 CHAPTER IV EARNINGS OF LABOR CONTINUED The action of demand and supply with regard to labor was discussed in the last chapter with reference to the difficulties of ascertaining the real as opposed to the nominal price of labor. But some peculiarities in this action remain to be studied, which are of a more vital character, for they affect not merely the form, but also the substance of the action of the forces of demand and supply, and to some extent they limit and hamper the free action of those forces. We shall find that the influence of many of them is not at all to be measured by their first and most obvious effects, and that these effects which are cumulative are generally far more important in the long run than those which are not, however prominent the latter may appear. The problem has thus much in common with that of the tracing of the economic influence of custom, for it has already been noticed, and it will become more clear as we go on, that the direct effects of custom in causing a thing to be sold for a price sometimes a little higher, and sometimes a little lower than it would otherwise fetch, are not really of very great importance, because any such divergence does not, as a rule, tend to perpetuate and to increase itself, but on the contrary, if it becomes considerable, it tends itself to call into action forces that counteract it. Sometimes these forces break down the custom altogether, but more often they evade it by gradual and imperceptible changes in the character of the thing sold, so that the purchaser really gets a new thing at the old price under the old name. These direct effects then are obvious, but they are not cumulative. On the other hand, the indirect effects of custom in hindering the methods of production, and the character of producers from developing themselves freely are not obvious, but they generally are cumulative, and therefore exert a deep and controlling influence over the history of the world. If custom checks the progress of one generation, then the next generation starts from a lower level than it would otherwise have done, and any retardation which it suffers itself is accumulated and added to that of its predecessor, and so on, from generation to generation. And so it is with regard to the action of demand and supply on the earnings of labor. If at any time it presses hardly on any individuals or class, the direct effects of the evils are obvious. But the sufferings that result are of different kinds, those the effects of which end with the evil by which they were caused, and are not generally to be compared in importance with those that have the indirect effect of lowering the character of the workers, or of hindering it from becoming stronger. For these last cause further weakness and further suffering, which again in their turn cause yet further weakness and further suffering, and so on, cumulatively. On the other hand, higher earnings and a strong character lead to greater strength and higher earnings, which again lead to still greater strength and still higher earnings, and so on, cumulatively. The first point to which we have to direct our attention is the fact that human agents of production are not bought and sold as machinery and other material agents of production are. The worker sells his work, but he himself remains his own property. Those who bear the expense of rearing and educating him receive but very little of the price that is paid for his services in later years. Whatever deficiencies the modern methods of business may have, they have at least this virtue, that he who bears the expenses of production of material goods receives the price that is paid for them. He who builds factories or steam engines or houses or rear slaves reaps the benefit of all net services which they render so long as he keeps them for himself, and when he sells them he gets a price which is the estimated net value of their future services, and therefore he extends his outlay until there seems to him no good reason for thinking that the gains resulting from any further investment would compensate him. He must do this prudently and boldly under the penalty of finding himself worsted in competition with others who follow a broader and more farsighted policy, and ultimately disappearing from the ranks of those who direct the course of the world's business. The action of competition and the survival and the struggle for existence of those who know best how to extract the greatest benefits for themselves from the environment tend in the long run to put the building of factories and steam engines into the hands of those who will be ready and able to incur every expense which will add more than its cost to their value as productive agents. But the investment of capital in the rearing and early training of the workers of England is limited by the resources of parents in the various grades of society, by their power of forecasting the future, and by their willingness to sacrifice themselves for the sake of their children. This evil is indeed of comparatively small importance with regard to the higher industrial grades. For in those grades most people distinctly realize the future and discount it at a low rate of interest. They exert themselves much to select the best careers for their sons and the best trainings for those careers, and they are generally willing and able to incur a considerable expense for the purpose. The professional classes especially, while generally eager to save some capital for their children, are even more on the alert for opportunities of investing it in them. And whenever there occurs in the upper grades of industry a new opening for which an extra and special education is required the future gains need not be very high relatively to the present outlay in order to secure a keen competition for the post. But in the lower ranks of society the evil is great, for the slender means and education of the parents, and the comparative weakness of their power of distinctly realizing the future, prevent them from investing capital in the education and training of their children with the same free and bold enterprise with which capital is applied to improving the machinery of any well-managed factory. Many of the children of the working classes are imperfectly fed in clothes. They are housed in a way that promotes neither physical nor moral health. They receive a school education which, though in modern England it may not be very bad so far as it goes, yet only goes a little way, and they have few opportunities of getting a broader view of life or an insight into the nature of the higher work of business, of science or art. They meet hard and exhausting toil early on the way, and for the greater part of it keep to it all their lives. At least they go to the grave carrying with them undeveloped abilities and faculties, which if they could have borne full fruit would have added to the material wealth of the country. To say nothing of higher considerations, many times as much as would have covered the expense of providing adequate opportunities for their development. But the point on which we have specially to insist now is that this evil is cumulative. The worst fed are the children of one generation, the less will they earn when they grow up, and the less will be their power of providing adequately for the material wants of their children, and so on to following generations. And again the less fully their own faculties are developed, the less will they realize the importance of developing the best faculties of their children, and the less will be their power of doing so. And conversely any change that awards to the workers of one generation better earnings, together with better opportunities of developing their best qualities, will increase the material and moral advantages which they have the power to offer to their children. While by increasing their own intelligence, wisdom, and forethought, such a change will also to some extent increase their willingness to sacrifice their own pleasures for the well-being of their children, though there is much of that willingness now even among the poorest classes, so far as their means and the limits of their knowledge will allow. The advantages which those born in one of the higher grades of society have over those born in a lower consist in a great measure of the better introductions and the better start in life which they receive from their parents, and the importance of this good start in life is nowhere seen more clearly than in a comparison of the fortunes of the sons of artisans and of unskilled laborers. There are not many skilled trades to which the son of an unskilled laborer can get easy access, and in the large majority of cases the son follows the father's calling. In the old-fashioned domestic industries this was almost a universal rule, and even under modern conditions the father has often great facilities for introducing his son to his own trade. Employers and their foremen generally give to a lad whose father they already know and trust, a preference over one for whom they would have to incur the entire responsibility. And in many trades a lad, even after he has got entrance to the works, is not very likely to make good progress and obtain a secure footing unless he is able to work by the side of his father or some friend of his father's who will take the trouble to teach him and to let him do work that requires careful supervision but has an educational value. And the son of the artisan has further advantages. He generally lives in a better and cleaner house and under material surroundings that are more consistent with refinement than those with which the ordinary laborer is familiar. His parents are likely to be better educated and to have a higher notion of their duties to their children, and last but not least his mother is likely to be able to give more of her time to the care of her family. If we compare one country of the civilized world with another, or one part of England with another, or one trade in England with another, we find that the degradation of the working classes varies almost uniformly with the amount of rough work done by women. The most valuable of all capital is that invested in human beings, and of that capital the most precious part is the result of the care and influence of the mother, so long as she retains her tender and unselfish instincts and has not been hardened by the strain and stress of unfreminant work. This draws our attention to another aspect of the principle already noticed, that in estimating the cost of production of efficient labor we must often take our unit as the family. At all events we cannot treat the cost of production of efficient men as an isolated problem. It must be taken as part of the broader problem of the cost of production of efficient men together with the women who are fitted to make their homes happy, and to bring up their children vigorous in body and mind, truthful and cleanly, gentle and brave. As the youth grows up, the influence of his parents and his schoolmaster declines, and thence forward to the end of his life his character is molded chiefly by the nature of his work, and the influence of those with whom he associates for business, for pleasure, and for religious worship. A good deal has already been said of the technical training of adults, of the decadence of the old apprenticeship system, and of the difficulty of finding anything to take its place. Here again we meet the difficulty that whoever may incur the expense of investing capital in developing the abilities of the workmen, those abilities will be the property of the workmen himself, and thus the virtue of those who have aided him must remain for the greater part its own reward. It is true that high-paid labor is really cheap to those employers who are aiming at leading the race, and whose ambition it is to turn out the best work by the most advanced methods. They are likely to give their men high wages and to train them carefully, partly because it pays them to do so, and partly because the character that fits them to take the lead in the arts of production is likely also to make them take a generous interest in the well-being of those who work for them. But though the number of such employers is increasing, they are still comparatively few. And even they cannot always afford to carry the investment of capital in the training of their men as far as they would have done if the results of investment accrued to them in the same way as the results of any improvements they might make in their machinery. Even they are sometimes checked by the reflection that they are in a similar position to that of a farmer who, with an uncertain tenure and no security of compensation in his improvements, is sinking capital in raising the value of his landlord's property. Again in paying his work-people high wages and in caring for their happiness and culture, the liberal employer can first benefits which do not end with his own generation. For the children of his work-people share in them and grow up stronger in body and in character than otherwise they would have done. The price which he has paid for labor will have borne the expensive production of an increased supply of high industrial faculties in the next generation, but these faculties will be the properties of others who will have the right to hire them out for the best price they will fetch. Neither he nor even his heirs can reckon on reaping much material reward for this part of the good that he has done. The next of those characteristics of the action of demand and supply peculiar to labor which we have to study lies in the fact that when a person sells his services he has to present himself where they are delivered. It matters nothing to the seller of bricks whether they are to be used in a building of a palace or a sewer, but it matters a great deal to the seller of labor who undertakes to perform a task of given difficulty whether or not the place in which it is to be done is a wholesome and a pleasant one, and whether or not his associates will be such as he cares to have. In those yearly hirings which still remain in some parts of England the laborer inquires what sort of a temper his new employer has, quite as carefully as what rate of wages he pays. This peculiarity of labor is of great importance in many individual cases, but it does not often exert a broad and deep influence of the same nature as that last discussed. The more disagreeable the incidence of an occupation, the higher, of course, are the wages which require to attract people into it. But whether these incidents do lasting and widespreading harm depends on whether they are such as to undermine men's physical health and strength or to lower their character. When they are not of this sort they are indeed evils in themselves, but they do not generally cause other evils beyond themselves. Their effects are seldom cumulative. Since however no one can deliver his labor in a market in which he is not himself present, it follows that the mobility of labor and the mobility of the laborer are convertible terms, and unwillingness to quit home and to leave old associations, including perhaps some loved cottage and burial-ground, will often turn the scale against a proposal to seek better wages in a new place. And when the different members of a family are engaged in different trades, and a migration, which would be advantageous to one member would be injurious to others, the inseparability of the worker from his work considerably hinders the adjustment of the supply of labor to the demand for it. But more of this hereafter. Again, labor is often sold under special disadvantages arising from the closely connected group of facts that labor power is perishable, that sellers of it are not commonly poor and have no reserve fund, and that they cannot easily withhold it from the market. The time lost when a worker is thrown out of employment cannot be recovered, though in some cases his energies may be refreshed by rest. It must, however, be remembered that much of the working power of material agents of production is perishable in the same sense, for a great part of the income, which they are also prevented from earning by being thrown out of work, is completely lost. There is indeed some saving of what the laborer has to offer there is indeed some saving of where and tear on a factory or a steamship when it is lying idle, but this is often small compared with the income which its owners have to forego. They get no compensation for their loss of interest on the capital invested, or for the depreciation which it undergoes from the action of the elements, or from its tendency to be rendered obsolete by new inventions. Again, many vendible commodities are perishable. In the strike of dock laborers in London in 1889, the perishableness of the fruit, meat, et cetera on many of the ships told strongly on the side of the strikers. The want of reserve funds and of the power of long withholding their labor from the market is common to nearly all grades of those whose work is chiefly with their hands. But it is especially true of unskilled laborers, partly because they're wageously very little margin for saving, partly because when any group of them suspends work there are large numbers who are capable of filling their places. And, as we shall see presently, when we come to discuss trade combinations, it is more difficult for them than for skilled artisans to form themselves into strong and lasting combinations, and so to put themselves on something like terms of equality in bargaining with their employers. For it must be remembered that a man who employs a thousand others is in himself an absolutely rigid combination to the extent of 1,000 units among buyers in the labor market. But these statements do not apply to all kinds of labor. Domestic servants, though they have not large reserve funds and seldom any formal trades union, are sometimes better able than their employers to act in concert. The total real wages of domestic servants of fashionable London are very high in comparison with other skilled trades in which equal skill and ability are required. But on the other hand, those domestic servants who have no specialized skill and who hire themselves to persons with very narrow means have not been able to make even tolerably good terms for themselves. They work very hard for very low wages. Turning next to the highest grades of industry, we find that as a rule they have the advantage in bargaining over the purchaser of their labor. Many of the professional classes are richer, have larger reserve funds, more knowledge and resolution, and much greater power of concerted action with regard to the terms on which they sell their services than the greater number of their clients and customers. If further evidence were wanted that the disadvantages of bargaining under which the vendor of labor commonly suffers depend on his own circumstances and qualities and not on the fact that the particular thing which he has to sell is labor, such evidence could be found by comparing the successful barrister or solicitor or physician or opera singer or jockey with the poorer independent producers of vendible goods. Those, for instance, who in remote places collect shellfish to be sold in the large central markets have little reserve funds and little knowledge of the world and of what other producers are doing in other parts of the country, while those to whom they sell are a small and compact body of wholesale dealers with wide knowledge and a large reserve fund and in consequence the sellers are at a great disadvantage in bargaining. And much the same is true of the women and children who sell handmade lace and of the garret masters of East London who sell furniture to large and powerful dealers. It is, however, certain that manual laborers as a class are at a disadvantage in bargaining and that the disadvantage wherever it exists is likely to be cumulative in its effects. For those so long as there is any competition among employers at all, they are likely to bid for labor something not very much less than its real value to them. That is, something not very much less than the highest price they would pay rather than go on without it. Yet anything that lowers wages tends to lower the efficiency of the laborer's work and therefore to lower the price which the employer would rather pay than go without that work. The effects of the laborer's disadvantage in bargaining are therefore cumulative in two ways. It lowers his wages and, as we have seen, this lowers his efficiency as a worker, and thereby lowers the normal value of his labor. And in addition, it diminishes his efficiency as a bargainer and thus increases the chance that he will sell his labor for less than its normal value. CHAPTER V. EARNINGS OF LABOR CONTINUED. The next peculiarity in the action of demand and supply with regard to labor, which we have to consider, is closely connected with some of those we have already discussed. It consists in the length of time that is required to prepare and train labor for its work and in the slowness of the returns which result from this training. This discounting of the future, this deliberate adjustment of supply of expensively trained labor to the demand for it, is most clearly seen in the choice made by parents of occupations for their children and in their efforts to raise their children in a higher grade than their own. It was these chiefly that Adam Smith had in view when he said, when any expensive machine is erected, the ordinary work to be performed by it before it is worn out, it must be expected, will replace the capital laid out, with at least the ordinary profits. A man educated at the expense of much labor and time to any of those employments which require extraordinary dexterity and skill may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labor, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this too in a reasonable time, regard being had to the very uncertain duration of human life, in the same manner as to the more certain duration of the machine. But this statement is to be received only as broad indication of general tendencies, for independently of the fact that in rearing and educating their children, parents are governed by motives different from those which induce a capitalist undertaker to erect a new machine. The period over which the earning power extends is generally greater in the case of a man than of a machine, and therefore the circumstances by which the earnings are determined are less capable of being foreseen, and the adjustment of supply to demand is both slower and more imperfect. For though factories and houses, the main shafts of a mine and the embankments of a railway may have much longer lives than those of the men who made them, yet these are exceptions to the general rule. Not much less than a generation elapses between the choice by parents of a skilled trade for one of their children and his reaping the choice. And meanwhile the character of the trade may have been almost revolutionized by changes, of which some probably threw long shadows before them, but others were such as could not have been foreseen even by the shrewdest persons and those best acquainted with the circumstances of the trade. The working classes in nearly all parts of England are constantly on the lookout for advantageous openings for the labor of themselves and their children, and they question friends and relatives who have settled in other districts as to the wages that are to be got in various trades and as to their incidental advantages and disadvantages. But it is very difficult to ascertain the causes that are likely to determine the distant future of the trades which they are selecting for their children and there are not many who enter on this obstruce inquiry. The majority assume without a further thought that the condition of each trade in their own time sufficiently indicates what it will be in the future and so far as the influence of this habit extends the supply of labor in a trade in any one generation tends to conform to its earnings not in that but in the preceding generation. Again some parents observing that the earnings in one trade have been for some years rising relatively to others in the same grade assume that the course of change is likely to continue in the same direction. But it often happens that the previous rise was due to temporary causes and that even if there had been no exceptional influx of labor into the trade the rise would have been followed by a fall instead of a further rise and that if there is such an exceptional influx the consequence may be a supply of labor so excessive that its earnings remain below their normal level for years. Next we have to recall the fact that although there are some trades which are difficult of access except to the sons of those already in them yet the majority draw recruits from the sons of those in other trades in the same grade and therefore when we consider the dependence of the supply of labor on the resource of those who bear the expenses of its education and training we must often regard the whole grade rather than any one trade as our unit and say that in so far as the supply of labor is limited by the funds available for defraying its cost of production the supply of labor in any grade is determined by the earnings of that grade in the last rather than in the present generation. It must however be remembered that the birth rate in every grade a society is determined by many causes among which deliberate calculations of the future hold but a secondary place though even in a country in which tradition counts for as little as it does in modern England a great influence is exerted by custom and public opinion which are themselves the outcome of the experience of past generations but we must not omit to notice those adjustments of the supply of labor to the demand for it which are affected by movements of adults from one trade to another one grade to another and one place to another the movements from one grade to another can seldom be on a very large scale although it is true that exceptional opportunities may sometimes develop rapidly a great deal of latent ability among the lower grades thus for instance the sudden opening out of a new country or such an event is the American war will raise from the lower ranks of labor many men who bear themselves well in difficult and responsible posts but the movements of adult labor from trade to trade and from place to place can in some cases be so large and so rapid as to reduce within a very short compass the period which is required to enable the supply of labor to adjust itself to the demand that general ability which is easily transferable from one trade to another is every year rising in importance relatively to that manual skill and technical knowledge which are specialized to one branch of industry and thus economic progress brings with it on the one hand a constantly increasing changefulness in the methods of industry and therefore a constantly increasing difficulty in predicting the demand for labor of any kind a generation ahead but on the other hand it brings also an increasing power of remedying such errors of judgment as have been made let us now revert to the principle that the income derived from the appliances for the production of a commodity exerts a controlling influence in the long run over their own supply and price and therefore over the supply and the price of the commodity itself but that within short periods there is not time for the exercise of any considerable influence of this kind and let us inquire how this principle needs to be modified when it is applied not to the material agents of production which are only a means towards an end and which may be the private property of the capitalist but to human beings who are ends as well as means of production and who remain their own property to begin we must notice that since labor is slowly produced and slowly worn out we must take the term long period more strictly and regarded as generally implying a greater duration when we are considering the relations of normal demand and supply for labor than when we were considering them for ordinary commodities. There are many problems the period of which is long enough to enable the supply of ordinary commodities and even of most of the material appliances required for making them to be adjusted to the demand and long enough therefore to justify us in regarding the average prices of those commodities during the period as normal and is equal to their normal expenses of production and a fairly broad use of the term while yet the period would not be long enough to allow the supply of labor to be adjusted at all well to the demand for it. The average earnings of labor during this period therefore would not be at all certain to give about a normal return to those labor but they would rather have to be regarded as determined by the available stock of labor on the one hand and the demand for it on the other. Let us consider this point more closely. Market variations in the price of a commodity are governed by the temporary relations between demand and the stock that is in the market or with an easy access of it. When the market price so determined is above its normal level those who are able to bring new supplies into the market in time to take advantage of the high price receive an abnormally high reward and if they are small handicraftsmen working on their own account the whole of this rise in price goes to increase their earnings. In the modern industrial world however those who undertake the risks of production and to whom the benefits of any rise in price and the evils of any fall come in the first instance are the undertakers of industry. Their net receipts in excess of the immediate outlay involved for making the commodity that is its prime money cost are a return to ride for the time being from the capital invested in their business in various forms including their own faculties and abilities. But when trade is good the force of competition among the employers themselves each desiring to extend his business and to get for himself such as possible of this high return makes them consent to pay higher wages to their employees in order to obtain their services and even if they act in concert and refuse for a time any concession a combination among their employees may force it from them under penalty of foregoing the harvest which the favorable turn of the market is offering. The result generally is that before long a great part of the gains are being distributed among the employees and earnings remain above the normal level so long as the prosperity lasts. Thus the high wages of minors during the inflation which culminated in 1873 were governed for the time by the relation in which the demand for their services stood to the amount of skilled mining labor available the unskilled labor imported into the trade being counted as equivalent to an amount of skilled labor of equal efficiency. Had it been impossible to impart labor at all the earnings of minors would have been limited only by the elasticity of the demand for coal on the one hand and the gradual coming to age of the rising generation of miners on the other. As it was men were drawn from other occupations which they were not eager to lead for they could have got high wages by staying where they were since the prosperity of the coal and iron trades was what the highest crest of a swelling tide of credit. These new men were unaccustomed to underground work its discomforts told heavily on them while its dangers were increased by their want of technical knowledge and their want of skill caused them to waste much of their strength. The limits therefore which their competition imposed on the rise of the special earnings of miners skill were not narrow. When the tide turned those of the newcomers who were the least adapted for the work left the mines but even then the miners who remained many for the work to be done and their wage fell till it reached that limit at which those who were least adapted for the work and life of a miner could get more by selling their labor in other trades. And that limit was a low one for the swollen tide of credit which culminated in 1873 had undermined solid business impaired the true foundations of prosperity and left nearly every industry in a more or less unhealthy and depressed condition. We have already remarked that only part of the return derived from an improvement which is being exhausted can be regarded as being its net earnings. For some equivalent to the exhaustion of the capital value for the improvement must be deducted from these returns before they can be counted as net income of any kind. Similarly allowance must be made for the wear and tear of machine as well as for the cost of working it before we can arrive at its net earnings. Now the miner is as liable to wear and tear as machinery is and a deduction must be made from his earnings also on account of wear and tear when the special return of his skill is being estimated. But in his case there is a further difficulty for while the owner of machinery does not suffer from its being kept long at work when the expenses of working it including wear and tear have once been allowed for the owner of skilled faculties does suffer when they are kept long at work and he suffers incidental inconveniences such as loss of recreation and of freedom in movement etc. If the miner has only four days work in one week and earns one pound and in the next week he has six days work and earns one pound, ten shillings only part of this extra ten shillings can be regarded as return for his skill for the remainder must be reckoned as the recompense of his additional fatigue as well as wear and tear. To conclude this part of our argument the market price of everything i.e. its price for short periods is determined mainly by the relations in which the demand for it stands to the available stocks of it and in the case of any agent of production whether it be human or material agent this demand is derived from the demand for those things which it is used in making. In these relatively short periods fluctuations in wages follow and do not proceed fluctuations in the selling prices of the goods produced but the incomes which are being earned by all agents of production human as well as material and those which appear likely to be earned by them in the future exercise a ceaseless influence on those persons by whose action the future supplies of these agents are determined. There is a constant tendency towards a position of normal equilibrium in which the supply of each of these agents shall stand in such a relation to the demand for its services as to give those who have provided the supply a sufficient reward for their efforts and sacrifices. If the economic conditions of the country remain stationary sufficiently long this tendency would realize itself in such an adjustment of supply to demand that both machines and human beings would earn generally what corresponded fairly with their cost of rearing and training conventional necessaries as well as those things which are strictly necessary being reckoned for but conventional necessaries might change under the influence of non-economic causes even while economic conditions themselves were stationary and this change would affect the supply of labor and would lessen the national dividend and slightly alter its distribution as it is the economic conditions that the country are constantly changing and the point of adjustment of normal demand and supply in relation to labor is constantly being shifted. We may now discuss the question under what head to class those extra incomes which are earned by extraordinary natural abilities. Since they are not the result of the investment of human effort in an agent of production for the purpose of increasing its efficiency there is a strong prima facie cause for regarding them as a larger surplus resulting from the possession of a differential advantage for production freely given by nature. This analogy is valid and useful so long as we are merely analyzing the component parts of the income earned by an individual and there is some interest in the inquiry how much of the income of successful men is due to chance to opportunity to the conjecture how much to the good start that they have had in life how much his profits from the capital invested in their special training how much is the reward of exceptionally hard work and how much remains as a producer surplus or rent resulting from the possession of rare natural gifts. But when we are considering the whole body of those engaged in any occupation we are not at liberty to treat the exceptionally high earnings of successful men as rent without making allowance for the low earnings of those who fail. For the supply and the occupation is governed other things being equal by the earnings of which it holds out the prospect. The future of those who enter the occupation cannot be predicted with certainty. Some who start with the least promise turn out to have great latent ability and aided perhaps by good luck they earn large fortunes while others who made a brilliant promise at starting come to nothing. For the chances of success and failure are to be taken together much as the chances of a good and bad haul by a fisherman or of good and bad harvest by a farmer and a youth when selecting an occupation or his parents when selecting one for him are far from leaving out of the account the fortunes of successful men. These fortunes are therefore part of the price that is paid in the long run for the supply of labor and ability that seeks the occupation they enter into the true or long period normal supply price of labor in it. It may be conceded, however, that if a certain class of people were marked out from their birth as having special gifts for some particular occupation and for no other, so that they would be sure to seek that occupation in any case, then the earnings which such men would get might be left out of account as exceptional when we were considering the chances of success or failure for ordinary persons. But as a matter of fact that is not the case for a great part of a person's success any occupation depends on the development of talents and tastes, the strength of which cannot be clearly predicted until he has already committed himself to a choice of occupation. Such predictions are at least as fallible as those which a new settler can make as to the future fertility and advantageous situation of the various plots of land that are offered for his selection. And partly for this reason the extra income derived from rare natural qualities bears a closer analogy to the surplus produce from the holding of a settler who has made an exceptionally lucky selection than to the rent of land in an old country. But land and human beings differ in so many respects that even that analogy if pursued very far is apt to mislead and the greatest caution is required in the application of the term producer surplus to the earnings of extraordinary ability. Finally it may be observed that the argument of Part 5, Chapter 8, Part 11, with regard to the special earnings, whether of the nature of rents or quasi-rents of appliances capable of being used in several branches of production is applicable to the special earnings of natural abilities and of skill. When land or machinery capable of being used for producing one commodity is used for another, the supply price of the first is raised, though not by an amount dependent on the terms which those appliances for production would yield in the second use. So when trained or skilled natural abilities which could have been applied to produce one commodity are applied for another, the supply price of the first is raised through the narrowing of its sources of supply. End of Chapter 5 Chapter 6 of Principles of Economics Book 6 This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer please visit LibriVox.org Recording by Rhonda Federman. Principles of Economics Book 6 by Alfred Marshall Chapter 6 Interest of Capital The relations between demand and supply cannot be studied by themselves in the case of capital any more than they could in the case of labor. All the elements of the great central problem of distribution and exchange mutually govern one another. And the first two chapters of this book and more especially the parts that relate directly to capital may be taken as an introduction to this and the next two chapters. But before entering on the detailed analysis with which they will be mainly occupied something may be said as to the position which the modern study of capital and interest holds in relation to earlier work. The aid which Economic Science has given towards understanding the part played by capital in our industrial system is solid and substantial. But it has made no startling discoveries. Everything of importance which is now known to economists has long been acted upon by able businessmen though they may not have been able to express their knowledge clearly or even accurately. Everyone is aware that no payment would be offered of capital unless some gain were expected from that use and further that these gains are of many kinds. Some borrow to meet a pressing need real or imaginary and pay others to sacrifice the present to the future in order that they themselves may sacrifice the future to the present. Some borrow to obtain machinery and other intermediate goods with which they may make things to be sold at a profit some to obtain hotels theaters and other things which yield their services directly but are yet a source of profit to those who control them. Some borrow houses for themselves to live in or else the means wherewith to buy or build their own houses and the absorption of the resources of the country and such things as houses increases other things being equal with every increase in those resources and every adequate fall in the rate of interest just as does the absorption of those resources in machinery docks etc. The demand for durable stone houses in place of wood houses which give nearly equal accommodation for the time indicates that a country is growing in wealth and that capital is to be had at a lower rate of interest and it acts on the market for capital and on the rate of interest in the same way as would a demand for new factories or railways. Everyone knows that people will not lend gratis as a rule because even if they have not themselves some good use to which to turn the capital or it's equivalent they are sure to be able to find others to whom it's use would be of benefit and who would pay for the loan of it and they stand out for the best market. Everyone knows that few even among the Anglo-Saxon and other steadfast and self-disciplined races care to save a large part of their incomes and that many openings have been made for the use of capital in recent times by the progress of discovery and the opening up of new countries and thus everyone understands generally the causes which have kept the supply of accumulated wealth so small relatively to the demand for it's use and that it's use is on the balance of source of gain and can therefore require a payment when loaned. Everyone is aware that the accumulation of wealth is held in check and the rate of interest so far sustained by the preference which the great mass of humanity have for present over deferred gratifications or in other words by their unwillingness to wait and indeed the true work of economic analysis in this respect is not to emphasize this familiar truth but to point out how much more numerous are the exceptions to this general preference than would appear at first sight. These truths are familiar and they are the basis of the theory of capital and interest but in the affairs of ordinary life truths are apt to present themselves in fragments. Particular relations are seen clearly at one time but the interactions of mutually relations are seldom grouped as a whole. The chief task of economics then as regards capital is to set out in order and in their mutual relations all the forces which operate in the production and accumulation of wealth and the distribution of income so that as regards both capital and other agents of production they may be seen mutually governing one another. Next it has to analyze which sway men in their choice between present and deferred gratifications including leisure and opportunities for forms of activity that are their own reward but here the post of honor lies with mental science the received doctrines of which economic supplies in combination with other material to its special problems. Its work is therefore heavier in that analysis on which we are to be engaged in the next two chapters of the gains that are derived from the aid of accumulated wealth in the attainment of desirable ends especially when that wealth takes the form of trade capital for these gains or profits contain many elements some of which belong to interest for the use of capital in a broad sense of the term while others constitute net interest or interest properly so called to institute the reward of managing ability and of enterprise including the bearing of risks and others again belong not so much to any one of these agents of production as to their combination. The scientific doctrine of capital has had a long history of continuous growth and improvement in these three directions during the last three centuries. Adam Smith appears to have seen indistinctly and Ricardo and distinctly almost everything of primary importance in the theory very much as it is known now and though one writer has preferred to emphasize one of its many sides and another another there seems no good reason for believing that any great economist since the time of Adam Smith has ever completely overlooked any side and especially it is certain that nothing which would be familiar to men of business was overlooked by the practical financial genius of Ricardo but there has been progress almost everyone has improved some part and given it a sharper and clearer outline or else has helped to explain the complex relations of its different parts scarcely anything done by any great thinker has had to be undone but something new has constantly been added but if we go back to ancient history we certainly do seem to find an absence of clear ideas as to the nature of the services which capital renders in production and for which interest is the payment and since this early history is exercising an indirect influence on the problems of our own age something should be said of it here in primitive communities there were but few openings for the employment of fresh capital in enterprise and anyone who had property that he did not need for his own immediate use would seldom forgo much by lending it on good security to others without charging any interest for the loan those who borrowed were generally the poor and the weak people whose needs were urgent and whose powers of bargaining were very small those who lent were as a rule either people who spared freely of their super fluidity to help their distressed neighbors or else professional money lenders to these lasts the poor man had resort in his need and they frequently made a cruel use of their power entangling him in meshes from which he could not escape without great suffering and perhaps the loss of personal freedom of himself or his children not only uneducated people but the sages of early times the fathers of the medieval church and the English rulers of India in our own time have been inclined to say that money lenders traffic in other people's misfortunes seeking gain through their adversity under the pretense of compassion they dig a pit for the oppressed in such a state of society it may be a question for discussion whether it is to the public advantage that people should be encouraged to borrow wealth under a contract to return it with increase after a time whether such contracts taken in one with another do not on the whole diminish rather than increase the sum total of human happiness but unfortunately attempts were made to solve this difficult and important practical question by a philosophical distinction between the interest for the loan of money and the rental of material wealth Aristotle had said that money was barren and that to derive interest from lending it out was to an unnatural use and following his lead scholastic writers argued with much labor and ingenuity that he who lent out a house or a horse might charge for its use because he gave up the enjoyment of a thing that was directly productive of benefit but they found no similar excuse for the interest on money that they said was wrong because it was a charge for a service which did not cost the lender anything if the loan really cost him nothing if he could have made no use of the money himself if he was rich and the borrower poor and needy then it might no doubt be argued that he was morally bound to lend his money grudice but on the same grounds he would have been bound to lend without charge to a poor neighbor a house which he would not himself inhabit or a horse for a day's work of which he had himself no need the doctrine of these writers therefore really implied and in fact it did convey to people's minds the mischievous fallacy that independently of the special circumstances of the borrower and the lender the loan of money i.e. the command over things in general is not a sacrifice on the part of the lender and a benefit to the borrower of the same kind as the loan of a particular commodity they obscured the fact that he who borrows money can buy for instance a young horse whose services he can use and which he can sell when the loan has to be returned at as good a price as he paid for him the lender gives up the power of doing this the borrower acquires it there is no substantial difference between the loan of the purchase price of a horse and the loan of a horse history has in part repeated itself and in the modern western world a new reforming impulse has derived strength from and given strength to another erroneous analysis of the nature of interest as civilization has progressed the loans of wealth to needy people have become steadily more rare and a less important part of the whole while the loans of capital for productive use in business have grown at an ever increasing rate and in consequence though the borrowers are not now regarded as the subjects of oppression a grievance has been found in the fact that all producers whether working with borrowed capital or not reckon interest on the capital used by them as among the expenses which they require to have returned to them in the long run in the price of their wares as a condition of their continuing business on this account and on account of the openings the present industrial system offers of amassing great wealth by sustained good fortune and speculation it has been argued that the payment of interest in modern times oppresses the working class indirectly though not directly and that it deprives them of their fair share of the benefits resulting from the growth of knowledge and hence is derived the practical conclusion that it would be for the general happiness and therefore right that no private person should be allowed to own any of the means of production nor any direct means of enjoyment saves such as he needs for his own use this practical conclusion has been supported by other arguments which will claim our attention but at present we are only concerned with the doctrine that has been used by William Thompson Redberters Carl Marx and others in support of it they argued that labor always produces a surplus above its wages and the wear and tear of capital used in aiding it and that the wrong done to labor lies in the exploitation of this surplus by others but this assumption that the whole of the surplus is the produce of labor already takes for granted what they ultimately profess to prove by it they make no attempt to prove it and it is not true it is not true that the spinning yarn in a factory after allowance has been made for the wear and tear of the machinery is the product of the labor of the operatives it is the product of their labor together with that of the employer and subordinate managers and of the capital employed and that capital itself is the product of labor and waiting and therefore the spinning is the product of labor of many kinds and of waiting if we admit that it is the product of labor alone and not of labor and waiting we can no doubt be compelled by inexorable logic to admit that there is no justification for interest the reward of waiting for the conclusion is implied in the premise Rudbertus and Marx do indeed boldly claim the authority of Ricardo for their premise but it is really as opposed to his explicit statement and the general tenor of his theory of value as it is to common sense to put the same thing in other words if it be true that the postponement of gratifications involves in general a sacrifice on the part of him who postpones just as additional effort does on the part of him who labors and if it be true that this postponement enables man to use methods of production of which cost is great but by which the aggregate of enjoyment is increased as certainly as it would be by an increase of labor then it cannot be true that the value of a thing depends simply on the amount of labor spent on it every attempt to establish this premise has necessarily assumed implicitly that the service performed by capital is a free good rendered without sacrifice and therefore needing no interest to induce its continuance and this is the very conclusion which the premises wanted to prove the strength of Robertuses and Marx's sympathies with suffering must always claim our respect but what they regarded as the scientific foundation of their practical proposals appears to be little more than a series of arguments in a circle to the effect that there is no economic justification for interest while that result has been all along latent in their premises though in the case of Marx it was routed by mysterious Hegelian phrases with which he coquetted as he tells us in his preface we may now proceed with our analysis the interest of which we speak when we say that interest is the earnings of capital simply or the reward of waiting simply is net interest but what commonly passes by the name interest includes other elements besides this and may be called gross interest these additional elements are the more important the lower and more rudimentary the state of commercial security and of the organization of credit thus for instance in medieval times when a prince wanted to forestall some of his future revenues he borrowed perhaps a thousand ounces of silver and undertook to pay back fifteen hundred at the end of the year there was however no perfect security that he would fulfill the promise and perhaps the lender would have been willing to exchange that promise for an absolute certainty of receiving thirteen hundred at the end of the year in that case while the nominal rate at which the loan was made was fifty percent the real rate was thirty the necessity for making this allowance for insurance against risk is so obvious that it is not often overlooked but it is less obvious that every loan causes some trouble to the lender that when from the nature of the case the loan involves considerable risk a great deal of trouble has often to be taken to keep these risks as small as possible and that then a great part of what appears to the borrower as interest is from the point of view of the lender earnings of management of a troublesome business at the present time the net interest on capital in England is a little under three percent per annum for no more than that can be obtained by investing in such first rate stock exchange securities as yield to the owner a secure income without appreciable trouble or expense on his part and when we find capable businessmen borrowing on perfectly secure mortgages at say four percent we may regard that gross interest four percent as consisting of net interest or interest proper to the extent of a little under three percent end of earnings of management by the lenders to the extent of rather more than one percent again a porn brokers business involves next to no risk but his loans are generally made at a rate of twenty five percent per annum or more the greater part of which is really earnings of management of a troublesome business or to take a more extreme case there are men in London and Paris and probably elsewhere who make a living by lending money to costar mongers the money is often lent at the beginning of the day for the purchase of fruit et cetera and returned at the end of the day when the sales are over at a profit of ten percent there is a little risk in the trade and the money is seldom lost now a farthing invested at ten percent a day would amount to a million pounds at the end of a year but no one can become rich by lending to costar mongers because no one can lend much in this way the so called interest on the loans really consists almost entirely of earnings of a kind of work for which few capitalists have a taste it is then necessary to analyze a little more carefully the extra risks which are introduced into business when much of the capital used in it has been borrowed let us suppose that two men are carrying on similar businesses the one working with his own the other chiefly with borrowed capital there is one set of risks which is common to both which may be described as the trade risks of the particular business in which they are engaged they arise from fluctuations in the markets for their raw materials and finished goods from unforeseen changes of fashion from new inventions to the incursion of new and powerful rivals into their respective neighborhoods and so on but there is another set of risks the burden of which has to be born by the man working with borrowed capital and not by the other and we may call them personal risks for he who lends capital to be used by another for trade purposes has to charge a high interest as insurance against the chance of some flaw or deficiency in his personal character or ability the borrower may be less able than he appears less energetic or less honest he has not the same inducements as a man working with his own capital has to look failure straight in the face and withdraw from a speculative enterprise as soon as it shows signs of going against him on the contrary should his standard of honor not be high he may be not very keen as to his losses for if he withdraws at once he will have lost all he has of his own and if he allows the speculation to run on any additional loss will fall on his creditors and any gain will come to himself many creditors lose through semi-fraudulent inertness of this kind on the part of their debtors and a few lose through deliberate fraud the debtor for instance may conceal in subtle ways a majority that is really his creditors until his bankruptcy is over and he is entered on a new business career he can bring gradually into play his secret reserve funds without exciting over much suspicion the price then that the borrower has to pay for the loan of capital in which he regards his interest is from the point of view of the lender more properly to be regarded as profits for it includes insurance against risks which are often very heavy and earnings of management for the task which is often very arduous of keeping those risks as small as possible variations in the nature of these risks and of the task of management will of course occasion corresponding variations in the gross interest so called that is paid for the use of money the tendency of competition is therefore not towards equalizing this gross interest on the contrary the more thoroughly lenders and borrowers understand their business the more certainly will some classes of borrowers obtain loans at a lower rate than others we must defer to a later stage our study of the marvelously efficient organization of the modern money market by which capital is transferred from one place where it is super abundant to another where it is wanted or from one trade that is in the process of contraction for which is being expanded and at present we must be contented to take it for granted that a very small difference between the rates of net interest to be got on the loan of capital in two different modes of investment in the same western country will cause capital to flow though perhaps by indirect channels from the one to the other it is true that if either of the investments is on a small scale and few people know much about it the flow of capital may be slow one person for instance may be paying 5% on a small mortgage while his neighbor is paying 4% on a mortgage which offers no better security but in all large affairs the rate of net interest so far as it can be disentangled from the other elements of profits is nearly the same all over England and further the divergencies between the average rates of net interest in different countries are rapidly diminishing as a result of the general growth of intercourse and especially of the fact that the leading capitalists of all these countries hold large quantities of stock exchange securities which yield the same revenue and are sold practically at the same price on the same day all over the world when we come to discuss the money market we shall have to study the causes which render the supply of capital for immediate use much larger at some times than at others in which at certain times makes bankers and others contented with an extremely low rate of interest provided the security be good and they can get their money back into their own hands quickly in case of need at such times they are willing to lend for short periods even to borrowers whose security is not of the first order at a rate of interest that is not very high for their risk of loss are much reduced by their power of refusing to renew the loan if they notice any indication of weakness on the part of the borrower and since short loans on good security are fetching only a nominal price nearly the whole of what interest they get from him is insurance against risk and remuneration of their own trouble but on the other hand such loans are not really very cheap to the borrower they surround him by risks to avoid which he would often be willing to pay a much higher rate of interest if the money misfortune should injure his credit or if a disturbance of the money market should cause a temporary scarcity of loanable capital he may be quickly brought into great straits loans to traders at nominally low rates of interest if for short periods only do not therefore really form exceptions to the general rule just discussed the flow of investment resources from their common source in production consists of two streams the smaller consists of new additions to the accumulated stock the larger merely replaces that which is destroyed whether by immediate consumption as in the case of food fuel etc by wear and tear as in that of railway irons by the lapse of time as in that of a thatched roof or a trade directory or by all these combined the annual flow of this second stream is probably not less than a quarter of the total stock of capital even in a country in which the prevailing forms of capital are as durable as in England it is therefore not unreasonable to assume for the present that the owners of capital in general have been able in the main to adapt its forms to the normal conditions of the time so as to derive as good and net income from their investments in one way as another it is only on this supposition of liberty to speak of capital in general as being accumulated under the expectation of a certain net interest which is the same for all its forms for it cannot be repeated too often that the phrase the rate of interest is applicable to old investments of capital only in a very limited sense for instance we may perhaps estimate that a trade capital of some 7000 millions is invested in the different trades of this country at about 3% net interest but such a method of speaking though convenient and justifiable for many purposes is not accurate what ought to be said is that taking the rate of net interest on the investments of new capital in each of those trades i.e. on marginal investments to be about 3% then the aggregate net income rendered by the whole of the trade in the various trades is such that if capitalized at 33 years purchase that is on the basis of interest at 3% it would amount to some 7000 million pounds for the value of the capital already invested in improving land or erecting a building and making a railway or a machine is the aggregate discounted value of its estimated future net incomes and if its prospective income yielding power should diminish its value would fall accordingly and would be the capitalized value of that smaller income after allowing for depreciation throughout the present volume we are supposing in the absence of any special statement to the contrary that all values are expressed in terms of money of fixed purchasing power just as astronomers have taught us to determine the beginning and ending of the day with reference not to the actual sun but to a mean sun which is supposed to move uniformly through the heavens further the influences which changes in the purchasing power of money do exert on the terms on which loans are arranged are most conspicuous in the market for short loans a market which differs in many of its incidents from any other and a full discussion of their influences must be deferred but they should be noticed here in passing at all events as a point of abstract theory for the rate of interest which the borrower is willing to pay measures the benefits that he expects to derive from the use of the capital only on the assumption that the money has the same purchasing power when it is borrowed and when it is returned let's suppose for instance that a man borrows 100 pounds under contract to pay back 105 pounds at the end of the year if meanwhile the purchasing power of money has risen 10% or which is the same thing general prices have fallen in the ratio of 10 to 11 he cannot get the 105 pounds which he has to pay back without selling 1 tenth more commodities than would have been sufficient for the purpose at the beginning of the year assuming that is the things which he handles have not changed in value relatively to things in general he must sell at the end of the year commodities which would have cost him 115 pounds 10 shillings at the beginning in order to pay back with interest his loan of 100 pounds and therefore he has lost ground unless the commodities have increased under his hands 15.5% while nominally paying 5% for the use of his money he has really been paying 15.5% on the other hand if prices had risen so much that the purchasing power of money had fallen 10% during the year and he could get 100 pounds for things which cost him 90 pounds at the beginning of the year then instead of paying 5% for the loan he would really be paid 5.5% for taking charge of the money when we come to discuss the causes of alternating periods of inflation and depression of commercial activity we shall find that they are intimately connected with those variations in the real rate of interest which are caused by changes in the purchasing power of money for when prices are likely to rise people rush to borrow money and buy goods and thus help prices to rise business is inflated and is managed recklessly and wastefully those working on borrowed capital pay back less real value than they borrowed and enrich themselves at the expense of the community when afterwards credit is shaken and prices begin to fall everyone wants to get rid of commodities and get hold of money which is rapidly rising in value this makes prices fall all the faster and the further fall makes credit shrink even more and thus for a long time prices fall because prices have fallen we shall find that fluctuations and prices are caused only to a very slight extent by fluctuations in the supply of the precious metals and that they would not be much diminished by the adoption of gold and silver gold as the basis of our currency but the evils which they cause are so great that it is worthwhile to do much in order to diminish them a little these evils however are not necessarily inherent in those slow changes in the purchasing power of money which follow the course of man's changing command over nature and in such changes there is generally both loss and gain in the 50 years preceding the great war improvements in the arts of production and in the access to rich sources of supply of raw material doubled the efficiency of man's labor in procuring many of the things which he wants an injury would have been done to those members of the working classes now indeed rapidly diminishing a number whose money wages are much influenced by custom if the purchasing power of a sovereign in terms of commodities had remained stationary instead of following as it has the increasing command by man over nature but this matter will require full discussion in another place End of Chapter 6 Recording by Ronda Fetterman Please visit Recording by Ashwin Jain Principles of Economics Books X by Alfred Marshall Chapter 7 Profits of Capital and Business Power In the concluding chapters of Book 5 we made some study of the various forms of business management and the faculties required for them and we saw how the supply of business power in command of capital will be regarded as consisting of three elements the supply of capital the supply of the business power to manage it and the supply of the organization by which the two are brought together and made effective for production In the last chapter we were concerned mainly with interest and earnings of the first of these elements In the earlier part of this chapter we shall be occupied with the earnings of the second and third taken together which we have called gross earnings of management and afterwards we shall pass to the relation in which this stands to the earnings of the second taken by itself which we have called net earnings of management We have to inquire more closely into the nature of the services which are rendered to society by those who undertake and manage business enterprises and the reward of their work and we shall find that the causes by which these are governed are less arbitrary and present closer analogies to those which cover other kinds of earnings than is commonly supposed We must however make a distinction at starting We must call to mind that the struggle for survival tends to make those methods of organization prevail which are best fitted to thrive in their environment but not necessarily those best fitted to benefit their environment unless it happens that they are duly rewarded for all the benefits with the confer with a direct or indirect and in fact there is not so for as a general rule the law of substitution which is nothing more than a special and limited application of the law of survival of the fittest tends to make one method of industrial organization supplant another when it offers a direct and immediate service at a lower price The direct and ultimate services which either will render have as a general rule little or no weight in the balance and as a result many businesses languish and die which might in the long run have done good for society if only they could have obtained a fair start this is especially true of some forms of cooperative associations in this connection we may divide employers and other undertakers into two classes those who open out new and improved methods of business and those who follow beaten tracks The services which later perform for society are chiefly direct and seldom missed their full reward but it is otherwise with the former class for instance economies have lately been introduced into some branches of iron manufacture by diminishing the number of times with the metal is heated in passing from ore to its final form and some of these new inventions have been of such a nature that they could neither be patented nor kept secret let us suppose then that a manufacturer with a capital of £50,000 is getting in normal times a net profit of £4,000 a year 1500 of which we may regard as its earnings of management having £25,000 for the other two elements of profits we assume that he has been working so far in the same way as his neighbours and showing an amount of ability though great is no more than the normal or average ability of the people who feel such exceptionally difficult post that is we assume that £1500 a year is the normal earnings for the kind of work he has been doing but as time goes on he thinks out a way of dispensing with one of the heating that have his auto bean customary and in consequence without increasing his expenses he is able to increase his annual output by things which can be sold for £2,000 net so long therefore as he can sell his wares at the old price his earnings of management will be £2,000 a year above the average and he will earn full reward of his services to society his neighbours however will copy his plan and probably make more than average profits for a time but soon competition will increase the supply and lower the prices of their wares until their profits fall to about their old level so no one could get extra high wages for making extra tax on their ends after Columbus plan and become public property many businessmen whose inventions have in the long run been of almost priceless value to the world have earned even less by the discoveries than Milton his paradise lost or milled by his angels and while many men have amassed great wealth by a good fortune rather than by exceptional ability in the performance of public services of high importance it is probable that those businessmen who have pioneered new paths have often conferred on society benefits out of all proportion to their own gains even though they have died millionaires but then we shall find that the rewards of every business undertaker tend to be proportionate to the direct services he renders to the community this will by itself go with a small way towards proving that the existing industrial organization of society is the best conceivable for even the best attainable and it must not be forgotten that the scope of our present inquiry is limited to a study of the action of causes and the earnings of business undertaking and management and the existing social institutions we will begin by tracing the adjustment of the rewards of the services rendered to society by ordinary workmen by foremen and by employers of different grades we shall find the principle of substitution everywhere at work part 2 we have already noticed that a great part of the work done by the head of a small business himself is relegated in a large business to salvage heads of departments managers, foremen and others and this thread will guide us to much that is useful for our present inquiry the simplest case is that of the earnings of the ordinary foremen with which we may begin let us suppose for instance that a railway contractor or a dockyard manager means that it answers best to have one foreman to every 20 laborers the wages of a foreman being twice those of a laborer this means that if it found himself with 500 laborers and 24 foremen he would expect to get just a little more work done in the same expense by adding one more foreman than by adding two more ordinary laborers while if he had had 490 laborers and 25 foremen would have found it better to add two more laborers if he had got his foreman for one and a half times the wages of a laborer perhaps he would have employed one foreman to every 15 laborers but as it is the number of foremen employed is determined at 120th of that of the laborers and the demand price at twice the laborers wages in criminal cases the foremen may earn their wages by over-driving those whose work they superintendent but we may now support them to contribute to the success of the undertaking in a legitimate way by securing a better organization of its details so that fewer things are done amiss and need to be undone so that everyone finds the help that he wants in moving heavyweights etc ready for him so that all machinery and implements are kept in good working order and no one has to waste his time and strength by working with inadequate appliances and so on the wages of foremen who do work of this kind may be taken as typical of a great part of the earnings of management society acting through the individual employer offers an effective demand for the services until that margin is reached at which the aggregate efficiency of industry would be increased by adding workers of some other trade more than by adding foremen whose wages would add an equal amount to the expenses of production so far the employer has been regarded as the agent through whom competition acts in contriving and arranging the factors of production so that the maximum of direct services estimated by their money measure should be performed at a minimum money cost but now we have to look at the work of the employers themselves being contrived and arranged for them though of course in a more half hazard fashion by the immediate action of their own competition part 3 let us look the next at the way in which the work of foremen and salaried managers is constantly being weighed against that of businesses it will be interesting to watch the course of a small business as it gradually expands a house carpenter for instance steadily increases his stock of tools he can hire a small workshop and undertake odd jobs for private persons who have to agree with him as to what is to be done the work of management and of undertaking both him and him and as this gives them a great deal of trouble they are not willing to pay him at a high rate for what work of management he does so his next step is to undertake all the different sides of small repairs he has now entered on the career of a master builder and if his business grows he gradually withdraws himself from manual labour and to some extent substituting for his own work that of hired men he is now to detect their wages from his receipts before he can begin to reckon his profits and unless he proves himself to have a business ability up to the normal level of that grade of industry which he has now entered will probably soon lose all the little capital which he has gained and after a short struggle return to that humbler rank of life in which he has prospered should this ability be just about that level he will with average good fortune retain his position and perhaps gain a little ground and the excess of his receipts over his outgoings will be representative of the normal earnings of management in his grade if his ability be greater than that which is normal in his grade he will be able to obtain as good a result with a given outlook for wages and other expenses as most of his rivals can with a larger outlay he will have substituted his extra ability in organization for some of their outlay and his earnings of management will include the value of that outlay with which he has dispensed he will thus increase his capital and his credit and be able to borrow more and at a lower rate of interest he will obtain a wider business acquaintanceship and connection and he will get an increased knowledge of materials and processes and opportunities for bold but wise and profitable adventure until at last he has delegated to others nearly all those duties which occupied his old time even after he had ceased to do manual work himself part 4 having watched the adjustment of the earnings of 4 men and of ordinary workmen and again of employers and 4 men we now look at the earnings of employers on a small and a large scale our carpenter having become a master builder on a very large scale his undertakings will be so many and so great as to have occupied the time and energies of some scores of employers who superintendent all the details of their several businesses through the struggle between large businesses and small we see the principle of substitution constantly in operation in the larger employer substitution a little of his own work and a good deal of that of salaried managers and 4 men for that of a small employer when for instance tenders are invited for erecting a building a builder with a large capital it worth his while to enter the list even though he lives at a distance the local builders secure great economies in having workshops and men whom they can crest already near the spot while he gains something through buying his materials on a large scale through his command of machinery especially for woodwork and perhaps through being able to borrow what capital he wants on easier terms these two sets of advantages frequently about balance one another and the contest for the field of employment often turns on the relative efficiency of the undivided energies of the small builder and of that slight supervision which is all that the abler but busier large builder can offer to give himself though he supplements it by the work of his local manager and of the clerks in his central part 5 so far we have been considering the cross earnings of management of a man who applies his own capital in business and therefore can himself reap the equivalent of the cost direct and indirect which are entailed when command over capital has to be collected from owners who do not care to apply it to business users themselves and to be transferred to those who own capital is insufficient for the enterprises we are next to consider the struggle for survival and pushing forward in some trades businessmen working chiefly with their own capital and in others those who work chiefly with borrowed capital the personal risks against which the lender of capital to be used in business require to be indemnified vary to some extent with the nature as well as with the circumstances of the individual borrower they are very high in some cases as for instance when a man is starting a new branch of the electrical trades in which there is very little past experience to go by and the lender cannot easily form an independent judgment as to the progress which is being made by the borrower and in all such cases the man working with the borrowed capital is at a great disadvantage the rate of profit is determined chiefly by the competition of those who apply their own capital it may happen that not many such men have access to the trade and in that case the competition may not be keen and the rate of profit may be high that is it makes it considerably net increased on the capital together with earnings of management on a scale come in straight with the difficulty of the business turn though that difficulty will probably be above the average and again the new man with but little capital of his own is at a disadvantage in trade which move slowly and in which it is necessary to sell a long time before one reaps but in all these industries in which bold and tireless enterprise can reap a quick harvest in particular wherever high profits are to be made for a time in the production of costive wares there the new man is in his element it is he who by his quick resolutions and dexterous contravences and perhaps also little by his natural recklessness forces the pace and he often holds his own with great tenacity even in the considerable disadvantages for the freedom and dignity of his position are very attractive to him thus the peasant proprietor whose little plot is heavily mortgaged the small so called sweater or garret master who takes out a subcontract at a low price will often work harder than the ordinary workman and for a lower net income and the manufacturer who is doing a large business with comparatively little capital of his own will reckon his labour and anxiety almost as nothing for he knows that he must anyhow work for his living and he is unwilling to go into service to another he will therefore work favouritly for a gain that would not count much in the balance with a wealthy rival who being able to retire and live in comfort on the interest of his capital he will be doubting whether it is worthwhile to endure any longer the wear and tear of business life the inflation of prices which culminated in 1873 enriched borrowers in general and in particular business undertakers at the expense of other members of society Newman therefore found their way into business made very smooth and those who had already made or inherited business fortunes found their way made smooth retiring from active work thus Bejehardt writing about that time argued that the growth of Newman was making English business increasingly democratic and though admitting that the propensity to variation in the social as in the animal kingdom is the principle of progress he pointed out regretfully how much the country might have gained by the long duration of families of merchant princes but in recent years there has been some reaction due partly to social causes and partly to the influence of a continued fall in prices the sons of businessmen are rather more inclined than they were a generation ago to take pride in the father's callings and they find it harder to satisfy the demands of an ever increasing luxury on the income which would be theirs if they withdrew from business the weighing in the balance of the services and therefore the earnings of employees against the earnings of management of businessmen is in some ways best illustrated by reference to joint stock companies for in them most of the work of management is divided between salaried directors who indeed hold a few shares themselves and salaried managers and other subordinate officials most of whom have little or no capital of any kind and their earnings being almost the pure earnings of labor are governed in the long run by those general causes which rule the earnings of labor of equal difficulty and disagreeableness in ordinary occupations as has already been observed joint stock companies are empowered by internal fractions and conflicts of interest between shareholders and debenture holders between ordinary and preferred shareholders and between all these and the directors and by the need for an elaborate system of checks and counterchecks they seldom have the enterprise the energy the unity of purpose and the quickness of action of a private business but these disadvantages are of relatively small importance in some trades that publicity which is one of the chief drawbacks of public companies in many branches of manufacture and of speculative commerce is a positive advantage in ordinary banking and insurance and kindred businesses while in these as well as in most of the transport industries railways, tramways, canals and the supply of gas water and electricity their unbounded command over capital gives them almost undisputed sway when powerful joint stock companies are working in harmony and are not directly or indirectly involved in speculative ventures on the stock exchange or in campaigns for the crushing or for the compulsory fusion of rivals they generally look forward to a distant future and pursue a far-seeing if a sluggish policy they are seldom willing to sacrifice their reputation for the sake of a temporary gain they are not inclined to drive such extremely hard bargains with their employees as will make their service unpopular part 7 thus then each of the many modern methods of business has its own disadvantages and its application is extended in every direction until that limit or margin is reached at which its special advantages for that use no longer exceed its disadvantages or to put the same thing in another way the margin of profitableness of different methods of business organization for any particular purpose is to be regarded not as a point on any one line but a boundary line of irregular shape getting one after another every possible line of business organization and these modern methods partly on account of the great variety but partly also on account of the scope which many of them offer to men of business ability who have no capital render possible a much closer correspondence between the earnings of undertaking and management and the services by which those earnings are got then could be generally attained under the primitive system in which capital was scarcely ever applied to production by any save its owners for then it could only be by a fortunate accident that those who had the capital and the opportunity for carrying on any trade or performing any service of which the public was in need had the aptitudes and the abilities required for the task but as it is the share of the normal expenses of production of any commodity which is commonly classed as profits is so controlled on every side by the action of the principle of substitution that it cannot long diverge from the normal supply price of the capital needed added to the normal supply price of the ability and energy required for managing the business and lastly the normal supply price of that organization by which the appropriate business ability and the requisite capital are brought together the supply of business power is large and elastic since the area from which it is drawn is wide everyone has the business of his own life to conduct and in this he can gain some training for business management the natural aptitudes for it there is therefore no other kind of useful rare and there were highly paid ability which depends so little on labor and expense applied especially to obtaining it and so much on natural qualities and further business power is highly non-specialized because in the large majority of trades technical knowledge and skill become everyday less important relatively to the broad and non-specialized faculties of judgment promptness, resource carefulness and steadfastness of purpose it is true that in small businesses in which the master is little more than the head workman specialized skill is very important and it is true that each sort of trade has a tradition of its own which is never written which cannot be written which can only be learnt in fragments and which is best taken in early life before the mind is shaped and the idea is fixed but each trade in modern commerce is surrounded by subsidiary and inner trades which familiarize the imagination with it and make it state known moreover those general faculties which are characteristic of the modern businessman increase in importance as the scale of business increases it is they which mark him out as a leader of men and which enable him to go straight to the kernel of the practical problems with which he has to deal to see almost instinctively the relative proportions of things to conceive wise and firing policies and to carry them out calmly and resolutely it must be admitted indeed that the adjustment of supply to demand in the case of business ability is somewhat hindered by the difficulty of ascertaining exactly what is the price that is being paid for it in any trade it is comparatively easy to find out the wages of preclares or parallels by striking an average between the wages that are owned by men of various degrees of efficiency in allowing for the inconstancy of the employment but the gross earnings of management which a man is getting only can be found after making up a careful account of the true profits of his business and detecting interest on his capital the exact state of his affairs is often not known by himself it can seldom be guessed at all accurately even by those who are in the same trade with himself it is not true even in a little village at the present day that everyone knows all his neighbors affairs as clifflessly said the village innkeeper, publican or shopkeeper who is making a small fortune does not invite competition by telling his neighbors of his profits and the man who is not doing well does not alarm his creators by exposing but though it may be difficult to read the lessons of an individual trader's experience those of a whole trade can never be completely hidden, cannot be hidden at all for long although one cannot tell whether the tide is rising or falling by merely watching half a dozen waves breaking on the seashore yet a very little patience settles the question there is a general agreement among businessmen that the average rate of profits in a trade cannot rise or fall much without general attention being attracted to the change before long and though it may sometimes be a more difficult task for a businessman than for a skilled neighbor to find out whether he could improve his prospects by changing his trade yet the businessman has great opportunities for discovering whatever can be found out about the present and future of other trades and if he should wish to change his trade he will generally be able to do so more easily than the skilled workman could on the whole then we may conclude that the rarity of natural abilities and the expansiveness of the special training required for the work affect normal earnings of management in much the same way as they do the normal wages of skilled labor in either case a rise in the income to be earned sets in operation forces extending to increase the supply of those capable of earning it and in either case the extent to which the supply will be increased by a given rise of income depends upon the social and economic conditions of those from whom the supply is drawn for though it is true that an able businessman who starts in life with a great deal of capital and a good business connection is likely to obtain higher earnings than an equally able man who starts without these advantages yet there are similar though smaller inequalities between the earnings of professional men of equal abilities who start with unequal social advantages and the wages even of working man depend on the start he has had in life almost as much as on expense which his father has been able to afford for his education in the end of chapter 7 recording by