CHAPTER III
ECONOMIC FACTORS AND ORGANIZATION
The purpose of this chapter is to show how wealth is created and how it is distributed among the people.
The Economic Needs of Man.—The most elementary needs of human beings are for food, clothing, and shelter. Until these are satisfied no higher needs can develop. In the lowest stages of barbarism men are content with the satisfaction of these elementary needs alone; but as they obtain a greater mastery over nature and are able to supply these wants more easily, other and higher wants arise within them. As men and women become more intelligent and more refined, they grow discontented with the primitive and coarser kinds of food; they seek more presentable clothing than the skins of wild animals; they replace their rude huts with substantial houses of wood. Step by step, as the human race has advanced in civilization, its needs have become more numerous and more varied. Purely material requirements being satisfied, other and higher demands arise. The spiritual and social aspirations make their appearance. As mankind passes each stage in civilization it finds, through the growing control over nature, that purely material wants can be satisfied with less and less exertion. Men gain their daily bread today with infinitely less effort than in primitive times. The chief reason is that they have learned to act collectively in mastering the forces of nature; in other words they have achieved a high degree of economic organization.
The Economic Motives.—Self-preservation is the first law of nature. The primeval instinct in man is to look out for himself, to protect himself from hunger, thirst, and hardship. This, for the moment, is more important to him than the satisfaction of his social and civic needs. Hence the economic motive, the instinct which prompts him to seek the means of getting a living, is extremely strong. This instinct the lower animals possess as well, but it does not carry them beyond the satisfaction of elementary wants. The birds of the air and the beasts of the fields have never enlarged or raised the scale of their needs beyond the simple requirements of food, drink, and shelter. No matter how easily obtainable these become they make no progress to anything higher. But mankind, endowed with superior mental faculties and a spiritual nature, does not rest content with the easy earning of a livelihood. The economic motive prompts men and women to move on, to achieve wealth, to procure luxuries, and to gain such happiness as the possession of worldly goods can bring. This economic motive, deeply implanted in humanity, has been a great incentive to progress in civilization,—probably the greatest of all incentives.
Let it not be assumed, however, that because the economic motive is strong in man he is an altogether selfish creature. There is also an altruistic motive which impels him to help his fellow-men, even at personal sacrifice. Men desire to gain wealth for themselves, but having gained enough and to spare, they frequently devote much of it to the assistance of those who have not been so fortunate. The higher our civilization the more marked does this spirit of altruism or economic unselfishness become.
The Subject-Matter of Economics.—The study of economics does not concern itself with all the possible wants and aspirations of men. It deals only with the production, distribution, and consumption of those things which satisfy man’s desire for (a) material objects and (b) personal services. In other words economics is a subject which concerns itself with the production, distribution, and consumption of economic goods, a term which includes material possessions known as wealth and also such personal services as have an economic value. Not all things of a material sort are economic goods; air and sunlight, for example, being free to all, require no effort on the part of man to obtain. They are called free goods. We apply the term economic goods only to such things and services as satisfy human wants and are not to be had free. Requiring effort to produce, these economic goods are limited in supply and hence have a value in exchange for other goods. For this reason they are commonly spoken of as wealth. Certain personal services, those of the physician, the lawyer, the foreman, the laborer, also have an economic value in that they are limited in supply, satisfy material wants, and can be exchanged for tangible goods. These services form a part of the economic activities of society, a very important part. So the study of economics includes these personal services as well.
The Consumption of Wealth.—All economic goods are produced for the purpose of being used. This use is what the economist calls consumption. Some economic goods are in finished form, ready for immediate consumption at any time; others are in the form of raw materials or half-finished products not yet ready to be used. Hence we distinguish between present and future economic goods. Economic organization strives to manage matters so that a sufficient supply of economic goods will reach their finished form in time to fill the demands that arise. This demand on the part of the consumers determines the methods and amount of production. If there is no demand for a particular kind of economic goods, these goods will not be intentionally produced. On the other hand a vigorous demand will encourage production and speed up the process of distribution.
So we get back, in the end, to the proposition with which we started, that the purpose of economic activity and organization is to supply human needs. Where the need is felt, the demand arises. When the demand arises, the agencies of supply, namely production and distribution, usually respond. One of the great tasks of economic organization, therefore, is to estimate the probable demand and so influence production and distribution that the supply will neither be excessive nor fall short. If there is an over-supply of any commodity, prices normally will fall. That means that goods may bring less than it costs to produce and to distribute them. One reason for the organization of industry on a large scale under great corporations is that supply can thus be kept closer to demand. At any rate the consumer, by his greater or smaller demand, virtually determines all activities of production and distribution. He is the pivot of the whole economic system.
Whether the demand on the part of the consumer will be larger or smaller depends on three factors. The first is the utility of the goods to him. Economic goods do not have the same utility to all men at all times. The utility of ice on a warm summer day may be considerable; in midwinter it is next to nothing. The utility of eye-glasses to short-sighted men is great; to men of normal sight they have no utility at all. Economic goods may, therefore have a greater or smaller utility depending upon the place, the time, and the consumer. Bear in mind, moreover, that each consumer matches the utility of one commodity with the utility of other commodities which he finds available, and his demand follows the direction of the greater utility. A second factor in demand is the price of the goods. When the price goes up, the demand ordinarily will go down, because some customers will decide that the utility of their money is greater than that of the goods at the increased price. Finally, demand depends in part upon the purchasing power or wealth of the consumers. In prosperous times, when people have plenty of income, the utility of goods seems greater than the utility of money; in times of depression and low incomes the reverse is true. The interaction of these three factors determines the demand.
Economic Production.—Production is the general term applied to all the processes whereby economic goods are adapted to the satisfaction of human wants. We are often told that no man can either create or destroy a single atom of matter. Strictly speaking, therefore, production does not mean the creation of economic goods but the utilization of materials in such a way that they may satisfy the consumers’ demands. This utilization may involve changing their form, as where iron is made into tools or wool into cloth. The miner who takes coal out of the earth; the farmer who makes two blades of grass grow where one grew before; the mason who hews the stone for the building; the baker who makes flour into bread; the manufacturer who takes leather and turns it into shoes—all are engaged in production. So, also, are such workers as statesmen, judges, lawyers, physicians, and teachers. They may not directly produce commodities but their services are essential to the smooth working of the processes of production. The only workers who do not deserve to be called productive laborers are thieves, swindlers, counterfeiters, and other parasites. They often work harder than would suffice to earn them an honest living; but their labor is not productive. They live on what others produce.
The Factors in Production.—There are five factors in production; namely, (1) natural resources (including land); (2) labor; (3) capital; (4) organization and management; (5) government. Natural resources, without the application of labor to them, do not go far in satisfying human wants. Men cannot live on soil, climate, rainfall, and minerals. Nor can labor and natural resources, when one is applied to the other, succeed in producing all the economic goods which people in an advanced stage of civilization require. Capital is also essential—capital in the form of machinery, or in the form of money to support labor during the process of production. These three things, natural resources, labor, and capital must be brought together, furthermore, and kept working in unison. This is where organization, the fourth factor in production, comes in. It borrows the capital, buys the raw materials, sets the labor to work, and markets the products. Government is not commonly looked upon as a factor in production, but it ought to be. Without the protection and regulation which government affords we could not carry on production at high efficiency. It is government that assures to labor, capital, and organization their rightful shares in the joint production and thus affords them the incentive to do their best.
Nature’s Contributions to Production.—Nature contributes to the production of economic goods such things as land, timber, waterways for transportation, minerals, coal and oil, the motive power of steam,—in a word nature provides all the materials and the environment of production. Hence it is fundamentally the most important of all the factors. If one studies the history of those nations which have become great in various periods in history, it will be found that the basis of their material greatness was in practically every case the bounty of nature. Civilization made its first advance in the fertile valleys of the Euphrates and the Nile. Its progress since the dawn of history has been conditioned by man’s success in discovering and using natural resources.
Among the contributions of nature to production some, such as land, can be brought under private ownership. So long as land was plentiful and population scanty there was no occasion for private property in land. When Caesar first came into contact with the Teutonic tribes he found that land was not held in private ownership. Everyone took what he wanted; when the land seemed to be growing exhausted the whole tribe moved on to some other region. But as these tribes grew in number and unoccupied land became less plentiful, common ownership gave way to private ownership. The Anglo-Saxons had reached this stage before they migrated to England.
Land held in private ownership can be bought, sold, and leased. When it is leased, the owner receives for its use a payment known as rent. Rent may be defined as the return which is obtained by the owner of any form of natural resource. This includes not only land but mines, water-powers, trout-streams, and so forth. The return which is received for the use of unimproved land is usually called ground rent, while the return which results from improvements such as buildings upon the land, fences, and drains is called improvement rent. Strictly speaking, this is not rent, but a return upon invested capital. The amount of ground rent paid for any piece of land depends upon its relative fertility, if it is to be used for agriculture, and its location. Location alone determines the ground rent of land in towns and cities.
Labor as a Factor in Production.—What is labor? Is all muscular and mental exertion entitled to be called labor? Mountain climbing involves the most severe sort of bodily effort. Tourists do it for pleasure and guides do it for pay. Is it labor in one case and not in the other? Some men play chess for recreation; others make a living out of it; in either case there is strenuous mental exertion involved. So where does labor begin and end?
No exact answer can be given to that question. One man’s play is another man’s labor,—gardening, fishing, acting on the stage, for example. But economists usually define labor as “human exertion or effort directed toward the creation of economic goods”. This includes mental as well as physical exertion. All who are engaged in the production of material things or personal services for the satisfaction of human wants are engaged in productive labor.
Labor, of course, is of great economic importance. The natural resources of the American continent were as great three hundred years ago as they are today; yet they were practically useless in satisfying human wants because the red man would not and could not bestow his labor upon them. It remained for the white man to transform natural resources into economic goods. This he has done not only by the use of muscular exertion but by the application of intelligence. Labor is never an end in itself; it is always a means to an end, and this end is the satisfaction of human demands.
Division of Labor.—In applying their labor to natural resources men soon found that the best results could be obtained by apportioning different tasks to different workers. This is called the division of labor and it has been one of the great factors in the progress of production. In its simpler form, division of labor merely meant that each workman confined himself to a simple occupation and carried through all the processes of production in that particular trade. The cloth-maker, the shoemaker, the implement-maker performed all the work of making cloth, shoes, or implements from start to finish. This simple division of labor was practiced in very early times. But as the world moved forward a more complex division of labor developed and this is particularly a feature of modern production. In this development the individual worker is assigned to make only a part of a commodity. The making of cloth is no longer a trade, but embodies a series of trades—that of the wool-carder, the spinner, the weaver, the fuller, the dyer, and the finisher. In the modern shoe factory one employee cuts the sole, another trims it, a third turns the heels, a fourth sews the uppers to the sole, and so on. There are more than twenty distinct operations in the making of a factory shoe, each requiring special skill on the part of the worker.
In the time of the Roman empire it is said that only thirty-seven different trades and professions were in existence. Today the number runs into the thousands. It would be practically impossible to make a list of them all. This is the age of specialists. Men no longer call themselves shoemakers but cutters, lasters, welters, sole-makers. Even in the engineering profession we have electrical engineers, civil engineers, mechanical engineers, locomotive engineers, stationary engineers, mining engineers, marine engineers, and chemical engineers.
Advantages and Disadvantages of Division of Labor.—Division of labor has brought many economic advantages. It enables the worker, by constant practice at a single operation, to acquire skill and dexterity. It enables almost every worker to find some task that he is able to do and for which he has a special liking or aptitude. It stimulates the invention of new processes and methods by reducing each operation to the simplest possible form, at which point it can often be taken over by machinery.
But the elaborate division of labor which marks modern industry also has its defects. It increases the monotony and irksomeness of labor. It prevents the development of all-round craftsmen, men who can turn their hands to a variety of things. Hence when a worker in modern industry loses his regular employment it is difficult for him to change to anything else. Confining men and women to a single, simple task day after day and year after year tends to narrow them; it certainly does not conduce to the extension of their intelligence. No great inspiration comes from his work to the man who spends his life in making the nineteenth part of a pin.[13] Division of labor has come to stay, however, and in spite of all these disadvantages the world is on the whole far better for its coming. It has made the production of goods so much easier that to give it up now would carry the world back to primitive conditions and lower the standard of living.
Our aim should be to utilize all its advantages while reducing its evils to the minimum. This we may hope to do by several methods; for example, by reducing the daily hours of labor, by promoting vocational education, by the restriction of child employment, by a better organization of the labor market (see p. 418), and by providing wholesome recreation for the workers.
Is Labor a Commodity?—Labor, as a factor in production, receives its return in the form of wages. A generation ago it was customary to speak of labor as a commodity and to say that the worker “sold his labor” for wages. But labor is not a commodity. The seller of goods parts company with them when he makes a sale; the worker is inseparable from his work. The man who sells shoes cares not who wears them; but it makes some difference to the shoe-worker how and where and for whom he labors. No commodity, moreover, is so perishable as labor. The labor of one day will not keep for sale the next. Hence sales of labor, if we call them such, are in the nature of forced sales. In the case of nearly all commodities, again, the supply can be diminished by stopping production, thereby preventing a drastic fall in price. But the supply of labor cannot be so easily cut down. The analogy between labor and commodities is a poor analogy and it is much better to speak of labor as a personal service. Workers contract with employers for the giving of this service and should receive, in return, not only wages but various assurances as to the conditions under which the service is to be rendered. The Congress of the United States, in the Clayton Act of 1914, declared that “the labor of a human being is not a commodity or article of commerce” and that an organization of workers was not to be regarded, therefore, as a “combination in restraint of trade.”
Wages.—The wages of labor depend fundamentally upon demand and supply. But as the supply of labor is not susceptible to a quick and unlimited increase or reduction, wages depend principally upon demand. When there is an increased demand for economic goods, due to factors which have already been explained (see p. 40), the quest for labor becomes more keen on the part of employers; better terms are offered to the worker; in other words wages go up and the conditions of labor are improved. When the demand for economic goods diminishes the contrary takes place, but in this case the decline in the rate of wages does not, as a rule, keep exact pace with the decrease in demand. Organizations of labor strive to keep wages up and often succeed, temporarily at least, in doing so. During the years 1918-1920, when the demand for economic goods expanded greatly, the wages of labor in the United States went up promptly all along the line. When the turn in the tide came, about the middle of 1920, wages began to fall slowly and their descent has been very gradual. Wages, thus, incline to follow the general course of prices but they show this tendency more clearly when prices are going up than when they are coming down. This is altogether natural, for higher wages conduce to a better standard of living, and when such better standard has been achieved there is objection to any lowering of it.
This suggests that a distinction ought to be drawn between nominal and real wages. Wages, of course, are not an end in themselves; they are merely a means which enables the worker to satisfy his wants. The real utility of wages depends, therefore, upon what they will purchase, and this, again, depends upon the general level of prices. Even if wages, reckoned in dollars, go up fifty per cent, the worker is no better off if the general level of prices also goes up fifty per cent. A worker’s nominal wages are what he receives in dollars; his real wages are reckoned in terms of purchasing-power. The rate of wages should always be studied, therefore, in connection with prices. An increase or decrease in nominal wages may mean much or it may mean very little.
There is a limit below which real wages cannot fall. This is the point at which the worker can manage to maintain himself and his family. Just where this point is, stated in terms of money, no one can say. It varies in different parts of the country. Before the World War the statistics showed that half the adult male workers in this country were earning less than six hundred dollars a year, yet the standard of living among American workmen was higher than that of the workers in any other country. Today it is probable that these same workers are earning more than a thousand dollars. This does not mean, necessarily, that the standard of living has risen, for the amount of nominal wages needed to maintain the pre-war standard is greater because of the rise in prices.
Capital.—Capital is the third factor in production. In primitive industry the application of labor to natural resources produced direct and almost immediate results. The savages who gathered nuts and caught fish with their hands, for example, gained the fruits of their efforts at once. But these direct methods of satisfying their wants did not carry mankind very far. It soon became apparent that men could produce economic goods more easily and more abundantly by indirect methods, that is by the use of tools, implements, machinery, and other labor-saving devices. These made possible the utilization of minerals and other natural resources which could never have been made to serve the wants of man without using the appliances of indirect production. So, as civilization developed, production came to be spread over a considerable period of time, until today it often happens that a whole year intervenes between the first step in production and the sale of the finished article. Consider the articles of daily use, clothes, shoes, furniture, books, and realize how vast has been the series of operations necessary to produce each of them! Many workers have contributed their share, and each of these has had to receive his wages long before the goods passed into the hands of the ultimate consumer.
Now the factor which has enabled production to become indirect and long-spread-out is capital. Capital consists of all the intermediate things which men use in producing economic goods. It includes buildings, materials, machinery, and the money which pays the wages of the workers. The use of capital saves labor by enabling a given amount of it to achieve vastly better results than would be the case if capital did not exist. Capital is really stored-up labor in the form of economic goods which have been produced but not consumed. In other words it is the result of saving. If everything that the world produces were at once consumed, there would be no capital.
Interest on Capital.—Interest is the return paid to the owner of capital for its part in production. It is his recompense for saving his economic goods instead of consuming them. Productive capital is frequently in the form of material things but its value is reckoned in terms of money and a certain per cent per annum is paid on this value in the form of interest. Were it not so, there would be no strong inducement for men to save, and capital would not be forthcoming. The rate of interest depends, in a general way, upon the interaction of demand and supply. If the demand for capital exceeds the supply, the rate of interest will ordinarily go up, and vice-versa. But this does not always take place because capital is sometimes obtained at a fixed rate for a long period, and this rate, whatever it is, remains the same for the duration of such period.
Organization and Management as a Factor in Production.—When labor and capital are brought into play upon natural resources the production of economic goods is the outcome. But these three factors are in separate hands and have to be brought into co-operation. Owners of lands, mines, and forests control the natural resources; another class possesses the capital; a third is in a position to furnish the labor. Organization brings all three into joint action for the production of wealth.
This organization may take any one of several forms. The simplest form of organization is represented by the individual employer, the man who borrows capital (or provides it from his own savings), purchases the raw materials, and hires labor to be applied to it. He is an organizer of the productive process. This system of single employers was nearly universal in the earlier stages of industry and trade. Next comes the partnership. Two or more men assume the task of bringing natural resources, capital, and labor together. The partners divide the work and jointly assume all responsibilities of loss. Finally, and most common in large-scale production nowadays, there is the joint stock company or business corporation in which many persons participate. Each contributes to the organization and takes a proportionate share of the risk.[14] The nature and work of these corporations are explained in a later chapter.
THRIFT AND PROSPERITY. By Frederick Dielman.
Copyright by Frederick Dielman. From a Copley Print, copyright by Curtis & Cameron, Boston. Reproduced by permission.
From a mosaic picture in the Albany Savings Bank, Albany, N.Y.
A mosaic is a decoration formed out of small pieces of natural stone or enamel, of various colors, set in cement. This decoration measures fourteen feet by seven and one-half, the figures being somewhat larger than life size.
Under a fruit tree in a landscape suggesting grain fields and meadows, is a group of figures. The central and principal figure, the mistress of a household with her distaff and spindle, typifies industry and good management; behind her on either side among the hollyhocks are beehives—the conventional emblems of industry and saving.
In the foreground on the left, a woman with a sheaf of wheat at her feet and a sickle in her hand turns toward the keeper of the flocks and herds. At the right, a kneeling maiden lays a basket of fruit near the sheaf of wheat, while a stalwart man, adze in hand, bares his arm for work. All these figures symbolize the different branches of agriculture. The children and the young animals typify the way in which each young generation is nourished by the industry and thrift of its elders.
The whole impression of this picture is one of industry, prosperity, thrift, and—by reason of these three—happiness.
Profits.—The return received by the organizers and managers of productive enterprises is commonly known as profit. The amount of their profit depends upon the degree of success with which they can produce goods for less than the selling price. Every employer or organizer assumes a considerable amount of risk. He obligates himself to pay definite amounts for the use of capital, materials, and labor no matter what the value of the finished products. If this value be less than the cost of production, he loses; if it be more, he gains. Losses, if continued, mean bankruptcy. Gains are profits and, if continued, make him rich. It will be seen, therefore, that the employers or organizers of production take more risk than those who supply the materials, the capital, or the labor. |What determines the rate of profits.| Their success, in other words their rate of profits, depends in general upon the degree of managing and organizing ability which they display; but it sometimes happens that profits will be high in all branches of production for a time irrespective of the employer’s skill. The price of the finished product may rise without an immediate and proportionate increase in the cost of materials, interest, and wages. This situation, while it continues, affords an opportunity for abnormal profits or “profiteering” as it is often called. Abnormal profits may also be due to the existence of a monopoly in a particular form of production.
Government as a Factor in Production.—It has not been customary to speak of government as one of the essential factors in production, but a few moments’ reflection will show that its part in the process of industry and trade is very important. To begin with, the government determines what forms of production may be carried on and by what methods. It forbids certain forms, such as the making of intoxicants, and strictly limits others, such as the manufacture of narcotics. It gives to some individuals and corporations the exclusive right to produce certain articles under patents. It determines the forms of business organizations, the responsibilities of employers, the rules relating to partnership, and the powers of corporations. It sets a limit upon the rate of interest by means of usury laws and through its banks may virtually control the rate (see p. 438). The government, moreover, makes rules for the conservation of natural resources and to some extent fixes the relation between the employer and his workers. At times it even fixes prices. It provides courts and commissions for the settlement of disputes affecting production. Finally, the whole system of private property rests upon the support of the government.
What return does the government get for these services to production? Offhand, one might say that the government receives its return in taxes. In a sense this is true, for taxes, like interest, wages, and profits, must be paid from the selling price of goods. Taxes, indeed, must be provided for before profits can be determined. But it is not usual, nor is it accurate, to speak of taxes as a reward or return for services which the government renders. Revenue in the form of taxation is essential in order that a government may function properly, yet there is no close relation between the rate of taxation and the amount of service given. This whole question of taxation, in theory and in practice, will be discussed further on.
Some Essential Economic Activities
Exchange.—It has been shown that several factors in production are each entitled to their share. This share is reckoned in terms of money because every producer gets his own return in terms of money. In other words goods are exchanged for money, and money in turn is exchanged for other goods or service. This mechanism of exchange engages the energy of a great many individuals and institutions, such as wholesalers, retailers, brokers, and banks. Economic goods would have relatively little value if they could not be translated into money and thus distributed from hand to hand. No one, as a rule, can live and flourish by consuming exactly what he produces and nothing else. He must use his share in what he produces as purchasing-power to secure whatever best satisfies his own wants. Money is the lubricant which facilitates this; in a word, it is the medium of exchange.
Value and Price.—Exchange takes place on a basis of relative values. He who sells goods or services receives something of assumed equal value in return. But what is value? The term value is employed in two different senses, value in use and value in exchange. By the former we mean the intrinsic utility of a thing. Air and sunlight, for example, have a high value in use; they are indispensable to life in fact; but they have no value in exchange. When the economist speaks of value he means value in exchange or market value, that is to say the ratio in which one commodity or service will exchange for other commodities. If a ton of coal can be exchanged for a large quantity of cloth, or food, or labor, its value is high; if it can be exchanged for only small amounts of these other commodities, its value is said to be low.
But price is quite another thing. The price of a commodity is the ratio at which it will exchange, not for all other goods and services but for one specific thing, namely, money. Price is value expressed in terms of the medium of exchange. We habitually translate our economic goods into terms of money before we buy or sell them. A general rise or fall in prices is quite possible, for this is merely another way of saying that money will buy less or more of all other things. It is immaterial whether we say that prices have gone up or that money has gone down; we mean exactly the same thing.
Competition and Monopoly.—Exchange is conducted, for the most part, under free competition. Buyers give as little as they can in money for goods; sellers get as much as they can. When goods bring higher prices, more will be produced until prices are forced down again; if prices fall, production will decline until the reduction in supply serves to bring them up again. This is the theory of free competition. In practice, however, it does not always work so automatically. Some things, such as diamonds and platinum, cannot be produced in unlimited quantities no matter how much labor, capital, and organization we may apply. Other things are legal monopolies, or patented articles, which can be produced by only one concern and are not subject to the direct influence of competition. Still others are natural monopolies due to the fact that from the nature of things only one concern can produce the goods or render the service. A telephone company, for example, has a natural monopoly. Competition involves a complete duplication of the service. It means that many subscribers have to put two telephones in their stores or homes in order to get into full touch with other users of telephones. The net cost of telephone service to customers cannot be reduced in this way. Finally, some things are the subject of artificial monopoly, that is to say, they are produced or distributed under arrangements which restrict or eliminate competition (see pp. 386-388).
All these forms of monopoly interfere with free competition and they cover a great many of the things which are in common use by the people.[15] Recent investigations have shown that the number of commodities which are either wholly or in large part controlled by monopolistic combines is larger than people commonly realize. A certain amount of legal monopoly is essential in order to encourage research and invention.[16] Men will not strive to invent new machines and appliances if the invention at once becomes common property. Natural monopolies arise from the essential nature of things and it is difficult to see how most of them can ever be avoided. We cannot very well have two competing street railways on the same street, for example. There would then be little room in the street for anything else. Artificial monopolies are often objectionable because they enable a few persons or corporations to obtain excessive prices from the public; but even an artificial monopoly can in some cases be advantageous. Occasionally some corporation, by producing things on a very large scale, is able to do it so cheaply that small producers are driven out of business. The large concern then finds that it has become a monopoly, but so long as it does not arbitrarily raise prices the public is not injured by the mere fact that a monopoly exists.
Freedom of Contract.—An outstanding characteristic of modern economic organization is the encouragement of private enterprise through freedom of contract. By the laws of the land the worker is not forced to take employment from anybody; he may contract with whomsoever he pleases. He may even join with other workers in a union and make a collective bargain, that is, a group of workers, large or small, may contract with one or more employees or with a group of employers. The employer, on his side, is not forced to hire anybody; he also has freedom of contract. It is true, of course, that this legal theory of individual freedom does not find complete exemplification in actual practice. The right of the wage-earner to bargain collectively is not everywhere conceded by employers; the right of the employer to hire non-union men is not everywhere conceded by the unions (see p. 406). The landlord is not obliged to rent his house, nor the tenant to stay against his will. Both are bound by the terms of their contract and no more. Buying and selling are conducted with similar freedom. All this affords a great spur to private initiative. Everyone depends for his own prosperity and advancement upon the skill with which he can use his freedom. A well-known English writer, Sir Henry Maine, once declared that the progress of civilization has been a movement from status to contract. He meant that in primitive times all men had their careers virtually determined for them by the station in which they were born. The child of a noble became a nobleman; the child of a peasant remained a peasant through life. In modern economic society the individual’s own efforts, exerted through his freedom to contract with others for his own advantage, count far more heavily in determining his ultimate station in life.
Private Property.—Freedom of contract would prove a poor incentive to progress were it not accompanied by a provision whereby industrious men can enjoy the fruits of their labor and thrift. Hence we guarantee to every man not only the right to earn but the right to save, for future enjoyment, a portion of his earnings. These savings become his property and within certain limits he may use them as he pleases. He may utilize his savings during his own lifetime or leave them to his children when he dies. Savings may take the form of private property in land and buildings, or movable goods, or such investments as bonds, stocks, mortgages, and bank deposits. Property in land and buildings is commonly known as real property or real estate. All other forms of property are called personal property. Sometimes we distinguish between two kinds of personal property, tangible, which includes all goods and chattels, and intangible, which comprises stocks, bonds, mortgages, notes, deposits, and other obligations.
The institution of private property is the basis of our whole economic system. No nation has ever enjoyed industrial prosperity for any length of time without recognizing the right of private property. Destroy this right and you take away what now constitutes the chief incentive to labor, saving, and industrial efficiency. Under a socialistic system, which would either abolish or largely curtail this right of private property, it is argued that other incentives would take the place of the motive now furnished by private property and that men would keep on working and organizing even if private property were entirely abolished; but this is a large question and its discussion must be relegated to a later chapter.
In any case most men are now agreed that the right of private property cannot be left unfettered; it must be guarded against abuse. Society cannot wisely permit it to stand as an obstacle to the general interest. Even the right of private property, therefore, must bend to the good of the community. Men are allowed to own property because their doing so promotes the well-being of the whole people; the right should not go further than that. It is for this reason that we place various restrictions upon the right of private property, restrictions in the interest of the public health, or for protection against fire, or for the preservation of public morals. No one has the right to own and maintain property that constitutes a public nuisance, such as an unsanitary tenement house, for example, or a building that forms a fire trap. The right of private property is entitled to respect only in so far as it is exercised in keeping with its prime purpose, which is to advance the interests of the whole people by giving each individual a sufficient incentive to work and to save.
H. C. Adams, Description of Industry, pp. 3-117; F. W. Taussig, Principles of Economics, Vol. I, pp. 1-110; H. R. Seager, Introduction to Economics, 4th ed., pp. 1-121; R. T. Ely, Outlines of Economics, 3rd ed., pp. 1-98; C. J. Bullock, Introduction to the Study of Economics, pp. 115-179; 375-431; H. R. Burch, American Economic Life, pp. 1-37; 71-80; 315-335; T. N. Carver, Principles of National Economy, pp. 3-46.