The losses of various kinds that would result from the transfer of other taxes to land may be thus summarised. Land would depreciate in value by an amount equal to the capitalised tax. For example; if the rate of interest were five per cent., an additional tax of one per cent. would reduce land worth one hundred dollars an acre to eighty dollars. This decline might, indeed, be partly, wholly, or more than offset by a simultaneous rise due to economic forces. In any case, however, the land would be worth twenty dollars less than it would have been worth had the tax not been imposed. For some owners this would mean a positive loss; for others it would signify mere failure to gain. The latter would happen in the case of all those owners who at any time after the imposition of the tax sold their land at as high a price as they had paid for it. Not all of the owners whose land was forced by the tax to a figure below their purchase price would suffer positive loss; for the land might subsequently rise in value sufficiently to wipe out the unfavourable difference. In this respect a special tax on the present value of land has a different effect from a tax that appropriates all the future value increases. Only those owners who actually sold their land below their purchase price could charge the former tax with inflicting upon them positive losses. In the case of the land exemplified above, the owner who sold at ninety dollars per acre could properly attribute to the tax a loss of ten dollars; the owner who sold at eighty dollars would have a grievance amounting to twenty dollars; and a loss would be suffered by any owner who sold for less than eighty dollars. In the second place, all owners of vacant land who sold at a price insufficient to provide for accumulated interest on the purchase price, could justly hold the tax responsible, so long as the deficiency did not exceed the value-depreciation caused by the tax. Thirdly, all persons whose land had an unusually high value relatively to the value of their exempted property, would suffer losses as taxpayers. They would lose more through the heavier land taxes than they would gain through the lighter taxes, or the absence of taxes, on their other property.
To compensate all owners who underwent these three kinds of losses would be practically impossible. The number of persons would be too large, the difficulty of proving many of the claims would be too expensive, and the compensation process would be too long drawn out, since it would have to continue until the death of all persons who had owned land when the last instalment of the increased land taxes went into effect. Therefore, the losses in question must be counterbalanced by other and indirect methods. These will be found mainly in the following considerations: the amount of the new taxes; the gradual method of imposing them; and their socially beneficial results.
According to Professor King's computations, the total rent of land in the United States in 1910 was $2,673,900,000, while the total expenditures of national, state, county and city governments were $2,591,800,000.[100] In his opinion (p. 162) "the rent would have been barely sufficient to pay off the various governmental budgets as at present constituted, and with the growing concentration of activities in the hands of the government, it appears that rent will soon be a quantity far too small to meet the required changes. With increasing pressure on our natural resources, however, it is probable that the percentage of the total income paid for rent will gradually increase and, since this is true, the lag behind the growing governmental expenses will be considerably less than would otherwise be the case."
A change in our fiscal system providing for the immediate derivation of all revenues from land taxes would, therefore, involve the confiscation of all rent, and the destruction of all private land values. Land would be worth nothing to the owners when its entire annual return was taken by the State in the guise of taxes. Even if the process of imposing the new taxes on land were extended over a long term of years the same result would be reached in the end; for whatever increase had taken place in the economic value of land during the process would in all probability have been neutralised by the increase in governmental expenditures. It is evident, therefore, that the proposal to put all taxes on land must be rejected on grounds of both morals and expediency.
Let us suppose that all national revenues continued, as now, to be raised from other sources than land, and that all state, county, and city revenues remained as they are, except those derived from the general property tax. This would mean that all the following taxes would be unchanged: all federal taxes, the taxes on licenses of all kinds, all taxes on business, incomes, and inheritances, and all special property taxes. If, then, the whole of the general property tax were concentrated on land; that is, if all the taxes on improvements and on all forms of personal property were legally shifted to land,—the entire revenue to be raised from land would in 1912 have amounted to $1,349,841,038.[101] This is slightly more than one-half of Professor King's estimate of the total rent for 1910, which was $2,673,900,000. But this figure equals four per cent. of the land values of the country; hence the concentration of the general property tax on land would mean a tax rate of two per cent. on the full value of the land.
How much would this change increase the present rate of land taxes, and decrease existing land values? While no accurate and definite answer can be given to either of these questions, certain approximations can be attempted which should be of considerable service.
In 1912 the average tax rate on the assessed valuation of all goods subject to the general property tax was .0194, or $19.40 per thousand dollars.[102] The assessed valuation of taxed real property and improvements (land, buildings, and other improvements) was nearly fifty-two billion dollars, while the true value of the same property was nearly ninety-eight and one-half billions.[103] Consequently, the actual tax rate of .0194 on the assessed valuation was exactly one per cent. on the true value of real estate. On the assumption that both land and improvements were undervalued to the same extent, the land tax was one per cent. of the full value of the land. If now we take Thomas G. Shearman's estimate, that land values form sixty per cent. of the total value of real estate, we find that the taxes derived from land constituted only forty-four per cent. of the total revenues raised by the general property tax. To concentrate the whole of the general property tax on land, by transferring thereto the taxes on improvements and on personal property, would, accordingly, cause the land tax to be somewhat more than doubled. It would be slightly above two per cent. on the full value of the land. This is the same estimate that we obtained above by a different process; that is, by comparing Professor King's estimate of land value and rent with the total revenues derived from the general property tax.
However, it is not improbable that sixty per cent. is too low an estimate of the ratio of land values to entire real estate values. In 1900, farm land and improvements, exclusive of buildings, formed 78.6 per cent. of the value of real estate, i.e., land, improvements, and buildings. In 1910, the per cent. was a little less than 82. Now it is quite unlikely that the value of non-building improvements on farms amounted to the difference between sixty per cent. and seventy-eight per cent. in 1900, or between sixty per cent. and eighty-two per cent. in 1910. Hence the value of farm land is something more than sixty per cent. of farm real estate. On the other hand, the value of factory land in 1900 formed only 41.5 per cent. of the total value of factory land and buildings, while the value of city and town lots in five rural states varied from 34 to 62 per cent. of this species of real estate.[104] In Greater New York land constitutes 61 per cent. of real estate values.[105] Owing to the lack of data, the average ratio for all kinds of real estate for the whole country is impossible of determination. If the estimate of seventy per cent. be adopted, which is probably the upper limit of the average proportion between land values and real estate values throughout the country, the portion of the general property tax now paid by land amounts to about fifty-two per cent. Consequently the imposition of the whole general property tax on land would not quite double the present rate on land. To the first of the two questions raised above the answer can be given with a fair amount of confidence that the transfer of improvement and personal property taxes to land would cause land taxes to be about twice what they are at present.
To the second question, concerning the extent to which land values would fall in consequence of the heavier taxes, the answer must be somewhat less definite. The added land taxes would be about one-half the present general property taxes, or $675,000,000. This is about one per cent. the total land values of the country. One per cent. of land values capitalised at five per cent. represents a depreciation of twenty per cent. in the value of land; capitalised at four per cent., it represents a depreciation of twenty-five per cent. For example; if land worth one hundred dollars an acre returns to its owner a net income of five dollars annually, the appropriation of one dollar by a new tax will leave a net revenue of only four dollars; capitalised at the current rate of five per cent., this represents only eighty dollars of land value, or a depreciation of twenty per cent. If the land has the same value of one hundred dollars, and still yields only four dollars revenue, a deduction of one dollar in new taxes will leave only three dollars net; capitalised at the current rate of four per cent., this represents only seventy-five dollars of land value, or a depreciation of twenty-five per cent. Using the other method of calculation, which estimated the present tax rate on the full value of land at one per cent., we get exactly the same results; namely, the new tax is one per cent., which is equivalent to a depreciation of twenty per cent. or of twenty-five per cent., according as we assume an interest rate of five per cent. or of four per cent. Suppose, however, that the assessors do not undervalue land to the extent that we have been assuming; suppose that the present rate of .0194 on assessed valuation is equivalent to, not merely one per cent., but one and one-half per cent. of the full value of land. In that hypothesis the additional tax would likewise be one and one-half per cent., which capitalised at five per cent, would represent a depreciation of thirty per cent., and at four per cent. a depreciation of thirty-seven and one-half per cent. Combining in one generalisation the various suppositions made in this paragraph, we estimate the depreciation of land values resulting from the proposed tax transfer as somewhere between twenty and forty per cent.
We have considered two hypothetical transfers of taxes to land. The first we found to be out of the question because it would appropriate the whole of the rent and destroy all private land values. The second would apparently amount to two per cent. of the value of land, and cause land values to depreciate from twenty to forty per cent. It is unnecessary to consider the probable effects of any plan that would involve heavier land taxes than the second; that is, the scheme of imposing all the general property tax on land; for it represents the extreme feasible and fair limit of the movement within, at any rate, the next fifteen or twenty years.
Even this degree of tax transference would be unjust to the landowners if it were brought about at once. No social or other considerations exist that would justify a depreciation in land values of from twenty to forty per cent. If, however, the process were extended over a period of, say, twenty years, the decline would be only one or two per cent. annually, which is considerably less than the rate at which farm lands and the land in large cities have risen in value during recent years. Under such an arrangement the great majority of owners would probably find that the depreciation caused by the heavier land taxes, had been more than offset by the upward tendency resulting from the increased demand for land.
Nevertheless, there would still be positive losses of the three kinds described a few pages back; namely, to owners who sold land below the price that they had paid for it; to owners who sold vacant land at a price insufficient to cover accumulated interest on the investment; and to owners whose aggregate tax burdens were increased. Some degree of each of these sorts of losses would be due specifically to the new land taxes. As noted above, public compensation in all such cases would be impracticable. Consequently the justification of a law that inflicts such losses must be found, if it exists, in social considerations.
These may be summed up under three heads: making land easier to acquire; cheapening the products and rent of land; and reducing the burdens of taxation borne by the poorer and middle classes. An increase in the tax on land would reduce its value and price, or at least cause the price to be lower than it would have been in the absence of the tax. This does not mean that land would be more profitable to the purchaser, since he is enabled to buy it at a lower price only because it yields him less net revenue, or because it is less likely to increase in value. The value of land is always determined by its revenue-producing power, and by its probabilities of price-appreciation. Consequently, what the purchasers would gain by the lower price resulting from the new tax, they would lose when they came to pay the tax itself, and when they found the chances of value increases diminished. If a piece of land which brings a return of five dollars a year costs one hundred dollars before the new tax of one per cent. is imposed, and can be bought for eighty dollars afterward, the net interest on the purchase price has not changed. It is still five per cent. Hence the only advantage to the prospective purchaser of land in getting it cheaper consists in the fact that he can obtain it with a smaller outlay of capital. For persons in moderate circumstances this is a very important consideration.
In the second place, higher taxes would cause many existing owners either to improve their land, in order to have the means of meeting the added fiscal charges, or to sell it to persons who would be willing to make improvements. And the desire to erect buildings and other forms of improvements would be reinforced by the reduction or abolition of taxes on those kinds of personal property which consist of building materials. An increase in the rapidity of improvements on land would mean an increase in the rate at which land was brought into use, and therefore an unusual increase in the volume of products. This virtual increase in the supply of land, and actual increase in the supply of products, would cause a fall in three kinds of prices: the price of products, the rent of land, and the price of land. The last named reduction would be distinct from the reduction of land value caused in the first instance by the imposition of the tax.
In the third place, the reduction, and finally the abolition, of taxes on improvements and personal property would be especially beneficial to the poorer and middle classes because they now pay a disproportionate share of these charges. Lower taxes on dwellings would mean lower rents for all persons who did not own their homes, and lower taxes for all owners whose residence values were unusually large relatively to their land values. And the tendency to lower rents on dwellings would be reinforced by the lower cost of building materials resulting, as noted above, from the increased supply and the lower tax on this form of personal property. Lower taxes on that species of personal property which consists of consumers' goods, such as household furniture and wearing apparel, would lessen the present inequity of taxation because this class of goods is reached to a much greater extent in the case of the poor than in the case of the rich. It is not easy to conceal or to undervalue a relatively small number of simple and standard articles; but diamonds, costly furniture, and luxurious wardrobes can be either hidden, or certified to the assessor at a low valuation. As for those forms of personal property which are of the nature of capital and other profit producing goods, such as machinery and tools of all kinds, productive animals, money, mortgages, securities, the stocks of goods held by manufacturers and merchants, and likewise buildings which are used for productive purposes,—the taxes on all these kinds of property are for the most part shifted to the consumer. The latter ultimately pays the tax in the form of higher prices for food, clothing, shelter, and the other necessaries and comforts of life.[106] Now a tax on consumption is notoriously unfair to the poorer and middle classes because it affects a greater portion of their total expenditures, and takes a larger per cent. of their income than in the case of the rich. Hence the removal of the taxes specified in this paragraph would be at once the abolition of a fiscal injustice, and a considerable assistance to the less fortunate classes.
All those landowners who occupied rented dwellings would benefit by the reduction in house rent, and all landowners without exception would reap some advantage from the reduction or abolition of the taxes on consumers' goods and on the various forms of producers' goods. It is not improbable that a considerable proportion of them would gain as much in these respects as they would lose in the capacity of landowners.
Would the social benefits summarily described in the foregoing paragraphs be sufficient to justify the increased land taxes in the face of the losses that would be undergone by some landowners in the three ways already specified? In view of our ignorance concerning the probable amount of benefits on the one hand and losses on the other, it is impossible to give a dogmatic answer. However, when we reflect on the manifold social evils that are threatened by a rapid and continuous increase in land values, and the resulting decrease in the proportion of the population that can hope to participate in the ownership of land, we are forced to conclude that some means of checking both tendencies is urgently necessary for the sake of social justice and social peace. The project that we have been considering; namely, the transfer of taxes on improvements and on personal property to land by a process extending over twenty years, seems to involve a sufficiently large amount of advantage and a sufficiently small amount of disadvantage to justify systematic and careful experiment.
Every estate containing more than a maximum number of acres, say, ten thousand, whether composed of a single tract or of several tracts, could be compelled to pay a special tax in addition to the ordinary tax levied on land of the same value. The rate of this supertax should increase with the size of the estate above the fixed maximum. Through this device large holdings could be broken up, and divided among many owners and occupiers. For several years it has been successfully applied for this purpose in New Zealand and Australia.[107] Inasmuch as this tax exemplifies the principle of progression, it is in accord with the principles of justice; for relative ability to pay is closely connected with relative sacrifice. Other things being equal, the less the sacrifice involved, the greater is the ability of the individual to pay the tax. Thus, the man with an income of ten thousand dollars a year makes a smaller sacrifice in giving up two per cent. of it than the man whose income is only one thousand dollars; for the latter case the twenty dollars surrendered represent a privation of the necessaries or the elementary comforts of life, while the two hundred dollars taken from the rich man would have been expended for luxuries or converted into capital. While the incomes of both are reduced in the same proportion, their satisfactions are not diminished to the same degree. The wants that are deprived of satisfaction are much less important in the case of the richer than in that of the poorer man. Hence the only way to bring about anything like equality of sacrifice between them is to increase the proportion of income taken from the former. This means that the rate of taxation would be progressive.[108]
It is in order to object that the principle of progression should not be applied to the taxation of great landed estates, since a considerable part of them is unproductive, and consequently does not directly affect sacrifice. But the same objection can be urged against any taxation of unoccupied land. The obvious reply is that the equal taxation of unproductive with productive land is justified by social reasons, chiefly, the unwisdom of permitting land to be held out of use. The same social reasons apply to the question of levying an exceptionally high tax on large estates, even though they may at present produce no revenue.
While the tax is sound in principle, it is probably not much needed in America in connection with agricultural or urban land. Its main sphere of usefulness would seem to be certain great holdings of mineral, timber, and water power lands. "There are many great combinations in other industries whose formation is complete. In the lumber industry, on the other hand, the Bureau now finds in the making a combination caused, fundamentally, by a long standing public policy. The concentration already existing is sufficiently impressive. Still more impressive are the possibilities for the future. In the last forty years concentration has so proceeded that 195 holders, many interrelated, now have practically one-half of the privately owned timber in the investigation area (which contains eighty per cent. of the whole). This formidable process of concentration, in timber and in land, clearly involves grave future possibilities of impregnable monopolistic conditions, whose far reaching consequences to society it is now difficult to anticipate fully or to overestimate."[109] In January, 1916, the Secretary of Agriculture called the attention of Congress to the fact that a small number of corporations closely associated in a policy of community of interest were threatening to secure and exercise a monopoly over the developed water power of the country. Ninety per cent. of the anthracite coal lands of Pennsylvania are owned or controlled by some nine railroads acting as a unit in all important matters. For situations of this kind a supertax on large estates would seem to hold the promise of a large measure of relief.
To sum up the main conclusions of this very long chapter: Exceptionally valuable lands, as those containing timber, minerals, oil, gas, phosphate, and water power, which are still under public ownership should remain there. Through a judicious system of loans, deserving and efficient persons should be assisted to get possession of some land. Municipalities should lease rather than sell their lands, and should strive to increase their holdings. To take all the future increases in the value of land would be morally lawful, provided that compensation were given to owners who thereby suffered positive losses of interest or principal. To take a small part of the increase, and to transfer very gradually the taxes on improvements and on personal property to land, would probably be just, owing to the beneficial effects upon public welfare. A supertax on large holdings of exceptionally valuable and scarce land would likewise be beneficial and legitimate.[110]
REFERENCES ON SECTION I
Ashley: The Origin of Property in Land. London; 1892.
Laveleye: Primitive Property. London; 1878.
Whittaker: The Taxation, Tenure, and Ownership of Land. London; 1914.
Preuss: The Fundamental Fallacy of Socialism. St. Louis; 1908.
George: Progress and Poverty; and A Perplexed Philosopher.
Marsh: Land Value Taxation in American Cities. N. Y.; 1911.
Fillebrown: A Single Tax Handbook for 1913. Boston; 1912.
Young: The Single Tax Movement in the United States. Princeton; 1916.
Shearman: Natural Taxation. N. Y.; 1898.
Mathews: Taxation and the Distribution of Wealth. N. Y.; 1914.
Cathrein: Das Privatgrundeigenthum und seine Gegner. Freiburg; 1909.
Fallon: Les Plus-Values et l'Impot. Paris; 1914.
Nearing: Anthracite. Philadelphia; 1916.
Haig: Final Report of the Committee on Taxation of the City of New York; 1916.
The exemption of Improvements from Taxation in Canada and U. S.; 1915.
Some Probable Effects of Exemption in City of New York; 1915.
Kelleher: Private Ownership. Dublin; 1911.
Proceedings of the 1913 Meeting of the American Economic Association.
U. S. Commissioner of Corporations: Reports on the Lumber, Petroleum, Steel, and Water Power of the United States.
Seligman: Essays in Taxation; Shifting and Incidence of Taxation; and Progressive Taxation in Theory and Practice.
Also the works of Taussig, Devas, Carver, Pesch, King, Vermeersch, Willoughby, and the Commission on Industrial Relations, all of which are cited at the end of the introductory chapter.
SECTION II
THE MORALITY OF PRIVATE CAPITAL AND INTEREST
Interest denotes that part of the product of industry which goes to the capitalist. As the ownership of land commands rent, so the ownership of capital commands interest; as rent is a price paid for the use of land, so interest is a price paid for the use of capital.
However, the term capital is less definite and unambiguous, both in popular and in economic usage, than the word land. The farmer, the merchant, and the manufacturer often speak of their land, buildings, and chattels as their capital, and reckon the returns from all these sources as equivalent to a certain per cent. of interest or profit. This is not technically correct; when we use the terms capital and interest we should exclude the notions of land and rent.
Capital is ordinarily defined as, wealth employed directly for the production of new wealth. According as it is considered in the abstract or the concrete, it is capital-value or capital-instruments. For example, the owner of a wagon factory may describe his capital as having a value of 100,000 dollars, or as consisting of certain buildings, machines, tools, office furniture, etc. In the former case he thinks of his capital as so much abstract value which, through a sale, he could take out of the factory, and put into other concrete capital forms, such as a railroad or a jobbing house. In the latter case he has in mind the particular instruments in which his capital is at present embodied. The capital-value concept is the more convenient, and is usually intended when the word capital is used without qualification. It is also the basis upon which interest is reckoned; for the capitalist does not measure his share of the product as so many dollars of rent on his capital-instruments, but as so many per cent. on his capital-value.
Capitalists are of two principal kinds: those who employ their own money in their own enterprises; and those who lend their money to others for use in industry. The former may be called active capitalists, the latter loan-capitalists. Perhaps a majority of active capitalists use some borrowed money in their business. To the lenders of this borrowed money or capital they turn over a part of the product in the form of interest. When, therefore, interest is defined as the share of the product that goes to the capitalist, it is the owner of capital-value rather than of capital-instruments that is meant. For the man who has loaned 50,000 dollars at five per cent. to the wagon manufacturer is not, except hypothetically, the owner of the buildings which have been erected with that money. These are owned (subject possibly to a mortgage) by the borrower, the active capitalist. But the abstract value which has gone into them continues to be the property of the lender. As owner thereof, he, instead of the active capitalist, receives the interest that is assigned to this portion of the total capital. Hence interest is the share of the product that is taken by the owner of capital, whether he employs it himself or lends it to some one else. While the fundamental reason of interest is the fact that certain concrete instruments are necessary to the making of the product, interest is always reckoned on capital-value, and goes to the owner of the capital-value. It goes to the man whose money has been put into the instruments, whether or not he is the owner of the instruments.
Interest is the share of the capitalist as capitalist. The man who employs his own capital in his own business receives therefrom in addition to interest other returns. Let us suppose that some one has invested 100,000 dollars of borrowed money and 100,000 dollars of his own money in a wholesale grocery business. At the end of the year, after defraying the cost of labour, materials, rent, repairs, and replacement, his gross returns are 15,000 dollars. Out of this sum he must pay five thousand dollars as interest on the money that he has borrowed. This leaves him a total amount of ten thousand dollars, as his share of the product of the industry. Since he could command a salary of three thousand dollars if he worked for some one else, he regards his labour of directing his own business as worth at least this sum. Deducting it from ten thousand dollars, he has left seven thousand dollars, which must in some sense be accredited as payment for the use of his own capital. However, it is not all pure interest; for he runs the risk of losing his capital, and also of failing to get the normal rate of interest on it during future unprosperous years. Hence he will require a part of the seven thousand dollars as insurance against these two contingencies. Two per cent. of his capital, or two thousand dollars, is not an excessive allowance. If the business did not provide him with this amount of insurance he would probably regard it as unsafe, and would sell it and invest his money elsewhere. Subtracting two thousand dollars from seven thousand, we have five thousand left as pure interest on the director's own capital. This is equivalent to five per cent., which is the rate that he is paying on the capital that he has borrowed. If he could not get this rate on his own money he would probably prefer to become a lender himself, a loan capitalist instead of an active capitalist. This part of his total share, then, and only this part, is pure interest. The other two sums that he receives, the three thousand dollars and the two thousand dollars, are respectively wages for his labour and insurance against his risks. Sometimes they are classified together under the general name of profits.
Let us suppose, however, that the gross returns are not 15,000 dollars, but 17,000. How is the additional sum to be denominated? In strict economic language it would probably be called net profits, as distinguished from normal or necessary profits, which comprise wages of direction and insurance against loss. Sometimes it is called interest. In that case the owner of the store would receive seven instead of five per cent, on his own capital. Whether the extra two per cent. (2,000 dollars) be called net profits or surplus interest, is mainly a matter of terminology. The important thing is to indicate clearly that these terms designate the surplus which goes to the active capitalist in addition to necessary profits and necessary interest.
At the risk of wearisome repetition, one more example will be given to illustrate the distinction between interest and the other returns that are received in connection with capital. The annual income from a railway bond is interest on lender's capital, and consequently pure interest. Ordinarily the bondholder is adequately protected against the loss of his capital by a mortgage on the railroad. On the other hand, the holder of a share of railway stock is a part owner of the railroad, and consequently incurs the risk of losing his property. Hence the dividend that he receives on his stock comprises interest on capital plus insurance against loss. It is usually one or two per cent. higher than the rate on the bonds. Since the officers and directors are the only shareholders who perform any labour in the management of the railroad, only they receive wages of management. Consequently the gross profits are divided into interest and dividends at fixed rates, and fixed salaries. When a surplus exists above these requirements it is not, as a rule, distributed among the stockholders annually. In railroads, therefore, and many other corporations, interest is easily distinguished from those other returns with which it is frequently confused in partnerships and enterprises carried on by individuals.
Is there a single rate of interest throughout industry? At first sight this question would seem to demand a negative answer. United States bonds pay about two per cent.; banks about three per cent.; municipal bonds about four per cent.; railway bonds about five per cent.; the stocks of stable industrial corporations about six per cent. net; real estate mortgages from five to seven per cent.; promissory notes somewhat higher rates; and pawnbrokers' loans from twelve per cent. upwards. Moreover, the same kind of loans brings different rates in different places. For example, money lent on the security of farm mortgages yields only about five per cent. in the states of the East, but seven or eight per cent. on the Pacific coast.
These and similar variations are differences not so much of interest as of security, cost of negotiation, and mental attitude. The farm mortgage pays a higher rate than the government bond partly because it is less secure, partly because it involves greater trouble of investment, and partly because it does not run for so long a time. For the same reasons a higher rate of interest is charged on a promissory note than on a bank deposit certificate. Again, the lower rates on government bonds and bank deposits are due in some degree to the peculiar attitude of that class of investors whose savings are small in amount, who are not well aware of the range of investment opportunities, and to whom security and convenience are exceptionally important considerations. If such persons did not exist the rates on government bonds and savings deposits would be higher than they actually are. The higher rates in a new country on, say, farm mortgages are likewise due in part to psychical peculiarities. Where men are more speculative and more eager to borrow money for industrial purposes, the demand for loans is greater relatively to the supply than in older and more conservative communities. Therefore, the price of the loans, the rate of interest, is higher.
In one sense it would seem that the lowest of the rates cited above, namely, that on United States bonds, represents pure interest, and that all the other rates are interest plus something else. Nevertheless, the sums invested in these bonds form but a very small part of the whole amount of money and capital drawing interest, and they come from persons who do not display the average degree either of business ability or of willingness to take risks. Hence it is more convenient and more correct to regard as the standard rate of interest in any community that which is obtained on first class industrial security, such as the bonds of railroads and other stable corporations, and mortgages on real estate. Loans to these enterprises are subject to what may properly be called the average or prevailing industrial risks, are negotiated in average psychical conditions, and embrace by far the greater part of all money drawing interest; consequently the rate that they command may be looked upon as in a very real and practical sense normal. While this conception of the normal rate is in a measure conventional, it accords with popular usage. It is what most men have in mind when they speak of the prevailing rate of interest.
The prevailing or standard rate in any community can usually be stated with a sufficient approach to precision to be satisfactory for all practical purposes. In all the Eastern States it is now about five per cent.; in the Middle West it is somewhere between five and six per cent.; on the Pacific coast it is between six and seven per cent. The supreme court of Minnesota decided in 1896 that, in view of the actual rates of interest then obtaining, five per cent. on the reproduction cost of railroads was a fairly liberal return, and could be adopted by the state authorities in fixing charges for carrying freight and passengers.[111] A few years later the Michigan tax commission allowed the railroads four per cent. on the reproduction cost of their property, on the ground that investments which yielded that rate in addition to the usual tax of one per cent. (or five per cent. before the deduction of the tax) stood at par on the stock market.[112] In other words, the prevailing rate was five per cent. At the beginning of the year 1907, the railroad commission of Wisconsin fixed six per cent. as the return to which the stockholders of railroads were entitled, because this was about the return which investors generally were able to get on that kind of security. In the view of the Commission, the current rate of interest on railroad bonds, and similar investments, was about five per cent.[113] The significance of these decisions by the public authorities of three states is found not so much in the particular rates which they sanctioned as in the fact that they were able to determine a standard or prevailing rate. Therefore a standard rate exists. At the same time it is interesting to note that in all three states the rate of industrial interest was declared to be about the same, that is, five per cent. Perhaps it is safe to say that, throughout the greater part of the industrial field of America, five or six per cent. is the prevailing rate of interest.
What causes the rate to be five per cent., or six per cent., or any other per cent.? Briefly stated, it is the interplay of supply and demand. Since interest is a price paid for the use of a thing, i.e., capital, its rate or level is determined by the same general forces that govern the price of wheat, or shoes, or hats, or any other commodity that is bought and sold in the market. The rate is five or six per cent. because at that rate the amount of money offered by lenders equals the amount demanded by borrowers. Should the amount offered at that rate increase without a corresponding increase in the amount demanded, the rate would fall, just as it would rise under opposite conditions.
Supply and demand, however, are merely the immediate forces. They are themselves the outcome or resultant of factors more remote. On the side of supply, the principal remote forces which regulate the rate of interest are: the industrial resources of the community, and the relative strength of its habits of saving and spending. On the side of demand, the chief ultimate factors are: the productivity of capital-instruments, the comparative intensity of the social desires of investing and lending, and the supplies of land, business ability and labour. Each of these factors exercises upon the rate of interest an influence of its own, and each of them may be assisted or counteracted by one or more of the others. Precisely what rate will result from any given condition of the factors, cannot be stated beforehand, for the factors cannot be measured in such a way as to provide a basis for this kind of forecast. All that can be said is that, when changes occur on the side of either demand or supply, there will be a corresponding change in the rate of interest, provided that no neutralising change takes place on the other side.
In a preceding chapter we saw that Marxian Socialism is logically debarred from passing moral judgment upon any social institution or practice.[114] If social institutions are produced necessarily by socio-economic forces they are neither morally good nor morally bad. They are quite as unmoral as rain and snow, verdure and decay, tadpoles and elephants. Consistent Socialists cannot, therefore, censure on purely ethical grounds the system of private capital and interest.
This logical requirement of the theory of economic determinism is exemplified in much of the rigidly scientific discussions of Socialists. Marx maintained that the value of commodities is all determined and created by labour, and that interest is the surplus which the labourer produces above the cost of his keep; nevertheless Marx did not formally assert that the labourer has a moral right to the whole product, nor that interest is theft. He set forth his theories of value and surplus value as positive explanations of economic facts, not as an ethical evaluation of human actions. His object was to show the causes and nature of value, wages, and interest, not to estimate the moral claims of the agents of production, or the morality of the distributive process. In his formal discussion of the theory of value and of surplus value, Marx said nothing that implied a belief in genuine moral responsibility, or that contradicted the principles of philosophical materialism and economic determinism. It is, therefore, quite erroneous to infer that, since the Marxian theory attributes all value and products to the action of labour, Marxian Socialists must condemn the interest-taker as a robber.
Neither Marx nor any other Socialist authority, however, has always held consistently to this purely positive method of economic exposition. When they declare that the labourer is "exploited," that surplus value is "filched" from him, that the capitalist is a "parasite," etc., they are expressing and conveying distinct moral judgments. In their more popular writings Socialist authors do not seriously attempt to observe the logical requirements of their necessitarian philosophy. They assume the same ethical postulates, and give expression to the same ethical intuitions as the man who believes in the human soul and free will.[115] And the great majority of their followers likewise regard the question of distribution as a moral question, as a question of justice. In their view the labourer not only creates all value, but has a just claim to the whole product.
This doctrine is sometimes formally based upon the Marxian theory of value, and is sometimes defended independently of that theory. In the former case its groundwork is about as follows: By eliminating the factors of utility and scarcity, Marx found that the only element common to all commodities is labour, and then concluded that labour is the only possible explanation, creator, and determinant of value.[116] Since capital, that is, concrete capital, is a commodity, its value is likewise determined and created by labour. Since it cannot create value, for only labour has that power, it can contribute to the product of the productive process in which it is engaged only as much value as it originally received. Since it is only a reservoir of value, it cannot transfer more value than it holds and possesses. In the words of Marx, "the means of production transfer value to the new product, so far only as during the labour-process they lose value in the shape of the old use-value. The maximum loss of value that they can suffer in the process is plainly limited by the amount of the original value with which they came into the process, or, in other words, by the labour time necessary for their production. Therefore, the means of production can ever add more value to the product than they themselves possess independently of the process in which they assist. However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost 150 pounds, or say 500 days' labour, yet it cannot, under any circumstances, add to the value of the product more than 150 pounds."[117]
To view the matter from another angle: capital contributes to the product only sufficient value to pay for its own reproduction. When, as is the normal usage, the undertaker has deducted from the product sufficient value or money to replace the deteriorated or worn out machine, or other concrete capital, all the remaining value in the product is due specifically to labour.
When, therefore, the capitalist goes further, and appropriates from the product interest and profits, he takes a part of the value that labour has created. He seizes the surplus value which labour has produced in excess of the wages that it receives. In ethical terms, he robs the labourers of a part of their product.
It is not necessary to introduce any extended refutation of this arbitrary, unreal, and fantastic argument. "The theory that labour is the sole source of value has few defenders to-day. In the face of the overwhelming criticism which has been directed against it, even good Marxists are forced to abandon it, or to explain it away."[118] It may, however, be useful to recount very briefly the facts which disprove the theory. Labour creates some things which have no value, as wooden shoes in a community that does not desire wooden shoes; some things have value, exchange value, although no labour has been expended upon them, as land and minerals; the value of things is sometimes greater, sometimes less, proportionately, than the labour embodied in them; for example, paintings by the old masters, and last year's styles of millinery; and, finally, the true determinants of value are utility and scarcity. If it be objected that Marx was aware of these two factors, the reply is that he either restricted them to the function of conditions rather than efficient causes of value, or attributed to them an influence that is inconsistent with his main theory that labour is the sole determinant of value. Indeed, the contradictions into which Marx was led by the theory are its sufficient refutation.[119]
With the destruction of the labour theory of value, the Marxian contention that capital contributes only its own original value to the product is likewise overthrown. The same conclusion is reached more directly by recalling the obvious facts of experience that, since the joint action of both capital and labour is required to bring into being every atom of the product, each is in its own order the cause of the whole product, and the proportion of the whole that is specifically due to the casual influence of either is as incapable of determination as the procreative contribution of either parent to their common offspring. The productive process carried on by labour and capital is virtually an organic process, in which the precise amount contributed by either factor is unknown and unknowable.
In so far, therefore, as the alleged right of labour to the whole product is based upon the Marxian theory of value, it has not a shadow of validity.
But the claim is not necessarily dependent upon this foundation. Those Socialists who have abandoned the labour theory of value can argue that the labourer (including the active director of industry) is the only human producer, that the capitalist as such produces nothing, and consequently has no moral claim to any part of the product. Whatever theory of value we may adopt, or whether we adopt any, we cannot annul the fact that interest does not represent labour expended upon the product by the capitalist.
Nevertheless, this fact does not compel the conclusion that the share of the product now taken by the capitalist belongs of right to the labourer. Productivity does not of itself create a right to the product. It is not an intrinsic title. That is to say, a right to the product is not inherent in the relation between product and producer. It is determined by certain extrinsic relations. When Brown makes a pair of shoes out of materials that he has stolen, he has not a right to the whole product; when Jones turns out a similar product from materials that he has bought, he becomes the exclusive owner of the shoes. The intrinsic relation of productivity is the same in both cases. It is the difference of extrinsic relation, namely, the relation between the producer and the material, that begets the difference between the moral claims of the two producers upon the product.
The right of the producer is conditioned by certain other and more fundamental relations. Why has Jones a right to the shoes that he has made out of materials that he has bought? Not because he needs them; he is not alone in this condition. The ultimate reason and basis of his ownership is to be sought in the practical requirements of an equitable social distribution. Unless men receive an adequate return for their labour, they will not be able to satisfy their wants in a regular and sufficient manner. If they are forced to labour for others without compensation, they are deprived of the opportunity to develop their personality. They are treated as mere instruments to the welfare of beings who are not their superiors, but their moral and juridical equals. Their intrinsic worth and sacredness of personality is outraged, their essential equality with their fellows is disregarded, and their indestructible rights are violated. On the other hand, when a producer, such as Jones, gets possession of his product, he subordinates no human being to himself, deprives no man of the opportunity to perform remunerative labour, nor appropriates an unreasonable share of the common bounty of the earth. He has a right to his product because this is one of the reasonable methods of distribution.
In fact, it is the exigencies of reasonable distribution that constitute the fundamental justification of every title of ownership. The title of purchase by which a man claims the hat that he wears; the title of inheritance by which a son claims the house that once belonged to his father; the title of contract through which a labourer gets wages, a merchant prices, and a landlord rent,—are all valid simply because they are reasonable devices for enabling men to obtain the goods of the earth for the satisfaction of their wants. All titles of property, productivity included, are conventional institutions which reason and experience have shown to be conducive to human welfare. None of them possesses intrinsic or metaphysical validity.[120]
Therefore, the Socialist cannot establish the right of labour to the full product of industry until he proves that this so-called right could be reduced to practice consistently with individual and social welfare. In other words, he must show that to give the entire product to the labourer would be a reasonable method of distribution. Now the arrangement by which the Socialist proposes to award the whole product of labour is the collective ownership and operation of the means of production, and the social distribution of the product. If this system would not enable the labourer and the members of society generally to satisfy their wants to better advantage than is possible under the present system, the contention that the labourer has a right to the entire product of industry falls to the ground. The question will be considered in the following chapter.
"Never has our party told the workingman about a 'State of the future,' never in any way than as a mere utopia. If anybody says: 'I picture to myself society after our programme has been realised, after wage labour has been abolished, and the exploitation of men has ceased, in such and such a manner,—' well and good; ideas are free, and everybody may conceive the Socialist State as he pleases. Whoever believes in it may do so; whoever does not, need not. These pictures are but dreams, and Social Democracy has never understood them otherwise."[121]
Such is the official attitude of Socialism toward descriptions of its contemplated industrial organisation. The party has never drawn up nor approved any of the various outlines of this sort which have been defended by individual Socialists. It maintains that it cannot anticipate even the essential factors in the operation of a social and industrial system which will differ so widely from the one that we have to-day, and which will be so profoundly determined by events that are in the nature of the case impossible to prognosticate.
From the viewpoint of all but convinced Socialists, this position is indefensible. We are asked to believe that the collective ownership and operation of the means of production would be more just and beneficial than the present plan of private ownership and operation. Yet the Socialist party refuses to tell us how the scheme would bring about these results; refuses to give us, even in outline, a picture of the machine at work. As reasonably might we be expected to turn the direction of industry over to a Rockefeller or a Morgan, making an act of faith in their efficiency and fairness. We are in the position of a man who should be advised to demolish an unsatisfactory house, without receiving any solid assurance that the proposed new one would be as good. To our requests for specific information about the working of the new industrial order the Socialists, as a rule, answer in terms of prophesied results. They leave us in the dark concerning the causes by which these wonderful results are to be produced.
From the viewpoint of the confirmed Socialist, however, this failure to be specific is not at all unreasonable. He can have faith in the Socialist system without knowing beforehand how it will work. He believes in its efficacy because he believes that it is inevitable. In the words of Kautsky, "what is proved to be inevitable is proved not only to be possible, but to be the only possible outcome."[122] The Socialist believes that his scheme is inevitable because he thinks that it is necessarily included in the outcome of economic and social evolution.
Neither the premises nor the conclusion of this reasoning is valid. The doctrines of economic determinism, the class struggle, the concentration of capital, the disappearance of the middle classes, the progressive pauperisation of the working classes, and all the other tenets of the Socialist philosophy, have been thoroughly discredited by the facts of psychology, the experience of the last half century, and the present trend of industrial and social forces.[123] Even if the Socialist outcome were inevitable, it would not necessarily be an improvement on the present system. It might illustrate the principle of retrogression.
Since we cannot make an act of faith in either the inevitableness or the efficacy of the Socialist industrial scheme, we are compelled to submit it to the ordinary tests of examination and criticism. We must try to see what would be the essential structure, elements, and operation of a system in which the means of production were owned and managed collectively, and the product socially distributed. In attempting to describe the system, we shall be guided by what seems to be inherently necessary to it, and by the prevalent conception of it among present day Socialists. In this connection we have to observe that some of the criticisms of the Socialist order attribute to it elements that are not essential, nor any longer demanded by the authoritative spokesmen of the movement; for example, complete confiscation of capital, compulsory assignment of men to the different industrial tasks, equality of remuneration, the use of labour checks instead of money, the socialisation of all capital down to the smallest tool, and collective ownership of homes.
The first problem confronting a Socialist administration would be the method of getting possession of the instruments of production. In the early years of the Socialist movement, most of its adherents seemed to favour a policy of outright confiscation. Professor Nearing estimates the total property income now paid in the United States as, "well above the six-billion-dollar mark."[124] Were the Socialist State to seize all land and capital without compensation, it could conceivably transfer more than six billion dollars annually from landowners and capitalists to the community. Not all of it, however, would be available for diversion to the labourers. According to the computations of Professor King, about two billion dollars were in 1910 saved and converted into capital.[125] A progressive Socialist régime would want to appropriate at least that sum for the renewal and increase of the instruments of production. Consequently, it would have only four billion dollars to add to the present total income of labour. This would be equivalent to $43.50 for every person in the United States.
Desirable as would be such an addition to the remuneration of labour, it could never be realised through the process of confiscation. The owners of land and capital would be sufficiently powerful to defeat any such simple scheme of setting up the collectivist commonwealth. They constitute probably a majority of the adults of our population, and their economic advantages would make them much stronger relatively than their numbers.[126] Ethically the policy of confiscation would be, on the whole, sheer robbery. To be sure, not all owners of land and capital have a valid claim to all their possessions, but practically all of them hold the greater part of their wealth by some kind of just title. Much land and capital that was originally acquired by unjust means has become morally legitimatised by the title of prescription.
The majority of present day Socialists seem to advocate at least partial compensation.[127] But this plan does not seem to offer any considerable advantage over complete confiscation. As regards morality, it would differ only in the degree of its injustice; as regards expediency, it would be at best of doubtful efficacy. If the capitalists were given only a small fraction of the value of their holdings they would oppose the change with quite as much determination as though they were offered nothing; if they were paid almost the full value of their possessions there would be no substantial gain to the community from the transfer; if they were compensated at a figure somewhere between these two extremes their resistance would still be more costly to the State than the extra amount required to make full compensation.
Finally, if full compensation were offered it would have to take the form of government obligations, securities, or bonds. If these did not bear interest the great majority of capital owners would regard the scheme as partial and considerable confiscation, and would fight it with determination and effectiveness. If the State bound itself to pay interest on the bonds it would probably find itself giving the dispossessed capitalists as high a rate of return on their capital, as large a share of the national product, as they receive under the present system. Consequently, the expropriation of the capitalists would bring no direct and pecuniary gain to the labouring classes. Indeed, the latter would suffer positive loss by the change, owing to the fact that the State would be required to withdraw from the national product a considerable amount for the maintenance, renewal, and expansion of the instruments of production. At present the capitalist class performs the greater part of this function through the reinvestment of the incomes that it receives in the form of interest and rent. The average Socialist entirely ignores this capitalistic service, when he draws his pessimistic picture of the vast share of the national product which now goes to "idle capitalists." So far as the larger capitalist incomes are concerned; that is, those in excess of twenty-five thousand dollars annually, it is probable that the greater part is not consumed by the receivers, but is converted into socially necessary capital instruments. Since this would not be permitted in a Socialist order, the capitalists would strive to consume the whole of the incomes received from the public securities, and the State would be compelled to provide the required new capital out of the current national product. In a word, society would have to give the capitalists as much as it does at present, and to withhold from the labourers for new capital an immense sum which is now furnished by the capitalists.
It is undoubtedly true that the richest capitalists would be unable to expend the whole of their incomes upon themselves and their families. If they turned a considerable part of it over to the State, the surrendered sum would be available as capital, thereby reducing the amount that the State would need to take out of the national product for this purpose. Were all those possessing incomes in excess of fifty thousand dollars per family to give up all above that amount, the total thus accruing to the State would be a little more than one billion dollars.[128] But this would be only one-half the required new capital. A part of the additional one billion is now provided out of wages and salaries, but the greater part probably comes out of rent and interest. Under Socialism this latter portion would have to be deducted from that part of the national product which at present goes to the workers and is consumed by them. Hence they would undergo a loss of several hundred million dollars.
One reply to this difficulty is that the total product of industry would be much increased under Socialism. Undoubtedly an efficient organisation of industry on collectivist lines would be able to effect economies by combining manufacturing plants, distributive concerns, and transportation systems, and by reducing unemployment to a minimum; but it could not possibly make the enormous economies that are promised by the Socialists. The assertion that under Socialism men would be able to provide abundantly for all their wants on a basis of a working day of four, or even two, hours is seductive and interesting, but it has no support in the ascertainable facts of industrial resources. Even if the Socialist organisation were operating with a fair degree of efficiency, the gains that it could effect over the present system would probably not more than offset the social losses resulting from increased consumption by the compensated capitalists.
But the proposed industrial organisation would not operate with a fair degree of efficiency. According to present Socialist thought, industries that are national in scope, such as the manufacture of petroleum, steel, and tobacco, would be carried on under national direction, while those that supplied only a local market, such as laundries, bakeries, and retail stores, would be managed by the municipalities. This division of control would be undoubtedly wise and necessary. Moreover, the majority of Socialists no longer demand that all tools and all industries should be brought under collective or governmental direction. Very small concerns which employed no hired labour, or at most one or two persons, could remain under private ownership and operation, while even larger enterprises might be carried on by co-operative associations.[129] Nevertheless the attempt to organise and operate collectively the industries of the country, even with these limitations, would encounter certain insuperable obstacles. These will be considered under the general heads of inefficient industrial leadership, inefficient labour, and interference with individual liberty.