Supply and Demand Part 5

--1. _A Reference to Marx_. Interest is the price paid simply for the use of capital. But what is capital, and in what does its use consist?

What claim has it to be regarded as an independent factor of production? Our very familiarity with the term, our habit of employing it with the rich looseness of every-day life is an obstacle to the clearness of thought, which is again essential. We recognize, most of us, clearly enough that capital, although we reckon it in terms of money, consists, like income, of real things; factories, machinery, materials and the like. It is quite obvious that these things are of use, are, indeed, indispensable for production; what more natural than that capital should command a price? It almost seems as though we might pa.s.s, without further ado, to a detailed discussion of the forces which determine the amount of this price.

But this account does not bring out the essential point as brief reference to a very famous controversy will show. Some ingenious writers in the last century, the most notable of whom was Karl Marx, set out to prove that, in our modern society, workpeople are "exploited," robbed of the "whole produce of their labor," to the full extent of the return which accrues to capital. The argument was exceedingly complex in detail; but it boils down to this: The factories and machinery which are admittedly essential to production were themselves produced in exactly the same way as consumable goods. They were produced by labor, working with the a.s.sistance of nature, and, again, if you choose, of capital in the form of further factories, machinery, etc. But these further capital goods can in their turn be regarded as the product of labor, nature and capital; and so we can proceed until it seems as though the element of capital must disappear in the last a.n.a.lysis, as though labor and nature were the sole ultimate agents of production, and the reward of capital represented no more than the exercise of the exploiter's power. In one form or another this argument still dominates the minds of a large proportion of the so-called "rebels" against the existing social order.

If we are to meet this argument, if, which is perhaps more important, we are to understand the true nature of capital, we cannot rest content with saying that it consists of factories and machinery, and that these are essential to the worker. Just as it was well to get behind the money terms, in which we often think of capital, to the real goods; so we have now to get behind the real goods to something else. What this something else is, the first chapter may have already done something to reveal.

--2. _Waiting for Production_. Between production and consumption there is an interval of time. All productive processes take time to accomplish. The farmer must plow the soil and sow the seed months before he can reap the harvest which will reward him for his efforts. Meanwhile, he must live, and in order that he may live he must consume. If he employs laborers he must pay them wages, that they too may consume and live. For both purposes he requires purchasing power, which represents of course command over real things; and if he has not sufficient purchasing power of his own, he must borrow from someone else who has. In either case it is not enough that the farmer and his laborers should work; no less essential is it that someone should _wait_. The farmer must wait till he has sold his crops, both for the reward of his own labor and for the repayment of the wages he advances in the meantime to his laborers. Or, if he cannot afford to wait, and borrows in antic.i.p.ation of the harvest, then the lender must wait, until the farmer, having sold his crop, is able to repay him. Thus the period of time involved in all production gives rise to a demand for _waiting_, which someone or other must supply, if the production is to take place. It is this waiting which is the essential reality underlying the phenomena of capital and interest. It is really this which const.i.tutes an independent factor of production, distinct from labor and nature, and equally necessary.

--3. _Waiting for Consumption_. But let us carry the argument a step further. After the farmer has sold his crops, there are many stages through which they must pa.s.s, at each of which more waiting is required, before they reach the ultimate consumer. But then the waiting is at an end.

This, however, is by no means the case with a great number of commodities. Let us take the case of a speculative builder. While he is building a house he, like the farmer, must wait (or find someone to wait on his behalf), for his own reward, and for the repayment of his expenditure on wages and materials. But, after the house is built, if he lets it to a tenant for an annual rent, his waiting is far from over. Not until many years have pa.s.sed will the rent payments add up to a sum which equals or exceeds his outlay. He may, of course, sell the house, and thus bring his waiting to an end. But then the purchaser must wait, no matter whether or not he is the occupier. For no one would consider the use of a house for a day, a month, or a year as an adequate return for the price it cost to buy. The occupier-owner pays for the prospect of its use for a long and perhaps indefinite number of years ahead, and he must wait to enjoy the benefits for which he pays now in full. Waiting is as inherent in the consumption of durable things as it is in all production.

Now most industries are consumers of durable things of a very expensive kind. Here we come back to the factories and machinery which ordinarily spring to our mind at the mention of the word capital. Not merely does the construction of these things involve waiting; their consumption involves waiting on a vastly larger scale. Just as with a house, many years must elapse before their derived utility can even approximate to their purchase price. It is mainly to supply the waiting involved in the consumption of such durable goods, that a typical joint-stock company issues shares for public subscription. The waiting required to cover the period of time, which its own productive process requires, is largely supplied by means of bank overdrafts or other forms of short-period borrowing. More strictly, fixed capital represents the waiting involved in the consumption of durable things; circulating capital the waiting involved in current production.

This distinction loses its sharpness when we consider not the affairs of a particular business, but the industrial system as a whole. Then the period of time involved in the consumption of durable instruments falls into place as part of the time required for the production of the ultimate consumers' goods. We can even, perhaps, conceive of an "average period of production" for industry and commerce as a whole; and this conception is not without its uses. For it serves to bring out the fact that the period of consumption, and the period of production in the narrower sense, are only two aspects of the same fundamental thing, the interval of time which elapses between work and the utility, which is its ultimate purpose. It serves, moreover, to make clear that anything which lengthens this interval of time increases the demand for waiting, or in other words, the demand for capital; and, conversely, that anything which shortens this interval diminishes the demand for capital.

--4. _Capital not a Stock of Consumable Goods_. But the distinction between the two forms of waiting, though not fundamental, is none the less worth noting. It enables us to keep our theory in conformity with fact, to look at the phenomenon of capital the right way up; and it is easy, if we are not careful, to slip into the habit of looking at it upside down. People sometimes speak as though the commodities which const.i.tute our capital, instead of being mainly, as our plain sense tells us that they are, factories, machinery and other durable instruments, were rather a _store_ or _stock_ of immediately consumable goods. The argument takes the following form. It is consumers' goods, things like food and clothes, which the farmer, the builder and their workpeople consume while they are working. To enable them to work, therefore, it is vital that such things should not in the past have been consumed as soon as they were made; part of them must have been saved, and carried forward for future use.

Furthermore, the longer the time that the work on which people are now engaged takes to yield its product, the larger must be this store of consumers' goods. For these products, when they are completed, will serve (taking society as a whole) to replace the store which in the meantime is being used up, so that the longer this replacement takes, the larger must be the initial store. Conversely, the larger the store of consumers' goods available, the more distant is the future for which we can afford to work. It is thus the store or stock of consumers' goods which represents our real capital; for it is the magnitude of this store which determines how far we can devote our energies to purposes which are remote in time.

Now this is pure mysticism. Regarded literally, it is in direct conflict with the facts. The processes of industry are fairly regular and continuous. At any moment, large quant.i.ties of consumers' goods of almost every kind are on the point of completion; at the same moment equally large quant.i.ties are consumed. The things which we buy were finished, very likely, only recently; or, if in fact they have lain idle for some time in stock, there is nothing essential or at all helpful in that fact. It represents rather a defect--a maladjustment which should be rectified. Even many kinds of agricultural produce do not need to be carried forward from one year to another, for they are produced in many parts of the world, where the seasons come at different periods of the year. It is conceivable, therefore, that we might consume all non-durable things the moment they were ready, and the degree to which we approximate to this ideal is a mark of the efficiency of our economic system. A large store of consumable goods is thus _not_ a fundamental necessity of a prosperous society.

What _is_ necessary is plainly the power to produce these things in large quant.i.ties as they are required. And this power is furnished by the durable instruments of production, which we thus rightly regard as the true representatives of modern capital. If it is argued that this power to produce consumable goods may be regarded as being _in effect_ a store of consumable goods, it must be sternly replied that this is the language of symbolism, not of science, and that symbolism is highly dangerous in this connection. The false conception of capital as essentially a store of consumers' goods has led and still leads to many serious fallacies. It was this that gave rise to the notorious doctrine of the Wages Fund; the notion that the sum which can at any time be paid in wages is equal to the quant.i.ty of capital, _alias_ consumable goods, which happens to exist. To this day it blocks, with an undergrowth of obscurantist controversies, the way to a straightforward account of the problem of trade cycles.

--5. _The Essence of Waiting_. But it is with positive conclusions that we must here concern ourselves. What is the essence of this waiting, as we have called it? What are its results from the point of view of the community? The individual, who saves and lends, waits in the obvious sense that he postpones consumption. He foregoes his right to purchase now a quant.i.ty of consumers' goods in consideration of the prospect of purchasing a larger quant.i.ty of such things in the future. From the standpoint of the whole community, there is a similar postponement of consumption, though it need not commence so soon. The store of consumable goods is what it is: the quant.i.ty of goods in _process_ of manufacture, which will shortly be coming forward, is also what it is. For some time, therefore, a sudden access of saving cannot affect the quant.i.ty of goods available for consumption; and if, in fact, they should be consumed less rapidly, that will represent an unfortunate defect, not an essential condition of a smoothly working system. The _necessary_ consequence comes later. The increased saving will cause labor, materials, land, agents of production generally, to be devoted to distant purposes. Men will be set to work producing durable goods, largely durable instruments of production like ships or railways or factories or plant. If the increased saving is considerable, the labor, materials, etc., required for these purposes will be withdrawn even under our present system, as under a smoothly working system they clearly must be, from the production of other and more immediately consumable things. Hence, some time later, the supplies of consumable things will be diminished, while at a later period still they will be more than correspondingly increased as the result of the a.s.sistance of the new durable instruments. That is the essence of saving from the social standpoint. An early future is sacrificed to a more remote future. The aggregate consumable income of the present is unaffected; the aggregate consumable income of the near future is actually diminished; it is not until at least some years later that the aggregate consumable income is increased.

--6. _Individual and Social Saving_. This conclusion is important: but there is an obvious misinterpretation against which it will be well to guard. It is customary for social moralists to preach thrift and saving as a public duty, and to impart to their appeals a special note of urgency in times like the present, when, as the result of the havoc of the war, dest.i.tution is widespread over Europe. Now obviously these advisers do not mean to recommend something which will impoverish the world next year and the year after and the benefit of which will accrue only in a distant future: it is the immediate urgency of the world's needs which is rather the substance of their case. Nor would it be right to conclude that these wise men are the victims of a delusion, and advocate a course, the consequence of which they do not understand. The explanation of the paradox is simple. The more the community as a whole saves now, the less in the near future will be the aggregate consumable income of the whole community: but not of the _remainder_ of the community, exclusive of the savers. It is the saver who must wait, whose consumption must be postponed to perhaps a distant future; but _at no time_ does his saving result in a smaller income of consumable goods for other people. The aggregate consumable income of the near future will be diminished, but it may be better distributed, and it may consist of things of a different _kind_. For consumers' goods, we must remember, comprise champagne and motor cars as well as food and clothes; and, if a rich man saves, it may be purely articles of luxury, the production of which will shortly be diminished. Moreover, if his saving has the effect of transferring purchasing power to impoverished people, like those in Central Europe, it will not be devoted to a distant future; it will very likely be devoted to quite immediate ends. In other words, it may not result in any "creation of capital"; it may not represent any saving on the part of the community as a whole. A relatively rich man waits, and a relatively poor man _antic.i.p.ates_ his income to a corresponding extent; and it is precisely this that is so urgently desirable in a time of widespread poverty and chaos.

This is no matter of hair-splitting, and making plain things obscure. While it is always better for the _rest_ of us that an individual, who can afford to save, should save rather than spend (though it might be better for us still if we could have his money to spend ourselves) and while this is the more important the greater is the poverty which generally prevails; yet, as a community we cannot save so much, we _ought_ not to save so much, when we are impoverished as when we are prosperous. It is vital to appreciate this truth, because, as we shall see, by no means all the saving of the world is done by individuals. There are many forms of "collective saving,"

which take place in actual fact; still more which we are often urged to undertake. And it is of practical importance to realize that the very considerations, which call most urgently for individual thrift, forbid a great indulgence in such projects. A time of national poverty is not a time when it is suitable for the State to embark on large schemes of capital development: we require our resources for more immediate ends. Faced with such problems, our practical sense may no doubt suffice to keep us straight; but it is apt to do so at the expense of a complete inversion of the real issues. If, for instance, we call for Governmental retrenchment on what we deem extravagant policies of housing and education, we usually speak as though they represented the profligacy of a spendthrift as contrasted with the saving that is indispensable. The truth is rather that these policies represent a saving, an investment for future purposes, which may conceivably be greater (this must not be taken as representing my personal opinion) than the community can properly afford. This is another instance of what I mean by looking at the problem of capital the right way up.

--7. _The Necessity of Interest_. It is only now that we are in a position to appreciate the true functions of a rate of interest, and the nature of its claims to be regarded as a "real cost." Interest, it is sometimes said, is necessary to provide for the future. It is far more certain that interest is necessary to provide for the present. It is a matter of legitimate doubt how far it is necessary to _pay_ interest to secure a supply of capital; there is no doubt at all that it is necessary to _charge_ interest to limit the demand for it. As we saw in Chapter I, a world socialist commonwealth would require to retain a rate of interest, if only as a matter of bookkeeping, in order to choose between the various capital undertakings that were technically possible. And this is the primary function which the fate of interest fulfils in our present-day society. It separates the sheep from the goats. It serves as a screen, by means of which capital projects are sifted, and through which only those are allowed to pa.s.s which will benefit the future in a high degree. For this essential purpose it is hard to imagine how a better instrument could be devised.

--8. _The Supply of Capital_. Let us dwell for a moment on this image of a screen, or sieve. One condition of a good sieve is that its meshes should all be of the same size. This condition the rate of interest almost perfectly fulfils. But it is also important that the meshes should be of the _right_ size. Whether this is true of the actual rate of interest is a far more doubtful matter. It is, indeed, plain that it is not altogether devoid of merit in this respect. In times of general world poverty, like those which follow upon a great war, it is desirable, as has been argued, that more of our productive resources should be devoted to immediately useful purposes, and a smaller portion dedicated to a distant future. This readjustment the rate of interest helps to bring about. For it rises to a higher level, and there is accordingly a strong inducement to all manufacturers and traders to economize their use of capital, and thus to set free productive resources for more urgent needs. But, while the meshes of the sieve, as it were, contract in times when it is desirable that they should contract, we have no reason for supposing that they will contract in just the degree that is desired, neither more nor less; or, indeed, that at any time they approximate to the right size. We in the twentieth century owe much of the material wealth that we enjoy to the fact that over the last century men saved as largely as they did. But our natural grat.i.tude should not restrain us from doubting whether they were really well advised to do so. If we ask the question _how_ they managed to do so, our doubts are deepened. For first place among the explanations must be a.s.signed to the inequality in the then distribution of wealth. It was because many men in England were rich enough to save that our railways were built, and the resources of new Continents were opened up. But England, a century or even half a century ago, was not really a rich community. And if the national income in those days had been distributed more evenly among the people, can we doubt that they would have spent a far larger proportion of it on immediate needs; can we doubt that they would have been right to do so? We may rather doubt, in view of the reactions of poverty on physical and mental efficiency, on social harmony, even possibly on population, whether we to-day would have been really injured as much as might appear. How, then, can we suppose that the sum of the amounts which it suits individuals to save will bear any close relation to the resources which the community can properly devote to future ends? Are we to regard an unjust distribution of wealth as a mysterious dispensation of Providence for securing perfect harmony between the future and the present? The point need not be labored further. There are no grounds for a.s.suming that we save, as a community, even roughly what we ought to save. If we wish to believe we do, we must turn for support from economics to theology.

It is important to be clear upon this issue in order to distinguish it from another, with which it sometimes seems to be confused. This is the question, briefly outlined in Chapter II, of the effect of changes in the rate of interest on the supply of capital. As was there indicated, there are good reasons for supposing that a fall in the rate of interest would induce some people to save more, and conversely. But the balance of probability is in favor of the conclusion that the _net_ effect of changes in the rate of interest, though perhaps slight, is usually of the more ordinary kind. The decisive argument in this connection is the fact, upon which we have just touched, that savings are supplied largely by people who are relatively rich, and who become richer when the rate of interest rises. For at this point it is necessary to be careful. It is easy to slide from the above conclusion into an argument of the following kind. A higher rate of interest leads to more saving; it is thus necessary to _evoke_ more saving; it is thus required as an _incentive_ to induce people to incur the _sacrifice_ of waiting; this sacrifice represents the "real cost" for which interest is paid.

This terminology of incentive, inducement and sacrifice is of very dubious validity. A rich man, who is made richer by a rise in the rate of interest, will probably save more, but it will be rather because he has become richer than because he is tempted by the higher rate: and the less we talk about his sacrifice the better. Nor is it clear that the attraction of a high rate of interest is an operative factor on the mind of a man to whom saving means a real sacrifice of immediate comfort or enjoyment. Certainly it is only one among many factors, and seldom an important one. A really poor man will think not so much of the annual income which will accrue from his savings, as of the capital sum upon which he or his family can fall back if a rainy day should come. And for this purpose he might save as much as he saves now, even if there were no interest to be obtained thereby. He might even be prepared to lend what he had saved, at least to banks (a deposit with a bank is in effect a loan), for the mere advantage of safe custody. The people who save rather for the sake of the capital sum that can be realized than for that of the annual interest are very numerous, and probably include many men in receipt of quite considerable earned incomes. Moreover, those who consider mainly the future annual income which their savings will yield them, are usually more concerned with its absolute amount than with the ratio it bears to the amount they must save in order to acquire it. For this reason, as has been often recognized, they may save less when the rate of interest rises, since a smaller quant.i.ty of savings will insure to them the future annual income they desire to obtain. There is no need to be dogmatic upon any of these points. The psychology of saving is both complex and obscure. Our conclusion must be the negative one that we have insufficient evidence to warrant the a.s.sertion that the particular rate of interest which happens to prevail is a measure of the sacrifice involved in saving, even in the case of what we might regard as the "marginal saving." And, if we cannot a.s.sert this, we must be careful not to a.s.sume it as the basis of other arguments, or as part of a general a.n.a.lysis of price or exchange value.

It is of some interest to observe that the difficulties which our world socialist commonwealth would encounter if it attempted to dispense with the rate of interest, would not necessarily include that of obtaining a supply of capital. It might, indeed, not find it easy to determine the proportions in which it should allocate its productive resources between immediate and distant ends. Our present system cannot be said to have evolved satisfactory principles for the solution of this question; and the socialist commonwealth would have to work out its own solution. But when it directed that labor and materials should be devoted to purposes of long-period utility, there would be an automatic collective saving, of which no one would be conscious as an individual sacrifice. Even at the present time, our capital is not supplied entirely by the savings of individuals, but to an extent, which though quite incalculable is yet certainly considerable, by involuntary saving of an essentially similar type to the above.

--9. _Involuntary Saving_. When a munic.i.p.ality embarks on a munic.i.p.al tramways scheme or any other industrial enterprise, and pays off by means of a sinking-fund the capital which it borrows in the first instance, the proceeding amounts, as the defenders of munic.i.p.al trading have rightly claimed, to a compulsory and unconscious saving on the part of the citizens. Their consumption has been postponed w.i.l.l.y-nilly as the result of the increased rates or the high charges which they have had to pay; and, when the subscribers to the original loan have been paid off, the capital of the community is enhanced to the extent of that loan. Central governments might similarly increase the supply of capital by devoting annual revenue to capital purposes; though their actual record, as it happens, is mainly of a different kind. But what is chiefly a possibility in the case of Governments has actually been carried out on an enormous scale by other inst.i.tutions.

The development of the joint-stock company system has introduced a new factor into the problem of the supply of capital, which is of immense though but dimly perceived importance. The directors of a company are technically no more than the servants of the shareholders. It is the profit of the shareholders that it is the directors' duty to promote with a single mind, and the whole capital of the concern, including its reserves both open and concealed, is the shareholders' exclusive property. But realities have a way of differing from forms, and just as in political affairs it is common to regard the State as a very different thing to the people who compose it, as a sublime ent.i.ty with a separate existence of its own, so directors are apt to distinguish between the company and the shareholders. It is the company to which they owe allegiance. To pay away in dividends to shareholders money which they could employ in extending the business or strengthening the position of the company appears to some directors a necessity hardly less unpleasant than an increased wages bill, or an Excess Profits Duty. Concessions must indeed be made to the shareholders' rapacity: but when something has been done in this direction, dust can easily be thrown in their not very observant eyes. Reserves, which within limits are a necessity of sound finance, can be acc.u.mulated beyond those limits, and, when the further limits of an extreme but just arguable conservatism have been pa.s.sed, there remain the innumerable devices, known to every resourceful Board, of hidden reserves, the secret of which is unmenaced by the meager information of a balance-sheet. In all this the shareholder, as the directors occasionally a.s.sure themselves, has no real grievance, for he will gain in the long run, from the appreciation in the capital value of his shares, all and perhaps more than all that he foregoes in the meantime in the way of dividends.

In the long run the shareholder is not injured; but in the meantime he is in effect compelled, without any consciousness of the proceeding, to save and to reinvest in the company a portion of the dividends, which he might otherwise have spent. The reserves which are acc.u.mulated are not allowed to lie idle: they are employed either in what are really capital extensions of the business, or in the purchase of outside securities, and in either case they represent an increase in the total supply of capital. The princ.i.p.al which these proceedings represent is capable of indefinite extension.

But however possible it might be to secure a supply of capital without the inducement of a rate of interest, that rate is indispensable for dealing with the demand. It is no good saying, "Three per cent seems a fair rate of interest; let us try and limit it to that." Given the amount of savings which are supplied, the rate of interest must be allowed to reach whatever figure is necessary to confine the demand to that amount. Given the quant.i.ty of resources which you have available for future needs, the meshes of the sieve must be made as narrow as is necessary to confine the projects that pa.s.s through within those limits. And so, indeed, it becomes necessary for any particular business to pay for its capital interest at the market rate, not so much to secure the saving of it as to secure its allocation from the common pool.

--10. _Interest and Distribution_. It is unavoidable that this interest should accrue to whoever it is that supplies the capital. If the capital were supplied, as it might conceivably be, collectively by the community, the interest would accrue to the community, and all would be well. But as things are, the capital is supplied mainly by the savings of individuals, and largely by individuals confined to a relatively narrow cla.s.s. The profits of Capital have thus a vital influence on the very serious matter of the distribution of wealth between social cla.s.ses. Now, as experience shows, there is no element in profits which is capable of such radical change in so short a s.p.a.ce of time, as is the rate of interest. Even before the war it had become hard for people in Great Britain to realize that 3 per cent Consols had stood at 114 as late as 1896. "How blest," wrote two cynical satirists of society in the same period:

"How blest the prudent man, the maiden pure, Whose income is both ample and secure, Arising from Consolidated Three Per cent Annuities, paid quarterly."[1]

It is impossible to read those lines now without a sense of irony, different from that which they were intended to convey.

Not only is the rate of interest now double what it was a generation ago; we have no good reason to suppose that the present high level will quickly be reduced. The havoc of the war, of which the widespread poverty of Europe and the huge debts of Governments are but two different aspects, makes it almost inevitable that the rate should rule high in the present decade. This cannot but exercise a profound influence, of a most disquieting character on the general level of profits, and to a lesser extent (for here we must allow for the effects of high taxation) on the distribution of real wealth between social cla.s.ses. Here we are on the threshold of tremendous issues. We almost feel the earth quake beneath our feet. We hear the m.u.f.fled roar of far-reaching social controversy:

"And 'mid this tumult Kubla heard from far Ancestral voices prophesying war."

[Footnote 1: _Narcissus_, by Samuel Butler and Henry Festing Jones.]

CHAPTER IX

LABOR

--1. _A Retrospect on Laissez-faire_. When, a century and a half ago, the foundations were being laid in the Western world of systematic economic theory, the public attention was much occupied with a subject, which indeed has not ceased to hold it: that of the failings of Governments. The general interest in that topic was shared by the pioneers of economic thought, of whom, in Great Britain, Adam Smith was the most notable. It was indeed their practical concern with the concrete economic issues of the day which very naturally gave the impetus to their scientific quest. It was hardly less natural that they should have expressed their opinions on these concrete issues with considerable emphasis.

Now the keynote of their practical conclusions was that Governments were doing immense mischief by meddling with a great many matters, which they would have done better to leave alone. In this they were in general agreement with one another; incidentally--let there be no mistake about it--they were right. But, as invariably happens in public controversy, their opinions became crystallized in a compact formula, or cry, with unduly sweeping implications. This was the cry of "_laissez-faire_." Let Governments preserve law and order; and leave the economic sphere alone. The economists picked no quarrel with this formula; it served well enough for workaday purposes to indicate the lines of policy which they rightly thought essential in their day.

The history of this cry is the history of every cry which has won a wide acceptance from mankind. It did good work for perhaps half a century; but then many crimes were committed in its name. The instrument which had been forged to clear away a noxious tariff jungle and the monstrous laws of Settlement, was turned against Lord Shaftesbury and the Factory Acts. Not only was inaction recommended to Governments as the highest wisdom; other inst.i.tutions, like trade unions, were warned off the economic gra.s.s. An ideal of perfect compet.i.tion became an idol to which much human flesh and blood were sacrificed.

But, what is more to our present purpose, the idea took root of an intimate a.s.sociation between the laws of economics and the policy of _laissez-faire_. People who opposed some long-overdue measure of State regulation believed themselves to be justified by the eternal verities of economic law, and this claim even the advocates of the measure seldom ventured to dispute. They took refuge rather in a conception of economic law as a dangerous monster, whose claws must be clipped in the interests of the higher good. This notion that all interference with so-called "free compet.i.tion," is a violation (though very likely fully justified) of economic laws has sunk deep into our common thought. So that to this day, whenever we see at work the hand of a State department, a trust or a trade union, we are apt to say "Demand and supply are here in abeyance," and possibly we add "A good thing too." Since in the matter of wages, the hand of the trade union is very generally evident, it is impossible to discuss the subject-matter of this chapter, until we have rid our minds of this quite baseless prepossession. To sweep away this cobweb, I urge the reader to recall here the general tenor of the a.n.a.lysis of the preceding chapters. Whether we were dealing with the price of an ordinary commodity, with joint products, land or capital, we came across relationships which seemed altogether more fundamental than our present industrial system; nor, we may incidentally observe, were we ever required to suppose that the present system was one of "perfect compet.i.tion." These relationships were almost invariably such that even a world socialist commonwealth would find it necessary to maintain them. It was not suggested, and most certainly it must not be thought, that a world socialist commonwealth, or even a more modest remodeling of the social order would not effect great changes, possibly for good, and possibly for ill. The same economic laws might be made to bear very different fruits, but they themselves would remain unchanged. What is true in all these other fields--this should be our predisposition--is not likely to be quite untrue in the field of labor.

--2. _Ideas and Inst.i.tutions_. Another point is worth noting here. We are sometimes advised to distinguish sharply between "What should be"

and "What is"; often two very different things. The advice is pertinent and useful, particularly in the sphere of sociology. But our incorrigible habit of confusing the two things together is not without justification, or at least excuse. For, in fact, they gravitate towards one another with a force which is just as strong as the capacity of man for understanding and controlling his environment. When we have a system which is clearly bad, _and_ when we see our way to make it better, we generally make the change however tardily. Our sense of "What should be" thus reacts upon "What is."

Meanwhile, until we can make the system better, our appreciation of "What is" affects our sense of "What should be." And the more so, as we are sensible. For "What should be" is pre-eminently an affair of relativity. A man may hold very strongly that equal pay to every individual is desirable, as he puts it, as an ideal. But this will not prevent him, in a world in which managers are paid far more than manual workers, from maintaining hotly (at any rate, if he is sensible) that to pay the manager of a particular concern a manual worker's wage would be monstrously unfair. He would also argue that it would be highly inexpedient. Equity and expediency are, in fact, intricately intertwined in our sense of "What should be"; and our sense of "What should be" in the particular is governed by our knowledge of "What is" in the general.

These may seem unnecessary commonplaces. But they have a vital bearing on the _modus operandi_ of economic laws. These laws do not work _in vacuo_. They work through the medium of the acts of men. The acts of men are greatly influenced by their inst.i.tutions, and by their ideas of right and wrong. Both inst.i.tutions and ideas may serve to smooth rather than obstruct the path of economic laws; because the laws may represent either "what should be" in the general, or "what is" in the general, and therefore "what should be" in the particular. This may hold true even of a trade union or a sense of "fair wages." The business of economic theory is not to justify a regime of _laissez-faire_, still less to show the folly of bringing morals into business. Its value is rather that it may help us, by improving our understanding, to shape our inst.i.tutions, and to adopt our moral sentiments so as to promote the public welfare. With these general notions in our minds, let us turn to see how stands the case with Labor.

--3. _The General Wage Level_. The term Labor may be used in a broad or in a narrow sense. It may be confined to weekly wage-earners: it may be extended to include all those who work, as the phrase goes, "with either hand or brain." It is with all cla.s.ses of Labor, in the broadest sense of the term, that we must here concern ourselves. It will be convenient, however, in the first instance to ignore the differences between them, and to consider the forces which determine what we may regard as the general wage-level.

The general laws of supply and demand hold good. The wages of labor tend to a level at which the demand is equal to the supply. For, if the demand exceeds the supply, if, in other words, labor is scarce, wages tend to rise, sooner or later in any case, and the more promptly in proportion as the workpeople are organized. Conversely, if the supply exceeds the demand, if in other Words there is general unemployment, wages tend to fall, and the strongest trade unions cannot resist the tendency, though they may delay it. Moreover, the higher the wages that must be paid, the smaller, other things being equal, is the demand for labor. For, even if we leave foreign compet.i.tion out of account, and consider, as it were, labor throughout the world as a whole, the demand for labor is by no means inelastic. It is derived along with the demand for the other agents of production in the manner described in Chapter V. As was there shown, the greater the supply of the other agents of production, the greater is likely to be the demand for labor; but these other agents can be subst.i.tuted for labor in a great variety of ways, and an increase in wages (unless accompanied by increased efficiency) will make it profitable for employers to effect such a subst.i.tution, where it was not profitable before. Thus, higher wages for the same labor efficiency must stimulate the tendency for capital to act as a subst.i.tute for labor at the expense necessarily (since the aggregate supply of capital will not be increased thereby) of its tendency to serve as a complement; and this must mean a decrease in the volume of employment. Hence the power of labor to secure a general advance of wages by concerted or simultaneous trade union action, applied if you will, not merely to every industry, but to every country, is necessarily very limited. Beyond a certain point, such a policy must result in general unemployment; and, if pushed sufficiently far, in unemployment so extensive that it would continue even in periods of active trade. Such a policy could neither be maintained in practice nor would it be a wise policy from the workers' point of view.

In other words, given on the one hand the conditions of the demand for labor (i.e. the supply of capital, natural resources, business ability, risk-bearing and knowledge of technical processes, etc., which happens to exist), and given on the other hand the supply of labor (i.e. both the numbers of workpeople and their efficiency), the wage-level in the long run is fairly rigidly determined. The introduction of the phrase "in the long run" in this connection is apt to provoke comment which may be pertinent, but may be misconceived.

The worker, it is pointed out, is deeply concerned with "the short run" in which he has to live. It is very true; and it is this that supplies one of the many justifications of trade unionism. To secure for the workers advances of wages, which economic conditions justify, sooner than would otherwise have been obtained, is certainly no trivial or contemptible function. But it is none the less an illusion to suppose that the general wage-level can be appreciably and permanently raised by trade union action, except in so far as it increases the efficiency of the workers or incidentally stimulates the efficiency of the employers.