at times, as a sentimentalist, wonder whether the vast sums drawn as interest on capital are consistent with social fairness; but if it is shown that interest is simply the "natural price" of capital representing the actual "productive power" of the capital, there is nothing further to say. You may have similar qualms over rent and the rightness and wrongness of it. The enormous "unearned increment" that accrues for the fortunate owner of land who toils not neither spins to obtain it, may seem difficult of justification. But after all, land is only one particular case of ownership under the one and the same system. The rent for which the owner can lease it, emerges simply as a consequence of the existing state of wages and prices. High rent, says the economist, does not make big prices: it merely follows as a consequence or result of them. Dear bread is not caused by the high rents paid by tenant farmers for the land: the train of cause and effect runs in the contrary direction. And the selling price of land is merely a consequence of its rental value, a simple case of capitalization of annual return into a present sum. City land, though it looks different from farm land, is seen in the light of this same analysis, to earn its rent in just the same way. The high rent of a Broadway store, says the economist, does not add a single cent to the price of the things sold in it. It is because prices are what they are that the rent is and can be paid. Hence on examination the same canon of social justice that covers and explains prices, wages, and interest applies with perfect propriety to rent.

Or finally, to take the strongest case of all, one may, as a citizen, feel apprehension at times at the colossal fortune of a Carnegie or a Rockefeller. For it does seem passing strange that one human being should control as property the mass of coin, goods, houses, factories, land and mines, represented by a billion dollars; stranger still that at his death he should write upon a piece of paper his commands as to what his surviving fellow creatures are to do with it. But if it can be shown to be true that Mr. Rockefeller "made" his fortune in the same sense that a man makes a log house by felling trees and putting them one upon another, then the fortune belongs to Mr. Rockefeller in the same way as the log house belongs to the pioneer. And if the social inferences that are drawn from the theory of natural liberty and natural value are correct, the millionaire and the landlord, the plutocrat and the pioneer, the wage earner and the capitalist, have each all the right to do what he will with his own. For every man in this just world gets what is coming to him. He gets what he is worth, and he is worth what he gets.

But if one knocks out the keystone of the arch in the form of a proposition that natural value conforms to the cost of production, then the whole edifice collapses and must be set up again, upon another plan and on another foundation, stone by stone.

_IV.--Work and Wages_

WAGES and prices, then, if the argument recited in the preceding chapter of this series holds good, do not under free competition tend towards social justice. It is not true that every man gets what he produces. It is not true that enormous salaries represent enormous productive services and that humble wages correspond to a humble contribution to the welfare of society. Prices, wages, salaries, interest, rent and profits do not, if left to themselves, follow the simple law of natural justice. To think so is an idle dream, the dream of the quietist who may slumber too long and be roused to a rude awakening or perish, perhaps, in his sleep. His dream is not so dangerous as the contrasted dream of the socialist, now threatening to walk abroad in his sleep, but both in their degree are dreams and nothing more.

The real truth is that prices and wages and all the various payments from hand to hand in industrial society, are the outcome of a complex of competing forces that are not based upon justice but upon "economic strength." To elucidate this it is necessary to plunge into the jungle of pure economic theory. The way is arduous. There are no flowers upon the path. And out of this thicket, alas, no two people ever emerge hand in hand in concord. Yet it is a path that must be traversed. Let us take, then, as a beginning the very simplest case of the making of a price. It is the one which is sometimes called in books on economics the case of an unique monopoly. Suppose that I offer for sale the manuscript of the Pickwick Papers, or Shakespere's skull, or, for the matter of that, the skull of John Smith, what is the sum that I shall receive for it? It is the utmost that any one is willing to give for it. That is all one can say about it. There is no question here of cost or what I paid for the article or of anything else except the amount of the willingness to pay on the part of the highest bidder. It would be possible, indeed, for a bidder to take the article from me by force. But this we presume to be prevented by the law, and for this reason we referred above not to the physical strength, but to the "economic strength" of the parties to a bargain. By this is meant the relation that arises out of the condition of the supply and the demand, the willingness or eagerness, or the sheer necessity, of the buyers and the sellers. People may offer much because the thing to be acquired is an absolute necessity without which they perish; a drowning man would sell all that he had for a life belt. Or they may offer much through the sheer abundance of their other possessions. A millionaire might offer more for a life belt as a souvenir than a drowning man could pay for it to save his life.

Yet out of any particular conjunction between desires on the one hand and goods or services on the other arises a particular equation of demand and supply, represented by a particular price. All of this, of course, is A. B. C., and I am not aware that anybody doubts it.

Now let us make the example a little more elaborate. Suppose that one single person owned all the food supply of a community isolated from the outside world. The price which he could exact would be the full measure of all the possessions of his neighbors up to the point at least where they would commit suicide rather than pay. True, in such a case as this, "economic strength" would probably be broken down by the intrusion of physical violence. But in so far as it held good the price of food would be based upon it.

Prices such as are indicated here were dismissed by the earlier economist as mere economic curiosities. John Stuart Mill has something to say about the price of a "music box in the wilds of Lake Superior," which, as he perceived, would not be connected with the expense of producing it, but might be vastly more or perhaps decidedly less. But Mill might have said the same thing about the price of a music box, provided it was properly patented, anywhere at all. For the music box and Shakespere's skull and the corner in wheat are all merely different kinds of examples of the things called a monopoly sale.

Now let us change the example a little further. Suppose that the monopolist has for sale not simply a fixed and definite quantity of a certain article, but something which he can produce in larger quantities as desired. At what price will he now sell? If he offers the article at a very high price only a few people will take it: if he lowers the price there will be more and more purchasers. His interest seems divided. He will want to put the price as high as possible so that the profit on each single article (over what it costs him to produce it) will be as great as possible. But he will also want to make as many sales as he possibly can, which will induce him to set the price low enough to bring in new buyers. But, of course, if he puts the price so low that it only covers the cost of making the goods his profit is all gone and the mere multiplicity of sales is no good to him. He must try therefore to find a point of maximum profit where, having in view both the number of sales and the profit over cost on each sale the net profit is at its greatest. This gives us the fundamental law of monopoly price. It is to be noted that under modern conditions of production the cost of manufacture per article decreases to a great extent in proportion as a larger and larger number is produced and thus the widening of the sale lowers the proportionate cost. In any particular case, therefore, it may turn out that the price that suits the monopolist's own interest is quite a low price, one such as to allow for an enormous quantity of sales and a very low cost of manufacture. This, we say, _may_ be the case. But it is not so of necessity. In and of itself the monopoly price corresponds to the monopolist's profit and not to cheapness of sale. The price _may_ be set far above the cost.

And now notice the peculiar relation that is set up between the monopolist's production and the satisfaction of human wants. In proportion as the quantity produced is increased the lower must the price be set in order to sell the whole output. If the monopolist insisted on turning out more and more of his goods, the price that people would give would fall until it barely covered the cost, then till it was less than cost, then to a mere fraction of the cost and finally to nothing at all. In other words, if one produces a large enough quantity of anything it becomes worthless. It loses all its value just as soon as there is enough of it to satisfy, and over-satisfy the wants of humanity. Thus if the world produces three and a half billion bushels of wheat it can be sold, let us say, at two dollars a bushel; but if it produced twice as much it might well be found that it would only sell for fifty cents a bushel. The value of the bigger supply as a total would actually be less than that of the smaller. And if the supply were big enough it would be worth, in the economic sense, just nothing at all. This peculiarity is spoken of in economic theory as the paradox of value. It is referred to in the older books either as an economic curiosity or as a mere illustration in extreme terms of the relation of supply to price. Thus in many books the story is related of how the East India Companies used at times deliberately to destroy a large quantity of tea in order that by selling a lesser amount they might reap a larger profit than by selling a greater.

But in reality this paradox of value is the most fundamental proposition in economic science. Precisely here is found the key to the operation of the economic society in which we live. The world's production is aimed at producing "values," not in producing plenty. If by some mad access of misdirected industry we produced enough and too much of everything, our whole machinery of buying and selling would break down. This indeed does happen constantly on a small scale in the familiar phenomenon of over-production. But in the organization in which we live over-production tends to check itself at once. If the world's machinery threatens to produce a too great plenty of any particular thing, then it turns itself towards producing something else of which there is not yet enough. This is done quite unconsciously without any philanthropic intent on the part of the individual producer and without any general direction in the way of a social command. The machine does it of itself. When there is _enough_ the wheels slacken and stop. This sounds at first hearing most admirable. But let it be noted that the "_enough_" here in question does not mean enough to satisfy human wants. In fact it means precisely the converse. It means enough _not_ to satisfy them, and to leave the selling price of the things made at the point of profit.

Let it be observed also that we have hitherto been speaking as if all things were produced under a monopoly. The objection might at once be raised that with competitive producers the price will also keep falling down towards cost and will not be based upon the point of maximum profit. We shall turn to this objection in a moment. But one or two other points must be considered before doing so.

In the first place in following out such an argument as the present in regard to the peculiar shortcomings of the system under which we live, it is necessary again and again to warn the reader against a hasty conclusion to the possibilities of altering and amending it. The socialist reads such criticism as the above with impatient approval. "Very well," he says, "the whole organization is wrong and works badly. Now let us abolish it altogether and make a better one." But in doing so he begs the whole question at issue. The point is, _can_ we make a better one or must we be content with patching up the old one? Take an illustration. Scientists tell us that from the point of view of optics the human eye is a clumsy instrument poorly contrived for its work. A certain great authority once said that if he had made it he would have been ashamed of it. This may be true. But the eye unfortunately is all we have to see by. If we destroy our eyes in the hope of making better ones we may go blind. The best that we can do is to improve our sight by adding a pair of spectacles. So it is with the organization of society. Faulty though it is, it does the work after a certain fashion. We may apply to it with advantage the spectacles of social reform, but what the socialist offers us is total blindness. But of this presently.