The Principles of Economics Part 40

4. _The factors and agents of production mutually furnish the field of employment for each other._ Each factor is dependent for its technical efficiency on the presence of the other factors. If labor is plentiful and machines are scarce, machines bear a high rent. In accordance with the law of diminishing returns, the last unit of labor in that case contributes little to the product, and labor gets low wages, while more is attributed to the machine. Each machine thus may be considered to offer a field for the employment of labor. If population increases and land remains fixed, the need for food raises the rental value of land.

But if population increases slowly, and capital and science progress, the field for the employment of labor is enlarged; and if new lands are opened up or new resources are discovered beneath the surface of the land, the field for labor is still more enlarged and a greater share is attributed to labor. This changing character of the problem must be recognized; no share is foreordained in size.

The pursuit of the a.n.a.lysis of value along the lines of marginal utility thus leads to conclusions far less mechanical, and, to the superficial student, less simple than were the doctrines prevailing in the older economics. But the conclusions are, let us hope, more exact and more applicable to the real world, enabling the student to arrive at juster views of the present interests and of the future welfare of society.

DIVISION B--RELATION OF THE STATE TO INDUSTRY

CHAPTER 44

FREE COMPEt.i.tION AND STATE ACTION

-- I. COMPEt.i.tION AND CUSTOM

[Sidenote: Definition of economic freedom]

1. _Economic freedom exists when men's goods or their own services may be exchanged as they choose, without hindrance._ Compet.i.tion is but another expression for economic freedom. Where men are _free_ to exchange their goods and to get the best price they can, and actually do so, they are said to compete. The action of men in the ma.s.s follows pretty regular lines, corresponding to certain abiding motives. If one man dictated all industry, a very fragmentary science of economics would be possible; but the ma.s.s of men act according to some rule and are free so to act. When men are free to bring their goods to a market and get the best price possible, a single market price results.

When cost of production was believed to be the regulator of value, it was said that the law of value laid down was true "within the limit of free compet.i.tion." Market price varied ceaselessly from cost of production, and whenever it did "the law of value" as then formulated was admittedly invalid or inapplicable. The law of monopoly price was supposed to be in marked contrast to the law of compet.i.tive prices. The law of prices, as followed in our study, stated in terms of marginal utility, is equally valid in compet.i.tive and in monopolistic conditions if there is merely one-sided, or buyers', compet.i.tion. Two-sided compet.i.tion is not the sole, though it is the usual condition, which the economist takes account of in reasoning on the problem of price.

Anything that keeps men from exchanging what they have for the best price, interferes with compet.i.tion. Some of these hindrances have been noted, others are now to be.

[Sidenote: Economic freedom vs. equality of efficiency]

2. _Economic freedom does not mean equality of power or of efficiency._ It was said in discussing monopoly that it was not to be understood to be merely either scarcity or superiority. To speak of the cla.s.s of laborers of ability above that of the average day laborer as having a monopoly is certainly a confusion of monopoly with the scarcity of efficiency. The term compet.i.tion is not easy to define in practice; for it is not easy to see just what part of a man's inability to exchange is due to his own lack of efficiency, and what to things outside of himself which prevent him from exchanging his labor. But the thought is clear that free compet.i.tion--economic freedom--is limited whenever men are hindered by any power outside themselves from using their economic power as they prefer. The limitations of compet.i.tion, thus understood, are essentially social limitations, imposed by other men either unconsciously by custom, convention, tradition, or consciously by force or by laws. When, among Polynesian tribes, the custom of taboo prevailed, by which certain things were reserved to the rulers and were forbidden to the common man, there was a limitation on his economic freedom. Contrast such limits with those set by the penury of nature.

The savage may like best to hunt, but if there is no game, he must fish; he may like best to make arrowheads, but in need of food he must dig roots. Economic action is limited by lack of knowledge and skill; the resources of nature lie unused under the feet of savages who are suffering from their lack. These are limitations not of economic freedom but of economic efficiency.

[Sidenote: Limitation by custom in early society]

3. _In early society custom limits economic freedom in many ways._ The savage is not a man without law; he is bound in many ways to prescribed lines of conduct. Primitive custom usually takes on a religious sanction, and every member of the tribe is compelled to do as his fathers have done and as his neighbors are doing. He is not free to choose. Custom in some ways is favorable to the welfare of society, for it limits the power of masters and rulers, preserves the rights of individuals to common property, and is in the interest of the weak as well as of the strong. In an age of force if it were not for custom, he who had might on his side could take all. So in early society even economic relations were complex and yet almost fixed--changing only slowly from generation to generation. Every such social custom that limits the choice of men limits economic freedom.

[Sidenote: Limitation by custom in the Middle Ages]

4. _Custom ruled a large share of the industrial life of the Middle Ages._ Political and economic interests were not clearly divided in the Middle Ages. Land was the all-important kind of wealth. Military and other public services were performed by the va.s.sal, who thus at the same time paid his taxes and the rent of the land. The landlord was at once the ruler, the receiver of rents, and the collector of taxes. The rent, however, was not a compet.i.tive price, but consisted of the dues and services the forefathers had been accustomed to pay. This limited slavery, like all other slavery, was wasteful, as it did not give to the individual the strongest motive to increase the quant.i.ty and to improve the quality of his service. Trade became limited in almost every direction. Crafts and gilds arrogated to themselves the right of employment in their industries. No matter what talent the son of a peasant might show, he usually found it impossible and always found it difficult to follow the occupation of his choice. Privilege pervaded all the life of that time. In such conditions economic friction is great.

Men are kept in trades below their ability, while others gain command of monopolistic and unearned returns.

Yet through all the Middle Ages ran the forces of compet.i.tion. The inefficiency of customary services was a constant invitation to compet.i.tors. Men were striving to break over the barriers of custom and prejudice. The strife for freedom was the vital economic force even of the Middle Ages. The industrial history of that time is largely the story of the struggle of the forces of compet.i.tion against the bounds of custom.

-- II. ECONOMIC HARMONY THROUGH COMPEt.i.tION

[Sidenote: Effect of modern forces on custom]

1. _The industrial events following the discovery of America strengthened the forces making for economic freedom._ Discoveries in the Western hemisphere opened up a wide field for the adventure and enterprise of Europe. Commerce is the strongest enemy of custom, and new opportunities gave a rude shock to the conservatism both of the manor and of the village. With the rapid growth of industry and manufactures, old methods broke down. In an open market custom declines; it flourishes best in sheltered places. Further, the movement of thought in the Reformation and the spirit of the time, expressing the principle of personal liberty, allowing the individual to follow his own opinions and take the consequences, were favorable to compet.i.tion. Despite these facts the restraints of the national governments on trade continued great, in some respects increasing during the seventeenth and eighteenth centuries, in France, Holland, and England. The regulation before attempted by towns and villages was employed on a larger scale by national governments with their commercial systems. The colonies in America were used for the economic ends of the "mother countries" and for the selfish interests of the home merchants in Europe. The American Revolution was one of the bitter fruits of the English policy of trade restriction.

[Sidenote: Adam Smith's influence]

[Sidenote: The philosophy of natural law]

2. _Adam Smith's work advocating greater economic freedom had a profound influence upon public thought._ "The Wealth of Nations," the first great work on political economy, was published in the year 1776. That was the "psychological moment," as public thought was so prepared for it that it had its maximum possible influence. The year of the American Declaration of Independence gave the most striking object lesson on the evils of a selfish colonial policy that interfered on a grand scale with economic freedom. The old customs had become ill fitted to life, ill adapted to the rapid industrial changes that were going on. What was needed in many directions, both in politics and in industry, was negative action by the government, the repeal of the old laws, the overthrow of old abuses. The French Revolution, following a few years later, emphasized this thought in the political field. The philosophers of the time believed in a "natural law" in industry and politics. The reformers of the time wished to throw off the trammels of the past and to give men opportunity to exert themselves "naturally." In America the old abuses never had taken deep root, as the conditions of a new continent were not favorable to monopoly and privilege. Although the movement for the repeal of medieval laws has continued in Europe from 1776 till the present time, yet to-day custom is stronger in Europe than in America. Serfdom was not abolished until the nineteenth century in Austria and southeastern Europe, and not until a few years ago in Russia. Many economic and cultural forces furthered this movement, but the most powerful intellectual force in its favor was the work of Adam Smith. So strong an impression did Smith's book make, that in the minds of men "free trade" became almost identical in thought with political economy, whereas that was but the temporary economic problem of the eighteenth century.

[Sidenote: The doctrine of the economic harmonies]

3. _The doctrine of the "economic harmonies" is the extremest form of belief in the virtues of compet.i.tion._ Every truth in political philosophy finds some exaggerated expression. The main task of the student is to determine what shade of gray things are, rather than whether they are white or black. The belief in the benefits of compet.i.tion and the virtues of economic freedom found expression in the doctrine of "the economic harmonies." This is the faith that if men are left entirely free to do as their interest dictates, the highest and best efficiency for all will follow; it is the belief that the economic interests of all men are in harmony. The most striking evidence in support of this thought is the stimulating effect of self-interest freely working in the field of compet.i.tion. Each strives to do what will bring him the largest return, and the price others pay measures their estimate of the service. Each seeking his own interest is led to make himself more useful to others. Thus are men stimulated to sacrifice, to invention, to preparation; thus is zeal animated and are efforts sustained.

[Sidenote: Good social effects of self-interest]

Through self-interest the working force is distributed over the field of industry wherever it is most needed. The remarkable adjustment of industry to the needs of each neighborhood is brought about by individual motives, not by centralized authority. It is not mere chance that produces this harmony. Wherever consumers settle, stores are started and factories are built. Wherever work is to be done, men come in about the right number to do it. Skill is adjusted to needs by the delicate measurement of the market rate of wages. Compet.i.tion gives a definite rule of price--certainly the only definite impersonal rule; some say the only just rule. The compet.i.tive price must be appealed to even in arbitration. It is the standard to which things tend constantly to adjust themselves in an open market.

[Sidenote: Conflicting interests in the business world]

4. _Experience shows that the economic interests of men are only partly, not wholly, in harmony._ That there is a great measure of truth in the statements just made, all must admit; but their application is limited.

They are partial truths, never to be ignored, but quite false if taken, without modification, as practical rules of conduct. There are three species of compet.i.tion in every market: that between sellers, that between buyers, and that between sellers on the one hand and buyers on the other. It is to the interest of the buyers that the sellers shall be numerous, eager, and freely competing. It is to the interest of the seller that supply shall be small, that sellers shall be united, and that buyers shall compete sharply. If at any point free compet.i.tion is hindered, even the disciple of economic harmony must expect a discordant result. But in reality compet.i.tion is rarely quite complete on both sides, and when it is not, the weak suffer. Men do not start with fair and equal opportunities. All that they may be ent.i.tled to under compet.i.tion may be so little that social sympathy seeks to better the result; hence poor relief, public and private. Society as a whole has an interest in the outcome of the individual's economic struggle. It cannot see men starving or driven into crime. But the argument need not be confined to such crude and extreme cases, for wherever economic interests are not in harmony and it is possible to further the social welfare, will not society be justified in acting?

-- III. SOCIAL LIMITING OF COMPEt.i.tION

[Sidenote: Imperfections of economic freedom]

1. _Undoubted evils result from some forms of compet.i.tion under the conditions actually existing._ Complete freedom must remain a somewhat abstract ideal, and actual conditions must be recognized. Entire freedom of choice means freedom to make mistakes, a privilege whose enjoyment society cannot always permit. The child should be raised to good citizenship, and entire freedom of choice makes that impossible or improbable. The freedom of choice of the insane, the feeble-minded, and the criminal, cannot be recognized. Even where compet.i.tion is the ideal of sound adult humanity, it is not to be too suddenly or extremely applied. The inequality of faculties, the prevailing dishonesty, the ma.s.s of inherited abuses, cannot be either ignored or at once ended. The immigrant from Europe, plunged into the trying conditions of city life, suffers in health and in morals, and often becomes a burden upon society. One of many compet.i.tors may drive compet.i.tion to an evil extreme. The "problem of the twentieth man" is presented when nineteen men desire to limit compet.i.tion in ways not socially harmful, as by closing shops on Sunday or in the evening, and the one man refuses. The appeal to economic harmony often is the cry of "peace, peace, where there is no peace." The highest social result may be attained now by limiting, again by directing, in other cases possibly by fostering, compet.i.tion.

[Sidenote: Forces opposing compet.i.tion]

2. _The main rivals of compet.i.tion are custom, religion, morality, combination, and state action._ The first three of these were the strongest forces in the past and they are still operating; but combination and state action are more characteristic of the present. The influence of custom, of morality, and of religion on value, has been touched upon at several points in our study; that of combination has been recently and more fully discussed. But state action, one of the most important of all the limitations, has been reserved for the concluding portion of our work.

[Sidenote: The state's part in directing compet.i.tion]

3. _It is a function of the state to determine in part the ways in which men shall exert their powers._ This is not the sole function of the state, nor is its influence toward this end exclusive. The state puts limits to the physical rivalry of men. In the distant past no doubt physical rivalry between men was an agent of progress. The strong drove out the weak; physical contest developed more vigorous limbs, keener senses, and higher sagacity. To-day it is one of the princ.i.p.al functions of the state to suppress the physical contest between men. The citizen is surrounded with a network of rules and regulations of which he is hardly conscious. Most men easily avoid coming into contact with the police and feel no irksomeness in the control of the civil courts. The state regulates economic interests in many other ways; it controls the building of streets; it inspects the material and construction of houses; it forbids acts injurious to the public welfare; it regulates the issue of money; it determines the manner in which credit may be extended, the forms of taxation, and the direction which trade may legally take. The state has a part in shaping great industries of a public or semi-public nature, such as waterworks, railroads, and the postal system.

[Sidenote: Aim and failings of state action]

The state is as wise as the men who const.i.tute it. Men make mistakes, therefore men collectively will make them. The state regulates and limits--now wisely, now foolishly; but its aim is to preserve the benefits of compet.i.tion without its evils, to lift the compet.i.tion to a higher plane, and, by determining the direction in which men shall put forth their efforts, to give a higher and truer economic freedom.

CHAPTER 45

USE, COINAGE, AND VALUE OF MONEY

-- I. THE PRECIOUS METALS AS MONEY

[Sidenote: Money defined and reviewed]