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Title: Distributive Justice: The Right and Wrong of Our Present
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Author: John A. Ryan

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DISTRIBUTIVE JUSTICE

THE MACMILLAN COMPANY
NEW YORK · BOSTON · CHICAGO · DALLAS
ATLANTA · SAN FRANCISCO

MACMILLAN & CO., Limited
LONDON · BOMBAY · CALCUTTA
MELBOURNE

THE MACMILLAN CO. OF CANADA, Ltd.
TORONTO

DISTRIBUTIVE JUSTICE
The Right and Wrong of Our
Present Distribution of Wealth

BY

JOHN A. RYAN, D.D.
Associate Professor of Political Science at the
Catholic University of America; Professor of
Economics at Trinity College; Author of
"A Living Wage," "Alleged Socialism of the
Church Fathers," Joint Author with Morris
Hillquit of "Socialism: Promise or Menace?"

New York
THE MACMILLAN COMPANY
1916

All rights reserved

Nihil Obstat.
REMIGIUS LAFORT, S. T. D.,
Censor.

Imprimatur.
JOHN CARDINAL FARLEY,
Archbishop of New York.

Copyright, 1916,
By THE MACMILLAN COMPANY

Set up and electrotyped. Published November, 1916.

TO
ARCHBISHOP IRELAND
in

Admiration and Gratitude

PREFACE
Five of the nine members of the late Federal Commission on Industrial
Relations united in the declaration that the first cause of industrial unrest is,
"unjust distribution of wealth and income." In all probability this judgment
is shared by the majority of the American people. Regarding the precise
nature and extent of the injustice, however, there is no such preponderance
of opinion. Even the makers of ethical and economic treatises fail to give us
anything like uniform or definite pronouncements concerning the moral
defects of the present distribution. While the Socialists and the Single
Taxers are sufficiently positive in their statements, they form only a small
portion of the total population, and include only an insignificant fraction of
the recognised authorities on either ethics or economics.
The volume in hand represents an attempt to discuss systematically and
comprehensively the justice of the processes by which the product of
industry is distributed. Inasmuch as the product is actually apportioned
among landowners, capitalists, business men, and labourers, the moral
aspects of the distribution are studied with reference to these four classes.
While their rights and obligations form the main subject of the book, the
effort is also made to propose reforms that would remove the principal
defects of the present system and bring about a larger measure of justice.
Many treatises have been written concerning the morality of one or other
element or section of the distributive process; for example, wages, interest,
monopoly, the land question; but, so far as the author knows, no attempt has
hitherto been made to discuss the moral aspects of the entire process in all
its parts. At least, no such task has been undertaken by any one who
believes that the existing economic system is not inherently unjust. That the
present essay in this field falls far short of adequate achievement the author
fully realises, but he is sustained by the hope that it will provoke discussion,
and move some more competent person to till the same field in a more
thorough and fruitful way.
John A. Ryan.

The Catholic University of America,
Washington, D. C., June 14, 1916.

CONTENTS
Preface vii
Introductory Chapter: The Elements and Scope of the Problem xiii
General References xvii

SECTION I
THE MORALITY OF PRIVATE LANDOWNERSHIP AND RENT

CHAPTER PAGE
I The Landowner's Share of the National Product 3
Economic Rent Always Goes to the Landowner 4
Economic Rent and Commercial Rent 5
The Cause of Economic Rent 6
II Landownership in History 8
No Private Ownership in Pre-Agricultural Conditions 10
How the Change Probably Took Place 12
Limited Character of Primitive Common Ownership 14
Private Ownership General in Historical Times 15
Conclusions from History 17
III The Arguments Against Private Landownership 19
Arguments by Socialists 19
Henry George's Attack on the Title of First
Occupancy 21
His Defence of the Title of Labour 24
The Right of all Men to the Bounty of the Earth 30
The Alleged Right of the Community to Land Values 39
IV Private Ownership the Best System of Land Tenure 48
The Socialist Proposals Impracticable 48

Inferiority of the Single Tax System 51
V Private Landownership a Natural Right 56
Three Principal Kinds of Natural Rights 57
Private Landownership Indirectly Necessary for
Individual Welfare 59
Excessive Interpretations of the Right of Private
Landownership 61
The Doctrine of the Fathers and the Theologians 62
The Teaching of Pope Leo XIII 64
VI Limitations of the Landowner's Right to Rent 67
The Tenant's Right to a Decent Livelihood 69
The Labourer's Claim Upon the Rent 71
VII Defects of the Existing Land System 74
Landownership and Monopoly 75
Excessive Gains from Private Landownership 80
Exclusion from the Land 90
VIII Methods of Reforming Our Land System 94
The Leasing System 95
Public Agricultural Lands 97
Public Ownership of Urban Land 98
Appropriating Future Increases of Land Value 100
Some Objections to the Increment Tax 102
The Morality of the Proposal 108
The German and British Increment Taxes 114
Transferring Other Taxes to Land 117
The Morality of the Plan 120
Amount of Taxes Practically Transferable 122
The Social Benefits of the Plan 127
A Supertax on Large Holdings 130
References on Section I 133

SECTION II
THE MORALITY OF PRIVATE CAPITAL AND INTEREST

IX The Nature and the Rate of Interest 137
Meaning of Capital and Capitalist 137
Meaning of Interest 138
The Rate of Interest 141
The Alleged Right of Labour to the Entire Product
X Of Industry 145
The Labour Theory of Value 146
The Right of Productivity 149
XI The Socialist Scheme of Industry 152
Socialist Inconsistency 152
Expropriating the Capitalists 154
Inefficient Industrial Leadership 158
Inefficient Labour 162
Attempted Replies to Objections 162
Restricting Individual Liberty 168
XII Alleged Intrinsic Justifications of Interest 171
Attitude of the Church Toward Interest on Loans 172
Interest on Productive Capital 175
The Claims of Productivity 177
The Claims of Service 181
The Claims of Abstinence 182
XIII Social and Presumptive Justifications of Interest 187
Limitations of the Sacrifice Principle 187
The Value of Capital in a No-Interest Régime 188
Whether the Present Rate of Interest is Necessary 191
Whether at Least two Per Cent. is Necessary 193
Whether any Interest is Necessary 196
The State is Justified in Permitting Interest 199
Civil Authorisation not Sufficient for Individual
Justification 201
How the Interest-Taker is Justified 204
XIV Co-operation a Partial Solvent of Capitalism 210
Reducing the Rate of Interest 211
Need for a Wider Distribution of Capital 213

The Essence of Co-operative Enterprise 214
Co-operative Credit Societies 216
Co-operative Agricultural Societies 217
Co-operative Mercantile Societies 220
Co-operation in Production 222
Advantages and Prospects of Co-operation 228
References on Section II 233

SECTION III
THE MORAL ASPECT OF PROFITS

XV The Nature of Profits 237
The Functions and Rewards of the Business Man 237
The Amount of Profits 239
Profits in a Joint-Stock Company 241
XVI The Principal Canons of Distributive Justice 243
The Canon of Equality 243
The Canon of Needs 244
The Canon of Efforts and Sacrifice 246
The Canon of Productivity 247
The Canon of Scarcity 250
The Canon of Human Welfare 252
XVII Just Profits in Conditions of Competition 254
The Question of Indefinitely Large Profits 255
The Question of Minimum Profits 258
The Question of Superfluous Business Men 260
XVIII The Moral Aspect of Monopoly 262
Surplus and Excessive Profits 263
The Question of Monopolistic Efficiency 265
Discriminative Underselling 267
Exclusive-Sales Contracts 270
Discriminative Transportation Arrangements 272
Natural Monopolies 273
Methods of Preventing Monopolistic Injustice 275

Legalised Price Agreements 277
XIX The Moral Aspects of Stockwatering 279
Injurious Effects of Stockwatering 281
The Moral Wrong 284
The "Innocent" Investor 286
Magnitude of Overcapitalisation 288
XX The Legal Limitation of Fortunes 291
The Method of Direct Limitation 292
Limitation Through Progressive Taxation 296
The Proper Rate of Income and Inheritance Taxes 299
Effectiveness of Such Taxation 300
XXI The Duty of Distributing Superfluous Wealth 303
The Question of Distributing Some 303
The Question of Distributing All 308
Some Objections 311
A False Conception of Welfare and Superfluous
Goods 314
The True Conception of Welfare 316
References on Section III 318

SECTION IV
THE MORAL ASPECTS OF WAGES

XXII Some Unacceptable Theories of Wage-Justice 323
I The Prevailing-Rate Theory 323
Not in Harmony with Justice 325
II Exchange-Equivalence Theories 326
The Rule of Equal Gains 326
The Rule of Free Contract 328
The Rule of Market Value 330
The Mediæval Theory 332
A Modern Variation of the Mediæval Theory 337
III Productivity Theories 340
Labour's Right to the Whole Product 341

Clark's Theory of Specific Productivity 347
Carver's Modified Version of Productivity 351
XXIII The Minimum of Justice; a Living Wage 356
The Principle of Needs 356
Three Fundamental Principles 358
The Right to a Decent Livelihood 360
The Claim to a Decent Livelihood from a Present
Occupation 362
The Labourer's Right to a Living Wage 363
When the Employer is Unable to Pay a Living Wage 366
An Objection and Some Difficulties 370
The Family Living Wage 373
Other Arguments in Favour of a Living Wage 376
The Money Measure of a Living Wage 378
XXIV The Problem of Complete Wage Justice 381
Comparative Claims of Different Labour Groups 381
Wages Versus Profits 388
Wages Versus Interest 390
Wages Versus Prices 393
Concluding Remarks 398
XXV Methods of Increasing Wages 400
The Minimum Wage in Operation 400
The Question of Constitutionality 405
The Ethical and Political Aspects 407
The Economic Aspect 408
Opinions of Economists 412
Other Legislative Proposals 416
Labour Unions 417
Organisation Versus Legislation 420
Participation in Capital Ownership 423
References on Section IV 425
XXVI Summary and Conclusion 426
The Landowner and Rent 426
The Capitalist and Interest 427

The Business Man and Profits 428
The Labourer and Wages 430
Concluding Observations 431
Index 435

INTRODUCTORY CHAPTER

THE ELEMENTS AND SCOPE OF THE PROBLEM

Distributive justice is primarily a problem of incomes rather than of
possessions. It is not immediately concerned with John Brown's railway
stock, John White's house, or John Smith's automobile. It deals with the
morality of such possessions only indirectly and under one aspect; that is, in
so far as they have been acquired through income. Moreover, it deals only
with those incomes that are derived from participation in the process of
production. For example; it considers the labourer's wages, but not the
subsidies that he may receive through charity or friendship. Its province is
not the distribution of all the goods of the country among all the people of
the country, but only the distribution of the products of industry among the
classes that have taken part in the making of these products.
These classes are four, designated as landowners, capitalists, undertakers or
business men, and labourers or wage earners. The individual member of
each class is an agent of production, while the instrument or energy that he
owns and contributes is a factor of production. Thus, the landowner is an
agent of production because he contributes to the productive process the
factor known as land, and the capitalist is an agent of production because he
contributes the factor known as capital; while the business man and the
labourer are agents not only in the sense that they contribute factors to the
process, but in the very special sense that their contributions involve the
continuous expenditure of human energy. Now the product of industry is
distributed among these four classes precisely because they are agents of
production; that is because they own and put at the disposal of industry the
indispensable factors of production. We say that the agents of production
"put the factors of production at the disposal of industry," rather than
"exercise or operate the factors," because neither the landowner nor the
capitalist, as such, expend continuous energy in the productive process. All
that is necessary to enforce a claim upon the product is to contribute an
instrument or factor without which production cannot be carried on.

The product distributed in any country during a single year is variously
described by economists as the national product, the national income, the
national dividend. It consists not merely of material goods, such as houses,
food, clothing, and automobiles, but also of those non-material goods
known as services. Such are the tasks performed by the domestic servant,
the barber, the chauffeur, the public official, the physician, the teacher; or
any other personal service "that is valued, as material commodities are
valued, according to their selling prices." Even the services of the
clergyman are included in the national income or product, since they are
paid for and form a part of the annual supply of good things produced and
distributed within the country. In the language of the economist, anything
that satisfies a human want is a utility, and forms part of the national
wealth; hence there can be no sufficient reason for excluding from the
national income goods which minister to spiritual or intellectual wants. The
services of the clergyman, the actor, the author, the painter, and the
physician are quite as much a part of the utilities of life as the services of
the cook, the chambermaid, or the barber; and all are as clearly utilities as
bread, hats, houses, or any other material thing. In a general way, therefore,
we say that the national product which is available for distribution among
the different productive classes comprises all the utilities, material and non-
material, that are produced through human agents and satisfy human
desires.
In the great majority of instances the product is not distributed in kind. The
wheat produced on a given farm is not directly apportioned among the
farmers, labourers, and landowners that have co-operated in its production;
nor are the shoes turned out by a given factory divided among the co-
operating labourers and capitalists; and it is obvious that personal services
cannot be returned to the persons that have rendered them. Cases of partial
direct distribution do, indeed, occur; as when the tenant takes two-thirds
and the landowner one-third of the crop raised by the former on land
belonging to the latter; or when the miller receives his compensation in a
part of the flour that he grinds. To-day, however, such instances are
relatively insignificant. By far the greater part of the material product is
sold by the undertaker or business man, and the price is then divided
between himself and the other agents of production. All personal services
are sold, and the price is obtained by the performers thereof. The farmer

sells his wheat, the miller his flour, and the barber his services. With the
money received for his part in production each productive agent obtains
possession of such kinds and amounts of the national product as his desires
dictate and his income will procure. Hence the distribution of the product is
effected through the conversion of producers' claims into money, and the
exchange of the latter for specific quantities and qualities of the product.
While the national product as a whole is divided among the four productive
classes, not every portion of it is distributed among actually distinct
representatives of these classes. When more than one factor of production is
owned by the same person, the product will obviously not go to four
different classes of persons. For example; the crop raised by a man on his
own unmortgaged land, with his own instruments, and without any hired
assistance; and the products of the small shopkeeper, tailor, and barber who
are similarly self sufficient and independent,—are in each case obtained by
one person, and do not undergo any actual distribution. Even in these
instances, however, there occurs what may be called virtual distribution,
inasmuch as the single agent owns more than one factor, and performs more
than one productive function. And the problem of distributive justice in
such cases is to determine whether all these productive functions are
properly rewarded through the total amount which the individual has
received. Where the factors are owned by distinct persons, or groups of
persons, the problem is to determine whether each group is properly
remunerated for the single function that it has performed.
The problem of the morality of industrial incomes is obviously complex.
For example; the income of the farmer is sometimes derived from a product
which he must divide with a landowner and with labourers; sometimes from
a product which he shares with labourers only; and sometimes from a
product which he can retain wholly for himself. The labourer's income
arises sometimes out of a product which he divides with other agents of
production; sometimes out of a product which he divides with other
labourers as well as other agents; and sometimes out of a product of which
he receives the full money equivalent. The complexity of the forces
determining distribution and income indicate a complexity in the forces
affecting the morality of income. Moreover, there is the more fundamental
ethical question concerning the titles of distribution: whether mere
ownership of a factor of production gives a just claim upon the product, as

in the case of the landowner and the capitalist; whether such a claim,
assuming it to be valid, is as good as that of the labourer and the business
man, who expend human energy in the productive process; whether
different kinds of productive activity should be rewarded at different rates;
and if so in what proportion. Why should the capitalist receive six per cent.,
rather than two per cent., or sixteen per cent.? Why should the locomotive
engineer receive more than the trackman? Why should not all persons be
compensated equally? Should all or any of the benefits of industrial
improvements go to the consumer? Such are typical questions in the study
of distributive justice. They are sufficient to give some idea of the
magnitude and difficulty of the problem.
Scarcely less formidable is the task of suggesting means to correct the
injustices of the present distribution. The difficulties in this part of the field
are indicated by the multiplicity of social remedies that have been proposed,
and by the fact that none of them has succeeded in winning the adhesion of
more than a minority of the population. We shall be obliged not only to pass
moral judgment upon the most important of these proposals, but to indicate
and advocate a more or less complete and systematic group of such reforms
as seem to be at once feasible and righteous.

GENERAL REFERENCES

Taussig: Principles of Economics. Macmillan; 1911.
Devas: Political Economy. Longmans; 1901.
Hobson: The Industrial System. Longmans; 1909.
Clark: The Distribution of Wealth. Macmillan; 1899.
Smart: The Distribution of Income. London; 1899.
Willoughby: Social Justice. Macmillan; 1900.
Carver: Essays in Social Justice. Harvard University Press; 1915.

Ely: Property and Contract in Their Relations to the Distribution of
Wealth. Macmillan; 1914.
Nearing: Income. Macmillan; 1915.
Streightoff: The Distribution of Incomes in the United States.
Longmans; 1912.
Wagner: Grundlegung der Nationaloekonomie. Leipzig; 1892-1894.
Pesch: Lehrbuch der Nationaloekonomie. Freiburg; 1905-1913.
Antoine: Cours d'Économie Sociale. Paris; 1899.
Hitze: Capital et Travail. Louvain; 1898.
Hollander: The Abolition of Poverty. Houghton Mifflin Company;
1914.
Ellwood: The Social Problem. Macmillan; 1915.
Garriguet: The Social Value of the Gospel. Herder; 1911.
Parkinson: A Primer of Social Science. Devin-Adair Co.; 1913.
Vermeersch: Quaestiones de Justitia. Bruges; 1901.
King: The Wealth and Income of the People of the United States.
Macmillan; 1915.
Commission on Industrial Relations. Final Report; 1915.

SECTION I

THE MORALITY OF PRIVATE
LANDOWNERSHIP AND RENT

DISTRIBUTIVE JUSTICE

CHAPTER I
THE LANDOWNER'S SHARE OF THE NATIONAL PRODUCT

That part of the national product which represents land, and is attributed
specifically to land, goes to the landowner. It is called economic rent, or
simply rent. We say that rent "is attributed specifically to land," rather than
"is produced specifically by land," because we do not know what proportion
of the joint product of the different factors of production exactly reflects the
productive contribution of any factor. Economic rent represents the
productivity of land in so far as it indicates what men are willing to pay for
land-use in the productive process. In any particular case rent comes into
existence because the land makes a commercially valuable contribution to
the product; and it goes to the landowner because this is one of the powers
or rights included in the institution of private ownership. And the
landowner's share is received by him precisely in his capacity as landowner,
and not because he may happen to be labourer, farmer, or proprietor of
agricultural capital.
It is perhaps superfluous to observe that not all land produces rent. While
almost all land is useful and productive, at least potentially, there is in
almost every locality some land which in present conditions does not
warrant men in paying a price for its use. If the crop raised on very sandy
soil is so small as to cover merely the outlay for labour and capital, men
will not pay rent for the use of that soil. Yet the land has contributed
something to the product. Herein we have another indication that rent is not
an adequate measure of land productivity. It merely represents land value,—
at a given time, in given circumstances.

Economic Rent Always Goes to the Landowner

All land that is in use, and for the use of which men are willing to pay a
price yields rent, whether it is used by a tenant or by the owner. In the latter
case the owner may not call the rent that he receives by that name; he may

not distinguish between it and the other portions of the product that he gets
from the land; he may call the entire product profits, or wages. Nevertheless
the rent exists as a surplus over that part of the product that he can regard as
the proper return for his labour, and for the use of his capital-instruments,
such as, horses, buildings, and machinery. If a farmer employs the same
amount and kind of labour and capital in the cultivation of two pieces of
land, one of which he owns, the other being hired from some one else; if his
net product is the same in both cases, say, 1,000 dollars; and if he must pay
200 dollars to the owner of the hired land,—then, 200 of the 1,000 dollars
that he receives from his own land, is likewise to be attributed specifically
to his land rather than to his capital or labour. It is rent. While the whole
product is due in some degree to the productive power of land, 200 dollars
of it represents land value in the process of production, and goes to him
solely in his capacity as landowner. The rent that arises on land used for
building sites is of the same general character, and goes likewise to the
owner of the land. The owner of the site upon which a factory is located
may hire it to another for a certain sum annually, or he may operate the
factory himself. In either case he receives rent, the amount that the land
itself is worth for use, independently of the return that he obtains for his
expenditure of capital and labour. Even when a person uses his land as a site
for a dwelling which he himself occupies, the land still brings him
economic rent, since it affords him something for which he would be
obliged to pay if his house were located on land of the same kind owned by
some one else.

Economic Rent and Commercial Rent

It will be observed that the landowner's share of the product, or economic
rent, is not identical with commercial rent. The latter is a payment for land
and capital, or land and improvements, combined. When a man pays nine
hundred dollars for the use of a house and lot for a year, this sum contains
two elements, economic rent for the lot, and interest on the money invested
in the house. Assuming that the house is worth ten thousand dollars, and
that the usual return on such investments is eight per cent., we see that eight
hundred dollars goes to the owner as interest on his capital, and only one
hundred dollars as rent for his land. Similarly the price paid by a tenant for
the use of an improved farm is partly interest on the value of the

improvements, and partly economic rent. In both cases the owner may
reckon the land as so much capital value, and the economic rent as interest
thereon, just as the commercial rent for the buildings and other
improvements is interest on their capital value; but the economist
distinguishes between them because he knows that they are determined by
different forces, and that the distinction is of importance. He knows, for
example, that the supply of land is fixed, while the supply of capital is
capable of indefinite increase. In many situations, therefore, rent increases,
but interest remains stationary or declines. Sometimes, though more rarely,
the reverse occurs. As we shall see later, this and some other specific
characteristics of land and rent have important moral aspects; consequently
the moralist cannot afford to confuse rent with interest.

The Cause of Economic Rent

The cause of economic rent is the fact that land is limited relatively to the
demand for it. If land were as plentiful as air mere ownership of some
portion of it would not enable the owner to collect rent. As landowner he
would receive no income. If he cultivated his land himself the return
therefrom would not exceed normal compensation for his labour, and
normal interest on his capital. Since no one would be compelled to pay for
the use of land, competition among the different cultivators would keep the
price of their product so low that it would merely reimburse them for their
expenditures of capital and labour. In similar conditions no rent would arise
on building sites. The cause of the amount of rent may also be stated in
terms of scarcity. At any given time and place, the rent of a piece of land
will be determined by the supply of that kind of land relatively to the
demand for it. However, the demand itself will be regulated by the fertility
or by the location of the land in question. Two pieces of agricultural land
equally distant from a city, but of varying fertility, will yield different rents
because of this difference in natural productiveness. Two pieces of ground
of equal natural adaptability for building sites, but at unequal distances
from the centre of a city, will produce different rents on account of their
difference of location. The absolute scarcity of land is, of course, fixed by
nature; its relative scarcity is the result of human activities and desires.

The definition of rent adopted in these pages, "what men are willing to pay
for the use of land," or, "what land is worth for use," is simpler and more
concrete, though possibly less scientific, than those ordinarily found in
manuals of economics, namely: "that portion of the product that remains
after all the usual expenditures for labour, capital, and directive ability have
been deducted;" or, "the surplus which any piece of land yields over the
poorest land devoted to the same use, when the return from the latter is only
sufficient to cover the usual expenses of production."
The statement that all rent goes to the landowner supposes that, in the case
of hired land, the tenant pays the full amount that would result from
competitive bidding. Evidently this was not the case under the feudal
system, when rents were fixed by custom and remained stationary for
centuries. Even to-day, competition is not perfect, and men often obtain the
use of land for less than they or others might have been willing to give. But
the statement in question does describe what tends to happen in a system of
competitive rents.
Before discussing the morality of the landowner's income, and of rent
receiving, we may with profit glance at the history of land tenure. Thus we
shall get some idea, first, of the antiquity of the present system, and,
second, of its effects upon individual and social welfare. Both these
considerations have an important bearing upon the moral problem; for
length of existence creates a presumption in favour of the social, and
therefore the moral, value of any institution; and past experience is our
chief means of determining whether an institution is likely to be socially
beneficial, and therefore morally right, in the future.

CHAPTER II
LANDOWNERSHIP IN HISTORY

Thirty or thirty-five years ago, the majority of economic historians seemed
to accept the theory that land was originally owned in common.[1] They
held that in the beginning the community, usually a village community, was
the landowner; that the community either cultivated the land as a
corporation, and distributed the product among the individual members, or
periodically divided the land among the social units, and permitted the latter
to cultivate their allotments separately. The second of these forms of tenure
was the more general. The primitive time to which the theory referred was
not the period when men got their living by hunting and fishing, or by
rearing herds, but the agricultural stage of economic development, when
life had become settled. Of the arguments upon which the theory was based,
some consisted of ambiguous statements by ancient writers, such as Plato,
Cæsar, and Tacitus, and others were merely inferences drawn from the
existence of certain agrarian institutions: family ownership of land;
common pasture lands and woodlands; periodical distribution of land
among the cultivators, as in the German Mark, the Russian Mir, the
Slavonic Zadruga, and the Javanese Dessa. All these practices have been
interpreted as "survivals" of primitive common ownership. Only on this
hypothesis, it is argued, can they be satisfactorily explained.
More recent writers have subjected the various arguments for this theory to
a searching criticism.[2] To-day the great majority of scholars would
undoubtedly accept the conclusion of Fustel de Coulanges, that the
arguments and evidence are not sufficient to prove that in the earliest stages
of agricultural life land was held in common; and a majority would
probably take the more positive ground that common ownership in the
sense of communal cultivation and distribution, never existed for any
considerable length of time among any agricultural people. The present
authoritative opinion on the subject is thus summarized by Professor
Ashley:

"From the earliest historical times, in Gaul and Germany, very much land
was owned individually, and wealth on one side and slavery on the other
were always very important factors in the situation.
"Even in Germany, communal ownership of land was never a fundamental
or generally pervasive social institution; there was something very much
like large private estates, worked by dependents and slaves, from the very
earliest days of Teutonic Settlement.
"As to England, it is highly probable that we shall not find anything that can
fairly be called a general communal system of landowning, combined with
a substantial equality among the majority of the people, under conditions of
settled agriculture. To find it in any sense we shall have to go back to an
earlier and 'tribal' condition, if, indeed, we shall find it there!"[3]

No Private Ownership in Pre-Agricultural Conditions

Whenever and wherever men got their living by hunting and fishing, there
was no inducement to own land privately, except possibly those portions
upon which they built their huts or houses. "Until they become more or less
an agricultural people they are usually hunters or fishermen or both, and
possibly also to a limited extent keepers of sheep and cattle. Population is
then sparse and unoccupied territory is plentiful, and questions of the
ownership of particular tracts of land do not concern them."[4] In any region
occupied by a group or tribe, all portions of the land and the water were
about equally productive of game and fish; the amount obtainable by any
individual had no relation to labour on any particular piece of soil; and it
was much easier for each to range over the whole region in common with
his fellows than to mark off a definite section upon which he would not
permit others to come, but beyond which he himself would not be permitted
to go. In such conditions private ownership of land would have been folly.
Tribal or group ownership was, however, in vogue, especially among those
groups that were in control of the better grounds or streams. Even this form
of proprietorship was comparatively unstable, since the people were to a
considerable degree nomadic, and were willing to abandon present
possessions whenever there was a prospect of obtaining better ones
elsewhere. Among men who got their living by rearing herds, the

inducement to hold land in exclusive private control would be somewhat
stronger. The better grazing tracts would be coveted by many different
persons, especially in the more populous communities. And there would
always be the possibility of confusion among the different herds, and
contention among their owners. In such circumstances the advantages of
exclusive control would sometimes outweigh the benefits of common use
and ownership. In the thirteenth chapter of Genesis we are told that, owing
to strife between the herdsmen of Abram and Lot, the brothers separated,
and agreed to become the exclusive possessors of different territories.
Nevertheless, it is probable that tribal ownership was the prevailing form of
land tenure so long as people remained mainly in pastoral conditions.
It is likewise probable that the same system continued in many cases for
some time after men began to cultivate the soil. At least, this would seem to
have been the natural arrangement while land was plentiful, and the
methods of cultivation crude and soil-exhausting. It would be more
profitable to take up new lands than to continue upon the old. Within
historical times this system prevailed among the ancient Germans, some of
the tribes of New Zealand, and some of the tribes of Western Africa. Where
land was not so plentiful it was sometimes redistributed among individuals
or heads of families, as often as a death occurred or a new member arrived
in the community. Some of the tribes and peoples who observed this
practice were the ancient Irish, the aborigines of Peru, Mexico, and parts of
what is now the United States, and Australia, and some of the tribes of
Africa, India, and Malaysia.[5] Whether the most primitive agricultural
systems of every people were of this nature we have, of course, no means of
knowing, but the supposition is antecedently probable; for agriculture must
have begun very gradually, and been for some time practised in connection
with the more primitive methods of obtaining a livelihood. As the land had
been held for the most part in common during the hunting and fishing stage
and during the pastoral stage, the same arrangement would probably
continue until the people found it necessary to cultivate the same tracts of
land year after year, and conceived the desire to retain their holdings in
stable possession and to transmit them to their children. Moreover, so long
as the members of the clan remained strongly conscious of their kinship,
and realised the necessity of acting as a unit against their enemies, there
would be a strong incentive to clan ownership of the land, and clan

allotment of it among the individual members. In other words, the clan
would, in these circumstances, have the same motives for common
ownership that exist to-day in the family.
The oldest historical peoples, the Israelites, Egyptians, Assyrians,
Babylonians, and Chinese, had private ownership of land at the beginning
of their recorded history. Most of them, however, had been cultivating land
for a considerable length of time, and had acquired a considerable degree of
civilisation, before the earliest period of their existence of which we have
any knowledge. It is quite possible that those among them that had passed
through the hunting and fishing or the pastoral stage of existence, had
practised tribal or common ownership during the earlier portion of their
agricultural life.

How the Change Probably Took Place

The change from tribal to private landownership could have occurred in a
great variety of ways. For example, the chief, patriarch, or king might have
gradually obtained greater authority in making the allotments of land
among the members of the tribe or group, and thus acquired a degree of
control over the land which in time became practical ownership; he might
have seized the holdings of deceased persons, or of those who were unable
to pay him the tax or tribute that he demanded, or of those who were for any
reason obnoxious to him. Again, the taxes paid to the chief man in a
community for his services as ruler might have come in time to be regarded
as a payment for the use of the land, and therefore as an acknowledgment
that the chief was also the landlord. Even in the Middle Ages the rents
received by the feudal lords were in great measure a return for social and
political services, just as are the taxes received to-day from private
landowners by the State. In primitive times, as well as later on, the chief
would naturally do his best to convert this institution of tax paying or
tribute paying into rent paying, and to add the position of landowner to his
other prerogatives. After all, the transition from tribal ownership, with
private cultivation and private receipt of the produce of individual
allotments, to overlordship and landlordism, would not have been greater
than that which actually took place in England between the fifteenth and the
nineteenth centuries, when the lords became absolute owners of land that

they had previously held with their tenants in a sort of divided or dual
ownership. In a word, tribal ownership could have been displaced by
landlordism through the same methods that have been used everywhere by
the powerful, the ambitious, and the greedy against the weak, the
indifferent, and the upright. Nor must we forget the influence of conquest.
Most of the countries that appear in historical times with a system of private
ownership had at some previous period been subjugated by an alien people.
In many of these the conquerors undoubtedly introduced a considerable
degree of individual ownership, the more powerful among them becoming
landlords, while their weaker companions and the mass of the conquered
population were established in a condition of tenancy.
Where a somewhat widely diffused private ownership succeeded the
primitive system, it was probably due to the free action of the cultivators, as
soon as they came to realise the inconveniences of ownership in common.
"Any enclosed land round their permanent dwellings, and any land outside
the settlement which was cleared, reclaimed, and cultivated, or occupied
with cattle by individuals or families, was recognised as their personal
property. Only those who were industrious, enterprising, and courageous
enough would clear, occupy, retain, cultivate, and defend waste land. They
would become personal owners of cattle, and would gradually acquire
wealth which would enable them to employ others and still further improve
their position. As their power increased, and as population grew, the
bravest, wealthiest, and most capable fighting men amongst them would
become chiefs or a species of nobles, and the force of circumstances, often
no doubt aided by force and fraud, would eventually make them the
landowners of the greater part of the district, with the more or less willing
acquiescence and consent of the community amongst whom they lived, and
to whom they extended their protection."[6]

Limited Character of Primitive Common Ownership

A great deal of the opposition to the theory of primitive common ownership
of agricultural land, seems to be based upon an exaggerated conception of
the scope of that institution. The average man who thinks or speaks of
ownership to-day has in mind the Roman concept and practice of private
property. This includes the unrestricted right of disposal; that is, the power

to hold permanently, to transfer or transmit, to use or to abuse or not to use
at all, to retain the product of the owner's use, to rent the property to any
person and for any period that the owner chooses, and to obtain a price in
return called rent. Any man who takes the theory of primitive common
ownership to imply that the community or tribe exercised all these powers
over its land, will have no difficulty in proving that the evidence is
overwhelmingly against any such theory. Even among those people that are
certainly known to have practised so-called common ownership of land,
there are very few instances of communal cultivation, or communal
distribution of the product. Yet these are included in the Roman concept of
ownership. The usual method seems to have been periodical allotment by
the community of the land among individuals, individual cultivation of the
allotted tracts, and individual ownership of the product. Moreover, there
was always a chief or patriarch who exercised considerable authority in the
distribution of the land, frequently collected a rent or tax from the
cultivators, and almost invariably exercised something like private
ownership of a portion of the land for his direct and special benefit.
Sometimes other men of importance in the community possessed land
which was not subject to the communal allotment. Primitive ownership of
land in common was, therefore, very far from vesting in the community all
the powers that inhere in the private proprietor of land according to the
Roman law and usage.

Private Ownership General in Historical Times

So much for land tenure in prehistoric times. During the historical period of
the existence of the race, almost all civilised peoples have practised some
form of private ownership in the matter of their arable lands. While
differing considerably at various times and places, it has always excluded
communal allotment of land and communal distribution of the product, and
has always included private receipt of the product by the owner-user, or
private receipt of rent when the owner transferred the use to some one else.
But it did not always include the right to determine who should be the user.
In the later centuries of the feudal system, for example, the lord could not
always expel the tenants from the land, nor prevent them from transmitting
the use of it to their children. Moreover, the rent that he received was
customary and fixed, not competitive and arbitrary, and it was looked upon

in great measure as a return to the lord for social, military, and political
services, as well as a payment for the use of land. This system was private
ownership, indeed, but if we apply the Roman notion of ownership we shall
find it difficult to decide whether the tenant or the lord should more
properly be called the owner. At any rate, the right of ownership possessed
by the lord was greatly limited by restrictions which favoured the masses of
the cultivators. In every community there were common wood lands and
pasture lands for the free use of all the inhabitants. Among other restrictions
of private ownership and control in favour of the principle of equal access
to the land by all persons, we may mention the division of the English
villein's holding into several portions, intermingled with those of his
neighbours, so that each would have about the same amount of good land;
and the ancient Hebrew law whereby alienated land was returned to the
descendants of its original owners every fifty years.[7]
Reckoning the feudal lord, and all other overlords who had the same control
over land, as private proprietors, we may say that in historical times the
arable land of every country has been owned by a minority of the
population. Since the downfall of feudalism, the tendency in most regions
of the Western world has been toward an increase in the number of owners,
and a decrease in the number of great estates. This tendency has been
especially marked during the last one hundred years. It will, however, need
to continue for a very long time, or else to increase its pace very rapidly,
before land ownership will be diffused in anything like the measure that is
necessary if its benefits are to be shared by all the people. Even in the
United States, where the distribution is perhaps more general than in any
other country, only 38.4 per cent. of the families in towns and cities owned,
in 1910, the homes in which they lived, and therefore the land upon which
their homes were located. In the rural districts the per cent. of home-owning
families was only 62.8.

Conclusions from History

What conclusions does history warrant concerning the social and moral
value of private landownership? Here we are on very uncertain ground; for
different inferences may be drawn from the same group of facts if a
different section of them be selected for emphasis. Sir Henry Maine and

Henry George both accepted the theory of primitive agrarian communism,
but the former saw in this assumed fact a proof that common ownership was
suited only to the needs of rude and undeveloped peoples, while the latter
regarded it as a sure indication that common ownership was fundamentally
natural and in accordance with permanent social welfare. The fact that
practically all peoples whose history we know discarded communal for
private ownership as soon as they had acquired a moderate degree of
proficiency in methods of cultivation and in the arts of civilised life does,
indeed, create a presumption that the latter system is the better for civilised
men. To this extent Sir Henry Maine is right. Against this presumption
Henry George maintained that common ownership was abandoned solely
because of the usurpation, fraud, and force employed by the powerful and
privileged classes. Undoubtedly this factor played a great part in bringing
about the private ownership that has existed and still exists, but it does not
account for the institution as a whole and everywhere. If chiefs, kings, and
other powerful personages had never usurped control of the land, if no
people had ever conquered the territory of another, it is probable that private
ownership would have taken place to the same extent, although it would
have been much more widely diffused. For the system of periodical
repartition of land, to say nothing of communal cultivation and communal
distribution of the product, does hinder that attachment to a particular
portion of the soil and that intensive cultivation which are so necessary to
the best interests of the cultivator, the most productive use of the land, and
therefore the welfare of society.
On the other hand, the limitations on the right of private ownership which
have been established in so many places and times in favour of those who
were not owners, show that men have very generally looked upon land as in
some measure the inheritance of all the people. Hence arises the
presumption that this conviction is but the reflection of fundamental and
permanent human needs.
Summing up the matter, we may say that the history of land tenure points
on the whole to the conclusion that private ownership is socially and
individually preferable to agrarian communism, but that it should be
somewhat strictly limited in the interest of the non-owners, and of the
community as a whole.

CHAPTER III
THE ARGUMENTS AGAINST PRIVATE LANDOWNERSHIP

If land were not privately owned there would be no receiving of rent by
individuals. Therefore, the morality of the landlord's share of the national
product is intimately related to, and is usually treated in connection with,
the morality of private ownership.
Substantially all the opponents of private property in land to-day are either
Socialists or disciples of Henry George. In the view of the former, land as
well as the other means of production should be owned and managed by the
State. Although they are more numerous than the Georgeites, their attack
upon private landownership is less conspicuous and less formidable than
the propaganda carried on by the Henry George men. The Socialists give
most of their attention to the artificial instruments of production, dealing
with land only incidentally, implicitly, or occasionally. The followers of
Henry George, commonly known as Single Taxers or Single Tax men,
defend the private ownership of artificial capital, or capital in the strict
economic sense, but desire that the control of the community over the
natural means of production should be so far extended as to appropriate for
public uses all economic rent. Their criticism of private ownership is not
only more prominent than that made by the Socialists, but is based to a
much greater extent upon ethical considerations.

Arguments by Socialists

Indeed, the orthodox or Marxian Socialists are logically debarred by their
social philosophy from passing a strictly moral judgment upon property in
land. For their theory of economic determinism, or historical materialism,
involves the belief that private landownership, like all other social
institutions, is a necessary product of economic forces and processes.
Hence it is neither morally good nor morally bad. Since neither its existence
nor its continuance depends upon the human will, it is entirely devoid of

moral quality. It is as unmoral as the succession of the seasons, or the
movement of the tides. And it will disappear through the inevitable
processes of economic evolution. As expressed by Engels: "The growing
perception that existing social institutions are unreasonable and unjust, that
reason has become unreason, and right wrong, is only proof that in the
modes of production and exchange changes have taken place, with which
the social order, adapted to earlier economic conditions, is no longer in
keeping."[8]
Frequently, however, the individual Socialist forgets this materialistic
theory, and falls back upon his common sense, and his innate conceptions
of right and wrong, of free will and responsibility. Instead of regarding the
existing land system as a mere product of blind economic forces, he often
denounces it as morally wrong and unjust. His contentions may be reduced
to two propositions: The proprietor who takes rent from a cultivator robs the
producer of a part of his product; and no one has a right to take for his
exclusive use that which is the natural heritage and means of support for all
the people. Referring to the receipt of 35,000,000 pounds a year in rent by
8,000 British landlords, Hyndman and Morris exclaim: "Yet in the face of
all this a certain school still contend that there is no class robbery."[9] Since
the claim that the labourer has a right to the full product of his labour
applies to capital as well as to land, it can be more conveniently considered
when we come to treat of the income of the capitalist. With regard to the
second contention, the following statement by Robert Blatchford may be
taken as fairly representative of Socialist thought: "The earth belongs to the
people.... So that he who possesses land possesses that to which he has no
right, and he who invests his savings in land becomes the purchaser of
stolen property."[10] Inasmuch as this argument is substantially the same as
one of the fundamental contentions in the system of Henry George, it will
be discussed in connection with the latter, in the pages immediately
following.

Henry George's Attack on the Title of First Occupancy

Every concrete right, whether to land or to artificial goods, is based upon
some contingent fact or ground, called a title. By reason of some title a man
is justified in appropriating a particular farm, house, or hat. When he

becomes the proprietor of a thing that has hitherto been ownerless, his title
is said to be original; when he acquires an article from some previous
owner, his title is said to be derived. As an endless series of proprietors is
impossible, every derived title must be traceable ultimately to some original
title. Among the derived titles the most important are contract, inheritance,
and prescription. The original title is either first occupancy or labour. The
prevailing view among the defenders of private landownership has always
been that the original title is not labour but first occupancy. If this title be
not valid every derived title is worthless, and no man has a true right to the
land that he calls his own. Henry George's attack upon the title of first
occupancy is an important link in his argument against private property in
land.
"Priority of occupation give exclusive and perpetual title to the surface of a
globe in which, in the order of nature, countless generations succeed each
other!... Has the first comer at a banquet the right to turn back all the chairs,
and claim that none of the other guests shall partake of the food provided,
except as they make terms with him? Does the first man who presents a
ticket at the door of a theatre, and passes in, acquire by his priority the right
to shut the doors and have the performance go on for him alone?... And to
this manifest absurdity does the recognition of the individual right to land
come when carried to its ultimate that any human being, could he
concentrate in himself the individual rights to the land of any country, could
expel therefrom all the rest of the inhabitants; and could he concentrate the
individual rights to the whole surface of the globe, he alone of all the
teeming population of the earth would have the right to live."[11]
In passing, it may be observed that Henry George was not the first
distinguished writer to use the illustration drawn from the theatre. Cicero,
St. Basil, and St. Thomas Aquinas all employed it to refute extravagant
conceptions of private ownership. In reply to the foregoing argument of
Henry George, we point out: first, that the right of ownership created by
first occupancy is not unlimited, either extensively or intensively; and,
second, that the historical injustices connected with private ownership have
been in only a comparatively slight degree due to the first occupation of
very large tracts of land. The right of first occupancy does not involve the
right to take a whole region or continent, compelling all subsequent arrivals
to become tenants of the first. There seems to be no good reason to think

that the first occupant is justified in claiming as his own more land than he
can cultivate by his own labour, or with the assistance of those who prefer
to be his employés or his tenants rather than independent proprietors. "He
has not the right to reserve for himself alone the whole territory, but only
that part of it which is really useful to him, which he can make fruitful."[12]
Nor is the right of private landownership, on whatever title it may rest,
unlimited intensively, that is, in its powers or comprehension. Though a
man should have become the rightful owner of all the land in a
neighbourhood, he would have no moral right to exclude therefrom those
persons who could not without extreme inconvenience find a living
elsewhere. He would be morally bound to let them cultivate it at a fair
rental. The Christian conception of the intensive limitations of private
ownership is well exemplified in the action of Pope Clement IV, who
permitted strangers to occupy the third part of any estate which the
proprietor refused to cultivate himself.[13] Ownership understood as the
right to do what one pleases with one's possessions, is due partly to the
Roman law, partly to the Code Napoléon, but chiefly to modern theories of
individualism.
In the second place, the abuses which have accompanied private property in
land are very rarely traceable to abuses of the right of first occupancy. The
men who have possessed too much land, and the men who have used their
land as an instrument of social oppression, have scarcely ever been first
occupants or the successors thereof through derived titles. This is especially
true of modern abuses, and modern legal titles. In the words of Herbert
Spencer: "Violence, fraud, the prerogative of force, the claims of superior
cunning,—these are the sources to which these titles may be traced. The
original deeds were written with the sword, rather than with the pen: not
lawyers but soldiers were the conveyancers: blows were the current coin
given in payment; and for seals blood was used in preference to wax."[14]
Not the appropriation of land which nobody owned, but the forcible and
fraudulent seizure of land which had already been occupied, has been one
of the main causes of the evils attending upon private landownership.
Moreover, in England and all other countries that have adopted her legal
system, the title of first occupancy could never be utilised by individuals:
all unoccupied land was claimed by the Crown or by the State, and
transferred thence to private persons or corporations. If some individuals

have got possession of too much land through this process, the State, not the
title of first occupancy, must bear the blame. This is quite clear in the
history of land tenure in the United States and Australasia.
Henry George's attack upon private landownership through the title of first
occupancy is therefore ineffective; for he attributes to this qualities that it
does not possess, and consequences for which it is not responsible.

His Defence of the Title of Labour

Thinking that he has shattered the title of first occupancy, Henry George
undertakes to set up in its place the title of labour. "There can be to the
ownership of anything no rightful title which is not derived from the title of
the producer, and does not rest on the natural right of the man to himself."
[15]
The only original title is man's right to the exercise of his own faculties;
from this right follows his right to what he produces; now man does not
produce land; therefore he cannot have rightful property in land. Of these
four propositions the first is a pure assumption, the second is untrue, the
third is a truism, and the fourth is as unfounded as the first. Dependently
upon God, man has, indeed, a right to himself and to the exercise of his own
faculties; but this is a right of action, not of property. By the exercise of this
right alone man can never produce anything, never become the owner of
anything. He can produce only by exerting his powers upon something
outside of himself; that is, upon the goods of external nature. To become the
producer and the owner of a product, he must first become the owner of
materials. By what title is he to acquire these? In one passage[16] Henry
George seems to think that no title is necessary, and refers to the raw
material as an "accident," while the finished product is the "essence,"
declaring that "the right of private ownership attaches the accident to the
essence, and gives the right of ownership to the natural material in which
the labour of production is embodied." Now this solution of the difficulty is
too simple and arbitrary. Its author would have shrunk from applying it
universally; for example, to the case of the shoemaker who produces a pair
of shoes out of stolen materials, or the burglar who makes an overcoat more
useful (and therefore performs a task of production) by transferring it from
a warehouse to his shivering back! Evidently Henry George has in mind
only raw material in the strict sense, that which has not yet been separated

from the storehouse of nature; for he declares in another place that "the
right to the produce of labour cannot be enjoyed without the free use of the
opportunities offered by nature."[17] In other words, man's title to the
materials upon which he is to exercise his faculties, and of which he is to
become the owner by right of production, is the title of gift conferred by
nature, or nature's God.
Nevertheless this title is applicable only to those goods that exist in
unlimited abundance, not to those parts of the natural bounty that are scarce
and possess economic value. A general assumption by producers that they
were entitled to take possession of the gifts of nature indiscriminately
would mean industrial anarchy and civil war. Hence Henry George tells us
that the individual should pay rent to "the community to satisfy the equal
rights of all other members of the community."[18] Inasmuch as the
individual must pay this price before he begins to produce, his right to the
use of natural opportunities is not "free," nor does his labour alone
constitute a title to that part of them that he utilises in production.
Consequently labour does not create a right to the concrete product. It
merely gives the producer a right to the value that he adds to the raw
material. His right to the raw material itself, to the elements that he
withdraws from the common store, and fashions into a product, say, wheat,
lumber, or steel, does not originate in the title of labour but in the title of
contract. This is the contract by which in exchange for rent paid to the
community he is authorised to utilise these materials. Until he has made this
contract he has manifestly no full right to the product into which natural
forces as well as his own labour have entered. According to Henry George's
own statements, therefore, the right to the product does not spring from
labour alone, but from labour plus compensation to the community. Since
the contract by which the prospective user agrees to pay this compensation
or rent must precede his application of labour, it instead of labour is the
original title. Since the contract is made with a particular community for the
use of a particular piece of land, the title that it conveys must derive
ultimately from the occupation of that land by that community,—or some
previous community of which the present one is the legal heir. So far as
economically valuable materials are concerned, therefore, the logic of
Henry George's principles leads inevitably to the conclusion that the
original title of ownership is first occupancy.

Even in the case of economically free goods, the original title of ownership
is occupancy. Henry George declares that the traveller who has filled his
vessels at a free-for-all spring owns the water when he has carried it into a
desert, by the title of labour.[19] Nevertheless, in its original place this water
belonged either to the community or to nobody. In the former supposition it
can become the property of the traveller only through an explicit or implicit
gift from the community; and it is this contract, not labour, that constitutes
his title to the water. If we assume that the spring was ownerless, we see
that the labour of carrying a portion of it into the desert still lacks the
qualifications of a title; for the abstracted water must have belonged to him
before he began the journey. It must have been his from the moment that he
separated it from the spring. Otherwise he had no right to take it away. His
labour of transporting it gave him a right to the utility thus added to the
water, but not a right to the water when it first found a local habitation in
his vessels. Nor was the labour of transferring it from the spring into his
vessels the true title; for labour alone cannot create a right to the material
upon which it is exerted, as we see in the case of stolen objects. If it be
contended that labour together with the natural right to use the ownerless
goods of nature have all the elements of a valid title, the assertion must be
rejected as unprecise and inadequate. The right to use ownerless goods is a
general and abstract right that requires to become specific and concrete
through some title. In the case of water it is a right to water in general, to
some water, but not a right to a definite portion of the water in this
particular spring. The required and sufficient title here is that of
apprehension, occupation, the act of separating a portion from the natural
reservoir. Therefore, it is first occupancy as exemplified in mere seizure of
an ownerless good, not labour in the sense of productive activity, nor labour
in the sense of painful exertion, that constitutes the precise title whereby the
man acquires a right to the water that he has put into his cup or barrel. Mere
seizure is a sufficient title in all such cases as that which we are now
considering, simply because it is a reasonable method of determining and
specifying ownership. There is no need whatever of having recourse to the
concept of labour to justify this kind of property right. In the present case,
indeed, the acts of apprehension and of productive labour (the labour of
dipping the water into a vessel is productive inasmuch as the water is more
useful there than in the spring) are the same physically, but they are distinct
logically and ethically. One is mere occupation, while the other is

production; and ownership of a thing must precede, in morals if not in time,
the expenditure upon it of productive labour.
"The theory which bases the right of property on labour really depends in
the ultimate resort on the right of possession and the fact that it is socially
expedient, and is therefore upheld by the laws of society. Grotius,
discussing this in the old Roman days, pointed out that since nothing can be
made except out of pre-existing matter, acquisition by means of labour
depends, ultimately, on possession by means of occupation."[20]
Since man's right to his faculties does not of itself give him a right to
exercise them upon material objects, productive labour cannot of itself give
him a right to the product therefrom created, nor constitute the original title
of ownership. Since labour is not the original title to property, it is not the
only possible title to property in land. Hence the fact that labour does not
produce land, has no bearing on the question of private landownership.
In passing it may be observed that Henry George implicitly admitted that
the argument from the labour title was not of itself sufficient to disprove the
right of private property in land. Considering the objection, "if private
property in land be not just, then private property in the products of land is
not just, as the material of these products is taken from the land," he replied
that the latter form of ownership "is in reality a mere right of temporary
possession," since the raw material in the products sooner or later returns to
the "reservoirs provided for all ... and thus the ownership of them by one
works no injury to others."[21] But private ownership of land, he continued,
shuts out others from the very reservoirs. Here we have a complete
abandonment of the principle which underlies the labour argument. Instead
of trying to show from the nature of the situation that there is a logical
difference between the two kinds of ownership, he shifts his ground to a
consideration of consequences. He makes the title of social utility instead of
the title of labour the distinguishing and decisive consideration. As we shall
see later, he is wrong even on this ground; for the fundamental justification
of private landownership is precisely the fact that it is the system of land
tenure most conducive to human welfare. At present we merely call
attention to the breakdown in his own hands of the labour argument.

To sum up the entire discussion on the original title of ownership: Henry
George's attack upon first occupancy is futile because based upon an
exaggerated conception of the scope of private landownership, and upon a
false assumption concerning the responsibility of that title for the historical
evils of the system. His attempt to substitute labour as the original title is
likewise unsuccessful, since labour can give a right only to the utility added
to natural materials, not to the materials themselves. Ownership of the latter
reaches back finally to occupation. Whence it follows that the title to an
artificial thing, such as a hat or coat, water taken from a spring, a fish drawn
from the sea, is a joint or two-fold title; namely, occupation and labour.
Where the product embodies scarce and economically valuable raw
material, occupation is usually prior to labour in time; in all cases it is prior
to labour logically and ethically. Since labour is not the original title, its
absence in the case of land does not leave that form of property unjustified.
The title of first occupancy remains. In a word, the one original title of all
property, natural and artificial, is first occupancy.
The other arguments of Henry George against private landownership are
based upon the assumed right of all mankind to land and land values, and
on the contention that this right is violated by the present system of tenure.

The Right of All Men to the Bounty of the Earth

"The equal right of all men to the use of land is as clear as their equal right
to breathe the air—it is a right proclaimed by the fact of their existence. For
we cannot suppose that some men have a right to be in the world, and
others no right.
"If we are here by the equal permission of the Creator, we are all here with
an equal title to the enjoyment of his bounty—with an equal right to the use
of all that nature so impartially offers.... There is in nature no such thing as
a fee simple in land. There is on earth no power which can rightfully make a
grant of exclusive ownership of land. If all existing men were to grant away
their equal rights, they could not grant away the rights of those who follow
them. For what are we but tenants for a day? Have we made the earth that
we should determine the rights of those who after us shall tenant it in their
turn?"[22]

The right to use the goods of nature for the support of life is certainly a
fundamental natural right; and it is substantially equal in all persons. It
arises, on the one hand, from man's intrinsic worth, his essential needs, and
his final destiny; and, on the other hand, from the fact that nature's bounty
has been placed by God at the disposal of all His children indiscriminately.
But this is a general and abstract right. What does it imply specifically and
in the concrete? In the first place, it includes the actual and continuous use
of some land; for a man cannot support life unless he is permitted to occupy
some portion of the earth for the purposes of working, and eating, and
sleeping. Secondly, it means that in time of extreme need, and when more
orderly methods are not available, a man has the right to seize sufficient
goods, natural or produced, public or private, to support life. So much is
admitted and taught by all Catholic authorities, and probably by all other
authorities. Furthermore, the abstract right in question seems very clearly to
include the concrete right to obtain on reasonable conditions at least the
requisites of a decent livelihood; for example, by direct access to a piece of
land, or in return for a reasonable amount of useful labour. All of these
particular rights are equally valid in all persons.
Does the equal right to use the bounty of nature include the right to equal
shares of land, or land values, or land advantages? Since the resources of
nature have been given to all men in general, and since human nature is
specifically and juridically equal in all, have not all persons the right to
share equally in these resources? Suppose that some philanthropist hands
over to one hundred persons an uninhabited island, on condition that they
shall divide it among themselves with absolute justice. Are they not obliged
to divide it equally? On what ground can any person claim or be awarded a
larger share than his fellows? None is of greater intrinsic worth than
another, nor has any one made efforts, or sacrifices, or products which will
entitle him to exceptional treatment. The correct principle of distribution
would seem to be absolute equality, except in so far as it may be modified
on account of varying needs, and varying capacities for social service. In
any just distribution account must be taken of differences in needs and
capacities; for it is not just to treat men as equal in those respects in which
they are unequal, nor is it fair to deprive the community of those social
benefits which can be obtained only by giving exceptional rewards for
exceptional services. The same amount of food allotted to two persons

might leave one hungry and the other sated; the same amount of land
assigned to two persons might tempt the one to wastefulness and discourage
the other. To be sure, the factor of exceptional capacity should not figure in
the distribution until all persons had received that measure of natural goods
which was in each case sufficient for a decent livelihood. For the
fundamental justification of any distribution is to be sought in human needs;
and among human needs the most deserving and the most urgent are those
which must be satisfied as a prerequisite to right and reasonable life.
Now it is true that private ownership of land has nowhere realised this
principle of proportional equality and proportional justice. No such result is
possible in a system that, in addition to other difficulties, would be required
to make a new distribution at every birth and at every death. Private
ownership of land can never bring about ideal justice in distribution.
Nevertheless it is not necessarily out of harmony with the demands of
practical justice. A community that lacks either the knowledge or the power
to establish the ideal system is not guilty of actual injustice because of this
failure. In such a situation the proportionally equal rights of all men to the
bounty of nature are not actual rights. They are conditional, or hypothetical,
or suspended. At best they have no more moral validity than the right of a
creditor to a loan that, owing to the untimely death of the debtor, he can
never recover. In both cases it is misleading to talk of injustice; for this term
always implies that some person or community is guilty of some action
which could have been avoided. The system of private landownership is
not, indeed, perfect; but this is not exceptional in a world where the ideal is
never attained, and all things are imperfect. Henry George declares that
"there is on earth no power which can rightfully make a grant of exclusive
ownership in land"; but what would he have a community do which has
never heard of his system? Introduce some crude form of communism, or
refrain from using the land at all, and permit the people to starve to death in
the interests of ideal justice? Evidently such a community must make grants
of exclusive ownership, and these will be as valid in reason and in morals as
any other act that is subject to human limitations which are at the time
irremovable.
Perhaps the Single Taxer would admit the force of the foregoing argument.
He might insist that the titles given by the State in such conditions were not
exclusive grants in the strict sense, but were valid only until a better system

could be set up, and the people put in possession of their natural heritage.
Let us suppose, then, that a nation were shown "a more excellent way."
Suppose that the people of the United States set about to establish Henry
George's system in the way that he himself advocated. They would
forthwith impose upon all land an annual tax equivalent to the annual rent.
What would be the effect upon private land-incomes, and private land-
wealth? Since the first would be handed over to the State in the form of a
tax, the second would utterly disappear. For the value of land, like the value
of any other economic good, depends upon the utilities that it embodies or
produces. Whoever controls these will control the market value of the land
itself. No man will pay anything for a revenue-producing property if some
one else, for example, the State, is forever to take the revenue. The owner of
a piece of land which brings him an annual revenue or rent of one hundred
dollars, will not find a purchaser for it if the State appropriates the one
hundred dollars in the form of a tax that is to be levied year after year for all
time. On the assumption that the revenue represents a selling value of two
thousand dollars, the private owner will be worth that much less after the
introduction of the new system.
Henry George defends this proceeding as emphatically just, and denies the
justice of compensating the private owners. In the chapter of "Progress and
Poverty" headed, "Claim of Land Owners to Compensation," he declares
that "private property in land is a bold, bare, enormous wrong, like that of
chattel slavery"; and against Mill's statement that land owners have a right
to rent and to the selling value of their holdings, he exclaims: "If the land of
any country belong to the people of that country, what right, in morality and
justice, have the individuals called land owners to the rent? If the land
belong to the people, why in the name of morality and justice should the
people pay its salable value for their own?"[23]
Here, then, we have the full implication of the Georgean principle that
private property in land is essentially unjust. It is not merely imperfect,—
tolerable while unavoidable. When it can be supplanted by the right system,
its inequalities must not continue under another form. If inequalities are
continued through the compensation of private owners, individuals are still
hindered from enjoying their equal rights to land, and the State becomes
guilty of formal and culpable injustice. The titles which the State formerly
guaranteed to the private owners did not have in morals the perpetual

validity which they professed to have. Since the State is not the owner of
the land, it was morally powerless to create or sanction titles of this
character. Even if all the citizens at any given time had deliberately
transferred the necessary authorisation to the State, "they could not," in the
words of Henry George, "grant away the right of those who follow them."
The individual's right to land is innate and natural, not civil or social. The
author of "Progress and Poverty" attributes to the individual's common right
to land precisely the same absolute character that Father Liberatore
predicates of the right to become a private land owner.[24] In the view of
Henry George, the State is merely the trustee of the land, having the duty of
distributing its benefits and values so as to make effective the equal rights
of all individuals. Consequently, the legal titles of private ownership which
it creates or sanctions are valid only so long as nothing better is available.
At best such titles have no greater moral force than the title by which an
innocent purchaser holds a stolen watch; and the persons who are thereby
deprived of their proper shares of land benefits, have the same right to
recover them from the existing private owners that the watch-owner has to
recover his property from the innocent purchaser. Hence the demand for
compensation has no more merit in the one case than in the other.
To the objection that the civil laws of many civilised countries would permit
the innocent purchaser of the watch to retain it, provided that sufficient time
had elapsed to create a title of prescription, the Single Taxer would reply
that the two kinds of goods are not on the same moral basis in all respects.
He would contend that the natural heritage of the race is too valuable, and
too important for human welfare to fall under the title of prescription.
To put the matter briefly, then, Henry George contends that the individual's
equal right to land is so much superior to the claim of the private owner that
the latter must give way, even when it represents an expenditure of money
or other valuable goods. The average opponent does not seem to realise the
full force of the impression which this theory makes upon the man who
overemphasises the innate rights of men to a share in the gifts of nature. Let
us see whether this right has the absolute and overpowering value which is
attributed to it by Henry George.
In considering this question, the supremely important fact to be kept in
mind is that the natural right to land is not an end in itself. It is not a

prerogative that inheres in men, regardless of its purposes or effects. It has
validity only in so far as it promotes individual and social welfare. As
regards individual welfare, we must bear in mind that this phrase includes
the well being of all persons, of those who do as well as of those who do
not at present enjoy the benefits of private landownership. Consequently the
proposal to restore to the "disinherited" the use of their land rights must be
judged by its effects upon the welfare of all persons. If existing landowners
are not compensated they are deprived, in varying amounts, of the
conditions of material well being to which they have become accustomed,
and are thereby subjected to varying degrees of positive inconvenience and
hardship. The assertion that this loss would be offset by the moral gain in
altruistic feelings and consciousness, may be passed over as applying to a
different race of beings from those who would be despoiled. The hardship is
aggravated considerably by the fact that very many of the dispossessed
private owners have paid the full value of their land out of the earnings of
labour or capital, and that all of them have been encouraged by society and
the State to regard landed property in precisely the same way as any other
kind of property. In the latter respect they are not in the same position as the
innocent purchaser of the stolen watch; for they have never been warned by
society that the land might have been virtually stolen, or that the supposedly
rightful claimants might some day be empowered by the law to recover
possession. On the other hand, the persons who own no land under the
present system, the persons who are deprived of their "birthright," suffer no
such degree of hardship when they are continued in that condition. They are
kept out of something which they have never possessed, which they have
never hoped to get by any such easy method, and from which they have not
been accustomed to derive any benefit. To prolong this condition is not to
inflict upon them any new or positive inconvenience. Evidently their
welfare and claims in the circumstances are not of the same moral
importance as the welfare and claims of persons who would be called upon
to suffer the loss of goods already possessed and enjoyed, and acquired with
the full sanction of society.
Henry George is fond of comparing the private owner of land with the slave
owner, and the landless man with the man enslaved; but there is a world of
difference between their respective positions and moral claims. Liberty is
immeasurably more important than land, and the hardship suffered by the

master when he is compelled to free the slave is immeasurably less than that
endured by the slave who is forcibly detained in bondage. Moreover, the
moral sense of mankind recognises that it is in accordance with equity to
compensate slave owners when the slaves are legally emancipated.
Infinitely stronger is the claim of the landowner to compensation.
If the Georgeite replies that the landless man is at present kept out of
something to which he has a right, while confiscation would take from the
private owner something which does not really belong to him, the rejoinder
must be that this assertion begs the question. The question is likewise
begged when the unreasonable defender of private property declares that
the right of the landless is vague and undetermined, and therefore morally
inferior to the determinate and specific right of the individual landowner.
This is precisely the question to be solved. Does the abstract right of the
landless man become a concrete right which is so strong as to justify
confiscation? Is his natural right valid against the acquired right of the
private proprietor? These questions can be answered intelligently only by
applying the test of human welfare, individual and social. To say that land
of its very nature is not morally susceptible of private ownership, is to make
an easy assertion that may be as easily denied. To interpret man's natural
right to land by any other standard than human welfare, is to make of it a
fetish, not a thing of reason. Henry George himself seemed to recognise this
when he wrote that wonderfully eloquent but overdrawn and one-sided
description of the effects of private ownership which occurs in the chapter
entitled, "Claim of Landowners to Compensation."[25]
When we say that human welfare is the final determinant of the right to
land, we understand this phrase in the widest possible sense. To divide the
goods of the idle rich among the deserving poor, might be temporarily
beneficial to both these classes, but the more remote and enduring
consequences would be individually and socially disastrous. To restore a
legacy to persons who had been defrauded of it when very young, would
probably cause more hardship to the swindler than the heirs would have
suffered had there been no restitution; nevertheless the larger view of
human welfare requires that the legacy should be restored. When, however,
two or three generations have been kept out of their inheritance, the civil
law permits the children of the swindler to retain the property by the title of
prescription; and for precisely the same reason, human welfare.

The social consequences of the confiscation of rent and land values, would
be even more injurious than those falling upon the individuals despoiled.
Social peace and order would be gravely disturbed by the protests and
opposition of the landowners, while the popular conception of property
rights, and of the inviolability of property, would be greatly weakened, if
not entirely destroyed. The average man would not grasp or seriously
consider the Georgean distinction between land and other kinds of property
in this connection. He would infer that purchase, or inheritance, or bequest,
or any other title having the immemorial sanction of the State, does not
create a moral right to movable goods any more than to land. This would be
especially likely in the matter of capital. Why should the capitalist, who is
no more a worker than the landowner, be permitted to extract revenue from
his possessions? In both cases the most significant and practical feature is
that one class of men contributes to another class an annual payment for the
use of socially necessary productive goods. If rent-confiscation would
benefit a large number of people, why not increase the number by
confiscating interest? Indeed, the proposal to confiscate rent is so abhorrent
to the moral sense of the average man that it could never take place except
in conditions of revolution and anarchy. If that day should ever arrive the
policy of confiscation would not stop with land.

The Alleged Right of the Community to Land Values

In the foregoing pages we have confined our attention to the Georgean
principle which bases men's common right to land and rent upon their
common nature, and their common claims to the material gifts of the
Creator. Another argument against private ownership takes this form:
"Consider what rent is. It does not arise spontaneously from the soil; it is
due to nothing that the landowners have done. It represents a value created
by the whole community.... But rent, the creation of the whole community,
necessarily belongs to the whole community."[26]
Before taking up the main contention in this passage, let us notice two
incidental points. If all rent be due to the community by the title of social
production, why does Henry George defend at such length the title of
birthright? If the latter title does not extend to rent it is restricted to land
which is so plentiful as to yield no rent. Since the owners or holders of such

land rarely take the trouble to exclude any one from it, the right in question,
the inborn right, has not much practical value. Probably, however, the words
quoted above ought not to be interpreted as excluding the title of birthright.
In that case, the meaning would be that rent belongs to the community by
the title of production, as well as by the congenital title.
The second preliminary consideration is that the community does not create
all land values nor all rent. These things are as certainly due to nature as to
social action. In no case can they be attributed exclusively to one factor.
Land that has no natural qualities or capacities suitable for the satisfaction
of human wants will never have value or yield rent, no matter what society
does in connection with it: the richest land in the world will likewise remain
valueless, until it is brought into relation with society, with at least two
human beings. If Henry George merely means to say that, without the
presence of the community, land will not produce rent, he is stating
something that is perfectly obvious, but it is not peculiar to land.
Manufactured products would have no value outside of society, yet no one
maintains that their value is all created by social action. Although the value
of land is always due to both nature and society, for practical purposes we
may correctly attribute the value of a particular piece of land predominantly
to nature, or predominantly to society. When three tracts, equally distant
from a city, and equally affected by society and its activities, have different
values because one is fit only for grazing, while the second produces large
crops of wheat, and the third contains a rich coal mine, their relative values
are evidently due to nature rather than to society. On the other hand, the
varying values of two equally fertile pieces of land unequally distant from a
city, must be ascribed primarily to social action. In general, it is probably
safe to say that almost all the value of land in cities, and the greater part of
the value of land in thickly settled districts, is specifically due to social
action rather than to differences in fertility. Nevertheless, it remains true
that the value of every piece of land arises partly from nature, and partly
from society; but it is impossible to say in what proportion.
Our present concern is with those values and rents which are to be
attributed to social action. These cannot be claimed by any person, nor by
any community, in virtue of the individual's natural right to the bounty of
nature. Since they are not included among the ready made gifts of God, they
are no part of man's birthright. If they belong to all the people the title to

them must be sought in some historical fact, some fact of experience, some
social fact. According to Henry George, the required title is found in the
fact of production. Socially created land values and rents belong to the
community because the community, not the private proprietor, has produced
them. Let us see in what sense the community produces the social value of
land.
In the first place, this value is produced by the community in two different
senses of the word community, namely, as a civil, corporate entity, and as a
group of individuals who do not form a moral unit. Under the first head
must be placed a great deal of the value of land in cities; for example, that
which arises from municipal institutions and improvements, such as, fire
and police protection, water works, sewers, paved streets, and parks. On the
other hand, a considerable part of land values both within and without cities
is due, not to the community as a civil body, but to the community as a
collection of individuals and groups of individuals. Thus, the erection and
maintenance of buildings, the various economic exchanges of goods and
labour, the superior opportunities for social intercourse and amusement
which characterise a city, make the land of the city and its environs more
valuable than land at a distance. While the activities involved in these
economic and "social" facts and relations are, indeed, a social not an
individual product, they are the product of small, temporary, and shifting
groups within the community. They are not the activities of the community
as a moral whole. For example, the maintenance of a grocery business
implies a series of social relations and agreements between the grocer and
his customers; but none of these transactions is participated in by the
community acting as a community. Consequently such actions and
relations, and the land values to which they give rise are not due to, are not
the products of the community as a unit, as a moral body, as an organic
entity. What is true of the land values created by the grocery business
applies to the values which are due to other economic institutions and
relations, as well as to those values which arise out of the purely "social"
activities and advantages. If these values are to go to their producers they
must be taken, in various proportions, by the different small groups and the
various individuals whose actions and transactions have been directly
responsible.

To distribute these values among the producers thereof in proportion to the
productive contribution of each person is obviously impossible. How can it
be known, for example, what portion of the increase in the value of a city's
real estate during a given year is due to the merchants, the manufacturers,
the railroads, the labourers, the professional classes, or the city as a
corporation? The only practical method is for the city or other political unit
to act as the representative of all its members, appropriate the increase in
value, and distribute it among the citizens in the form of public services,
institutions, and improvements. Assuming that the socially produced value
of land ought to go to its social producer rather than to the individual
proprietor, this method of public appropriation and disbursement would
seem to be the nearest approximation to practical justice that is available.
Is the assumption correct? Do the socially produced land values necessarily
belong to the producer, society? Does not the assumption rest upon a
misconception of the moral validity of production as a canon of
distribution? Let us examine some of the ways in which values are
produced.
The man who converts leather and other suitable raw materials into a pair of
shoes, increases the utility of these materials, and in normal market
conditions increases their value. In a certain sense he has created value, and
he is universally acknowledged to have a right to this product. Similarly the
man who increases the utility and value of land by fertilising, irrigating, or
draining it, is conceded the benefit of these improvements by the title of
production.
But value may be increased by mere restriction of supply, and by mere
increase in demand. If a group of men get control of the existing supply of
wheat or cotton, they can artificially raise the price, thereby producing
value as effectively as the shoemaker or the farmer. If a syndicate of
speculators gets possession of all the land of a certain quality in a
community, they can likewise increase its value, produce new value. If a
few powerful leaders of fashion decide to adopt a certain style of millinery,
their action and example will effect an increase in the demand for and the
value of that kind of goods. Yet none of these producers of value are
regarded as having a moral right to their product.

When we turn to what is called the social creation of land values, we find
that it takes two forms. It always implies increase of social demand; but the
latter may be either purely subjective, reflecting merely the desires and
power of the demanders themselves, or it may have an objective basis
connected with the land. In the first case it may be due solely to an increase
of population. Within the last few years, agricultural land which is no more
fertile nor any better situated with regard to markets or other social
advantages than it was thirty years ago, has risen in value because its
products have risen in value. Its products have become dearer because
population, and therefore demand, have grown faster than agricultural
production. Merely by increasing its wants the population has produced
land values; but it has obviously no more right to them than have the
leaders of fashion to the enhanced value which they have given to feminine
headgear. On the other hand, the increased demand for land, and the
consequent increase in its value, are frequently attributable specifically to
changes connected with the land itself. They are changes which affect its
utility rather than its scarcity. The farmer who irrigates desert land increases
its utility, as it were, intrinsically. The community that establishes a city
increases the utility of the land therein and thereabout extrinsically. New
relations are introduced between that land and certain desirable social
institutions. Land that was formerly useful only for agriculture becomes
profitable for a factory or a store. Through its new external relations, the
land acquires new utility; or better, its latent and potential uses have become
actual. Now these new relations, these utility-creating and value-creating
relations, have been established by society, in its corporate capacity through
civil institutions and activities, and in its non-corporate capacity through the
economic and "social" (in the narrower "society" sense) activities of groups
and individuals. In this sense, then, the community has created the
increased land values. Has it a strict right to them? a right so rigorous and
exact that private appropriation of them is unjust?
As we have just seen, men do not admit that mere production of value
constitutes a title of ownership. Neither the monopolist who increases value
by restricting supply, nor the pace-makers of fashion, who increase value by
merely increasing demand, are regarded as possessing a moral right to the
value that they have "created." It is increase of utility, and not either actual
or virtual increase of scarcity to which men attribute a moral claim. Why do

men assign these different ethical qualities to the production of value? Why
has the shoemaker a right to the value that he adds to the raw material in
making a pair of shoes? What is the precise basis of his right? It cannot be
labour merely; for the cotton monopolist has laboured in getting his corner
on cotton. It cannot be the fact that the shoemaker's labour is socially
useful; for a chemist might spend laborious days and nights producing
water from its component elements, and find his product a drug on the
market. Yet he would have no reasonable ground of complaint. Why, then,
is it reasonable for the shoemaker to require, why has he a right to require
payment for the utilities that he produces? Because men want to use his
products, and because they have no right to require him to serve them
without compensation. He is morally and juridically their equal, and has the
same right as they to have access on reasonable terms to the earth and the
earth's possibilities of a livelihood. Being thus equal to his fellows, he is
under no obligation to subordinate himself to them by becoming a mere
instrument for their welfare. To assume that he is obliged to produce
socially useful things without remuneration, is to assume that all these
propositions are false; it is to assume that his life and personality and
personal development are of no intrinsic importance, and that his pursuit of
the essential ends of life has no meaning except in so far as may be
conducive to his function as an instrument of production. In a word, the
ultimate basis of the producer's right to his product, or its value, is the fact
that this is the only way in which he can get his just share of the earth's
goods, and of the means of life and personal development. His right to
compensation does not rest on the mere fact of value-production.
As a producer of land values, the community is not on the same moral
ground with the shoemaker. Its productive action is indirect and extrinsic,
instead of direct and intrinsic, and is merely incidental to its principal
activities and purposes. Land values are a by-product which do not require
the community to devote thereto a single moment of time or a single ounce
of effort. The activities of which land values are a by-product, have already
been remunerated in the price paid to the wage-earner for his labour, the
physician for his services, the manufacturer and the merchant for their
wares, and the municipal corporation in the form of taxes. On what ground
can the community, or any part of it, set up a claim in strict justice to the
increased land values? The right of the members of the community to the

means of living and self development is not dependent upon the taking of
these values by the community. Nor are they treated as instruments to the
welfare of the private owners who do get the socially created land values;
for they expend neither time nor labour in the interest of the latter directly.
Their labour is precisely what it would have been had there been no
increase in the value of the land.
Since social production does not constitute a right to land values nor to rent,
it affords not a shadow of justification for the confiscation of these things
by the community. If social appropriation of socially created land values
had been introduced with the first occupation of a piece of land, it might
possibly have proved more generally beneficial than the present system. In
that case, however, the moral claim of the community to these values would
have rested on the fact that they did not belong to anybody by a title of
strict justice. They would have been a "res nullius" ("nobody's property")
which might fairly have been taken by the community according as they
made their appearance. The community could have appropriated them by
the title of first occupancy. But there could have been no moral title of
social production. When, however, the community or the State failed to take
advantage of its opportunity to be the first occupant of these values, when it
permitted the individual proprietor to appropriate them, it forfeited its own
claim. Ever since it has had no more right to already existing land values
than it has to seize the labourer's wages or the capitalist's interest,—no more
right than one person has to recover a gift or donation that he has
unconditionally bestowed upon another.
To sum up the conclusions of this chapter: The argument against first
occupancy is valid only with regard to the abuses of private ownership, not
with regard to the institution; the argument based upon the title of labour is
the outcome of a faulty analysis, and is inconsistent with other statements of
its author; the argument derived from men's equal rights to land merely
proves that private ownership does not secure perfect justice, and the
proposal to correct this defect by confiscating rent is unjust because it
would produce greater evils; and the so called production of the social
values of land confers upon the community no property right whatever.

CHAPTER IV
PRIVATE OWNERSHIP THE BEST SYSTEM OF LAND TENURE

The defence of private landownership set forth in the last chapter has been
conditional. It has tended to show that the institution is morally lawful so
long as no better system is available. As soon as a better system has been
discovered, the State and the citizens are undoubtedly under some degree of
moral obligation to put it into practice. Hence the important present
question is whether this condition or contingency has become a reality. The
only proposed and the only possible alternative systems are Socialism and
the Single Tax. All other forms of tenure are properly classed as
modifications of private ownership, rather than as distinct systems.
Consequently the worth, and efficiency, and morality of private ownership
can be adequately determined by comparison with the two just mentioned.

The Socialist Proposals Impracticable

As now existing and as commonly understood, private landownership
comprises four elements which are not found together in either Socialism or
the Single Tax. They are: security of possession combined with the power to
transfer and transmit; the use of land combined with the power to let the use
to others; the receipt of revenue from improvements in or upon the land;
and the receipt of economic rent, the revenue due to the land itself, apart
from improvements. In its extreme form, and as formerly understood by the
majority of its authoritative exponents, Socialism would take from the
individual all of these elements or powers. The State, or the Collectivity,
would own and manage all productive land and land-capital, and would
receive and distribute the product. Consequently the cultivators of the land
would be deprived of even that limited degree of control which is now
possessed by the tenant on a rented farm; for the latter, though not a
landowner, is the owner of a farming business, and of agricultural
instruments of production. Under Socialism the users of the land would not
receive the revenue either from improvements or from the land itself. They

would be substantially employés of the community, receiving a share of the
product according to some plan of distribution established by public
authority. Land occupied by dwellings would likewise be owned and
managed by the State, although its product, the benefit of its use, would
necessarily go in the first instance to the occupier. In return for this benefit
he would undoubtedly be required to pay some kind of rent to the State.
Now the majority of persons believe that this system of land tenure would
be inferior to private ownership, both as regards individual welfare and
social welfare. The reasons for this belief will be given in detail in the
chapter on "The Socialist Scheme of Industry." For the present it will be
sufficient to point out in a summary way that Socialism would be unable to
organise and carry on efficiently all agricultural and extractive industries,
either under one central direction or under many provincial authorities; that
it could not adjust wages and salaries satisfactorily, nor give the individual
worker an incentive as effective as the self interest that goes with private
ownership; that it would deprive the worker of a great part of the freedom
that he now enjoys in the matters of occupation and residence; that it would
leave to the consumer less choice in the demand for the products of land;
that it would place all the people in a position of dependence upon a single
agency for all these products; and that it would make all land users, whether
as workers or as residents, tenants-at-will on the property of the State.
From the nature of the case, none of the foregoing propositions can be
demonstrated mathematically. Nevertheless they are as nearly evident as
any other practical conclusions which are based upon our general
experience of human nature, its tendencies, and its limitations. At any rate,
the burden of proof is upon the advocates of the new system. Until they
have assumed and satisfactorily disposed of this burden, we are justified in
rejecting their prophecies, and in maintaining the superiority of private
ownership.[27]
To-day, however, many Socialists, possibly the majority of them in some
countries, would reject the extreme form of land socialisation discussed in
the preceding paragraphs. "The nearest approach which Socialists have
made to a volte face since Marx, has been in relation to Agrarianism....
Marx thought that the advantage of concentrating capital would be felt in
agriculture as in other industries; but, in spite of a temporary confirmation

of this view by the mammoth farms which sprang up in North America, it
now appears very doubtful.... Recognition of this has led reformists to
substitute a policy of actively assisting the peasants for the orthodox policy
of leaving them to succumb to capitalism. Their formula is: 'Collectivise
credit, transport, exchange, and all subsidiary manufacture, but
individualise culture.'"[28] The Belgian Socialist leader, Vandervelde, seems
to prefer State ownership and management of the great agricultural
industries which require large masses of capital for their efficient operation,
such as dairying, distilling, and sugar making, together with State
ownership of the land thus used. Other lands he would have owned by the
State, but cultivated by individuals according to a system of leasing and
rent-paying.[29] By a referendum vote the members of the Socialist party in
the United States recently amended their platform on land, to read as
follows: "The Socialist party strives to prevent land from being used for the
purpose of exploitation and speculation. It demands the collective
possession, control or management of land to whatever extent may be
necessary to attain that end. It is not opposed to the occupation and
possession of land by those using it in a useful and bona fide manner
without exploitation."[30] As to land occupied by dwellings, perhaps the
majority of Socialists would now agree with Spargo in the statement that,
"so far as the central principle of Socialism is concerned, there is no more
reason for denying the right of a man to own his own home than there is to
deny him the right to own his hat."[31]
In so far as the foregoing modifications of Socialist proposals would allow
the individual to own the land that he cultivates or occupies, they do not call
for further discussion here. In so far as they combine State ownership of
land with individual management of cultivation, they are subject to at least
all the limitations of the Single Tax. To the latter system we now turn our
attention.

Inferiority of the Single Tax System

Of the four leading elements of private ownership enumerated above, the
Single Tax scheme would comprise all but one. In the words of Henry
George himself: "Let the individuals who now hold it still retain, if they
want to, possession of what they are pleased to call their land. Let them

continue to call it their land. Let them buy and sell, and bequeath and
devise it. We may safely leave them the shell, if we take the kernel. It is not
necessary to confiscate land; it is only necessary to confiscate rent.... In this
way the State may become the universal landlord without calling herself so,
and without assuming a single new function. In form, the ownership of land
would remain just as now. No owner of land need be dispossessed, and no
restriction need be placed upon the amount of land that any one could
hold."[32]
Individuals would, therefore, still enjoy security of possession, the
managerial use of land, and the revenue due to improvements. The income
arising from the land itself, the economic rent, they would be obliged to
hand over as a free gift to the State. As we have seen in a preceding chapter,
this confiscation of rent by the State would be pure and simple robbery of
the private owner. Suppose, however, that the State were willing to
compensate individual proprietors with a sum equal to the present value, or
the capitalised rent, of their land. In that case the only difference made to
the individual would be that he could no longer invest his money in land
nor profit by the increases in land values. While this would deprive some
persons of advantages that they now enjoy, it would be beneficial to the
majority, and to the community. Since no man would find it profitable to
retain control of more land than he could use himself, the number of actual
land users would be increased. The land speculator would disappear,
together with the opportunity of making and losing fortunes by gambling on
the changes in land values. Owing to the removal of taxation from the
necessaries of life and from industry, consumers would get goods cheaper,
and some stimulus would be given to production and employment. Those
monopolies which derive their strength from land would become weaker
and tend to disappear. Sooner or later there would probably be a
considerable increase in the amount of money available for public
improvements and socially beneficial institutions.
On the other hand, there would be certain and serious disadvantages. A
considerable number of land users might permit their holdings to deteriorate
through careless cultivation. To be sure, they would not find this a
profitable course if they intended to remain on the land permanently; but
they might prefer to exhaust the best qualities of a farm in a few years, and
then retire, or go into some other business, or repeat the wearing-out

process on other lands. Thus the community would suffer through the
lowered productiveness of its land, and because of the lower rent that it
would receive from all subsequent users of the deteriorated tracts. In the
second place, the administrative machinery required to levy and collect the
rent, and to apportion the different holdings among competitive bidders,
would inevitably involve a vast amount of error, inequality, favouritism, and
corruption. For the land tax to be levied and collected would not be, as now,
a fraction of the rental value, but the full amount of the annual rent. In the
third place, cultivators would not have the inducement to make
improvements which arises from the hope of selling both the improvements
and the land at a profit, owing to the increased demand for the land. Perhaps
the greatest disadvantage of the system would be the instability of tenure,
with regard to both productive and residential lands. Owing to misfortunes
of various kinds, for example, one or two bad crops, many cultivators
would be temporarily unable to pay the full amount of the land tax or rent.
It is scarcely conceivable that the State would remit the deficiency, or refuse
to turn the land over to other persons on terms more advantageous to itself.
Inasmuch as the value and rent of land would be continuously adjusted by
competition, the more efficient and more wealthy would frequently supplant
the less efficient and the less wealthy, even though the latter had occupied
their holdings or their dwellings for a great number of years. Legal security
of tenure, though theoretically the same as that enjoyed by the private
owner to-day, would be much less effective practically. In this respect land
users would be in almost as bad a case as renters are at present.[33]
Our conclusion, then, is that private landownership is certainly better than
extreme Socialism, or any form of Socialism which does not concede to the
land user all the control that he would have under the Single Tax system,
and that it is very probably superior to the latter. In making this comparison
and drawing this conclusion, we have in mind private ownership, not at its
worst nor as it exists or has existed in any particular country, but private
ownership in its essential elements, and with its capacity for modification
and improvement. If we were to examine carefully the results of private
ownership as it obtained in Ireland for several centuries before the
enactment of the recent Land Purchase Act, we should probably be tempted
to declare that the most extreme form of agrarian Socialism could scarcely
have been productive of more individual and social injury. Certain other

countries present almost equally unfavourable conditions of comparison.
Failure to note this distinction between the historical and the potential
aspects of private landownership has vitiated many otherwise excellent
defences of the institution. It has provoked the retort that almost any
plausible change would be an improvement upon private ownership as it
has existed in this or that country. But these are not the real alternatives.
The practical choice is between private ownership as shown by experience
and reason to be capable of improvement, and some untried system which is
subject to grave defects, and which at its best would be probably inferior to
modified private ownership. An attempt to describe some of these
modifications and improvements will be made in a subsequent chapter. In
the meantime we content ourselves with the statement that private land
ownership is capable of becoming better than Socialism certainly, and
probably better than the Single Tax system. Consequently it is justified not
merely so long as neither of these schemes is introduced, but as an
institution which the State would do well to maintain, protect, and improve.

CHAPTER V
PRIVATE LANDOWNERSHIP A NATURAL RIGHT

The conclusions of the preceding chapter include the statement that
individuals are morally justified in becoming and remaining landowners.
May we take a further step, and assert that private landownership is a
natural right of the individual? If it is, the abolition of it by the State, even
with compensation to the owners, would be an act of injustice. The doctrine
of natural rights is so prominent in the arguments of both the advocates and
the opponents of private landownership that it deserves specific treatment.
Moreover, the claim that private landownership is a natural right rests upon
precisely the same basis as the similar claim with regard to the individual
ownership of capital; and the conclusions pertinent to the former will be
equally applicable to the latter.
A natural right is a right derived from the nature of the individual, and
existing for his welfare. Hence it differs from a civil right, which is derived
from society or the State, and is intended for a social or civil purpose. Such,
for example, is the right to vote, or the right to hold a public office. Since a
natural right neither proceeds from nor is primarily designed for a civil end,
it cannot be annulled, and it may not be ignored, by the State. For example:
the right to life and the right to liberty are so sacred to the individual, so
necessary to his welfare, that the State cannot rightfully kill an innocent
man, nor punish him by a term in prison.

Three Principal Kinds of Natural Rights

Although natural rights are all equally valid, they differ in regard to their
basis, and their urgency or importance. From this point of view, we may
profitably distinguish three principal types.
The first is exemplified in the right to live. The object of this right, life
itself, is intrinsically good, good for its own sake, an end in itself. It is the

end to which even civil society is a means. Since life is good intrinsically,
the right to life is also valid intrinsically, and not because of consequences.
Since there is no conceivable equivalent for life in the case of any
individual in any contingency, the right to life is immediate and direct in all
possible circumstances.
Among the natural rights of the second class, the most prominent are the
right to marry, to enjoy personal freedom, and to own consumption-goods,
such as food and clothing. The objects of these rights are not ends in
themselves, but means to human welfare. Confining our attention to
marriage, we see that membership in the conjugal union is an indispensable
means to reasonable life and self development in the majority of persons.
The only conceivable substitutes are free love and celibacy. Of these the
first is inadequate for any person, and the second is adequate only for a
minority. Marriage is, therefore, directly and per se necessary for the
majority of individuals; for the majority it is an individual necessity. If the
State were to abolish marriage it would deprive the majority of an
indispensable means of right and reasonable life. Consequently the majority
have a direct natural right to the legal power of marrying.
In the case of the minority who do not need to marry, who can live as well
or better as celibates, the legal opportunity of marriage is evidently not
directly necessary. But it is necessary indirectly, inasmuch as the power of
choice between marriage and celibacy is an individual necessity. No
argument is required to show that the State could not decide this matter
consistently with individual welfare or social peace. Whence it follows that
even the minority who do not wish or do not need to marry, have a natural
right to embrace or reject the conjugal condition. In their case the right to
marry is indirect, but none the less inviolable.[34]
Private ownership of land belongs in a third class of natural rights.
Inasmuch as it is not an intrinsic good, but merely a means to human
welfare, it differs from life and resembles marriage. On the other hand, it is
unlike marriage in that it is not directly necessary for any individual
whatever.[35] The alternative to marriage, namely, celibacy, would not even
under the best social administration enable the majority to lead right and
reasonable lives. The alternative to private landownership (and to private
ownership of capital as well), namely, some form of employment as wage

receiver, salary receiver, or fee receiver enables the individual to attain all
the vital ends of private ownership: food, clothing, shelter, security of
livelihood and residence, and the means of mental, moral, and spiritual
development. None of these vital ends or needs is essentially dependent
upon private ownership of land; for millions of persons satisfy them every
day without becoming landowners. Nor are they exceptions, as those who
can get along without marriage are exceptions. The persons who live
reasonable lives without owning land are average persons. What they do
any other person could do if placed in the same circumstances. Therefore,
private landownership is not directly necessary for the welfare of any
individual.

Private Landownership Indirectly Necessary for Individual
Welfare

In our present industrial civilisation, however, private landownership is
indirectly necessary for the welfare of the individual. It is said to be
indirectly necessary because it is necessary as a social institution, rather
than as something immediately connected with individual needs as such. It
is not, indeed, so necessary that society would promptly go to pieces under
any other form of land tenure. As we have seen in the last chapter, it is
necessary in the sense that it is capable of promoting the welfare of the
average person, of the majority of persons, to a much greater degree than
State ownership. It is necessary for the same reason and in the same way as
a civil police force. As the State is obliged to maintain a police force, so it is
obliged to maintain a system of private landownership. As the citizen has a
right to police protection, so he has a right to the social and economic
advantages which are connected with the system of private ownership of
land. These rights are natural, derived from the needs of the individual in
society, not dependent upon the good pleasure of the city or the State. They
are individual rights to the presence and benefits of these social institutions.
But man's rights in the matter of land tenure are more extensive than his
rights with regard to a police force. They are not restricted to the presence
and functioning of a social institution. Every citizen has a natural right to
police protection, but no citizen has a natural right to become a policeman.
The welfare of the citizen is sufficiently looked after when the members of

the police are selected by the authorities of the city. On the contrary, his
welfare would not be adequately safeguarded if the State were to decide
who might and who might not become landowners. In the first place, the
ideal condition is that in which all persons can easily become actual
owners. In the second place, the mere legal opportunity of becoming
owners is a considerable stimulus to the energy and ambition of all persons,
even of those who are never able to convert it into an economic opportunity.
Therefore, only a very powerful reason of social utility would justify the
State in excluding any person or any class from the legal power to own
land. No such reason exists; and there are many reasons why the State
should not attempt anything of the sort. As a consequence of these facts,
every person, whether an actual owner or not, has a natural right to acquire
property in land. This right is evidently a necessary condition of a fair and
efficient system of private ownership, which is in turn a necessary condition
of individual welfare. The right of private landownership is, therefore, an
indirect right; but it is quite as valid and quite as certain as any other natural
right.
Now this right is certainly valid as against complete Socialism, which
includes State management and use, as well as State ownership. Is it valid
against the Single Tax system, or against such modified forms of Socialism
as would allow the individual to rent and use the land as an independent
cultivator with security of tenure? Would the introduction of some such
scheme in a country in which only a small minority of the population were
actual owners, constitute a violation of individual rights? While we cannot
with any feeling of certainty return an affirmative answer to these questions,
we can confidently affirm that reform within the lines of private ownership
would in the long run be more effective, and, therefore, that the right of
private ownership is probably valid even against these modified forms of
common ownership.[36]

Excessive Interpretations of the Right of Private Landownership

The indirect character of the right of private landownership, its relativity to
and dependence upon social conditions, is not always sufficiently grasped
by either its advocates or its opponents. In the writings of the former we
sometimes find language which suggests that this right is as independent of

social conditions as the right to marriage or the right to life. "The State has
no right to abolish private property [in land] because private property is not
a social right, but an individual right derived from nature, not derived from
the State." It exists for human welfare, not merely for civil welfare.[37] The
only defect in this reasoning is that the premises do not justify the
conclusion. Undoubtedly the State may not abolish private ownership, so
long as it is necessary for human or individual welfare; but, when this
necessity ceases, the moral justification of the institution likewise
disappears. The institution may then be abolished, somehow, by some
agency, without any violation of individual rights. Why may not the task of
abolition be performed by the State? No other agency is available. The
assertion that the State is incompetent to decide whether the institution of
private ownership has outlived its usefulness, is entirely gratuitous; besides,
it implies that a small minority of selfishly interested persons may justly
require the continuation of a system of land tenure which has become
harmful to the overwhelming majority of the community. Extreme defences
of the right of private landownership are largely responsible for the
misconceptions of many of its opponents. Occasionally the latter represent
this right as an a priori monstrosity which is serenely independent of the
facts of life and industry. While such persons are at liberty to reject the
interpretations of facts contained in the preceding paragraphs, they cannot
reasonably deny the logic of the process which has led to the conclusion
that the individual has a natural right to own land.
So much for the natural right of landownership as seen in the light of
reason. Let us now consider it briefly from the side of doctrinal authority,
namely, the writings of the Fathers and Theologians of the Church, and the
formal pronouncements of the Popes.

The Doctrine of the Fathers and Theologians

Some of the Church Fathers, particularly Augustine, Ambrose, Basil,
Chrysostom, and Jerome, denounced riches and the rich so severely that
they have been accused of denying the right of private ownership. The facts,
however, are that none of the passages upon which this accusation is based
proves it to be true, and that in numerous other passages all of these writers
explicitly affirm that private ownership is lawful.[38] Speaking generally, we

may say that they taught the moral goodness of private ownership without
insisting upon its necessity. Hence they cannot be cited as authorities for the
doctrine that the individual has a natural right to own land.
Some of the great theologians of mediæval and post-mediæval times denied
this right, inasmuch as they denied that the institution of private ownership
was imposed or commanded by the natural law. Among them are Scotus,[39]
Molina,[40] Lessius,[41] Suarez,[42] Vasquez,[43] and Billuart.[44] Since
private ownership is not absolutely necessary to human welfare in all forms
of society, it cannot, in their view, be regarded as strictly prescribed by the
natural law, nor be instituted without the positive action of civil authority, or
the consent of the community. Nevertheless they all admit that it is much
better than common ownership in contemporary societies. The difference
between their position and that of de Lugo, for example, seems to be two-
fold: First, they put stronger emphasis upon the doctrines that the earth
belongs to all men in common, that in the absence of original sin ownership
would likewise have been common, and that this arrangement is therefore
in a fundamental sense normal, agreeing with nature and the natural law;
and, second, they put a lower estimate upon the superiority of private
ownership even in contemporary conditions. In a word, they denied that
private ownership was so much better than any alternative system as to
confer upon the individual a natural right in the strict sense; that is, a right
which laid upon the State the correlative obligation of maintaining the
institution of private landownership.
On the other hand, many of the ablest theologians of the same period
declared that private ownership was enjoined by the natural law and right
reason, and consequently that it was among the individual's natural rights.
According to St. Thomas Aquinas, private property is "necessary for human
life," and is one of those social institutions which are prescribed by the jus
gentium; and the content of the jus gentium is not determined by positive
law, but by the dictates of "natural reason," by "natural reason itself."[45]
These statements seem to convey the doctrine of natural right as clearly as
could be expected in the absence of an explicit declaration. Cardinal de
Lugo sets forth the same teaching somewhat more compactly, but in
substantially the same terms: "Speaking generally, a division of goods and
of ownership-titles proceeds from the law of nature, for natural reason

dictates such division as necessary in the present circumstances of fallen
nature and dense populations."[46] This view is to-day universally accepted
among Catholic writers.

The Teaching of Pope Leo XIII

The official teaching of the Church on the subject is found in the
Encyclical, "On the Condition of Labour," by Pope Leo XIII. In this
document we are told that the proposals of the Socialists are "manifestly
against justice"; that the right of private property in land is "granted to man
by nature"; that it is derived "from nature not from man, and the State has
the right to control its use in the interest of the public good alone, but by no
means to abolish it altogether." These statements the Pope deduces from a
consideration of man's needs. Private property in land is necessary to satisfy
the wants, present and future, of the individual and his family. Were the
State to attempt the task of making this provision, it would exceed its
proper sphere, and produce manifold domestic and social confusion.
While Pope Leo defines the natural right of private ownership as
incompatible with complete Socialism, that is, collective use as well as
collective ownership, his statements cannot fairly or certainly be interpreted
as condemning the Single Tax system, or any other arrangement which
would leave to the individual managerial use and secure possession of his
holding, together with the power to transmit and transfer it, and full
ownership of improvements. These are the only elements of ownership
which the Holy Father defends, and which he insists upon as necessary. The
one element of private ownership which the Single Tax system would
exclude; namely, the power to take rent from and profit by the changes in
land values, finds no place among the advantages of private ownership
enumerated in the Encyclical.
There is, indeed, one passage of the Encyclical in which Pope Leo seems to
allude to the Single Tax, or to some similar proposal. He expresses his
amazement at those persons who "assert that it is right for private persons to
have the use of the soil and its various fruits, but that it is unjust for any one
to possess outright either the land on which he has built, or the estate which
he has brought under cultivation. But those who deny these rights do not

perceive that they are defrauding man of what his own labour has produced.
For the soil which is tilled and cultivated with toil and skill utterly changes
its conditions: it was wild before, now it is fruitful; was barren, but now
brings forth in abundance. That which has thus altered and improved the
land becomes so truly a part of itself as to be in great measure
indistinguishable and inseparable from it. Is it just that the fruit of a man's
own labour should be possessed and enjoyed by any one else? As effects
follow their cause, so is it just and right that the results of labour should
belong to those who have bestowed their labour."
In this passage we find two principal statements: first, that those persons are
in error who declare full private ownership of land to be unjust; and,
second, that it is wrong to deprive a man of the improvements which he
makes in the soil. Now the first of these propositions does not touch the
Single Tax system as such; it only condemns the assertion of Henry George
that private ownership is essentially unjust. It is directed against one of the
arguments for the system, not against the system itself. More specifically, it
is a refutation of an argument against private land ownership, rather than a
positive attack upon any other system. It could be accepted by any Single
Taxer who does not agree with Henry George that the present system is
essentially unjust. The second proposition does not apply to the Single Tax
system at all; for the latter would concede to the individual holder the full
ownership and benefit of improvements; and it could easily be so
administered as to protect him against injury in any case in which
improvement values were not exactly and clearly distinguishable from land
values.
While Henry George opposed the doctrines of the Encyclical in his "Open
Letter to Pope Leo XIII," all his arguments are directed against the
proposition that private ownership is right and just. The "Letter" is an attack
upon private ownership rather than a defence of the Single Tax. Apparently
its author did not find that Pope Leo condemned any positive or essential
element of the Single Tax as a proposed system of land tenure.
If the rejoinder be made that Pope Leo could have had no other group of
persons in mind than the Single Taxers, when he wrote the paragraph
quoted above, our answer must be that he did not definitely identify them,
either by naming them, as he named the Socialists, or by any other

sufficiently explicit designation. Applying to this paragraph the customary
and recognised rules of interpretation, we are obliged to conclude that it
does not contain an explicit condemnation of the Single Tax system.
To put the substance of this chapter in two sentences: Private landownership
is a natural right because in present conditions the institution is necessary
for individual and social welfare. The right is certainly valid as against
complete Socialism, and probably valid as against any such radical
modification of the present system as that contemplated by the
thoroughgoing Single Taxers.

CHAPTER VI
LIMITATIONS ON THE LANDOWNER'S RIGHT TO RENT

The chapters immediately preceding have led to the conclusion that private
ownership is the best system of land tenure, and that the individual has a
natural right to participate in its advantages. Although this system confers
upon the individual owner the power to take the rent of the land, we are not
logically debarred from raising the question whether this power is a
necessary part of the moral rights of landownership. Does the right to own a
piece of land necessarily include the right to take its rent? By what ethical
principle of distribution is the landowner justified in appropriating a
revenue in return for which he has performed no labour, nor made any
sacrifice? This is unquestionably what happens when a man hires out his
land to another. And in conditions of perfect competition, those owners who
operate their own land are fully remunerated for their labour in the form of
profits. Over and above this sum they receive rent, the payment that they
could get from the land if they were to let its use to tenants. In the normal
situation, therefore, rent is a workless income. On what moral ground may
it be taken by the landowner?[47]
The fact that we have rejected the Single Tax and the confiscation of rent by
the community, does not of itself commit us to the conclusion that the
private owner has a moral right to receive rent. We have condemned the
State appropriation of rent on the assumption that it would take place
without a similar confiscation of interest. Such discrimination would be
grossly unfair; for it would cause land values to sink to zero, while leaving
the value of capital substantially undisturbed. To carry out such a
programme would be to treat property owners unequally, to penalise one set
of beneficiaries of "workless" incomes, while leaving another set
untouched. Consequently, the State is not justified in confiscating rent
unless it is justified in confiscating or prohibiting interest; and the
landowner is as fully justified in taking rent as the capital owner is in taking
interest. The contention of the Single Taxer that ownership of the former

kind is morally wrong, while ownership of capital is morally legitimate, has
already received sufficient discussion. The specific question remains,
therefore,—whether the landowner and the capitalist are justified in
receiving and retaining their "workless" incomes.
Inasmuch as the principles and pertinent facts involved in this question can
be more effectively and more conveniently discussed in relation to interest
than in relation to rent, the solution will be deferred to the chapters on
interest. Assuming provisionally that the outcome of the discussion will be
favourable to the claims of the landowner, let us inquire whether he always
has a moral right to all the rent. The parallel question regarding the
capitalist will be considered in connection with the right of the labourer to a
living wage.

The Tenant's Right to a Decent Livelihood

The actual payments made by tenants to landowners sometimes leave the
former without the means of decent living. Such had been the condition of a
large part of the Irish tenant farmers before 1881, when the Land Courts
were established. In the course of twenty-five years these courts reduced the
rents by twenty per cent. on the average in upwards of half a million cases.
While a part of the reductions was intended to free the tenants from the
unjust burden of paying rent on their own improvements, another part was
undoubtedly ordered on the theory that the tenants were entitled to retain a
larger share of the product for their own support. Yet the latter portion of the
reduction apparently represented true economic rent; for it was included in
the difference between the product and the current cost of production; it was
included in the amount that men in Ireland were willing to pay for the use
of land. It was a part of the surplus that they had left after defraying their
expenditures for capital and labour. To be sure, the tenants in some other
countries, say, the United States, would not have been satisfied with such a
small remuneration, and would not have handed over so much to the
landlord; but if the concept of economic rent is to have any serviceable
meaning it must be determined by the actual returns to capital and labour in
each locality, and not by the standards of some other place which are
assumed to be normal. In any case, the Irish Land Courts did reduce the

rents below the level fixed by competition, by the unregulated forces of
supply and demand.
Was this treating the landlords justly? May a tenant ever retain a part of the
rent which the free course of competition would yield to the landowner?
Here we must distinguish between the tenant who is and the tenant who is
not in possession of a holding sufficiently large to require all the time and
labour of a cultivator possessing average efficiency. The tenant who
controls and cultivates less than this amount of land ought not to expect to
get all his livelihood therefrom. Failure to do so would not necessarily mean
that he was paying exorbitant rent. Holdings of this sort are rightly called
"uneconomic"; that is, they are too small to permit a profitable and
reasonable application of labour and capital. On such holdings the fair rent
would be that amount per acre which would be regarded as fair for the use
of the same land held in farms of "economic" size. The proper recourse for
the occupiers of uneconomic holdings is to get control of more land, which
is exactly what has been happening in Ireland through the action of the
Congested Districts Board.
This brings us to the case of the man who cannot pay the competitive rent
on a holding of normal size, and have sufficient left to provide himself and
family with a decent livelihood. The fundamental reason why the rent is so
high is to be found in the economic weakness of the great mass of the
tenants, who can neither emigrate to another country nor get a better living
as wage earners in their own. Their predicament is exactly the same as that
of the helpless and unskilled labourers who are compelled by the force of
competition to accept less than living wages. In these circumstances it
seems clear that a government commission would be justified in reducing
the rents to such a level as would leave the tenants of average efficiency on
normal holdings the means of maintaining a decent standard of living. In
such cases, then, the landowner has not a right to the full economic or
competitive rent. His right thereto is morally inferior to the tenant's right to
a decent livelihood, just as the capitalist-employer's right to the prevailing
rate of interest is morally inferior to the labourer's right to a living wage.
Neither in the one case nor in the other is mere competition the final
determinant and measure of justice. It has no moral validity when it comes
into conflict with man's natural right to get a reasonable livelihood on

reasonable conditions from the bounty of the earth. These fundamental
questions will be discussed at length in the chapters on wages.
To the possible objection that the concept of a "normal" holding is vague,
the sufficient reply is that in practice it can be estimated with as much
definiteness as the concept of the "average" labourer. As we see from the
history of the Irish Land Courts and their "Judicial Rents," it can be defined
with sufficient accuracy to serve the ends of practical justice. More than this
is not attained in any department of human relations, particularly, economic
relations.

The Labourer's Claim Upon the Rent

Should any part of the rent go to the labourer? Let us take first the case of
the labourer who is employed by a tenant, and who is not occupied in
personal service but in some productive task connected with the land. Like
all other wage earners he has a right to a sufficient share of the product to
afford him a decent livelihood. Since the tenant is the employer, the director
of the business, and the owner of the product, he rather than the landowner
is the person who is primarily charged with the obligation of providing the
labourer with a living wage. As noted above, his own claim to a decent
livelihood is morally superior to the landlord's claim to rent; but if, having
taken this amount from the product, he finds himself unable to pay living
wages to all his employees unless he deducts something either from the
normal interest-return on his own capital or from the rent that would
ordinarily go to the landowner, he is morally bound to choose the former
course. He, not the landowner, is the wage payer. That he is obliged to
provide living wages to his labour force even at the cost of interest on his
own investment in the business, is a proposition that will receive ample
discussion and defence in a later chapter.[48]
Suppose, however, that the tenant has not the means of paying full living
wages after turning into the wage fund all the money that he had hoped to
retain as interest on his capital. May he withhold from the landowner a
sufficient portion of the rent to cover the deficit in wages? Were this action
practicable it would be undoubtedly justifiable; for the landowner's claim to
rent is no stronger than the tenant-capitalist's claim to interest. As claims

upon the product, both are morally weaker than the labourer's right to a
living wage. Nevertheless, the tenant who should attempt to carry out this
course would probably be prosecuted for non-fulfilment of his contract with
the landowner, or would be evicted from the holding. Nor is the landowner
obliged in such cases to give up the rent in order that a living wage may be
paid to the tenant's labour force. He cannot be certain that the failure of the
latter to receive full living wages has not been due to inefficiency or
fraudulent conduct on the part of the tenant. Moreover, the landowner
would be justified in seeking to protect himself against the recurrence of
such situations by putting his land in charge of a more capable tenant, or by
selling it and investing or lending the money elsewhere. However clear may
be the abstract proposition that the claim to a living wage possessed by the
employee of the tenant is superior to the claim to rent possessed by the
landowner, the difficulty of realising this right in practice is sufficient to
relieve even conscientious proprietors from the obligation of giving up the
rent for this purpose.
When the landowner is operating or cultivating his land himself, he is
evidently obliged to pay a living wage to all his employees at the expense
of rent, just as he is obliged to do so at the cost of interest on his artificial
capital. To be sure, the first charge upon the product should be a decent
livelihood for himself; but, when he has obtained this, the right of his
employees to a living wage is morally superior to his right to either rent or
interest.
At present the State takes a part of the rent through taxation. May it take a
larger share without violating justice? This question will be considered in
the second chapter following. In the meantime, we shall examine the
principal defects of the existing system of land tenure with a view to the
suggestion of appropriate remedies, whether through taxation or otherwise.

CHAPTER VII
DEFECTS OF THE EXISTING LAND SYSTEM

Starting from the principle that the rightness or wrongness of any system of
land tenure is determined not by metaphysical and intrinsic considerations,
but by the effects of the institution upon human welfare, we arrived at the
conclusion that private landownership is not unjust, so long as no better
system is available. By the same test of human welfare we found that it
would be wrong to substitute a better system through the process of
confiscating rent, while leaving interest undisturbed. A further step brought
us to the conclusion that complete Socialism would certainly, and the
complete Single Tax probably, be inferior to the present system. As a sort of
corollary, the social and moral superiority of private landownership was
stated in terms of natural rights. Finally, the question was raised whether the
landowner has a right to take rent, and to take all the rent.
In stating the superiority of the present system, we explicitly noted that we
had in mind the system as capable of improvement. This implied that there
are defects in the present form of land tenure, and that these can be
eliminated in such a way as to make the system more beneficial and more in
harmony with the principles of justice. In the present chapter we shall give
a summary review of the principal defects, and in the following chapter we
shall suggest some methods of reform. All the defects and abuses may
conveniently be grouped under three heads: Monopoly; Excessive Gains;
and Exclusion from the Land.

Landownership and Monopoly

In the literature of the Single Tax movement the phrase, "land monopoly," is
constantly recurring. The expression is inaccurate; for the system of
individual landownership does not conform to the requirements of a
monopoly. There is, indeed, a certain resemblance between the control
exercised by the owner of land and that possessed by the monopolist. As the

proprietor of every superior soil or site has an economic advantage over the
owner of the poorest soil or site, so the proprietor of a monopolistic
business obtains larger gains than the man who must operate in conditions
of competition. In both cases the advantage is based upon the scarcity of the
thing controlled, and the extent of the advantage is measured by the degree
of scarcity.
Nevertheless, there is an important difference between landownership and
monopoly. The latter is usually defined as that degree of unified control
which enables the persons in control arbitrarily to limit supply and raise
price. As a rule, no such power is exercised by individuals, or by
combinations of individuals with regard to land. The pecuniary advantage
possessed by the landowner, that is, the power to take rent, is conferred and
determined by influences outside of himself, by the natural superiority of
his land, or by its proximity to a city. He can neither diminish the amount of
land in existence nor raise the price of his own. The former result is
inhibited by nature; the latter by the competition of other persons who own
the same kind of land. To be sure, there are certain kinds of land which are
so scarce and so concentrated that they do fall under true monopolistic
control. Such are the anthracite coal mines of Pennsylvania, and some
peculiarly situated plots in a few great cities, for example, land that is
desired for a railway terminal. But these instances are exceptional. The
general fact is that the owners of any kind of land are in competition with
similar owners. While the element of scarcity is common to landownership
and to monopoly, it differs in its operation. In the case of monopoly it is
subject, within limits, to the human will. This difference is sufficiently
important, both theoretically and practically, to forbid the identification or
confusion of landownership with monopoly.
A notable illustration of such confusion is the volume by Dr. F. C. Howe,
entitled, "Privilege and Democracy in America." He maintains that
bituminous coal, copper ore, and natural gas are true monopolies, but gives
no adequate proof to support this assertion. Moreover, he exaggerates
considerably the part played by landownership in the formation of industrial
monopolies. Thus, his contention that the petroleum monopoly is due to
ownership of oil-producing lands is certainly incorrect; for the Standard Oil
Company (or companies) has never controlled as much as half the supply of
raw material. "The power of the Standard does not rest upon a direct

monopoly of the production of crude oil through ownership of the wells."
[49]
Perhaps the most remarkable misstatement in the volume is this: "The
railway is a monopoly because of its identity with land."[50] Now there are a
few important railway lines traversing routes or possessing terminal sites
which are so much better than any alternative routes or sites as to give all
the advantages of a true monopoly. But they are in a small minority. In the
great majority of cases, a second parallel strip or parallel site could be
found which would be equally or almost equally suitable. Neither the
amount nor the kind of land owned by a railroad, nor its legal privilege of
holding land in a long, continuous strip, is the efficient cause of a railway
monopoly. To attribute the monopoly to land is to confound a condition
with a cause. One might as well say that the land underlying the "wheat
king's" office is the cause of his corner in wheat. It is true that in a few of
the great cities the existing railroads may, through their ownership of all the
suitable terminal sites, prevent the entrance of a competing line. In the first
place, such instances are rare; in the second place, the fact that there are
several roads already in existence shows that competition was possible
without the entrance of another one. The influence impelling them to form a
monopoly for the regulation of charges is not their ownership of terminal
sites. No sort of uniform action with regard to terminals would produce any
such effect. The true source of the monopoly element in railways is inherent
in the industry itself. It is the fact of "increasing returns," which means that
each additional increment of business is more profitable than the preceding
one, and that in most cases this process can be kept up indefinitely. As a
consequence, each of two or more railroads between two points strives to
get all the traffic; then follows unprofitable rate cutting, and finally
combination.[51] The same forces would produce identical results if railroad
tracks and terminals were suspended in the air.
Dr. Howe asserts that the monopolistic character of such public utility
corporations as street railways and telephone companies is due to their
occupation of "favoured sites."[52] How can this be true, when it is possible
to build a competing line on an adjoining and parallel street? If the city
forbids this, and gives an exclusive franchise to one company, this legal
ordinance, and not any exceptional advantage in the nature of the land
occupied, is the specific cause of the monopoly. If the city permits a
competing line, and if the two lines sooner or later enter into a combination,

the true source and explanation are to be found in the fact of increasing
returns. Combination is immeasurably more profitable than cut-throat
competition. Moreover, the evils of public service monopolies can be
remedied through public control of charges and through taxation. Neither in
railroads nor in public utilities is land an impelling cause of monopoly, or a
serious hindrance to proper regulation.
Most of Dr. Howe's exaggerations of the influence of land upon monopoly
take the form of suggestion rather than of specific and direct statement.
When he attempts in precise language to enumerate the leading sources of
monopoly, he mentions four; namely, land, railways, the tariff, and public
service franchises.[53] Nor is he able to prove his assertion that of these the
most important is land.
Nevertheless, land is one of the foremost causes. The most prominent
examples of land monopoly in this country are the anthracite coal mines
and the iron ore beds. Fully ninety per cent. of our anthracite coal supply
(exclusive of Alaska) is under the control of eight railway systems which in
this matter act as a unit.[54] According to Dr. Howe, the excessive profits
reaped from this monopolistic control amount to between one hundred and
two hundred million dollars annually.[55] In other words, the consumers of
anthracite coal must pay every year that much more than they would have
expended if the supply had not been monopolised. On the other hand, the
formation of monopoly would have been much more difficult if the
railroads had been legally forbidden to own coal mines. As things stand,
railway monopoly is an important cause of the anthracite coal monopoly.
Some authorities are of the opinion that a similar condition of monopoly
will ultimately prevail in the bituminous coal mines. Iron ore has been
brought under the control of the United States Steel Corporation to such an
extent that the Commissioner of Corporations writes: "Indeed, so far as the
Steel Corporation's position in the entire iron and steel industry is of a
monopolistic character, it is chiefly through its control of ore holdings and
the transportation of ore."[56] From this statement, however, it is evident
that the monopoly depends upon control of transportation as well as upon
ownership of the ore beds. If the former were properly regulated by law, the
latter would not be so effective in promoting monopoly.

Speaking generally, we may say that when a great corporation controls a
large proportion of the raw material entering into its manufactured products,
such control will supplement and reinforce very materially those other
special advantages which make for monopoly.[57] Prominent examples are
to be found in steel, natural gas, petroleum, and water powers. In his
"Report on Water Power Development in the United States," the
Commissioner of Corporations (March 14, 1912) declared that the rapidly
increasing concentration of control might easily become the nucleus of a
monopoly of both steam and water power. Ten great groups of interests, he
said, already dominated about sixty per cent. of the developed water power,
and were pursuing a policy characterised by a large measure of agreement.
[58]
As a rough generalisation, it would be fair to say that in one or two
instances, at least, landownership is the chief basis, and in several other
cases an important contributory cause of monopoly.
Even an approximately accurate estimate of the amount of money which
consumers are compelled to pay annually for the products of such concerns
over and above what they would pay if the raw material were not wholly or
partially monopolised, is obviously impossible. It may possibly run into
hundreds of millions of dollars.

Excessive Gains from Private Landownership

The second evil of private landownership to be considered here, is the
general fact that it enables some men to take a larger share of the national
product than is consistent with the welfare of their neighbours and of
society as a whole. As in the matter of monopoly, however, so here, Single
Tax advocates are chargeable with a certain amount of overstatement. They
contend that the landowner's share of the national product is constantly
increasing, that rent advances faster than interest or wages, nay, that all of
the annual increase in the national product tends to be gathered in by the
landowner, while wages and interest remain stationary, if they do not
actually decline.[59]
The share of the product received by any of the four agents of production
depends upon the relative scarcity of the corresponding factor. When
undertaking ability becomes scarce in proportion to the supply of land,

labour, and capital, there is a rise in the remuneration of the business man;
when labour decreases relatively to undertaking ability, land, and capital,
there is an increase in wages. Similar statements are true of the other two
agents and factors. All these propositions are merely particular illustrations
of the general rule that the price of any commodity is immediately governed
by the movement of supply and demand. In view of this fact, it is not
impossible that rent might increase to the extent described in the preceding
paragraph. All that is necessary is that land should become sufficiently
scarce, and the other factors sufficiently plentiful.
As a fact, the supply of land is strictly limited by nature, while the other
factors can and do increase. There are, however, several forces which
neutralise or retard the tendency of land to become scarce, and of rent to
rise. Modern methods of transportation, of drainage, and of irrigation have
greatly increased the supply of available land, and of commercially
profitable land. During the nineteenth century, the transcontinental railroads
of the United States made so much of our Western territory accessible that
the value and rent of New England lands actually declined; and there are
still many millions of acres throughout the country which can be made
productive through drainage and irrigation. In the second place, every
increase of what is called the "intensive use" of land gives employment to
labour and capital which otherwise would have to go upon new land. In
America this practice is only in its infancy. With its inevitable growth, both
in agriculture and mining, the demand for additional land will be checked,
and the rise in land values and rents be correspondingly diminished. Finally,
the proportion of capital and labour that is absorbed in the manufacturing,
finishing, and distributive operations of modern industry is constantly
increasing. These processes call for very little land in comparison with that
required for the extractive operations of agriculture and mining. An increase
of one-fifth in the amount of capital and labour occupied in growing wheat
or in taking out coal, implies a much greater demand for land than the same
quantity employed in factories, stores, and railroads.[60]
As a consequence of these counteracting influences, it appears that the
share of the landowners has not increased disproportionately. The most
comprehensive endeavour yet made to determine the growth and relative
size of the different shares of the national product is embodied in Professor
W. I. King's volume, "The Wealth and Income of the People of the United

States," published in 1915. It estimates that the total annual income of the
nation increased from a little less than two and one-fourth billions of dollars
in 1850 to a little more than thirty and one-half billions in 1910, or slightly
more than fifteen times. During the same period rent, the share of the
landowners, advanced from $170,600,000 to $2,673,900,000, or about
fifteen and three quarter times. In the year 1910, therefore, the landowners
were receiving but a very small fraction more of the national product than
their predecessors obtained sixty years earlier.[61] As to the relative size of
the shares going to the different factors in 1910, the figures are even more
remarkable. Wages and salaries absorbed 46.9 per cent.; profits, 27.5 per
cent.; interest, 16.8 per cent.; and rent, only 8.8 per cent.[62] This was
exactly the same per cent. that the landowners received in 1860. To be sure,
these figures are only approximations, but they are probably the most
reliable that can be obtained from our notoriously incomplete statistics, and
they will deserve respectful consideration until they have been refuted by
specific criticism and argument. In the opinion of their compiler: "The
figures for wages and salaries are believed to be fairly accurate; those for
rent are thought to have an error of not more than twenty per cent. The
separation of the share of capital from that of the entrepreneur is very
crudely done and no stress should be laid on the results. The total for all
shares is thought to be more accurate than the mode of distribution, and for
the last three census years should come within ten per cent. of the correct
statement of the national income. For earlier years the error should not be
over twenty per cent. at the outside."[63] If we make the maximum
allowance for error in reference to the share of the landowner, and assume
that the rent estimate is twenty per cent. too low, we find that it was still
only ten and one-half per cent. of the total product in 1910, which
represents an increase of less than three per cent. since 1850. It is
significant that Dr. Howe, who has no bias toward belittling the share of the
landowner, suggested as his minimum and maximum estimates of the land
values of the country in 1910 figures which are respectively fifty per cent.
below and only five per cent. above the amount taken by Professor King as
the basis for his estimate of rent.[64] There is, consequently, a strong
presumption that Professor King is right when he stigmatises as "absurd"
the contention of the Single Taxer, "that all the improvements of industry
result only in the enrichment of the landlord.... The value of our products
has increased since 1850 to the extent of some twenty-eight billions of

dollars, while rent has gained less than three billions. Evidently it has
captured but a meagre part of the new production."[65]
There are strong indications, however, that the per cent. of the product
going to the owners of land has increased considerably in the last twenty
years, and that this movement will continue indefinitely. According to
Professor King's calculations, the per cent. of the total product assignable as
rent advanced from 7.8 in 1900 to 8.8 in 1910, which meant that during that
period the national income increased only 70 per cent., while the share of
the landowner increased 91 per cent.[66] It is true that a disproportionate
advance in rent has occurred between other census years, only to be
neutralised by subsequent decreases; but the present instance seems to
include certain features which did not characterise any of the former gains
in the relative share of the landowner. Since 1896 the prices of food
products "rose most rapidly in the case of meat, dairy products, and cereals,
which were derived directly from the land. The prices of raw materials
show a like relation. Timber, grain, and other raw materials obtained
directly from the land have risen rapidly in price, while semi-manufactured
articles have increased less rapidly, or have decreased in price.... There is no
parallel in any other field to the advance in those land values upon which
civilisation most directly depends—timber lands, fertile agricultural land,
and land in large commercial and industrial centres. The recent rise in land
values has been little short of revolutionary."[67]
Between 1900 and 1910 the value of farm lands per acre in the United
States advanced 108.1 per cent.[68] During the eight years beginning with
July 1, 1906, the value of land in Greater New York increased something
more than one-third; in the principal cities of New Jersey, and in Worcester,
Washington, Boston, and Buffalo, somewhat less; in Springfield and
Holyoke, considerably more. In the most recent ten years for which figures
are available (since 1900 in every case) the land values of Milwaukee, St.
Louis and San Francisco averaged only a slight degree of expansion, while
those of Kansas City doubled, and those of Houston, Dallas, Los Angeles,
and Seattle trebled. To quote Professor Nearing, from whose compilations
these estimates have been summarised: "The total extent of the increase in
American city land values may be hinted at rather than stated with any
certainty. The scattering instances in which land and improvements are

separately assessed led to the conclusion that in a large, well-established
city, growing at approximately the same rate as the other portions of the
United States, the land value is doubling in from ten to twenty-five years. In
the new, rapidly growing city of the middle and far West and in some of the
smaller cities of the East, the ratio of increase in land values is far greater,
amounting to two-fold or even three-fold in a decade. In a few instances the
rate of increase is much smaller, and in one case, Jersey City, land values
over a period of seven years have actually decreased.... Nevertheless, the
few available long range figures indicate a widespread and considerable
increase in American city land values."[69]
The rise in the value of timber lands during the last thirty years has been, in
the words of the federal investigators, "enormous." For the ten-year period
ending in 1908, "the value of a given piece of southern pine taken at
random is likely to have increased in any ratio from three-fold to ten-fold."
About the same ratio of increase obtained in the Pacific Northwest, and a
somewhat smaller increase in the region of the Great Lakes.[70] While a
considerable decline has taken place since 1908, it is only temporary; for
the demand for timber is notoriously increasing several times as fast as the
supply.
That this upward movement in the value of all three kinds of land will
continue without serious interruption, seems to be as nearly certain as any
economic proposition that is dependent upon the future. Although millions
of acres of arable lands are still unoccupied in the United States and
Canada, the far greater part of them require a comparatively large initial
outlay for draining, clearing, irrigation, etc., in order to become productive.
Hence there is no likelihood that they can be brought under cultivation fast
enough to halt or greatly retard the advancing values which follow upon the
growth of population and the increased demand for agricultural products. In
all probability the greater part of them will not come into use until the
prices of farm products have risen above the present level. Obviously this
supposes an increase in the value of all farm land, old and new. Nor is the
adoption of better methods of farming likely to check seriously the upward
movement. Between 1900 and 1910 the urban population of America
increased 34.8 per cent., as against a gain of only 21 per cent. in the total
population. This disproportionate growth in the number of the city dwellers

will if continued make certain what is in any case extremely probable, a
steady and considerable advance in urban land values and rents.
The circumstance that these remarkable increases in land values are a
comparatively recent phenomenon has prevented them from receiving the
attention that they deserve, either from the general public or from the
students of economic and social problems. The total value of the land of the
country has increased steadily from decade to decade, but so has the total
value of capital, and even between 1900 and 1910 the increase in the share
of the capitalist was exactly equal to the increase in the share of the
landowner, that is, 91 per cent.[71] Those persons who complacently make
such comparisons overlook the new and significant feature of the more
recent advances in land value; namely, that they are due in only a slight
degree to an expansion of the area of land under consideration. The
increases of value quoted in the foregoing paragraphs are increases per acre
and per urban lot, not increases derived from bringing new land under
cultivation or new tracts within municipal limits. On the other hand, the
increases in the value of capital, now as always, represent for the most part
concrete additions to the existing stock of productive instruments. Except
where monopoly holds sway, particular capital instruments, unlike
particular pieces of land, do not increase in value. Hence the owner of a
given amount of capital does not profit by the advance in the total value of
capital as the owner of the average parcel of land profits by the general
increase in the value of land. This means that all those consumers of
products who are not landowners must pay an increasing tribute to those
who are landed proprietors.
So much for the proportion of the national product which goes to the
landowning class. Let us next inquire how the landowner's share, or rent, is
distributed throughout the population. If it were equally divided among all
persons, its increase relatively to the shares of the other factors would, from
the social viewpoint, be a matter of considerable indifference. On the other
hand, if it is secured by a minority of the population, and if that minority
tends to become smaller as the share itself becomes larger, we have a
socially undesirable condition.
In the twenty years between 1890 and 1910, the proportion of farm families
in the United States owning farm land, mortgaged or unmortgaged, declined

from 65.9 per cent. to 62.8 per cent.; the proportion of urban families
owning their homes, encumbered or unencumbered, increased from 36.9 to
38.4 per cent., and the proportion of all families owning homes,
encumbered or unencumbered, fell from 47.8 to 45.8 per cent. Of the homes
owned by their occupiers, 28 per cent. were mortgaged in 1890, and 32.8
per cent. in 1910.[72] While a decline of two per cent. in the home owning
and landowning families in twenty years, and an increase of almost five per
cent. in the number of those families who hold their property subject to
encumbrance, may not seem very serious in themselves, they indicate a
definitely unhealthy trend. Not only are the landowning families in a
minority, but the minority is becoming smaller.
Nevertheless, when we consider the amount of gains accruing to the
average member of the landowning class, we do not find that it is
unreasonably large. The great majority of landed proprietors have not
received, nor are they likely to receive, from their holdings incomes
sufficiently large to be called excessive shares of the national product. Their
gross returns from land have not exceeded the equivalent of fair interest on
their actual investment, and fair wages for their labour. The landowners
who have been enabled through their holdings to rise above the level of
moderate living constitute a comparatively small minority. And these
statements are true of both agricultural and urban proprietors.
It is true that a considerable number of persons, absolutely speaking, have
amassed great wealth out of land. It is a well known fact that land was the
principal source of the great mediæval and post-mediæval fortunes, down to
the end of the eighteenth century. "The historical foundation of capitalism is
rent."[73] Capitalism had its beginning in the revenue from agricultural
lands, city sites, and mines. A conspicuous example is that of the great
Fugger family of the sixteenth century, whose wealth was mostly derived
from the ownership and exploitation of rich mineral lands.[74] In the United
States very few large fortunes have been obtained from agricultural land,
but the same is not true of mineral lands, timber lands, or urban sites. "The
growth of cities has, through real estate speculation and incremental
income, made many of our millionaires."[75] "As with the unearned income
of city land, our mineral resources have been conspicuously prolific
producers of millionaires."[76] The most striking instance of great wealth

derived from urban land is the fortune of the Astor family. While gains from
trading ventures formed the beginning of the riches of the original Astor,
John Jacob, these were "a comparatively insignificant portion of the great
fortune which he transmitted to his descendants."[77] At his death, in 1848,
John Jacob Astor's real estate holdings in New York City were valued at
eighteen or twenty million dollars. To-day the Astor estate in that city is
estimated at between 450 and 500 millions, and within a quarter of a
century will not improbably be worth one billion dollars.[78] According to
an investigation made in 1892 by the New York Tribune, 26.4 per cent. of
the millionaire fortunes of the United States at that time were traceable to
landownership, while 41.5 per cent. were derived from competitive
industries which were largely assisted by land possessions.[79] The
proportion of such fortunes that is due, directly or indirectly, in whole or in
part, to landownership has undoubtedly increased considerably since 1892.
With regard to great individual or corporate land holdings, there exist no
adequate statistics. A few conspicuous instances may be cited. The United
States Steel Corporation owns lands yielding iron ore, coal, coke, and
timber which are valued by the Commissioner of Corporations at nearly 250
million dollars, and by the Steel Corporation itself at more than 800 million
dollars.[80] Three companies own nearly eleven per cent., and 195
individuals or corporations own 48 per cent. of all the privately owned
timber in the United States.[81] The United States Census of 1910 shows
that the number of farms containing 500 acres or over was about 175,000,
and comprised ten per cent. of the total farm acreage. One hundred and fifty
persons and corporations are said to own 220,000,000 acres of various
kinds of land. None of these holders has less than ten thousand acres, and
two of the syndicates possess fifty million acres each.[82]

Exclusion from the Land

One of the most frequent charges brought against the present system of land
tenure is that it keeps a large proportion of our natural resources out of use.
It is contended that this evil appears in three principal forms: owners of
large estates refuse to break up their holdings by sale; many proprietors are
unwilling to let the use of their land on reasonable terms; and a great deal of

land is held at speculative prices, instead of at economic prices. So far as
the United States are concerned, the first of these charges does not seem to
represent a condition that is at all general. Although many holders of large
mineral and timber tracts seem to be in no hurry to sell portions of their
holdings, they are probably moved by a desire to obtain higher prices rather
than to continue as large landowners. As a rule, the great landholders of
America are without those sentiments of tradition, local attachment, and
social ascendency which are so powerful in maintaining intact the immense
estates of Great Britain. On the contrary, one of the common facts of to-day
is the persistent effort carried on by railroads and other holders of large
tracts to dispose of their land to settlers. While the price asked by these
proprietors is frequently higher than that which corresponds to the present
productiveness of the land, it is generally as low as that which is demanded
by the owners of smaller parcels. To be sure, this is one way of
unreasonably hindering access to the land, but it falls properly under the
head of the third charge enumerated above. There is no sufficient evidence
that the large landholders are exceptional offenders in refusing to sell their
holdings to actual settlers.
The assertion that unused land cannot be rented on reasonable terms is in
the main unfounded, so far as it refers to land which is desired for
agriculture. As a rule, any man who wishes to cultivate a portion of such
land can fulfil his desire if he is willing to pay a rent that corresponds to its
productiveness. After all, landowners are neither fools nor fanatics: while
awaiting a higher price than is now obtainable for their land, they would
prefer to get from it some revenue rather than none at all. As a matter of
fact, almost all the agricultural land that is immediately available for
renting, is constantly under cultivation. This refers to land that is already
under the plough, and is provided with buildings and other necessary
improvements. Practically none of this is out of use. New land which is
without buildings is not wanted by tenants, unless it is convenient to their
residences, because they do not desire to expend money for permanent
improvements upon land that they do not own. True, the present owners of
such land might erect buildings, and then let it to tenants. In so far as new
land might profitably be improved and cultivated, and in so far as the
owners are unwilling or unable to provide the improvements, the present
system does keep out of use agricultural land that could be cultivated by

tenants. Mineral and timber lands are sometimes withheld from tenants
because the owners wish to limit the supply of the product, or because they
fear that a long-term lease would prevent them from selling the land to the
best advantage. As to urban sites, the contention that we are now examining
is generally true. The practice of leasing land to persons who wish to build
thereon does not, with the exception of a very few cities, obtain in the
United States for other than very large business structures. As a rule, it does
not apply to sites for residences. The man who wants a piece of urban land
for a dwelling or for a moderately sized business building cannot obtain it
except by purchase.
Cannot the land be bought at a reasonable price? This brings us to the third
and most serious of the charges concerning exclusion from the land. Since
the value of land in most cities is rising, and apparently will continue to rise
more or less steadily, the price at which it is held and purchasable is not the
economic price but a speculative price. It is higher than the capitalised
value of the present revenue or rent. For example: if five per cent. be the
prevailing rate of interest, a piece of land which returns that rate on a capital
of one thousand dollars cannot be bought for one thousand dollars. The
purchaser is willing to pay more because he hopes to sell it for a still higher
price within a reasonable time. He knows that he cannot immediately obtain
five per cent. on the amount (say, 1,200 dollars) that he is ready to pay for
the land, but his valuation of it is not determined merely by its present
income-producing power, but by its anticipated revenue value and selling
value.[83] The buyer will pay more for such land than for a house which
yields the same return; for he knows that the latter will not, and hopes that
the former will, bring a higher return and a higher price in the future.
Wherever this discounting of the future obtains, the price of land is
unreasonably high, and access to vacant land is unreasonably difficult.
This condition undoubtedly exists most of the time in the great majority of
our larger cities. Men will not sell vacant land at a price which will enable
the buyer to obtain immediately a reasonable return on his investment. They
demand in addition a part of the anticipated increase in value. In the rural
regions this evil appears to be smaller and less general. The owners of
unused or uneconomically used arable land are more eager to sell their
holdings than the average proprietor of a vacant lot. So far as this sort of
land is concerned, it is probable that most of the denunciation of "land

speculators" and "land monopolists" overshoots the mark. Not the high
price at which unused arable lands are held, but the great initial cost of
draining, clearing, or irrigating them, is the main reason why they are not
purchased by cultivators.
While no general and precise estimate can be given of the extent to which
the speculative exceeds the actual rent-producing value of land in growing
cities, twenty-five per cent. would not improbably be a fair conjecture.
Even when a reaction occurs after a period of excessive "land-booming,"
the lower prices do not bring the manless land any nearer to the landless
men. Only the few who possess ready money or excellent credit can take
advantage of such a situation. On the whole the evil that we are now
considering is probably greater than any other connected with the private
ownership of land.
All the tendencies and forces that have been described in the present
chapter under the heads of Monopoly, Excessive Gains, and Exclusion from
the Land, are in some degree real defects and abuses of the existing system
of land tenure. Most of them do not seem to be sufficiently understood or
appreciated by the more ardent defenders of private ownership. To
recognise them, and to seek adequate correctives of them would seem to be
the task of both righteousness and expediency. In the next and final chapter
of this Section, we shall consider certain remedies that seem to be at once
effective and just.

CHAPTER VIII
METHODS OF REFORMING OUR LAND SYSTEM

In economic and social discussion the word reform is commonly opposed to
the word revolution. It implies modification rather than abolition, gradual
rather than violent change. Hence reforms of the system of land tenure do
not include such radical proposals as those of land nationalisation or the
Single Tax. On the other hand, some extension of State ownership of land,
and some increase in the proportion of taxes imposed upon land, may quite
properly be placed under the head of reform, inasmuch as they are changes
in rather than a destruction of the existing system.
In general, the reform measures needed are such as will meet the defects
described in the last chapter; namely, monopoly, excessive gains, and
exclusion from the land. Obviously they can be provided only by
legislation; and they may all be included under two heads, ownership and
taxation.
By far the greater part of the more valuable lands of the country are no
longer under the ownership of the State. Urban land is practically all in the
hands of private proprietors. While many millions of acres of land suitable
for agriculture are still under public ownership, almost all of this area
requires a considerable outlay for irrigation, clearing, and draining before it
can become productive. Forty years ago, three-fourths of the timber now
standing was public property; at present about four-fifths of it is owned by
private persons or corporations.[84] The bulk of our mineral deposits, coal,
copper, gold, silver, etc., have likewise fallen under private ownership, with
the exception of those of Alaska. The undeveloped water power remaining
under government ownership has been roughly estimated at fourteen
million horse power in the national forests, and considerably less than that
amount in other parts of the public domain.[85] This is a gratifying
proportion of the whole supply, developed and undeveloped, of this national
resource, which is said to be somewhere between 27 and 60 millions horse

power.[86] Only about seven million horse power has yet been developed,
almost all of which is privately owned.

The Leasing System

In many countries of Europe it has long been the policy of governments to
retain ownership of all lands containing timber, minerals, oil, natural gas,
phosphate, and water power. The products of these lands are extracted and
put upon the market through a leasing system. That is; the user of the land
pays to the State a rental according to the amount and quality of raw
material which he takes from the storehouse of nature. Theoretically, the
State could sell such lands at prices that would bring in as much revenue as
does the leasing system; practically, this result has never been attained. The
principal advantages of the leasing arrangement are: to prevent the
premature destruction of forests, the private monopolisation of limited
natural resources (which has happened in the case of the anthracite coal
fields of Pennsylvania) and the private acquisition of exceptionally valuable
land at ridiculously low prices; and to enable the State to secure just
treatment for the consumer and the labourer by stipulating that the former
shall obtain the product at fair prices, and that the latter shall receive fair
wages.
This example should be followed by the United States. All timber, mineral,
gas, oil, and water power lands which have not been alienated to private
persons should remain under government ownership, and be brought into
use through a leasing arrangement which would enable the private operators
to obtain the rates of profit and interest which are ordinarily yielded by
enterprises subject to the same degree of risk. Happily this policy now
seems likely to be adopted. In 1913 a law was passed by the United States
providing for the operation of the coal mines of Alaska on leases. The
amount that can be leased by any person or corporation is limited to 2560
acres, and the penalty for attempting to monopolise the product is forfeiture
of tenure. The Secretary of the Interior has urged a similar arrangement for
the development and extraction of water power, coal, oil, gas, phosphate,
sodium, and potassium on the public domain of Continental United States,
and his recommendation will probably be adopted by Congress. Thus the
rent of these lands will go to the whole people instead of to a comparatively

small number of individuals, monopoly of the products will be made
impossible, and our remaining public resources will be protected from rapid
and ruinous exploitation.
To the objection that capitalists will not invest their money in nor carry on
extractive enterprises on a leasing basis, the sufficient answer is that they
are doing it now. In 1909, 24.5 per cent. of all the lands producing minerals,
precious metals, and stone; 94.6 per cent. of the lands producing petroleum
and gas; and 61.2 per cent. of the two groups of lands combined, were
operated under leases from private owners or from the government.[87] If
the rental or royalty demanded is not unreasonably high capitalists will be
quite as willing to produce raw materials of these kinds from leased land as
they are to manufacture or sell goods in a rented building. Not the leasing
system, but the terms of the particular lease are the important consideration.
Public grazing lands should remain government property until such time as
they become available for agriculture. Cattle owners could lease the land
from the State on equitable terms, and receive ample protection for money
invested in improvements.

Public Agricultural Lands

The leasing system cannot well be applied to agricultural lands. In order
that they may be continuously improved and protected against deterioration,
they must be owned by the cultivators. The temptation to wear out a piece
of land quickly, and then move to another piece, and all the other obstacles
that stand in the way of the Single Tax as applied to agricultural land, show
that the government cannot with advantage assume the function of landlord
in this domain. In the great majority of cases the State would do better to
sell the land in small parcels to genuine settlers. There are, indeed, many
situations, especially in connection with government projects of irrigation,
clearing, and drainage, in which the leasing arrangement could be adopted
temporarily. It should not be continued longer than is necessary to enable
the tenants to become owners. With this end in view the State should make
loans to cultivators at moderate rates of interest, as is done in New Zealand
and Australia.

Whether the State ought to purchase undeveloped land from private owners
in order to sell it to settlers, may well be doubted. The only lands to which
such a scheme would be at all applicable are large estates which are held
out of use by their proprietors. Even here the transfer of the land to
cultivators could be accomplished indirectly, through an extra heavy tax.
This method has been adopted with success by Australia and New Zealand.
The only other action by the State that seems necessary or wise in order to
place settlers upon privately owned agricultural land, is the establishment of
a comprehensive system of rural credits. The need of cheaper food
products, and the desirability of checking the abnormal growth of our urban
populations, are powerful additional reasons for the adoption of this policy.
The Hollis Rural Credits Bill recently enacted into law by Congress goes a
considerable way toward meeting these needs.

Public Ownership of Urban Land

No city should part with the ownership of any land that it now possesses.
Since capitalists are willing to erect costly buildings on sites leased from
private owners, there is no good reason why any one should refuse to put up
or purchase any sort of structure on land owned by the municipality. The
situation differs from that presented by agricultural land; for the value of the
land can easily be distinguished from that of improvements, the owner of
the latter can sell them even if he is not the owner of the land, and he cannot
be deprived of them without full compensation. While the lessee paid his
annual rent, his control of the land would be as complete and certain as that
of the landowner who continues to pay his taxes. On the other hand, the
leaseholder could not permit or cause the land to deteriorate if he would; for
the nature of the land renders this impossible. Finally, the official activities
involved in the collection of the rent and the periodical revaluation of the
land, would not differ essentially from those now required to make
assessments and gather taxes.
The benefits of this system would be great and manifest. Persons who were
unable to own a home because of their inability to purchase land, could get
secure possession of the necessary land through a lease from the city.
Instead of spending all their lives in rented houses, thousands upon
thousands of families could become the owners and occupiers of homes.

The greater the amount of land thus owned and leased by the city, the less
would be the power of private owners to hold land for exorbitant prices.
Competition with the city would compel them to sell the land at its revenue-
producing value instead of at its speculative value. Finally, the city would
obtain the benefit of every increase in the value of its land by means of
periodical revaluation, and periodical readjustment of rent.
Unfortunately the amount of municipal land available for such an
arrangement in our American cities is negligible. If they are to establish the
system they must first purchase the land from private owners. Undoubtedly
this ought to be done by all large cities in which the housing problem has
become acute, and the value of land is constantly rising. This policy has
been adopted with happy results by many of the municipalities of France
and Germany.[88] At the state election of 1915 the voters of Massachusetts
adopted by an overwhelming majority a constitutional amendment
authorising the cities of the commonwealth to acquire land for prospective
home builders. In Savannah, Georgia, no extension of the municipal limits
is made until the land to be embraced has passed into the ownership of the
city. Another method is to refrain from opening a new street in a suburban
district until the city has become the proprietor of the abutting land.
Whatever be the particular means adopted, the objects of municipal
purchase and ownership of land are definite and obvious: to check the
congestion of population in the great urban centres, to provide homes for
the homeless, and to secure for the whole community the socially
occasioned increases in land values. Indeed, it is probable that no
comprehensive scheme of housing reform can be realised without a
considerable amount of land purchase by the municipalities. Cities must be
in a position to provide sites for those home builders who cannot obtain
land on fair conditions from private proprietors.[89]
Turning now from the direct method of public ownership to the indirect
method of reform through taxation, we reject the thoroughgoing proposals
of the Single Taxers. To appropriate all economic rent for the public
treasury would be to transfer all the value of land without compensation
from the private owner to the State. For example: a piece of land that
brought to the owner an annual revenue of one hundred dollars would be
taxed exactly that amount; if the prevailing rate of interest were five per
cent. the proprietor would be deprived of wealth to the amount of two

thousand dollars; for the value of all productive goods is determined by the
revenue that they yield, and benefits the person who receives the revenue.
Thus the State would become the beneficiary and the virtual owner of the
land. Inasmuch as we do not admit that the so-called social creation of land
values gives the State a moral right to these values, we must regard the
complete appropriation of economic rent through taxation as an act of pure
and simple confiscation.[90]

Appropriating Future Increases of Land Value

Let us examine, then, the milder suggestion of John Stuart Mill, that the
State should impose a tax upon land sufficient to absorb all future increases
in its value.[91] This scheme is commonly known as the appropriation of
future unearned increment. Either in whole or in part it is at least plausible,
and is to-day within the range of practical discussion. It is expected to
obtain for the whole community all future increases in land values, and to
wipe out the speculative, as distinguished from the revenue-producing value
of land. Consequently it would make land cheaper and more accessible than
would be the case if the present system of land taxation were continued.
Before discussing its moral character, let us see briefly whether the ends
that it seeks may properly be sought by the method of taxation. For these
ends are mainly social rather than fiscal.
To use the taxing power for a social purpose is neither unusual nor
unreasonable. "All governments," says Professor Seligman, "have allowed
social considerations in the wider sense to influence their revenue policy.
The whole system of productive duties has been framed not merely with
reference to revenue considerations, but in order to produce results which
should directly affect social and national prosperity. Taxes on luxuries have
often been mere sumptuary laws designed as much to check consumption as
to yield revenue. Excise taxes have as frequently been levied from a wide
social, as from a narrow fiscal, standpoint. From the very beginning of all
tax systems these social reasons have often been present."[92] Our Federal
taxes on imports, on intoxicating liquors, on oleo-margarine, and on white
phosphorus matches, and many of the license taxes in our municipalities, as
on pedlars, saloon keepers, and dog owners, are in large part intended to
meet social as well as fiscal ends. They are in the interest of domestic

production, public health, and public safety. The reasonableness of effecting
social reforms through taxation cannot be seriously questioned. While the
maintenance of government is the primary object of taxation, its ultimate
end, the ultimate end of government itself, is the welfare of the people.
Now if the public welfare can be promoted by certain social changes, and if
these in turn can be effected through taxation, this use of the taxing power
will be quite as normal and legitimate as though it were employed for the
upkeep of government. Hence the morality of taxing land for purposes of
social reform will depend entirely upon the nature of the particular tax that
is imposed.

Some Objections to the Increment Tax

The tax that we are now considering can be condemned as unjust on only
two possible grounds: first, that it would be injurious to society; and,
second, that it would wrong the private landowner. If it were fairly adjusted
and efficiently administered it could not prove harmful to the community. In
the first place, landowners could not shift the tax to the consumer. All the
authorities on the subject admit that taxes on land stay where they are put,
and are paid by those upon whom they are levied in the first instance.[93]
The only way in which the owners of a commodity can shift a tax to the
users or consumers of it, is by limiting the supply until the price rises
sufficiently to cover the tax. By the simple device of refusing to erect more
buildings until those in existence have become scarce enough to command
an increase in rent equivalent to the new tax, the actual and prospective
owners of buildings can pass the tax on to the tenants thereof. By refusing
to put their money into, say, shoe factories, investors can limit the supply of
shoes until any new tax on this commodity is shifted upon the wearers of
shoes in the form of higher prices. Until these rises take place in the rent of
buildings and the price of shoes, investors will put their money into
enterprises which are not burdened with equivalent taxes. But nothing of
this sort can follow the imposition of a new tax upon land. The supply of
land is fixed, and cannot be affected by any action of landowners or would-
be landowners. The users of land and the consumers of its products are at
present paying all that competition can compel them to pay. They would not
pay more merely because they were requested to do so by landowners who
were labouring under the burden of a new tax. If all landowners were to

carry out an agreement to refrain from producing, and to withhold their land
from others until rents and prices had gone up sufficiently to offset the tax,
they could, indeed, shift the latter to the renters of land and the consumers
of its products. Such a monopoly, however, is not within the range of
practical achievement. In its absence, individual landowners are not likely
to withhold land nor to discontinue production in sufficient numbers to raise
rents or prices. Indeed, the tendency will be all the other way; for all
landowners, including the proprietors of land now vacant, will be anxious to
put their land to the best use in order to have the means of paying the tax.
Owing to this increased production, and the increased willingness to sell
and let land, rents and prices must fall. It is axiomatic that new taxes upon
land always make it cheaper than it would have been otherwise, and are
beneficial to the community as against the present owners.
In the second place, the tax in question could not injure the community on
account of discouraging investment in land. Once men could no longer
hope to sell land at an advance in price, they would not seek it to the extent
that they now do as a field of investment. For the same reason many of the
present owners would sell their holdings sooner than they would have sold
them if the tax had not been levied. From the viewpoint of the public the
outcome of this situation would be wholly good. Land would be cheaper
and more easy of access to all who desired to buy or use it for the sake of
production, rather than for the sake of speculation. Investments in land
which have as their main object a rise in value are an injury rather than a
benefit to the community; for they do not increase the products of land,
while they do advance its price, thereby keeping it out of use. Hence the
State should discourage instead of encouraging mere speculators in land.
Whether it is or is not bought and sold, the supply of land remains the same.
The supreme interest of the community is that it should be put to use, and
made to supply the wants of the people. Consequently the only land
investments that help the community are those that tend to make the land
productive. Under a tax on future increases in value, such investments
would increase for the simple reason that land would be cheaper than it
would have been without the tax. Men who desired land for the sake of its
rent or its product would continue as now to pay such prices for it as would
enable them to obtain the prevailing rate of interest on their investment after
all charges, including taxes, had been paid. Men who wanted to rent land

would continue as now to get it at a rental that would give them the usual
return for their capital and labour.
So much for the effect of the tax upon the community. Would it not,
however, be unjust to the landowners? Does not private ownership of its
very nature demand that increases in the value of the property should go to
the owners thereof? "Res fructificat domino:" a thing fructifies to its owner;
and value-increases may be classed as a kind of fruit.
In the first place, this formula was originally a dictum of the civil law
merely, the law of the Roman Empire. It was a legal rather than an ethical
maxim. Whatever validity it has in morals must be established on moral
grounds, by moral arguments. It cannot forthwith be assumed to be morally
sound on the mere authority of legal usage. In the second place, it was for a
long time applied only to natural products, to the grain grown in a field, to
the offspring of domestic animals. It simply enunciated the policy of the
law to defend the owner of the land in his claim to such fruits, as against
any outsider who should attempt to set up an adverse title through mere
appropriation or possession. Thus far, the formula was evidently in
conformity with reason and justice. Later on it was extended, both by
lawyers and moralists, to cover commercial "fruits," such as, rent from
lands and houses, and interest from loans and investments. Its validity in
this field will be examined in connection with the justification of interest.
More recently the maxim has received the still wider application which we
are now considering. Obviously increases in value are quite a different thing
from the concrete fruit of the land, its natural product. A right to the latter
does not necessarily and forthwith imply a right to the former. In the third
place, the formula in question is not a self evident, fundamental principle. It
is merely a summary conclusion drawn from the consideration of the facts
and principles of social and industrial life. Consequently its validity as
applied to any particular situation will depend on the correctness of these
premises, and on the soundness of the process by which it has been
deduced.
The increment tax is sometimes opposed on the ground that it is new, in
fact, revolutionary. In some degree the charge is true, but the conditions
which the proposal is intended to meet are likewise of recent origin. The
case for this legislation rests mainly on the fact that, for the first time in the

world's history, land values everywhere show an unmistakable tendency to
advance indefinitely. This means that the landowning minority will be in a
position to reap unbought and continuous benefits at the expense of the
landless majority. This new fact, with its very important significance for
human welfare, may well require a new limitation on the right of property
in land.
It is also objected that to deprive men of the opportunity of profiting by
changes in the value of their land would be an unfair discrimination against
one class of proprietors. But there are good reasons for making the
distinction. Except in the case of monopoly, increases in the value of goods
other than land are almost always due to expenditures of labour or money
upon the goods themselves. The value increases that can be specifically
traced to external and social influences are intermittent, uncertain, and
temporary. Houses, furniture, machinery, and every other important
category of artificial goods are perishable, and decline steadily in value.
Land, however, is substantially imperishable, becomes steadily scarcer
relatively to the demand, and its value-increases are on the whole constant,
certain, and permanent. Moreover, it is the settled policy of most
enlightened governments to appropriate or to prevent all notable increases
in the value of monopolistic goods, either through special taxation or
through regulation of prices and charges. Taking the increment values of
land is, therefore, not so discriminative as it appears at first glance.[94]
Another objection is that the proposal would violate the canons of just
taxation, since it would impose a specially heavy burden upon one form of
property. The general doctrine of justice in taxation which is held by
substantially all economists to-day, and which has been taught by Catholic
moralists for centuries, is that known as the "faculty" theory.[95] Men should
be taxed in proportion to their ability to pay, not in accordance with the
benefits that they may be assumed to receive from the State. And it is
universally recognised that the proper measure of "ability" is not a man's
total possessions, productive and unproductive, but his income, his annual
revenue. Now, the increment tax does seem to violate the rule of taxation
according to ability, inasmuch as it would take all of one species of revenue,
while all other incomes and properties pay only a certain percentage.

All the adherents of the faculty theory maintain, however, that it is subject
to certain modifications. Incomes from interest, rent, and socially
occasioned increases in the value of property should be taxed at a higher
rate than incomes that represent expenditures of labour; for to give up a
certain per cent. of the former involves less sacrifice than to give up the
same per cent. of the latter. Therefore, increments of land-value may be
fairly taxed at a higher rate than salaries, personal property, or even rent and
interest. When, however, the law absorbs the whole of the value increments,
it seems to be something more than a tax. The essential nature of a tax is to
take only a portion of the particular class of income or property upon which
it is imposed. The nearest approach to the plan of taking all future increases
in land value is to be found in the special assessments that are levied in
many American cities. Thus, the owners of urban lots are frequently
compelled to defray the entire cost of street improvements on the theory
that their land is thereby and to that extent increased in value. In such cases
the contribution is levied not on the basis of the faculty theory, but on that
of the benefit theory; that is, the owners are required to pay in proportion to
benefits received. All adherents of the faculty theory admit that the benefit
theory is justifiably applied in situations of this kind. It might be argued that
the latter theory can also be fairly applied to increments of land value that
are to arise in the future. In both cases the owner returns to the State the
equivalent of benefits which have cost him nothing. There is, however, a
difference. In the former case the value increases are specifically due to
expenditures made by the State, while in the latter they are indirectly
brought about by the general activities of the community. We do not admit
with the Single Taxers that this "social production" of value increments
creates a right thereto on the part of either the community or the civil body;
but even if we did we should be compelled to admit that the two situations
are not exactly parallel; for the social production of increases in the value of
land involves no special expenditure of labour or money. Hence it is very
questionable whether the appropriation of the whole of the future value
increments can be harmonised with the received conceptions and
applications of the canons of taxation.

The Morality of the Proposal

However, it is neither necessary nor desirable to justify the proposal on the
mere ground of taxation. Only in form and administration is it a tax;
primarily and in essence it is a method of distribution. It resembles the
action by which the State takes possession of a newly discovered territory
by the title of first occupancy. The future increases of land value may be
regarded as a sort of no man's property which the State appropriates for the
benefit of the community. And the morality of this proceeding must be
determined by the same criterion that is applied to every other method or
rule of distribution; namely, social and individual consequences. No
principle, title, or practice of ownership, nor any canon of taxation, has
intrinsic or metaphysical value. All are to be evaluated with reference to
human welfare. Since the right of property is not an end in itself, but only a
means of human welfare, its just prerogatives and limitations are
determined by their conduciveness to the welfare of human beings. By
human welfare is meant not merely the good of society as a whole, but the
good of all individuals and classes of individuals. For society is made up of
individuals, all of whom are of equal worth and importance, and have equal
claims to consideration in the matter of livelihood, material goods, and
property. In general, then, any method of distribution, any modification of
property rights, any form of taxation, is morally lawful which promotes the
interests of the whole community, without causing undue inconvenience to
any individual. Whether a given rule of ownership or method of distribution
which is evidently conducive to the public good is, nevertheless, unduly
severe on a certain class of individuals, is a question that is not always
easily answered. Some of the methods and practices appearing in history
were clearly fair and just, others clearly unfair and unjust, and still others of
doubtful morality. Frequently the State has compelled private persons to
give up their land at a lower price than they paid for it; in more than one
country freebooters and kingly favourites robbed the people of the land, yet
their heirs and successors are recognised by both moralists and statesmen as
the legitimate owners of that land; in Ireland stubborn landlords are to-day
compelled by the British government to sell their holdings to the tenants at
an appraised valuation; in many countries men may become owners of their
neighbours' lands by the title of prescription, without the payment of a cent
of compensation. All these practices and titles inflict considerable hardship
upon individuals, but most of them are held to be justified on grounds of
social welfare.

Now the public appropriation of all future increments of land value would
evidently be beneficial to the community as a whole. It would enable all the
people to profit by gains that now go to a minority, and it would enable the
landless majority to acquire land more easily and more cheaply. We have in
mind, of course, only those value increases that are not due to
improvements in or on the land, and we assume that these could be
distinguished in practice from the increments of value that represent
improvements. Would the measure in question inflict undue hardship upon
individuals? Here we must make a distinction between those persons who
own land at the time that, and those who buy land after, the law is enacted.
The only inconvenience falling upon the latter class would be deprivation of
the power to obtain future increases in value. The law would not cause the
value of the land to decline below their purchase price. Other forces might,
indeed, bring about such a result; but, as a rule, such depreciation would be
relatively insignificant, for the simple reason that it would already have
been "discounted" in the reduction of value which followed the law at the
outset. The very knowledge that they could not hope to profit by future
increases in the value of the land would impel purchasers to lower their
price accordingly. While taking away the possibility of gaining, the law
enables the buyers to take the ordinary precautions against losing.
Therefore, it does not, as sometimes objected, lessen the so called
"gambler's chances." On the other hand, the tax does not deprive the owners
of any value that they may add to the land through the expenditure of labour
or money, nor in any way discourage productive effort. Now it is, as a rule,
better for individuals as well as for society that men's incomes should
represent labour, expenditure, and saving instead of being the result of
"windfalls," or other fortuitous and conjunctural circumstances. And the
power to take future value increments is not an intrinsically essential
element of private property in land. Like every other condition of
ownership, its morality is determined by its effects upon human welfare.
But we have seen in the last paragraph that human welfare in the sense of
the social good is better promoted by a system of landownership which
does not include this element; and we have just shown that such a system
causes no undue hardship to the individual who buys land after its
establishment. Such is the answer to the contention, noticed a few pages
back, that the landowner has a right to future increments of value because

they are a kind of fruit of his property. It is more reasonable that he should
not enjoy this particular and peculiar "fruit." Were the increment tax
introduced into a new community before any one had purchased land, it
would clearly be a fair and valid limitation on the right of ownership. Those
who should become owners after the regulation went into effect in an old
community would be in exactly the same moral and economic position.
Finally, there exists some kind of legal precedent for the proposal in the
present policy of efficient governments with regard to the only important
increases that occur in the value of goods other than land; namely, increases
due to the possession of monopoly power. By various devices these are
either prevented or appropriated by the State.
Those persons who are landowners when the increment tax goes into effect
are in a very different situation from those that we have just been
considering. Many of them would undoubtedly suffer injury through the
operation of the measure, inasmuch as their land would reach and maintain
a level of value below the price that they had paid for it. The immediate
effect of the increment tax would be a decline in the value of all land,
caused by men's increased desire to sell and decreased desire to buy. In all
growing communities a part of the present value of land is speculative; that
is, it is due to demand for the land by persons who want it mainly to sell at
an expected rise, and also to the disinclination of present owners to sell
until this expectation is realised. The practical result of the attitude of these
two classes of persons is that the demand for, and therefore the value of
land is considerably enhanced. Let a law be enacted depriving them of all
hope of securing the anticipated increases in value, and the one group will
cease to buy, while the other will hasten to sell, thus causing a decline in
demand relatively to supply, and therefore a decline in value and price.
All persons who had paid more for their land than the value which it came
to have as a result of the increment tax law, would lose the difference. For,
no matter how much the land might rise in value subsequently, the increase
would all be taken by the State. And all owners of vacant land the value of
which after the law was passed did not remain sufficiently high to provide
accumulated interest on the purchase price, would also lose accordingly. To
be sure, both these kinds of losses would exist even if the law should cause
no decline in the value of land, but they would not be so great either in
number or in volume.

Landowners who should suffer either of these sorts of losses would have a
valid moral claim against the State for compensation. Through its silence on
the subject of increment-tax legislation, the State virtually promised them at
the time of their purchases that it would not thus interfere with the ordinary
course of values. Had it given any intimation that it would enact such a law
at a future time, these persons would not have paid as much for their land as
they actually did pay. When the State passes the law, it violates its implicit
promise, and consequently is under obligation to make good the resulting
losses.
Is it not obliged to go further, and pay for the positive gains that many of
the owners would have reaped in the absence of the law? For example: a
piece of land is worth one thousand dollars the day after the tax goes into
effect, and that was exactly the price paid for it by the present owner;
another piece has the same value, but was bought by the present owner for
eight hundred dollars. While neither of these men suffer any loss on their
investments, they are deprived of possible gains; for had the law not been
enacted their holdings would be worth, say, eleven hundred dollars.
Nevertheless, they are no worse off in this respect than those persons who
buy land after the increment tax goes into effect, and have no greater claim
to compensation for abolished opportunities of positive gain. As we have
seen above, the certain advantages of the measure to the community, the
doubtful advantages to individuals of profiting by changes in price which
do not represent labour, expense, or saving, show that the owners have no
strict right to compensation. And it is still clearer that no landowner has a
valid claim on account of value increases that would have taken place
subsequent to the time that the measure was enacted. There is no way by
which owners who would have held their land long enough to profit by
these increments can be distinguished from owners who would not have
availed themselves of this conjectural opportunity, nor any method by
which the amount of such gains can be determined.
On the other hand, it might be objected that, in reimbursing all owners who
suffer the positive losses above described, the State is unduly generous; for
if the law had not been enacted many of the reimbursed persons would have
sold their holdings at a price insufficient to cover their losses. But these
cannot be distinguished from those who would have sold at a remunerative

price. Hence the State must compensate all or none. The former alternative
is not only the more just all round, but in the long run the more expedient.
In view of the social benefits of the increment tax, especially the removal of
many of the inequities of the present taxing system, the State might
sometimes be justified in making good only a part of the losses that we
have been discussing. But this could probably occur only for administrative
reasons, such as the difficulty of determining the persons entitled to and the
amounts of compensation. It would not be justified merely to enable the
State to profit at the expense of individuals. And, in any case, there seems to
be no good reason why the unpaid losses should amount to more than a
small fraction of the whole.
In the foregoing pages we have been considering a law which would from
the beginning of its operation take all the future increments of land value.
There is, however, no likelihood that any such measure will soon be enacted
in any country, least of all, in the United States. What we shall probably see
is the spread of legislation designed to take a part, and a gradual growing
part, of value increases, after the example of Germany and Great Britain.
Let us glance at the laws in force in these two countries.

The German and British Increment Taxes

The first increment tax (Werthzuwachssteuer) was established in the year
1898 in the German colony of Kiautschou, China. In 1904 the principle of
the tax was adopted by Frankfort-am-Main, and in 1905 by Cologne. By
April, 1910, it had already been enacted in 457 cities and towns of
Germany, some twenty of which had a population of more than 100,000
each, in 652 communes, several districts, one principality, and one grand
duchy. In 1911 it was inserted in the imperial fiscal system, and thus
extended over the whole German Empire. While these laws are all alike in
certain essentials, they vary greatly in details. They agree in taking only a
per cent. of the value increases, and in imposing a higher rate on the more
rapid increases. The rates of the imperial law vary from ten per cent. on
increases of ten per cent. or less to thirty per cent. on increases of 290 per
cent. or over. In Dortmund the scale progresses from one to 12½ per cent.
Inasmuch as the highest rate in the imperial law is 30 per cent., and in any

municipal law (Cologne and Frankfort) 25 per cent.; inasmuch as all the
laws allow deductions from the tax to cover the interest that was not
obtained while the land was unproductive; and inasmuch as only those
increases are taxed which are measured from the value that the land had
when it came into the possession of the present owner,—it is clear that
landowners are not obliged to undergo any positive loss, and that they are
permitted to retain the lion's share of the "unearned increment."[96]
It is to be noted that most of the German laws are retroactive, since they
apply not merely to future value increases, but to some of those that
occurred before the law was enacted. Thus, the Hamburg ordinance
measures the increases from the last sale, no matter how long ago that
transaction took place. The imperial law uses the same starting point, except
in cases where the last sale occurred before 1885. Accordingly, a man who
had in 1880 paid 2500 marks for a piece of land which in 1885 was worth
only 2000 marks, and who sold it for 3000 marks after the law went into
effect, would pay the increment tax on 1000 marks,—unless he could prove
that his purchase price was 2500 marks. In all such cases the burden of
proof is on the owner to show that the value of the land in 1885 was lower
than when he had bought it at the earlier date. Obviously this retroactive
feature of the German legislation inflicts no wrong on the owner, since it
does not touch value increases that he has paid for. Indeed, the value of the
land when it came into the present owner's possession seems to be a fairer
and more easily ascertained basis from which to reckon increases than any
date subsequent to the enactment of the law. On the one hand, persons
whose lands had fallen in value during their ownership would be
automatically excluded from the operation of the law until such time as the
acquisition value was again reached; on the other hand, those owners whose
lands had increased in value before the law went into effect would be taxed
as well as those whose gains began after that event; thus the law would
reach a greater proportion of the existing beneficiaries of "unearned
increment." Moreover, it would bring in a larger amount of revenue.
The British law formed a part of the famous Lloyd-George budget of 1909.
It taxes only those increments that occur after its enactment. These are
subject to a tax of twenty per cent. on the occasion of the next transfer of
the land, by sale, bequest, or otherwise.[97] In some cases this arrangement
will undoubtedly cause hardship. For example: if land which was bought

for 1,000 pounds in 1900 had fallen to 800 pounds in 1909, and were sold
for 1,000 pounds in 1915, the owner would have to pay a tax of twenty per
cent. on 200 pounds. This would mean a net loss of forty pounds, to say
nothing of the loss of interest in case the land was unproductive. It would
seem that some compensation ought to be given here; yet the rarity of such
instances, the administrative difficulties, and the general advantages of this
sort of legislation quite conceivably might forbid the conclusion that the
owner was made to suffer certain injustice. The compensating social
advantages of the increment tax as well as of other special taxes on land,
will receive adequate discussion presently.

Transferring Other Taxes to Land

Another taxation plan for reducing the evils of our land system consists in
the imposition of special taxes on the present value of land. As a rule, these
imply, not an addition to the total tax levy, but a transfer of taxes from other
forms of property. The usual practice is to begin by exempting either partly
or wholly buildings and other kinds of improvements from taxation, and
then to apply the same measure to certain kinds of personal property. In
most cases the transfer of such taxes to land is gradual, extending over a
period of five, ten, or fifteen years. The plan is in operation in Canada and
Australasia, and to a slight extent in the United States.
It has received its greatest development in the western provinces of Canada;
namely, British Columbia, Alberta, Saskatchewan, and Manitoba. The cities
of Edmonton, Medicine Hat, and Red Deer; Vancouver, Victoria, and
thirteen others of the thirty-three cities of British Columbia; all the towns of
Alberta except two; all but one of the villages of Alberta, and one-fourth of
those in Saskatchewan; all the rural municipalities and local improvements
districts in Alberta, Manitoba, and Saskatchewan, and 24 of the 28 in
British Columbia,—exempt improvements entirely from taxation. The three
cities in Alberta which retain some taxes on improvements; all the cities and
towns and three-fourths of the villages in Saskatchewan; the four largest
cities in Manitoba; and a considerable number of the municipalities in
Ontario (by the device of illegal under-assessment in this instance),—tax
improvements at less than full value, in some cases as low as fifteen per
cent. Land is invariably assessed at its full value. It is to be observed that

these special land taxes provide only local revenues; they do not contribute
anything to the maintenance of either the provincial or the dominion
governments. The reason why the local jurisdictions have adopted these
taxes so much more extensively in Alberta than in the other provinces is to
be found in a provincial law enacted in 1912, which requires all towns,
villages, and rural areas to establish within seven years the practice of
exempting from taxation personal property and buildings. Saskatchewan
permits cities and towns to tax improvements up to sixty per cent. of their
value, while British Columbia and Manitoba leave the matter entirely in the
hands of the local authorities. The provincial revenues are derived from
many sources, chiefly real estate, personal property, and incomes; but
British Columbia, Saskatchewan, and Alberta levy a special tax on
unimproved and only slightly improved rural land. The rate of this "wild
lands tax" is in British Columbia four per cent., and in the other two
provinces one per cent. Some of the municipalities of British Columbia and
Saskatchewan also impose a "wild lands tax." By a law passed in 1913
Alberta levies a provincial tax of five per cent. on the value increases of
non-agricultural lands. A movement for the reduction of the tax on
buildings has developed considerable strength in the eastern provinces of
Ontario, Nova Scotia, and New Brunswick.[98]
New Zealand and most of the states of Australia have for several years
levied special taxes on land, consisting mainly of general rates on estates of
moderate size, and a progressive super tax on large estates. The
Commonwealth of Australia also imposes a tax of one penny in the pound
on the value of land. A considerable proportion of the cities and towns in
both New Zealand and Australia derive practically all their revenues from
land, exempting improvements entirely. In both countries, however, the
bulk of the total revenue is obtained from other sources than land taxes. In
New Zealand they yield less than thirteen per cent. of the national receipts.
[99]

Pittsburgh and Scranton were required by a law enacted in 1913 to reduce
the local tax rate on buildings at such a pace that in 1925 and thereafter it
would be only one-half the highest rate on other forms of property. Everett,
Wash., and Pueblo, Col., within recent years adopted by popular vote more
sweeping measures of the same character, but the Everett law has never
gone into effect, and the Pueblo statute was repealed two years after it had

been passed. In many cities of the United States, buildings are undervalued
relatively to land by the informal and illegal action of assessors. The most
pronounced and best known instance of this kind is Houston, Texas, where
in 1914 land was assessed at seventy per cent. of its value and buildings at
only twenty-five per cent. In 1915, however, the practice was forbidden by
the courts as contrary to the Texas constitution. At more than one recent
session of the New York legislature, bills have been introduced providing
for the gradual reduction of the tax on buildings in New York City to a basis
of fifty per cent. of their value. While none of them has been passed, the
sentiment in favour of some such measure is probably increasing. A similar
movement of opinion is apparent in many other sections of the country.
On the whole, the special land taxes of Canada and Australasia are not
remarkably high. They seem to be as low or lower than the average rates
imposed on land, as well as on other forms of general property, in the
United States. In the provinces, the special land taxes provide only a small
portion of the total revenues; in the cities and towns, there are, as a rule,
other sources of revenue as well as land, and the expenses of municipal
government are probably not as high as in this country. Hence the land
taxes of Canada have not reached an abnormally high level, and are
probably lower than most persons who have heard of them would be
inclined to expect. The chief exceptions to the foregoing statements are to
be found in the "wild lands tax" of British Columbia, and in the land taxes
of some of the towns (not the cities) of Alberta. A rate of four per cent. on
unimproved and slightly improved rural land is extraordinary in fiscal
annals, and is scarcely warranted by any received principle of taxation,
although it may possibly be justified by peculiar social and administrative
conditions in the province of British Columbia. Some of the smaller towns
of Alberta which adopted the land tax during the recent period of depression
have been compelled to impose even higher rates, the maximum being
reached by Castor in 1912, with a rate of 8½ per cent. As a natural
consequence, a large proportion of the land in this town was surrendered by
its owners to the municipality. While this amazing tax rate is probably
temporary, and is likely to be lowered after the return of the average
conditions of prosperity, it inflicts unfair hardship upon those owners whose
circumstances are such that they must give up their land, instead of awaiting
the hoped for decline in the rate of taxation.

The Morality of the Plan

The losses of various kinds that would result from the transfer of other taxes
to land may be thus summarised. Land would depreciate in value by an
amount equal to the capitalised tax. For example; if the rate of interest were
five per cent., an additional tax of one per cent. would reduce land worth
one hundred dollars an acre to eighty dollars. This decline might, indeed, be
partly, wholly, or more than offset by a simultaneous rise due to economic
forces. In any case, however, the land would be worth twenty dollars less
than it would have been worth had the tax not been imposed. For some
owners this would mean a positive loss; for others it would signify mere
failure to gain. The latter would happen in the case of all those owners who
at any time after the imposition of the tax sold their land at as high a price
as they had paid for it. Not all of the owners whose land was forced by the
tax to a figure below their purchase price would suffer positive loss; for the
land might subsequently rise in value sufficiently to wipe out the
unfavourable difference. In this respect a special tax on the present value of
land has a different effect from a tax that appropriates all the future value
increases. Only those owners who actually sold their land below their
purchase price could charge the former tax with inflicting upon them
positive losses. In the case of the land exemplified above, the owner who
sold at ninety dollars per acre could properly attribute to the tax a loss of ten
dollars; the owner who sold at eighty dollars would have a grievance
amounting to twenty dollars; and a loss would be suffered by any owner
who sold for less than eighty dollars. In the second place, all owners of
vacant land who sold at a price insufficient to provide for accumulated
interest on the purchase price, could justly hold the tax responsible, so long
as the deficiency did not exceed the value-depreciation caused by the tax.
Thirdly, all persons whose land had an unusually high value relatively to the
value of their exempted property, would suffer losses as taxpayers. They
would lose more through the heavier land taxes than they would gain
through the lighter taxes, or the absence of taxes, on their other property.
To compensate all owners who underwent these three kinds of losses would
be practically impossible. The number of persons would be too large, the
difficulty of proving many of the claims would be too expensive, and the
compensation process would be too long drawn out, since it would have to

continue until the death of all persons who had owned land when the last
instalment of the increased land taxes went into effect. Therefore, the losses
in question must be counterbalanced by other and indirect methods. These
will be found mainly in the following considerations: the amount of the new
taxes; the gradual method of imposing them; and their socially beneficial
results.

Amount of Taxes Practically Transferable

According to Professor King's computations, the total rent of land in the
United States in 1910 was $2,673,900,000, while the total expenditures of
national, state, county and city governments were $2,591,800,000.[100] In
his opinion (p. 162) "the rent would have been barely sufficient to pay off
the various governmental budgets as at present constituted, and with the
growing concentration of activities in the hands of the government, it
appears that rent will soon be a quantity far too small to meet the required
changes. With increasing pressure on our natural resources, however, it is
probable that the percentage of the total income paid for rent will gradually
increase and, since this is true, the lag behind the growing governmental
expenses will be considerably less than would otherwise be the case."
A change in our fiscal system providing for the immediate derivation of all
revenues from land taxes would, therefore, involve the confiscation of all
rent, and the destruction of all private land values. Land would be worth
nothing to the owners when its entire annual return was taken by the State
in the guise of taxes. Even if the process of imposing the new taxes on land
were extended over a long term of years the same result would be reached
in the end; for whatever increase had taken place in the economic value of
land during the process would in all probability have been neutralised by
the increase in governmental expenditures. It is evident, therefore, that the
proposal to put all taxes on land must be rejected on grounds of both morals
and expediency.
Let us suppose that all national revenues continued, as now, to be raised
from other sources than land, and that all state, county, and city revenues
remained as they are, except those derived from the general property tax.
This would mean that all the following taxes would be unchanged: all

federal taxes, the taxes on licenses of all kinds, all taxes on business,
incomes, and inheritances, and all special property taxes. If, then, the whole
of the general property tax were concentrated on land; that is, if all the taxes
on improvements and on all forms of personal property were legally shifted
to land,—the entire revenue to be raised from land would in 1912 have
amounted to $1,349,841,038.[101] This is slightly more than one-half of
Professor King's estimate of the total rent for 1910, which was
$2,673,900,000. But this figure equals four per cent. of the land values of
the country; hence the concentration of the general property tax on land
would mean a tax rate of two per cent. on the full value of the land.
How much would this change increase the present rate of land taxes, and
decrease existing land values? While no accurate and definite answer can be
given to either of these questions, certain approximations can be attempted
which should be of considerable service.
In 1912 the average tax rate on the assessed valuation of all goods subject
to the general property tax was .0194, or $19.40 per thousand dollars.[102]
The assessed valuation of taxed real property and improvements (land,
buildings, and other improvements) was nearly fifty-two billion dollars,
while the true value of the same property was nearly ninety-eight and one-
half billions.[103] Consequently, the actual tax rate of .0194 on the assessed
valuation was exactly one per cent. on the true value of real estate. On the
assumption that both land and improvements were undervalued to the same
extent, the land tax was one per cent. of the full value of the land. If now we
take Thomas G. Shearman's estimate, that land values form sixty per cent.
of the total value of real estate, we find that the taxes derived from land
constituted only forty-four per cent. of the total revenues raised by the
general property tax. To concentrate the whole of the general property tax
on land, by transferring thereto the taxes on improvements and on personal
property, would, accordingly, cause the land tax to be somewhat more than
doubled. It would be slightly above two per cent. on the full value of the
land. This is the same estimate that we obtained above by a different
process; that is, by comparing Professor King's estimate of land value and
rent with the total revenues derived from the general property tax.
However, it is not improbable that sixty per cent. is too low an estimate of
the ratio of land values to entire real estate values. In 1900, farm land and

improvements, exclusive of buildings, formed 78.6 per cent. of the value of
real estate, i.e., land, improvements, and buildings. In 1910, the per cent.
was a little less than 82. Now it is quite unlikely that the value of non-
building improvements on farms amounted to the difference between sixty
per cent. and seventy-eight per cent. in 1900, or between sixty per cent. and
eighty-two per cent. in 1910. Hence the value of farm land is something
more than sixty per cent. of farm real estate. On the other hand, the value of
factory land in 1900 formed only 41.5 per cent. of the total value of factory
land and buildings, while the value of city and town lots in five rural states
varied from 34 to 62 per cent. of this species of real estate.[104] In Greater
New York land constitutes 61 per cent. of real estate values.[105] Owing to
the lack of data, the average ratio for all kinds of real estate for the whole
country is impossible of determination. If the estimate of seventy per cent.
be adopted, which is probably the upper limit of the average proportion
between land values and real estate values throughout the country, the
portion of the general property tax now paid by land amounts to about fifty-
two per cent. Consequently the imposition of the whole general property tax
on land would not quite double the present rate on land. To the first of the
two questions raised above the answer can be given with a fair amount of
confidence that the transfer of improvement and personal property taxes to
land would cause land taxes to be about twice what they are at present.
To the second question, concerning the extent to which land values would
fall in consequence of the heavier taxes, the answer must be somewhat less
definite. The added land taxes would be about one-half the present general
property taxes, or $675,000,000. This is about one per cent. the total land
values of the country. One per cent. of land values capitalised at five per
cent. represents a depreciation of twenty per cent. in the value of land;
capitalised at four per cent., it represents a depreciation of twenty-five per
cent. For example; if land worth one hundred dollars an acre returns to its
owner a net income of five dollars annually, the appropriation of one dollar
by a new tax will leave a net revenue of only four dollars; capitalised at the
current rate of five per cent., this represents only eighty dollars of land
value, or a depreciation of twenty per cent. If the land has the same value of
one hundred dollars, and still yields only four dollars revenue, a deduction
of one dollar in new taxes will leave only three dollars net; capitalised at the
current rate of four per cent., this represents only seventy-five dollars of

land value, or a depreciation of twenty-five per cent. Using the other
method of calculation, which estimated the present tax rate on the full value
of land at one per cent., we get exactly the same results; namely, the new
tax is one per cent., which is equivalent to a depreciation of twenty per cent.
or of twenty-five per cent., according as we assume an interest rate of five
per cent. or of four per cent. Suppose, however, that the assessors do not
undervalue land to the extent that we have been assuming; suppose that the
present rate of .0194 on assessed valuation is equivalent to, not merely one
per cent., but one and one-half per cent. of the full value of land. In that
hypothesis the additional tax would likewise be one and one-half per cent.,
which capitalised at five per cent, would represent a depreciation of thirty
per cent., and at four per cent. a depreciation of thirty-seven and one-half
per cent. Combining in one generalisation the various suppositions made in
this paragraph, we estimate the depreciation of land values resulting from
the proposed tax transfer as somewhere between twenty and forty per cent.
We have considered two hypothetical transfers of taxes to land. The first we
found to be out of the question because it would appropriate the whole of
the rent and destroy all private land values. The second would apparently
amount to two per cent. of the value of land, and cause land values to
depreciate from twenty to forty per cent. It is unnecessary to consider the
probable effects of any plan that would involve heavier land taxes than the
second; that is, the scheme of imposing all the general property tax on land;
for it represents the extreme feasible and fair limit of the movement within,
at any rate, the next fifteen or twenty years.
Even this degree of tax transference would be unjust to the landowners if it
were brought about at once. No social or other considerations exist that
would justify a depreciation in land values of from twenty to forty per cent.
If, however, the process were extended over a period of, say, twenty years,
the decline would be only one or two per cent. annually, which is
considerably less than the rate at which farm lands and the land in large
cities have risen in value during recent years. Under such an arrangement
the great majority of owners would probably find that the depreciation
caused by the heavier land taxes, had been more than offset by the upward
tendency resulting from the increased demand for land.

Nevertheless, there would still be positive losses of the three kinds
described a few pages back; namely, to owners who sold land below the
price that they had paid for it; to owners who sold vacant land at a price
insufficient to cover accumulated interest on the investment; and to owners
whose aggregate tax burdens were increased. Some degree of each of these
sorts of losses would be due specifically to the new land taxes. As noted
above, public compensation in all such cases would be impracticable.
Consequently the justification of a law that inflicts such losses must be
found, if it exists, in social considerations.

The Social Benefits of the Plan

These may be summed up under three heads: making land easier to acquire;
cheapening the products and rent of land; and reducing the burdens of
taxation borne by the poorer and middle classes. An increase in the tax on
land would reduce its value and price, or at least cause the price to be lower
than it would have been in the absence of the tax. This does not mean that
land would be more profitable to the purchaser, since he is enabled to buy it
at a lower price only because it yields him less net revenue, or because it is
less likely to increase in value. The value of land is always determined by
its revenue-producing power, and by its probabilities of price-appreciation.
Consequently, what the purchasers would gain by the lower price resulting
from the new tax, they would lose when they came to pay the tax itself, and
when they found the chances of value increases diminished. If a piece of
land which brings a return of five dollars a year costs one hundred dollars
before the new tax of one per cent. is imposed, and can be bought for eighty
dollars afterward, the net interest on the purchase price has not changed. It
is still five per cent. Hence the only advantage to the prospective purchaser
of land in getting it cheaper consists in the fact that he can obtain it with a
smaller outlay of capital. For persons in moderate circumstances this is a
very important consideration.
In the second place, higher taxes would cause many existing owners either
to improve their land, in order to have the means of meeting the added
fiscal charges, or to sell it to persons who would be willing to make
improvements. And the desire to erect buildings and other forms of
improvements would be reinforced by the reduction or abolition of taxes on

those kinds of personal property which consist of building materials. An
increase in the rapidity of improvements on land would mean an increase in
the rate at which land was brought into use, and therefore an unusual
increase in the volume of products. This virtual increase in the supply of
land, and actual increase in the supply of products, would cause a fall in
three kinds of prices: the price of products, the rent of land, and the price of
land. The last named reduction would be distinct from the reduction of land
value caused in the first instance by the imposition of the tax.
In the third place, the reduction, and finally the abolition, of taxes on
improvements and personal property would be especially beneficial to the
poorer and middle classes because they now pay a disproportionate share of
these charges. Lower taxes on dwellings would mean lower rents for all
persons who did not own their homes, and lower taxes for all owners whose
residence values were unusually large relatively to their land values. And
the tendency to lower rents on dwellings would be reinforced by the lower
cost of building materials resulting, as noted above, from the increased
supply and the lower tax on this form of personal property. Lower taxes on
that species of personal property which consists of consumers' goods, such
as household furniture and wearing apparel, would lessen the present
inequity of taxation because this class of goods is reached to a much greater
extent in the case of the poor than in the case of the rich. It is not easy to
conceal or to undervalue a relatively small number of simple and standard
articles; but diamonds, costly furniture, and luxurious wardrobes can be
either hidden, or certified to the assessor at a low valuation. As for those
forms of personal property which are of the nature of capital and other
profit producing goods, such as machinery and tools of all kinds, productive
animals, money, mortgages, securities, the stocks of goods held by
manufacturers and merchants, and likewise buildings which are used for
productive purposes,—the taxes on all these kinds of property are for the
most part shifted to the consumer. The latter ultimately pays the tax in the
form of higher prices for food, clothing, shelter, and the other necessaries
and comforts of life.[106] Now a tax on consumption is notoriously unfair to
the poorer and middle classes because it affects a greater portion of their
total expenditures, and takes a larger per cent. of their income than in the
case of the rich. Hence the removal of the taxes specified in this paragraph

would be at once the abolition of a fiscal injustice, and a considerable
assistance to the less fortunate classes.
All those landowners who occupied rented dwellings would benefit by the
reduction in house rent, and all landowners without exception would reap
some advantage from the reduction or abolition of the taxes on consumers'
goods and on the various forms of producers' goods. It is not improbable
that a considerable proportion of them would gain as much in these respects
as they would lose in the capacity of landowners.
Would the social benefits summarily described in the foregoing paragraphs
be sufficient to justify the increased land taxes in the face of the losses that
would be undergone by some landowners in the three ways already
specified? In view of our ignorance concerning the probable amount of
benefits on the one hand and losses on the other, it is impossible to give a
dogmatic answer. However, when we reflect on the manifold social evils
that are threatened by a rapid and continuous increase in land values, and
the resulting decrease in the proportion of the population that can hope to
participate in the ownership of land, we are forced to conclude that some
means of checking both tendencies is urgently necessary for the sake of
social justice and social peace. The project that we have been considering;
namely, the transfer of taxes on improvements and on personal property to
land by a process extending over twenty years, seems to involve a
sufficiently large amount of advantage and a sufficiently small amount of
disadvantage to justify systematic and careful experiment.

A Supertax on Large Holdings

Every estate containing more than a maximum number of acres, say, ten
thousand, whether composed of a single tract or of several tracts, could be
compelled to pay a special tax in addition to the ordinary tax levied on land
of the same value. The rate of this supertax should increase with the size of
the estate above the fixed maximum. Through this device large holdings
could be broken up, and divided among many owners and occupiers. For
several years it has been successfully applied for this purpose in New
Zealand and Australia.[107] Inasmuch as this tax exemplifies the principle of
progression, it is in accord with the principles of justice; for relative ability

to pay is closely connected with relative sacrifice. Other things being equal,
the less the sacrifice involved, the greater is the ability of the individual to
pay the tax. Thus, the man with an income of ten thousand dollars a year
makes a smaller sacrifice in giving up two per cent. of it than the man
whose income is only one thousand dollars; for the latter case the twenty
dollars surrendered represent a privation of the necessaries or the
elementary comforts of life, while the two hundred dollars taken from the
rich man would have been expended for luxuries or converted into capital.
While the incomes of both are reduced in the same proportion, their
satisfactions are not diminished to the same degree. The wants that are
deprived of satisfaction are much less important in the case of the richer
than in that of the poorer man. Hence the only way to bring about anything
like equality of sacrifice between them is to increase the proportion of
income taken from the former. This means that the rate of taxation would be
progressive.[108]
It is in order to object that the principle of progression should not be applied
to the taxation of great landed estates, since a considerable part of them is
unproductive, and consequently does not directly affect sacrifice. But the
same objection can be urged against any taxation of unoccupied land. The
obvious reply is that the equal taxation of unproductive with productive
land is justified by social reasons, chiefly, the unwisdom of permitting land
to be held out of use. The same social reasons apply to the question of
levying an exceptionally high tax on large estates, even though they may at
present produce no revenue.
While the tax is sound in principle, it is probably not much needed in
America in connection with agricultural or urban land. Its main sphere of
usefulness would seem to be certain great holdings of mineral, timber, and
water power lands. "There are many great combinations in other industries
whose formation is complete. In the lumber industry, on the other hand, the
Bureau now finds in the making a combination caused, fundamentally, by a
long standing public policy. The concentration already existing is
sufficiently impressive. Still more impressive are the possibilities for the
future. In the last forty years concentration has so proceeded that 195
holders, many interrelated, now have practically one-half of the privately
owned timber in the investigation area (which contains eighty per cent. of
the whole). This formidable process of concentration, in timber and in land,

clearly involves grave future possibilities of impregnable monopolistic
conditions, whose far reaching consequences to society it is now difficult to
anticipate fully or to overestimate."[109] In January, 1916, the Secretary of
Agriculture called the attention of Congress to the fact that a small number
of corporations closely associated in a policy of community of interest were
threatening to secure and exercise a monopoly over the developed water
power of the country. Ninety per cent. of the anthracite coal lands of
Pennsylvania are owned or controlled by some nine railroads acting as a
unit in all important matters. For situations of this kind a supertax on large
estates would seem to hold the promise of a large measure of relief.
To sum up the main conclusions of this very long chapter: Exceptionally
valuable lands, as those containing timber, minerals, oil, gas, phosphate,
and water power, which are still under public ownership should remain
there. Through a judicious system of loans, deserving and efficient persons
should be assisted to get possession of some land. Municipalities should
lease rather than sell their lands, and should strive to increase their
holdings. To take all the future increases in the value of land would be
morally lawful, provided that compensation were given to owners who
thereby suffered positive losses of interest or principal. To take a small part
of the increase, and to transfer very gradually the taxes on improvements
and on personal property to land, would probably be just, owing to the
beneficial effects upon public welfare. A supertax on large holdings of
exceptionally valuable and scarce land would likewise be beneficial and
legitimate.[110]

REFERENCES ON SECTION I

Ashley: The Origin of Property in Land. London; 1892.
Laveleye: Primitive Property. London; 1878.
Whittaker: The Taxation, Tenure, and Ownership of Land. London;
1914.
Preuss: The Fundamental Fallacy of Socialism. St. Louis; 1908.

George: Progress and Poverty; and A Perplexed Philosopher.
Marsh: Land Value Taxation in American Cities. N. Y.; 1911.
Fillebrown: A Single Tax Handbook for 1913. Boston; 1912.
Young: The Single Tax Movement in the United States. Princeton;
1916.
Shearman: Natural Taxation. N. Y.; 1898.
Mathews: Taxation and the Distribution of Wealth. N. Y.; 1914.
Cathrein: Das Privatgrundeigenthum und seine Gegner. Freiburg;
1909.
Fallon: Les Plus-Values et l'Impot. Paris; 1914.
Nearing: Anthracite. Philadelphia; 1916.
Haig: Final Report of the Committee on Taxation of the City of New
York; 1916.
The exemption of Improvements from Taxation in Canada and U. S.;
1915.
Some Probable Effects of Exemption in City of New York; 1915.
Kelleher: Private Ownership. Dublin; 1911.
Proceedings of the 1913 Meeting of the American Economic
Association.
U. S. Commissioner of Corporations: Reports on the Lumber,
Petroleum, Steel, and Water Power of the United States.
Seligman: Essays in Taxation; Shifting and Incidence of Taxation; and
Progressive Taxation in Theory and Practice.
Also the works of Taussig, Devas, Carver, Pesch, King, Vermeersch,
Willoughby, and the Commission on Industrial Relations, all of which
are cited at the end of the introductory chapter.

SECTION II

THE MORALITY OF PRIVATE CAPITAL AND
INTEREST

CHAPTER IX
THE NATURE AND THE RATE OF INTEREST

Interest denotes that part of the product of industry which goes to the
capitalist. As the ownership of land commands rent, so the ownership of
capital commands interest; as rent is a price paid for the use of land, so
interest is a price paid for the use of capital.
However, the term capital is less definite and unambiguous, both in popular
and in economic usage, than the word land. The farmer, the merchant, and
the manufacturer often speak of their land, buildings, and chattels as their
capital, and reckon the returns from all these sources as equivalent to a
certain per cent. of interest or profit. This is not technically correct; when
we use the terms capital and interest we should exclude the notions of land
and rent.

Meaning of Capital and Capitalist

Capital is ordinarily defined as, wealth employed directly for the production
of new wealth. According as it is considered in the abstract or the concrete,
it is capital-value or capital-instruments. For example, the owner of a
wagon factory may describe his capital as having a value of 100,000
dollars, or as consisting of certain buildings, machines, tools, office
furniture, etc. In the former case he thinks of his capital as so much abstract
value which, through a sale, he could take out of the factory, and put into
other concrete capital forms, such as a railroad or a jobbing house. In the
latter case he has in mind the particular instruments in which his capital is
at present embodied. The capital-value concept is the more convenient, and
is usually intended when the word capital is used without qualification. It is
also the basis upon which interest is reckoned; for the capitalist does not
measure his share of the product as so many dollars of rent on his capital-
instruments, but as so many per cent. on his capital-value.

Capitalists are of two principal kinds: those who employ their own money
in their own enterprises; and those who lend their money to others for use in
industry. The former may be called active capitalists, the latter loan-
capitalists. Perhaps a majority of active capitalists use some borrowed
money in their business. To the lenders of this borrowed money or capital
they turn over a part of the product in the form of interest. When, therefore,
interest is defined as the share of the product that goes to the capitalist, it is
the owner of capital-value rather than of capital-instruments that is meant.
For the man who has loaned 50,000 dollars at five per cent. to the wagon
manufacturer is not, except hypothetically, the owner of the buildings which
have been erected with that money. These are owned (subject possibly to a
mortgage) by the borrower, the active capitalist. But the abstract value
which has gone into them continues to be the property of the lender. As
owner thereof, he, instead of the active capitalist, receives the interest that is
assigned to this portion of the total capital. Hence interest is the share of the
product that is taken by the owner of capital, whether he employs it himself
or lends it to some one else. While the fundamental reason of interest is the
fact that certain concrete instruments are necessary to the making of the
product, interest is always reckoned on capital-value, and goes to the owner
of the capital-value. It goes to the man whose money has been put into the
instruments, whether or not he is the owner of the instruments.

Meaning of Interest

Interest is the share of the capitalist as capitalist. The man who employs his
own capital in his own business receives therefrom in addition to interest
other returns. Let us suppose that some one has invested 100,000 dollars of
borrowed money and 100,000 dollars of his own money in a wholesale
grocery business. At the end of the year, after defraying the cost of labour,
materials, rent, repairs, and replacement, his gross returns are 15,000
dollars. Out of this sum he must pay five thousand dollars as interest on the
money that he has borrowed. This leaves him a total amount of ten thousand
dollars, as his share of the product of the industry. Since he could command
a salary of three thousand dollars if he worked for some one else, he regards
his labour of directing his own business as worth at least this sum.
Deducting it from ten thousand dollars, he has left seven thousand dollars,
which must in some sense be accredited as payment for the use of his own

capital. However, it is not all pure interest; for he runs the risk of losing his
capital, and also of failing to get the normal rate of interest on it during
future unprosperous years. Hence he will require a part of the seven
thousand dollars as insurance against these two contingencies. Two per
cent. of his capital, or two thousand dollars, is not an excessive allowance.
If the business did not provide him with this amount of insurance he would
probably regard it as unsafe, and would sell it and invest his money
elsewhere. Subtracting two thousand dollars from seven thousand, we have
five thousand left as pure interest on the director's own capital. This is
equivalent to five per cent., which is the rate that he is paying on the capital
that he has borrowed. If he could not get this rate on his own money he
would probably prefer to become a lender himself, a loan capitalist instead
of an active capitalist. This part of his total share, then, and only this part, is
pure interest. The other two sums that he receives, the three thousand
dollars and the two thousand dollars, are respectively wages for his labour
and insurance against his risks. Sometimes they are classified together
under the general name of profits.
Let us suppose, however, that the gross returns are not 15,000 dollars, but
17,000. How is the additional sum to be denominated? In strict economic
language it would probably be called net profits, as distinguished from
normal or necessary profits, which comprise wages of direction and
insurance against loss. Sometimes it is called interest. In that case the owner
of the store would receive seven instead of five per cent, on his own capital.
Whether the extra two per cent. (2,000 dollars) be called net profits or
surplus interest, is mainly a matter of terminology. The important thing is to
indicate clearly that these terms designate the surplus which goes to the
active capitalist in addition to necessary profits and necessary interest.
At the risk of wearisome repetition, one more example will be given to
illustrate the distinction between interest and the other returns that are
received in connection with capital. The annual income from a railway bond
is interest on lender's capital, and consequently pure interest. Ordinarily the
bondholder is adequately protected against the loss of his capital by a
mortgage on the railroad. On the other hand, the holder of a share of
railway stock is a part owner of the railroad, and consequently incurs the
risk of losing his property. Hence the dividend that he receives on his stock
comprises interest on capital plus insurance against loss. It is usually one or

two per cent. higher than the rate on the bonds. Since the officers and
directors are the only shareholders who perform any labour in the
management of the railroad, only they receive wages of management.
Consequently the gross profits are divided into interest and dividends at
fixed rates, and fixed salaries. When a surplus exists above these
requirements it is not, as a rule, distributed among the stockholders
annually. In railroads, therefore, and many other corporations, interest is
easily distinguished from those other returns with which it is frequently
confused in partnerships and enterprises carried on by individuals.

The Rate of Interest

Is there a single rate of interest throughout industry? At first sight this
question would seem to demand a negative answer. United States bonds pay
about two per cent.; banks about three per cent.; municipal bonds about four
per cent.; railway bonds about five per cent.; the stocks of stable industrial
corporations about six per cent. net; real estate mortgages from five to
seven per cent.; promissory notes somewhat higher rates; and pawnbrokers'
loans from twelve per cent. upwards. Moreover, the same kind of loans
brings different rates in different places. For example, money lent on the
security of farm mortgages yields only about five per cent. in the states of
the East, but seven or eight per cent. on the Pacific coast.
These and similar variations are differences not so much of interest as of
security, cost of negotiation, and mental attitude. The farm mortgage pays a
higher rate than the government bond partly because it is less secure, partly
because it involves greater trouble of investment, and partly because it does
not run for so long a time. For the same reasons a higher rate of interest is
charged on a promissory note than on a bank deposit certificate. Again, the
lower rates on government bonds and bank deposits are due in some degree
to the peculiar attitude of that class of investors whose savings are small in
amount, who are not well aware of the range of investment opportunities,
and to whom security and convenience are exceptionally important
considerations. If such persons did not exist the rates on government bonds
and savings deposits would be higher than they actually are. The higher
rates in a new country on, say, farm mortgages are likewise due in part to
psychical peculiarities. Where men are more speculative and more eager to

borrow money for industrial purposes, the demand for loans is greater
relatively to the supply than in older and more conservative communities.
Therefore, the price of the loans, the rate of interest, is higher.
In one sense it would seem that the lowest of the rates cited above, namely,
that on United States bonds, represents pure interest, and that all the other
rates are interest plus something else. Nevertheless, the sums invested in
these bonds form but a very small part of the whole amount of money and
capital drawing interest, and they come from persons who do not display
the average degree either of business ability or of willingness to take risks.
Hence it is more convenient and more correct to regard as the standard rate
of interest in any community that which is obtained on first class industrial
security, such as the bonds of railroads and other stable corporations, and
mortgages on real estate. Loans to these enterprises are subject to what may
properly be called the average or prevailing industrial risks, are negotiated
in average psychical conditions, and embrace by far the greater part of all
money drawing interest; consequently the rate that they command may be
looked upon as in a very real and practical sense normal. While this
conception of the normal rate is in a measure conventional, it accords with
popular usage. It is what most men have in mind when they speak of the
prevailing rate of interest.
The prevailing or standard rate in any community can usually be stated with
a sufficient approach to precision to be satisfactory for all practical
purposes. In all the Eastern States it is now about five per cent.; in the
Middle West it is somewhere between five and six per cent.; on the Pacific
coast it is between six and seven per cent. The supreme court of Minnesota
decided in 1896 that, in view of the actual rates of interest then obtaining,
five per cent. on the reproduction cost of railroads was a fairly liberal
return, and could be adopted by the state authorities in fixing charges for
carrying freight and passengers.[111] A few years later the Michigan tax
commission allowed the railroads four per cent. on the reproduction cost of
their property, on the ground that investments which yielded that rate in
addition to the usual tax of one per cent. (or five per cent. before the
deduction of the tax) stood at par on the stock market.[112] In other words,
the prevailing rate was five per cent. At the beginning of the year 1907, the
railroad commission of Wisconsin fixed six per cent. as the return to which
the stockholders of railroads were entitled, because this was about the

return which investors generally were able to get on that kind of security. In
the view of the Commission, the current rate of interest on railroad bonds,
and similar investments, was about five per cent.[113] The significance of
these decisions by the public authorities of three states is found not so much
in the particular rates which they sanctioned as in the fact that they were
able to determine a standard or prevailing rate. Therefore a standard rate
exists. At the same time it is interesting to note that in all three states the
rate of industrial interest was declared to be about the same, that is, five per
cent. Perhaps it is safe to say that, throughout the greater part of the
industrial field of America, five or six per cent. is the prevailing rate of
interest.
What causes the rate to be five per cent., or six per cent., or any other per
cent.? Briefly stated, it is the interplay of supply and demand. Since interest
is a price paid for the use of a thing, i.e., capital, its rate or level is
determined by the same general forces that govern the price of wheat, or
shoes, or hats, or any other commodity that is bought and sold in the
market. The rate is five or six per cent. because at that rate the amount of
money offered by lenders equals the amount demanded by borrowers.
Should the amount offered at that rate increase without a corresponding
increase in the amount demanded, the rate would fall, just as it would rise
under opposite conditions.
Supply and demand, however, are merely the immediate forces. They are
themselves the outcome or resultant of factors more remote. On the side of
supply, the principal remote forces which regulate the rate of interest are:
the industrial resources of the community, and the relative strength of its
habits of saving and spending. On the side of demand, the chief ultimate
factors are: the productivity of capital-instruments, the comparative
intensity of the social desires of investing and lending, and the supplies of
land, business ability and labour. Each of these factors exercises upon the
rate of interest an influence of its own, and each of them may be assisted or
counteracted by one or more of the others. Precisely what rate will result
from any given condition of the factors, cannot be stated beforehand, for the
factors cannot be measured in such a way as to provide a basis for this kind
of forecast. All that can be said is that, when changes occur on the side of
either demand or supply, there will be a corresponding change in the rate of
interest, provided that no neutralising change takes place on the other side.

CHAPTER X
THE ALLEGED RIGHT OF LABOUR TO THE ENTIRE PRODUCT

OF INDUSTRY

In a preceding chapter we saw that Marxian Socialism is logically debarred
from passing moral judgment upon any social institution or practice.[114] If
social institutions are produced necessarily by socio-economic forces they
are neither morally good nor morally bad. They are quite as unmoral as rain
and snow, verdure and decay, tadpoles and elephants. Consistent Socialists
cannot, therefore, censure on purely ethical grounds the system of private
capital and interest.
This logical requirement of the theory of economic determinism is
exemplified in much of the rigidly scientific discussions of Socialists. Marx
maintained that the value of commodities is all determined and created by
labour, and that interest is the surplus which the labourer produces above
the cost of his keep; nevertheless Marx did not formally assert that the
labourer has a moral right to the whole product, nor that interest is theft. He
set forth his theories of value and surplus value as positive explanations of
economic facts, not as an ethical evaluation of human actions. His object
was to show the causes and nature of value, wages, and interest, not to
estimate the moral claims of the agents of production, or the morality of the
distributive process. In his formal discussion of the theory of value and of
surplus value, Marx said nothing that implied a belief in genuine moral
responsibility, or that contradicted the principles of philosophical
materialism and economic determinism. It is, therefore, quite erroneous to
infer that, since the Marxian theory attributes all value and products to the
action of labour, Marxian Socialists must condemn the interest-taker as a
robber.
Neither Marx nor any other Socialist authority, however, has always held
consistently to this purely positive method of economic exposition. When
they declare that the labourer is "exploited," that surplus value is "filched"

from him, that the capitalist is a "parasite," etc., they are expressing and
conveying distinct moral judgments. In their more popular writings
Socialist authors do not seriously attempt to observe the logical
requirements of their necessitarian philosophy. They assume the same
ethical postulates, and give expression to the same ethical intuitions as the
man who believes in the human soul and free will.[115] And the great
majority of their followers likewise regard the question of distribution as a
moral question, as a question of justice. In their view the labourer not only
creates all value, but has a just claim to the whole product.

The Labour Theory of Value

This doctrine is sometimes formally based upon the Marxian theory of
value, and is sometimes defended independently of that theory. In the
former case its groundwork is about as follows: By eliminating the factors
of utility and scarcity, Marx found that the only element common to all
commodities is labour, and then concluded that labour is the only possible
explanation, creator, and determinant of value.[116] Since capital, that is,
concrete capital, is a commodity, its value is likewise determined and
created by labour. Since it cannot create value, for only labour has that
power, it can contribute to the product of the productive process in which it
is engaged only as much value as it originally received. Since it is only a
reservoir of value, it cannot transfer more value than it holds and possesses.
In the words of Marx, "the means of production transfer value to the new
product, so far only as during the labour-process they lose value in the
shape of the old use-value. The maximum loss of value that they can suffer
in the process is plainly limited by the amount of the original value with
which they came into the process, or, in other words, by the labour time
necessary for their production. Therefore, the means of production can ever
add more value to the product than they themselves possess independently
of the process in which they assist. However useful a given kind of raw
material, or a machine, or other means of production may be, though it may
cost 150 pounds, or say 500 days' labour, yet it cannot, under any
circumstances, add to the value of the product more than 150 pounds."[117]
To view the matter from another angle: capital contributes to the product
only sufficient value to pay for its own reproduction. When, as is the

normal usage, the undertaker has deducted from the product sufficient value
or money to replace the deteriorated or worn out machine, or other concrete
capital, all the remaining value in the product is due specifically to labour.
When, therefore, the capitalist goes further, and appropriates from the
product interest and profits, he takes a part of the value that labour has
created. He seizes the surplus value which labour has produced in excess of
the wages that it receives. In ethical terms, he robs the labourers of a part of
their product.
It is not necessary to introduce any extended refutation of this arbitrary,
unreal, and fantastic argument. "The theory that labour is the sole source of
value has few defenders to-day. In the face of the overwhelming criticism
which has been directed against it, even good Marxists are forced to
abandon it, or to explain it away."[118] It may, however, be useful to recount
very briefly the facts which disprove the theory. Labour creates some things
which have no value, as wooden shoes in a community that does not desire
wooden shoes; some things have value, exchange value, although no labour
has been expended upon them, as land and minerals; the value of things is
sometimes greater, sometimes less, proportionately, than the labour
embodied in them; for example, paintings by the old masters, and last year's
styles of millinery; and, finally, the true determinants of value are utility
and scarcity. If it be objected that Marx was aware of these two factors, the
reply is that he either restricted them to the function of conditions rather
than efficient causes of value, or attributed to them an influence that is
inconsistent with his main theory that labour is the sole determinant of
value. Indeed, the contradictions into which Marx was led by the theory are
its sufficient refutation.[119]
With the destruction of the labour theory of value, the Marxian contention
that capital contributes only its own original value to the product is likewise
overthrown. The same conclusion is reached more directly by recalling the
obvious facts of experience that, since the joint action of both capital and
labour is required to bring into being every atom of the product, each is in
its own order the cause of the whole product, and the proportion of the
whole that is specifically due to the casual influence of either is as
incapable of determination as the procreative contribution of either parent
to their common offspring. The productive process carried on by labour and

capital is virtually an organic process, in which the precise amount
contributed by either factor is unknown and unknowable.
In so far, therefore, as the alleged right of labour to the whole product is
based upon the Marxian theory of value, it has not a shadow of validity.

The Right of Productivity

But the claim is not necessarily dependent upon this foundation. Those
Socialists who have abandoned the labour theory of value can argue that the
labourer (including the active director of industry) is the only human
producer, that the capitalist as such produces nothing, and consequently has
no moral claim to any part of the product. Whatever theory of value we may
adopt, or whether we adopt any, we cannot annul the fact that interest does
not represent labour expended upon the product by the capitalist.
Nevertheless, this fact does not compel the conclusion that the share of the
product now taken by the capitalist belongs of right to the labourer.
Productivity does not of itself create a right to the product. It is not an
intrinsic title. That is to say, a right to the product is not inherent in the
relation between product and producer. It is determined by certain extrinsic
relations. When Brown makes a pair of shoes out of materials that he has
stolen, he has not a right to the whole product; when Jones turns out a
similar product from materials that he has bought, he becomes the exclusive
owner of the shoes. The intrinsic relation of productivity is the same in both
cases. It is the difference of extrinsic relation, namely, the relation between
the producer and the material, that begets the difference between the moral
claims of the two producers upon the product.
The right of the producer is conditioned by certain other and more
fundamental relations. Why has Jones a right to the shoes that he has made
out of materials that he has bought? Not because he needs them; he is not
alone in this condition. The ultimate reason and basis of his ownership is to
be sought in the practical requirements of an equitable social distribution.
Unless men receive an adequate return for their labour, they will not be able
to satisfy their wants in a regular and sufficient manner. If they are forced to
labour for others without compensation, they are deprived of the
opportunity to develop their personality. They are treated as mere

instruments to the welfare of beings who are not their superiors, but their
moral and juridical equals. Their intrinsic worth and sacredness of
personality is outraged, their essential equality with their fellows is
disregarded, and their indestructible rights are violated. On the other hand,
when a producer, such as Jones, gets possession of his product, he
subordinates no human being to himself, deprives no man of the
opportunity to perform remunerative labour, nor appropriates an
unreasonable share of the common bounty of the earth. He has a right to his
product because this is one of the reasonable methods of distribution.
In fact, it is the exigencies of reasonable distribution that constitute the
fundamental justification of every title of ownership. The title of purchase
by which a man claims the hat that he wears; the title of inheritance by
which a son claims the house that once belonged to his father; the title of
contract through which a labourer gets wages, a merchant prices, and a
landlord rent,—are all valid simply because they are reasonable devices for
enabling men to obtain the goods of the earth for the satisfaction of their
wants. All titles of property, productivity included, are conventional
institutions which reason and experience have shown to be conducive to
human welfare. None of them possesses intrinsic or metaphysical validity.
[120]

Therefore, the Socialist cannot establish the right of labour to the full
product of industry until he proves that this so-called right could be reduced
to practice consistently with individual and social welfare. In other words,
he must show that to give the entire product to the labourer would be a
reasonable method of distribution. Now the arrangement by which the
Socialist proposes to award the whole product of labour is the collective
ownership and operation of the means of production, and the social
distribution of the product. If this system would not enable the labourer and
the members of society generally to satisfy their wants to better advantage
than is possible under the present system, the contention that the labourer
has a right to the entire product of industry falls to the ground. The question
will be considered in the following chapter.

CHAPTER XI
THE SOCIALIST SCHEME OF INDUSTRY

"Never has our party told the workingman about a 'State of the future,'
never in any way than as a mere utopia. If anybody says: 'I picture to myself
society after our programme has been realised, after wage labour has been
abolished, and the exploitation of men has ceased, in such and such a
manner,—' well and good; ideas are free, and everybody may conceive the
Socialist State as he pleases. Whoever believes in it may do so; whoever
does not, need not. These pictures are but dreams, and Social Democracy
has never understood them otherwise."[121]
Such is the official attitude of Socialism toward descriptions of its
contemplated industrial organisation. The party has never drawn up nor
approved any of the various outlines of this sort which have been defended
by individual Socialists. It maintains that it cannot anticipate even the
essential factors in the operation of a social and industrial system which
will differ so widely from the one that we have to-day, and which will be so
profoundly determined by events that are in the nature of the case
impossible to prognosticate.

Socialist Inconsistency

From the viewpoint of all but convinced Socialists, this position is
indefensible. We are asked to believe that the collective ownership and
operation of the means of production would be more just and beneficial
than the present plan of private ownership and operation. Yet the Socialist
party refuses to tell us how the scheme would bring about these results;
refuses to give us, even in outline, a picture of the machine at work. As
reasonably might we be expected to turn the direction of industry over to a
Rockefeller or a Morgan, making an act of faith in their efficiency and
fairness. We are in the position of a man who should be advised to demolish
an unsatisfactory house, without receiving any solid assurance that the

proposed new one would be as good. To our requests for specific
information about the working of the new industrial order the Socialists, as
a rule, answer in terms of prophesied results. They leave us in the dark
concerning the causes by which these wonderful results are to be produced.
From the viewpoint of the confirmed Socialist, however, this failure to be
specific is not at all unreasonable. He can have faith in the Socialist system
without knowing beforehand how it will work. He believes in its efficacy
because he believes that it is inevitable. In the words of Kautsky, "what is
proved to be inevitable is proved not only to be possible, but to be the only
possible outcome."[122] The Socialist believes that his scheme is inevitable
because he thinks that it is necessarily included in the outcome of economic
and social evolution.
Neither the premises nor the conclusion of this reasoning is valid. The
doctrines of economic determinism, the class struggle, the concentration of
capital, the disappearance of the middle classes, the progressive
pauperisation of the working classes, and all the other tenets of the Socialist
philosophy, have been thoroughly discredited by the facts of psychology,
the experience of the last half century, and the present trend of industrial
and social forces.[123] Even if the Socialist outcome were inevitable, it
would not necessarily be an improvement on the present system. It might
illustrate the principle of retrogression.
Since we cannot make an act of faith in either the inevitableness or the
efficacy of the Socialist industrial scheme, we are compelled to submit it to
the ordinary tests of examination and criticism. We must try to see what
would be the essential structure, elements, and operation of a system in
which the means of production were owned and managed collectively, and
the product socially distributed. In attempting to describe the system, we
shall be guided by what seems to be inherently necessary to it, and by the
prevalent conception of it among present day Socialists. In this connection
we have to observe that some of the criticisms of the Socialist order
attribute to it elements that are not essential, nor any longer demanded by
the authoritative spokesmen of the movement; for example, complete
confiscation of capital, compulsory assignment of men to the different
industrial tasks, equality of remuneration, the use of labour checks instead

of money, the socialisation of all capital down to the smallest tool, and
collective ownership of homes.

Expropriating the Capitalists

The first problem confronting a Socialist administration would be the
method of getting possession of the instruments of production. In the early
years of the Socialist movement, most of its adherents seemed to favour a
policy of outright confiscation. Professor Nearing estimates the total
property income now paid in the United States as, "well above the six-
billion-dollar mark."[124] Were the Socialist State to seize all land and
capital without compensation, it could conceivably transfer more than six
billion dollars annually from landowners and capitalists to the community.
Not all of it, however, would be available for diversion to the labourers.
According to the computations of Professor King, about two billion dollars
were in 1910 saved and converted into capital.[125] A progressive Socialist
régime would want to appropriate at least that sum for the renewal and
increase of the instruments of production. Consequently, it would have only
four billion dollars to add to the present total income of labour. This would
be equivalent to $43.50 for every person in the United States.
Desirable as would be such an addition to the remuneration of labour, it
could never be realised through the process of confiscation. The owners of
land and capital would be sufficiently powerful to defeat any such simple
scheme of setting up the collectivist commonwealth. They constitute
probably a majority of the adults of our population, and their economic
advantages would make them much stronger relatively than their numbers.
[126]
Ethically the policy of confiscation would be, on the whole, sheer
robbery. To be sure, not all owners of land and capital have a valid claim to
all their possessions, but practically all of them hold the greater part of their
wealth by some kind of just title. Much land and capital that was originally
acquired by unjust means has become morally legitimatised by the title of
prescription.
The majority of present day Socialists seem to advocate at least partial
compensation.[127] But this plan does not seem to offer any considerable
advantage over complete confiscation. As regards morality, it would differ

only in the degree of its injustice; as regards expediency, it would be at best
of doubtful efficacy. If the capitalists were given only a small fraction of the
value of their holdings they would oppose the change with quite as much
determination as though they were offered nothing; if they were paid almost
the full value of their possessions there would be no substantial gain to the
community from the transfer; if they were compensated at a figure
somewhere between these two extremes their resistance would still be more
costly to the State than the extra amount required to make full
compensation.
Finally, if full compensation were offered it would have to take the form of
government obligations, securities, or bonds. If these did not bear interest
the great majority of capital owners would regard the scheme as partial and
considerable confiscation, and would fight it with determination and
effectiveness. If the State bound itself to pay interest on the bonds it would
probably find itself giving the dispossessed capitalists as high a rate of
return on their capital, as large a share of the national product, as they
receive under the present system. Consequently, the expropriation of the
capitalists would bring no direct and pecuniary gain to the labouring
classes. Indeed, the latter would suffer positive loss by the change, owing to
the fact that the State would be required to withdraw from the national
product a considerable amount for the maintenance, renewal, and expansion
of the instruments of production. At present the capitalist class performs the
greater part of this function through the reinvestment of the incomes that it
receives in the form of interest and rent. The average Socialist entirely
ignores this capitalistic service, when he draws his pessimistic picture of the
vast share of the national product which now goes to "idle capitalists." So
far as the larger capitalist incomes are concerned; that is, those in excess of
twenty-five thousand dollars annually, it is probable that the greater part is
not consumed by the receivers, but is converted into socially necessary
capital instruments. Since this would not be permitted in a Socialist order,
the capitalists would strive to consume the whole of the incomes received
from the public securities, and the State would be compelled to provide the
required new capital out of the current national product. In a word, society
would have to give the capitalists as much as it does at present, and to
withhold from the labourers for new capital an immense sum which is now
furnished by the capitalists.

It is undoubtedly true that the richest capitalists would be unable to expend
the whole of their incomes upon themselves and their families. If they
turned a considerable part of it over to the State, the surrendered sum would
be available as capital, thereby reducing the amount that the State would
need to take out of the national product for this purpose. Were all those
possessing incomes in excess of fifty thousand dollars per family to give up
all above that amount, the total thus accruing to the State would be a little
more than one billion dollars.[128] But this would be only one-half the
required new capital. A part of the additional one billion is now provided
out of wages and salaries, but the greater part probably comes out of rent
and interest. Under Socialism this latter portion would have to be deducted
from that part of the national product which at present goes to the workers
and is consumed by them. Hence they would undergo a loss of several
hundred million dollars.
One reply to this difficulty is that the total product of industry would be
much increased under Socialism. Undoubtedly an efficient organisation of
industry on collectivist lines would be able to effect economies by
combining manufacturing plants, distributive concerns, and transportation
systems, and by reducing unemployment to a minimum; but it could not
possibly make the enormous economies that are promised by the Socialists.
The assertion that under Socialism men would be able to provide
abundantly for all their wants on a basis of a working day of four, or even
two, hours is seductive and interesting, but it has no support in the
ascertainable facts of industrial resources. Even if the Socialist organisation
were operating with a fair degree of efficiency, the gains that it could effect
over the present system would probably not more than offset the social
losses resulting from increased consumption by the compensated capitalists.
But the proposed industrial organisation would not operate with a fair
degree of efficiency. According to present Socialist thought, industries that
are national in scope, such as the manufacture of petroleum, steel, and
tobacco, would be carried on under national direction, while those that
supplied only a local market, such as laundries, bakeries, and retail stores,
would be managed by the municipalities. This division of control would be
undoubtedly wise and necessary. Moreover, the majority of Socialists no
longer demand that all tools and all industries should be brought under
collective or governmental direction. Very small concerns which employed

no hired labour, or at most one or two persons, could remain under private
ownership and operation, while even larger enterprises might be carried on
by co-operative associations.[129] Nevertheless the attempt to organise and
operate collectively the industries of the country, even with these
limitations, would encounter certain insuperable obstacles. These will be
considered under the general heads of inefficient industrial leadership,
inefficient labour, and interference with individual liberty.

Inefficient Industrial Leadership

Under Socialism the boards of directors or commissions which exercised
supreme control in the various industries, would have to be chosen either by
the general popular vote, by the government, or by the workers in each
particular industry. The first method may be at once excluded from
consideration. Even now the number of officials chosen directly by the
people is far too large; hence the widespread agitation for the "short ballot."
Public opinion is coming to realise that the voters should be required to
select only a few important officials, whose qualifications should be general
rather than technical, and therefore easily recognised by the masses. These
supreme functionaries should have the power of filling all administrative
offices, and all positions demanding expert or technical ability. If the task of
choosing administrative experts cannot be safely left to the mass of the
voters at present, it certainly ought not to be assigned to them under
Socialism, when the number and qualifications of these functionaries would
be indefinitely increased.
If the boards of industrial directors were selected by the government, that is,
by the national and municipal authorities, the result would be industrial
inefficiency and an intolerable bureaucracy. No body of officials, whether
legislative or executive, would possess the varied, extensive, and specific
knowledge required to pick out efficient administrative commissions for all
the industries of the country or the city. And no group of political persons
could safely be entrusted with such tremendous power. It would enable
them to dominate the industrial as well as the political life of the nation or
the municipality, to establish a bureaucracy that would be impregnable for a
long period of years, and to revive all the conceivable evils of governmental
absolutism.

The third method is apparently the one now favoured by most Socialists.
"The workers in each industry may periodically select the managing
authority," says Morris Hillquit.[130] Even if the workers were as able as the
stockholders of a corporation to select an efficient governing board, they
would be much less likely to choose men who would insist on hard and
efficient work from all subordinates. The members of a private corporation
have a strong pecuniary interest in selecting directors who will secure the
maximum of product at the minimum of cost, while the employés in a
Socialist industry would want managing authorities who were willing to
make working conditions as easy as possible.
The dependence of the boards of directors upon the mass of the workers,
and the lack of adequate pecuniary motives, would render their
management much less efficient and progressive than that of private
enterprises. In the rules that they would make for the administration of the
industry and the government of the labour force, in their selection of
subordinate officers, such as superintendents, general managers, and
foremen, and in all the other details of management, they would have
always before them the abiding fact that their authority was derived from
and dependent upon the votes of the majority of the employés. Their
supreme consideration would be to conduct the industry in such a way as to
satisfy the men who elected them. Hence they would strive to maintain an
administration which would permit the mass of the labour force to work
leisurely, to be provided with the most expensive conditions of
employment, and to be immune from discharge except in rare and flagrant
cases. Even if the members of the directing boards were sufficiently
courageous or sufficiently conscientious to exact reasonable and efficient
service from all their subordinates and all the workers, they would not have
the necessary pecuniary motives. Their salaries would be fixed by the
government, and in the nature of things could not be promptly adjusted to
reward efficient and to punish inefficient management. So long as their
administration of industry maintained a certain routine level of mediocrity,
they would have no fear of being removed; since they would be supervised
and paid by public officials who would have neither the extraordinary
capacity nor the necessary incentive to recognise and reward promptly
efficient management, they would lack the powerful stimulus which is
provided by the hope of gain. In the large private corporations, the tenure of

the boards of directors depends not upon the workers but upon the
stockholders, whose main interest is to obtain a maximum of product at a
minimum of cost, and who will employ and discharge, reward and punish,
according as this end is attained. Moreover, the members of the boards, and
the executive officers generally, are themselves financially interested in the
business and in the maintenance of the policy demanded by the other
stockholders.
All the subordinate officers, such as department managers, superintendents,
foremen, etc., would exemplify the same absence of efficiency. Knowing
that they must carry out the prudent policy of the board of directors, they
would be slow to punish shirking or to discharge incompetents. Realising
that the board of directors lacked the incentive to make promotions
promptly for efficient service, or to discharge promptly for inefficient
service, they would devote their main energies to the task of holding their
positions through a policy of indifferent and routine administration.
Invention and progress would likewise suffer. Men who were capable of
devising new machines, new processes, new methods of combining capital
and labour, would be slow to convert their potencies into action. They
would be painfully aware that the spirit of inertia and routine prevailing
throughout the industrial and political organisation would prevent their
efforts from receiving quick recognition and adequate rewards. Inventors of
mechanical devices particularly would be deprived of the stimulus which
they now find in the hope of indefinitely large gains. Boards of directors,
general managers, and other persons exercising industrial authority would
be very slow to introduce new and more efficient financial or technical
methods when they had no certainty that they would receive adequate
reward in the form of either promotion or money compensation. They
would see no sufficient reason for abandoning the established and pleasant
policy of routine methods and unprogressive management.

Inefficient Labour

The same spirit of inefficiency and mediocrity would permeate the rank and
file of the workers. Indeed, it would operate even more strongly among
them than among the officers and superiors; for their intellectual limitations

and the nature of their tasks would make them less responsive to other than
material and pecuniary motives. They would desire to follow the line of
least resistance, to labour in the most pleasant conditions, to reduce irksome
toil to a minimum. Since the great bulk of their tasks would necessarily be
mechanical and monotonous, they would demand the shortest possible
working day, and the most leisurely rate of working speed. And because of
their numerical strength they would have the power to enforce this policy
throughout the field of industry. They would have the necessary and
sufficient votes. In a general way they might, indeed, realise that the
practice of universal shirking and laziness must sooner or later result in
such a diminution of the national product as to cause them great hardship,
but the workers in each industry would hope that those in all the others
would be more efficient; or doubt that a better example set by themselves
would be imitated by the workers in other industries. They would not be
keen to give up the certainty of easy working conditions for the remote
possibility of a larger national product.

Attempted Replies to Objections

All the attempts made by Socialists to answer or explain away the foregoing
difficulties may be reduced to two: the achievements of government
enterprises in our present system; and the assumed efficacy of altruism and
public honour in a régime of Socialism.
Under the first head appeal is made to such publicly owned and managed
concerns as the post office, railroads, telegraphs, telephones, street railways,
water works, and lighting plants. It is probably true that all these enterprises
are on the whole carried on with better results to the public than if they
were in private hands. It is likewise probable that these and all other public
utility monopolies will sooner or later be taken over by the State in all
advanced countries. Even if this should prove in all cases to be a better
arrangement from the viewpoint of the general public welfare than private
ownership and management, the fact would constitute no argument for a
Socialist organisation of all industry. In the first place, the efficiency of
labour, management, and technical organisation is generally lower in public
than in private enterprises, and the cost of operation higher. Despite these
defects, government ownership of public utilities, such as street railways

and lighting concerns, may be socially preferable because these industries
are monopolies. Inasmuch as their charges and services cannot be regulated
by the automatic action of competition, the only alternative to public
ownership is public supervision. Inasmuch as the latter is often incapable of
securing satisfactory service at fair prices, public ownership and
management becomes on the whole more conducive to social welfare. In
other words, the losses through inefficient operation are more than offset by
the gains from better service and lower charges. Three cent fares and
adequate service on an inefficiently managed municipal street railway are
preferable to five cent fares on a privately owned street railway whose
management is superior. On the other hand, all those industries which are
not natural monopolies can be prevented from practising extortion upon the
public through regulated competition. In them, therefore, the advantages of
private operation, of which competition itself is not the least, should be
retained.
In the second place, practically all the public service monopolies are
simpler in structure, more routine in operation, and more mature in
organisation and efficiency than the other industries. The degree of
managerial ability required, the necessity of experimenting with new
methods and processes, and the opportunity of introducing further
improvements in organisation are relatively less. Now, it is precisely in
these respects that private has shown itself superior to public operation.
Initiative, inventiveness, and eagerness to effect economies and increase
profits are the qualities in which private management excels. When the
nature and maturity of the concern have rendered these qualities relatively
unimportant, public management can exemplify a fair degree of efficiency.
In the third place, the ability of the State to operate a few enterprises, does
not prove that it could repeat the performance with an equal degree of
success in all industries. I can drive two horses, but I could not drive
twenty-two. No matter how scientific the organisation and
departmentalisation of industries under Socialism, the final control of and
responsibility for all of them would rest with one organ, one authority,
namely, the city in municipal industries, and the nation in industries having
national scope. This would prove too great a task, too heavy a burden, for
any body of officials, for any group of human beings.

Finally, it must be kept in mind that the publicly operated utilities are
subject continuously to the indirect competition of private management. By
far the greater part of industry is now under private control, which sets the
pace for efficient operation in a hundred particulars. As a consequence,
comparisons are steadily provoked between public and private
management, and the former is subject to constant criticism. The managers
of the State concerns are stimulated and practically compelled to emulate
the success of private management. This factor is probably more effective
in securing efficiency in public industries than all other causes put together.
In the words of Professor Skelton: "A limited degree of public ownership
succeeds simply because it is a limited degree, succeeds because private
industry, in individual forms or in the socialised joint stock form, dominates
the field as a whole. It is private industry that provides the capital, private
industry that trains the men and tries out the methods, private industry that
sets the pace, and—not the least of its services—private industry that
provides the ever-possible outlet of escape."[131]
The Socialist expectation that altruistic sentiments and public honour would
induce all industrial leaders and all ordinary workers to exert themselves as
effectively as they now do for the sake of money, is based upon the very
shallow fallacy that what is true of a few men may very readily become true
of all men. There are, indeed, persons in every walk of life who work
faithfully under the influence of the higher motives, but they are and always
have been the exceptions in their respective classes. The great majority have
been affected only feebly, intermittently, and on the whole ineffectively by
either love of their kind or the hope of public approval.
A Socialist order could generate no forces which would be as productive of
unselfish conduct as the motives that are drawn from religion. History
shows nothing comparable either in extent or intensity to the record of self
surrender and service to the neighbour which are due to the latter influence.
Yet religion has never been able, even in the periods and places most
thoroughly dominated by Christianity, to induce more than a small minority
of the population to adopt that life of altruism which would be required of
the great majority under Socialism.
Moreover, the efficacy of the higher motives is much greater among men
devoted to scientific, intellectual, and religious pursuits than in either the

leaders or the rank and file engaged in industrial occupations. The cause of
this difference is to be sought in the varying nature of the two classes of
activity: the first necessarily develops an appreciation of the higher goods,
the things of the mind and the soul; the second compels the attention of men
to rest upon matter, upon the things that appeal to the senses, upon the
things that are measurable in terms of money.
There is a special fallacy underlying the emphasis placed by Socialists on
the power of public honour. It consists in the failure to perceive that this
good declines in efficacy according as the number of its recipients
increases. Even if all the industrial population were willing to work as hard
for public approval as they now do for money, the results expected by
Socialists would not be forthcoming. Public recognition of unselfish service
is now available in relatively great measure because the persons qualifying
for it are relatively few. They easily stand out conspicuous among their
fellows. Let their numbers vastly increase, and unselfishness would become
commonplace. It would no longer command popular recognition, save in
those who displayed it in exceptional or heroic measure. The public would
not have the time nor take the trouble to notice and honour adequately every
floor walker, retail clerk, factory operative, street cleaner, agricultural
labourer, ditch digger, etc., who might become a candidate for such
recognition.
When the Socialists point to such examples of disinterested public service
as that of Colonel Goethals in building the Panama Canal, they confound
the exceptional with the average. They assume that, since an exceptional
man performs an exceptional task from high motives, all men can be got to
act likewise in all kinds of operations. They forget that the Panama Canal
presented opportunities of self satisfying achievement and fame which do
not occur once in a thousand years; that the traditions and training of the
army have during many centuries deliberately and consistently aimed and
tended to produce an exceptionally high standard of honour and
disinterestedness; that, even so, the majority of army officers have not in
their civil assignments shown the same degree of faithfulness to the public
welfare as Colonel Goethals; that the Canal was built under a régime of
"benevolent despotism," which placed no reliance upon the "social
mindedness" of the subordinate workers; and that the latter, far from
showing any desire to qualify as altruists or public benefactors, demanded

and received material recognition in the form of wages, perquisites, and
gratuities which greatly surpassed the remuneration received by any other
labour force in history.[132] In a word, wherever in the construction of the
Canal notable disinterestedness or appreciation of public honour was
shown, the circumstances were exceptional; where the situation was
ordinary, the Canal builders were unable to rise above the ordinary motives
of selfish advantage.
Beneath all the Socialist argument on this subject lies the assumption that
the attitude of the average man toward the higher motives can by some
mysterious process be completely revolutionised. This is contrary to all
experience, and to all reasonable probability. Only a small minority of men
have ever, in any society or environment, been dominated mainly by
altruism or the desire of public honour. What reason is there to expect that
men will act differently in the future? Neither legislation nor education can
make men love their neighbours more than themselves, or love the applause
of their neighbours more than their own material welfare.

Restricting Individual Liberty

Even though human nature should undergo the degree of miraculous
transformation necessary to maintain an efficient industrial system on
Socialist lines, such a social organisation must soon collapse because of its
injurious effect upon individual liberty. Freedom of choice would be
abolished in the most vital economic transactions; for there would be but
one buyer of labour, and one seller of commodities. And these two would
be identical, namely, the State. With the exception of the small minority that
might be engaged in purely individual avocations, and in co-operative
enterprises, men would be compelled to sell their labour to either the
municipality or the national government. As competition between these two
political agencies in the matter of wages and other conditions of labour
could not be permitted, there would be virtually only one employer.
Practically all material goods would have to be purchased from either the
municipal or the national shops and stores. Since the city and the nation
would produce different kinds of goods, the purchaser of any given article
would be compelled to deal with one seller. His freedom of choice would be
further restricted by the fact that he would have to be content with those

kinds and grades of commodities which the seller saw fit to produce. He
could not create an effective demand for new forms and varieties of goods,
as he now does, by stimulating the ingenuity and acquisitiveness of
competing producers and dealers.
Prices and wages would, of course, be fixed beforehand by the government.
The supposition that this function might be left to the workers in each
industry is utterly impracticable. Such an arrangement would involve a
grand scramble among the different industries to see which could pay its
own members the highest wages, and charge its neighbours' members the
highest prices. The final result would be a level of prices so high that only
an alert and vigorous section of the workers in each industry could find
employment. Not only wages and prices but hours, safety requirements, and
all the other general conditions of employment, would be regulated by the
government. The individuals in each industry could not be permitted to
determine these matters any more than they could be permitted to determine
wages. Moreover, all these regulations would from the nature of the case
continue unchanged for a considerable period of time.
The restriction of choice enforced upon the sellers of labour and the buyers
of goods, the utter dependence of the population upon one agency in all the
affairs of their economic as well as their political life, the tremendous social
power concentrated in the State, would produce a diminution of individual
liberty and a perfection of political despotism surpassing anything that the
world has ever seen. It would not long be tolerated by any self respecting
people.
To reply that the Socialist order would be a democracy, and that the people
could vote out of existence any distasteful regulation, is to play with words.
No matter how responsive the governing and managing authorities might be
to the popular will, the dependence of the individual would prove
intolerable. Not the manner in which this tremendous social power is
constituted, nor the personnel of those exercising it, but the fact that so
much power is lodged in one agency, and so little immediate control of his
affairs left to the individual,—is the heart of the evil situation. In a word, it
is a question of the liberty of the individual versus the all pervading control
of his actions by an agency other than himself. Moreover, the people in a
democracy means a majority, or a compact minority. Under Socialism the

controlling section of the voting population would possess so much power,
political and economic, that it could impose whatever conditions it pleased
upon the non-controlling section for an almost indefinite period of time.
The members of the latter part of the population would not only be deprived
of that immediate liberty which consists in the power to determine the
details of their economic life, but of that remote liberty which consists in
the power to affect general conditions by their votes.
In the last chapter we saw that the claim to the full product of industry,
made on behalf of labour by the Socialists, cannot be established on
intrinsic grounds. Like all other claims to material goods, it is valid only if
it can be realised consistently with human welfare. Its validity depends
upon its feasibility, upon the possibility of constructing some social system
that will enable it to work. The present chapter has shown that the
requirements of such a system are not met by Socialism. A Socialist
organisation of industry would make all sections of the population,
including the wage earning class, worse off than they are in the existing
industrial order. Consequently, neither the private ownership of capital nor
the individual receipt of interest can be proved to be immoral by the
Socialist argument.
Since private ownership and management of capital are superior to
Socialism, the State is obliged to maintain, protect, and improve the
existing industrial system. This is precisely the conclusion that we reached
in chapter iv with reference to private ownership of land. In chapter v we
found, moreover, that individual ownership of land is a natural right. The
fundamental considerations there examined lead to the parallel conclusion
that the individual has a natural right to own capital. But we could not
immediately deduce from the right to own land the right to take rent.
Neither can we immediately deduce from the right to own capital the right
to take interest. The positive establishment of the latter right will occupy us
in the two following chapters.

CHAPTER XII
ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST

In his address as President of the American Sociological Society at the
annual meeting, Dec. 27, 1913, Professor Albion W. Small denounced "the
fallacy of treating capital as though it were an active agent in human
processes, and crediting income to the personal representatives of capital,
irrespective of their actual share in human service." According to his
explicit declaration, his criticism of the modern interest-system was based
primarily upon grounds of social utility rather than upon formally ethical
considerations.

A German priest has attacked interest from the purely moral viewpoint.[133]
In his view the owner of any sort of capital who exacts the return of
anything beyond the principal, violates strict justice.[134] The Church, he
maintains, has never formally authorised or permitted interest, either on
loans or on producing capital. She has merely tolerated it as an irremovable
evil.
Is there a satisfactory justification of interest? If there is, does it rest on
individual or on social grounds? That is to say: is interest justified
immediately and intrinsically by the relations existing between the owner
and the user of capital? Or, is rendered morally good owing to its effects
upon social welfare? Let us see what light is thrown on these questions by
the anti-usury legislation of the Catholic Church.

Attitude of the Church Toward Interest on Loans

During the Middle Ages all interest on loans was forbidden under severe
penalties by repeated ordinances of Popes and Councils.[135] Since the end
of the seventeenth century the Church has quite generally permitted interest
on one or more extrinsic grounds, or "titles." The first of these titles was
known as "lucrum cessans," or relinquished gain. It came into existence

whenever a person who could have invested his money in a productive
object, for example, a house, a farm, or a mercantile enterprise, decided
instead to lend the money. In such cases the interest on the loan was
regarded as proper compensation for the gain which the owner might have
obtained from an investment on his own account. The title created by this
situation was called "extrinsic" because it arose out of circumstances
external to the essential relations of borrower and lender. Not because of the
loan itself, but because the loan prevented the lender from investing his
money in a productive enterprise, was interest on the former held to be
justified. In other words, interest on the loan was looked upon as merely the
fair equivalent of the interest that might have been obtained on the
investment.
During the seventeenth, eighteenth, and nineteenth centuries, another title
or justification of loan-interest found some favour among Catholic
moralists. This was the "praemium legale," or legal rate of interest allowed
by civil governments. Wherever the State authorised a definite rate of
interest, the lender might, according to these writers, take advantage of it
with a clear conscience.
To-day the majority of Catholic authorities on the subject prefer the title of
virtual productivity as a justification. Money, they contend, has become
virtually productive. It can readily be exchanged for income-bearing or
productive property, such as, land, houses, railroads, machinery, and
distributive establishments. Hence it has become the economic equivalent
of productive capital, and the interest which is received on it through a loan
is quite as reasonable as the annual return to the owner of productive
capital. Between this theory and the theory connected with "lucrum
cessans" the only difference is that the former shifts the justification of
interest from the circumstances and rights of the lender to the present nature
of the money itself. Not merely the fact that the individual will suffer if,
instead of investing his money he loans it without interest, but the fact that
money is generally and virtually productive, is the important element in the
newer theory. In practice, however, the two explanations or justifications
come to substantially the same thing.
Nevertheless, the Church has given no positive approval to any of the
foregoing theories. In the last formal pronouncement by a Pope on the

subject, Benedict XIV[136] condemned anew all interest that had no other
support than the intrinsic conditions of the loan itself. At the same time, he
declared that he had no intention of denying the lawfulness of interest
which was received in virtue of the title of "lucrum cessans," nor the
lawfulness of interest or profits arising out of investments in productive
property. In other words, the authorisation that he gave to both kinds of
interest was merely negative. He refrained from condemning them.
In the Responses given by the Roman Congregations from 1822 onward to
questions relating to the lawfulness of loan-interest, we may profitably
consider four principal features. First, they declare more or less specifically
that interest may be taken in the absence of the title of "lucrum cessans";
second, some of them definitely admit the title of "praemium legale," or
civil authorisation, as sufficient to give the practice moral sanction; third,
they express a genuine permission, not a mere toleration, of interest taking;
fourth, none of them explicitly declares that any of the titles or reasons for
receiving loan-interest will necessarily or always give the lender a strict
right thereto. None of them contains a positive and reasoned approval of the
practice. Most of them merely decide that persons who engage in it are not
to be disturbed in conscience, so long as they stand ready to submit to a
formal decision on the subject by the Holy See. The insertion of the latter
condition clearly intimates that some day interest taking might be formally
and officially condemned.
Should such a condemnation ever appear, it would not contradict any moral
principle contained in the "Roman Responses," nor in the present attitude of
the Church and of Catholic moralists. Undoubtedly it could come only as
the result of a change in the organisation of industry, just as the existing
ecclesiastical attitude has followed the changed economic conditions since
the Middle Ages.
All the theological discussion on the subject, and all the authoritative
ecclesiastical declarations indicate, therefore, that interest on loans is to-day
regarded as lawful because a loan is the economic equivalent of an
investment. Evidently this is good logic and common sense. If it is right for
the stockholder of a railway to receive dividends, it is equally right for the
bondholder to receive interest. If it is right for a merchant to take from the
gross returns of his business a sum sufficient to cover interest on his capital,

it is equally right for the man from whom he has borrowed money for the
enterprise to exact interest. The money in a loan is economically equivalent
to, convertible into, concrete capital. It deserves, therefore, the same
treatment and the same rewards. The fact that the investor undergoes a
greater risk than the lender, and the fact that the former often performs
labour in connection with the operation of his capital, have no bearing on
the moral problem; for the investor is repaid for his extra risk and labour by
the profits which he receives, and which the lender does not receive. As a
mere recipient of interest, the investor undergoes no more risk nor exertion
than does the lender. His claim to interest is no better than that of the latter.

Interest on Productive Capital

On what ground does the Church or Catholic theological opinion justify
interest on invested capital? on the shares of the stockholders in
corporations? on the capital of the merchant and the manufacturer?
In the early Middle Ages the only recognised titles to gain from the
ownership of property were labour and risk.[137] Down to the beginning of
the fifteenth century substantially all the incomes of all classes could be
explained and justified by one or other of these two titles; for the amount of
capital in existence was inconsiderable, and the number of large personal
incomes insignificant.
When, however, the traffic in rent charges and the operation of partnerships,
especially the "contractus trinus," or triple contract, had become fairly
common, it was obvious that the profits from these practices could not be
correctly attributed to either labour or risk. The person who bought, not the
land itself, but the right to receive a portion of the rent thereof, and the
person who became the silent member of a partnership, evidently performed
no labour beyond that involved in making the contract. And their profits
clearly exceeded a fair compensation for their risks, inasmuch as the profits
produced a steady income. How then were they to be justified?
A few authorities maintained that such incomes had no justification. In the
thirteenth century Henry of Ghent condemned the traffic in rent charges; in
the sixteenth Dominicus Soto maintained that the returns to the silent
partner in an enterprise ought not to exceed a fair equivalent for his risks;

about the same time Pope Sixtus V denounced the triple contract as a form
of usury. Nevertheless, the great majority of writers admitted that all these
transactions were morally lawful, and the gains therefrom just. For a time
these writers employed merely negative and a pari arguments. Gains from
rent charges, they pointed out, were essentially as licit as the net rent
received by the owner of the land; and the interest received by a silent
partner, even in a triple contract, had quite as sound a moral basis as rent
charges. By the beginning of the seventeenth century the leading authorities
were basing their defence of industrial interest on positive grounds. Lugo,
Lessius, and Molina adduced the productivity of capital goods as a reason
for allowing gains to the investor. Whether they regarded productivity as in
itself a sufficient justification of interest, or merely as a necessary
prerequisite to justification, cannot be determined with certainty.
At present the majority of Catholic writers seem to think that a formal
defence of interest on capital is unnecessary. Apparently they assume that
interest is justified by the mere productivity of capital. However, this view
has never been explicitly approved by the Church. While she permits and
authorises interest, she does not define its precise moral basis.
So much for the teaching of ecclesiastical and ethical authorities. What are
the objective reasons in favour of the capitalist's claim to interest? In this
chapter we consider only the intrinsic reasons, those arising wholly out of
the relations between the interest-receiver and the interest-payer. Before
taking up the subject it may be well to point out the source from which
interest comes, the class in the community that pays the interest to the
capitalist. From the language sometimes used by Socialists it might be
inferred that interest is taken from the labourer, and that if it were abolished
he would be the chief if not the only beneficiary. This is incorrect. At any
given time interest on producing capital is paid by the consumer. Those who
purchase the products of industry must give prices sufficiently high to
provide interest in addition to the other expenses of production. Were
interest abolished and the present system of private capital continued, the
gain would be mainly reaped by the consumer in the form of lower prices;
for the various capitalist directors of industry would bring about this result
through their competitive efforts to increase sales. Only those labourers
who were sufficiently organised and sufficiently alert to make effective
demands for higher wages before the movement toward lower prices had

got well under way, would obtain any direct benefit from the change. The
great majority of labourers would gain far more as consumers than as wage
earners. Speaking generally, then, we may say that the capitalist's gain is the
consumer's loss, and the question of the justice of interest is a question
between the capitalist and the consumer.
The intrinsic or individual grounds upon which the capitalist's claim to
interest has been defended are mainly three: productivity, service, and
abstinence. They will be considered in this order.

The Claims of Productivity

It is sometimes asserted that the capitalist has as good a right to interest as
the farmer has to the offspring of his animals. Both are the products of the
owner's property. In two respects, however, the comparison is inadequate
and misleading. Since the owner of a female animal contributes labour or
money or both toward her care during the period of gestation, his claim to
the offspring is based in part upon these grounds, and only in part upon the
title of interest. In the second place, the offspring is the definite and easily
distinguishable product of its parent. But the sixty dollars derived as interest
from the ownership of ten shares of railway stock, cannot be identified as
the exact product of one thousand dollars of railway property. No man can
tell whether this amount of capital has contributed more or less than sixty
dollars of value to the joint product, i.e., railway services. The same is true
of any other share or piece of concrete capital. All that we know is that the
interest, be it five, six, seven, or some other per cent., describes the share of
the product which goes to the owner of capital in the present conditions of
industry. It is the conventional not the actual and physical product of
capital.
Another faulty analogy is that drawn between the productivity of capital
and the productivity of labour. Following the terminology of the
economists, most persons think of land, labour, and capital as productive in
the same sense. Hence the productivity of capital is easily assumed to have
the same moral value as the productive action of human beings; and the
right of the capitalist to a part of the product is put on the same moral basis
as the right of the labourer. Yet the differences between the two kinds of

productivity, and between the two moral claims to the product are more
important than their resemblances.
In the first place, there is an essential physical difference. As an instrument
of production, labour is active, capital is passive. As regards its worth or
dignity, labour is the expenditure of human energy, the output of a person,
while capital is a material thing, standing apart from a personality, and
possessing no human quality or human worth. These significant intrinsic or
physical differences forbid any immediate inference that the moral claims
of the owners of capital and labour are equally valid. We should logically
expect to find that their moral claims are unequal.
This expectation is realised when we examine the bearing of the two kinds
of productivity upon human welfare. In the exercise of productive effort the
average labourer undergoes a sacrifice. He is engaged in a process that is
ordinarily irksome. To require from him this toilsome expenditure of energy
without compensation, would make him a mere instrument of his fellows. It
would subordinate him and his comfort to the aggrandisement of beings
who are not his superiors but his moral equals. For he is a person; they are
no more than persons. On the other hand, the capitalist as such, as the
recipient of interest, performs no labour, painful or otherwise. Not the
capitalist, but capital participates in the productive process. Even though the
capitalist should receive no interest, the productive functioning of capital
would not subordinate him to his fellows in the way that wageless labour
would subordinate the labourer.
The precise and fundamental reason for according to the labourer his
product is that this is the only rational rule of distribution. When a man
makes a useful thing out of materials that are his, he has a strict right to the
product simply because there is no other reasonable method of distributing
the goods and opportunities of the earth. If another individual, or society,
were permitted to take this product, industry would be discouraged, idleness
fostered, and reasonable life and self development rendered impossible.
Direful consequences of this magnitude would not follow the abolition of
interest.
Perhaps the most important difference between the moral claims of
capitalist and labourer is the fact that for the latter labour is the sole means

of livelihood. Unless he is compensated for his product he will perish. But
the capitalist has in addition to the interest that he receives the ability to
work. Were interest abolished he would still be in as good a position as the
labourer. The product of the labourer means to him the necessaries of life;
the product of the capitalist means to him goods in excess of a mere
livelihood. Consequently their claims to the product are greatly unequal in
vital importance and moral value.
The foregoing considerations show that even the claim of the labourer to his
product is not based upon merely intrinsic grounds. It does not spring
entirely from the mere fact that he has produced the product, from the mere
relation between producer and thing produced. If this is true of labour-
productivity we should expect to find it even more evident with regard to
the productivity of capital; for the latter is passive instead of active, non
rational instead of human.
The expectation is well founded. Not a single conclusive argument can be
brought forward to show that the productivity of capital directly and
necessarily confers upon the capitalist a right to the interest-product. All the
attempted arguments are reducible to two formulas: "res fructificat domino"
("a thing fructifies to its owner") and "the effect follows its cause." The first
of these was originally a legal rather than an ethical maxim; a rule by which
the title was determined in the civil law, not a principle by which the right
was determined in morals. The second is an irrelevant platitude. As a
juristic principle, neither is self evident. Why should the owner of a piece of
capital, be it a house, a machine, or a share of railway stock, have a right to
its product, when he has expended neither time, labour, money, nor
inconvenience of any kind? To answer, "because the thing which produced
the product belongs to him," is merely to beg the question. To answer,
"because the effect follows the cause," is to make a statement which has
nothing to do with the question. What we want to know is why the
ownership of a productive thing gives a right to the product; why this
particular effect should follow its cause in this particular way. To answer by
repeating under the guise of sententious formulas the thesis to be proved, is
scarcely satisfactory or convincing. To answer that if the capitalist were not
given interest industry and thrift would decrease and human welfare suffer,
is to abandon the intrinsic argument entirely. It brings in the extrinsic
consideration of social consequences.

The Claims of Service

The second intrinsic ground upon which interest is defended, is the service
performed by the capitalist when he permits his capital to be used in
production. Without capital, labourers and consumers would be unable to
command more than a fraction of their present means of livelihood. From
this point of view we see that the service in question is worth all that is paid
in the form of interest. Nevertheless it does not follow that the capitalist has
a claim in strict justice to any payment for this service. According to St.
Thomas, a seller may not charge a buyer an extra amount merely because of
the extra value attached to the commodity by the latter.[138] In other words,
a man cannot justly be required to pay an unusual price for a benefit or
advantage or service, when the seller undergoes no unusual deprivation.
Father Lehmkuhl carries the principle further, and declares that the seller
has a right to compensation only when and to the extent that he undergoes a
privation or undertakes a responsibility.[139] According to this rule, the
capitalist would have no right to interest; for as mere interest-receiver he
undergoes no privation. His risk and labour are remunerated in profits,
while the responsibility of not withdrawing from production something that
can continue in existence only by continuing in production, is scarcely
deserving of a reward according to the canons of strict justice.
Whatever we may think of this argument from authority, we find it
impossible to prove objectively that a man who renders a service to another
has an intrinsic right to anything beyond compensation for the expenditure
of money or labour involved in performing the service. The man who
throws a life preserver to a drowning person may justly demand a payment
for his trouble. On any recognised basis of compensation, this payment will
not exceed a few dollars. Yet the man whose life is in danger would pay a
million dollars for this service if he were extremely rich. He would regard
the service as worth this much to him. Has the man with the life preserver a
right to exact such a payment? Has he a right to demand the full value of
the service? No reasonable person would answer this question otherwise
than in the negative. If the performer of the service may not charge the full
value thereof, as measured by the estimate put upon it by the recipient, it
would seem that he ought not to demand anything in excess of a fair price

for his trouble. In other words, he may not justly exact anything for the
service as such.
It would seem, then, that the capitalist has no moral claim to pure interest
on the mere ground that the use of his capital in production constitutes a
service to labourers and consumers. It would seem that he has no right to
demand a payment for a costless service.

The Claims of Abstinence

The third and last of the intrinsic justifications of interest that we shall
consider is abstinence. This argument is based upon the contention that the
person who saves his money, and invests it in the instruments of production
undergoes a sacrifice in deferring to the future satisfactions that he might
enjoy to-day. One hundred dollars now is worth as much as one hundred
and five dollars a year hence. That is, when both are estimated from the
viewpoint of the present. This sacrifice of present to future enjoyment
which contributes a service to the community in the form of capital, creates
a just claim upon the community to compensation in the form of interest. If
the capitalist is not rewarded for this inconvenience he is, like the unpaid
labourer, subordinated to the aggrandisement of his fellows.
Against this argument we may place the extreme refutation attempted by
the Socialist leader, Ferdinand Lassalle:
"But the profit of capital is the reward of abstinence. Truly a happy phrase!
European millionaires are ascetics, Indian penitents, modern St. Simons
Stylites, who perched on their columns, with withered features and arms
and bodies thrust forward, hold out a plate to the passers-by that they may
receive the wages of their privations! In the midst of this sacro-saint group,
high above his fellow-mortifiers of the flesh, stands the Holy House of
Rothschild. That is the real truth about our present society! How could I
have hitherto blundered on this point as I have?"[140]
Obviously this is a malevolently one-sided implication concerning the
sources of capital. But it is scarcely less adequate than the explanation in
opposition to which it has been quoted. Both fail to distinguish between the

different kinds of savers, the different kinds of capital-owners. For the
purposes of our inquiry savings may be divided into three classes.
First, those which are accumulated and invested automatically. Very rich
persons save a great deal of money that they have no desire to spend, since
they have already satisfied or safeguarded all the wants of which they are
conscious. Evidently this kind of saving involves no real sacrifice. To it the
words of Lassalle are substantially applicable, and the claim to interest for
abstinence decidedly inapplicable.
Second, savings to provide for old age and other future contingencies which
are estimated as more important than any of the purposes for which the
money might now be expended. Were interest abolished this kind of saving
would be even greater than it is at present; for a larger total would be
required to equal the fund that is now provided through the addition of
interest to the principal. In a no-interest régime one thousand dollars would
have to be set aside every year in order to total twenty thousand dollars in
twenty years; when interest is accumulated on the savings, a smaller annual
amount will suffice to produce the same fund. Inasmuch as this class of
persons would save in an even greater degree without interest, it is clear
that they regard the sacrifice involved as fully compensated in the resulting
provision for the future. In their case sacrifice is amply rewarded by
accumulation. Their claim to additional compensation in the form of
interest does not seem to have any valid basis. In the words of the late
Professor Devas, "there is ample reward given without any need of any
interest or dividend. For the workers with heads or hands keep the property
intact, ready for the owner to consume whenever convenient, when he gets
infirm or sick, or when his children have grown up, and can enjoy the
property with him."[141]
The third kind of saving is that which is made by persons who could spend,
and have some desire to spend, more on present satisfactions, and who have
already provided for all future wants in accordance with the standards of
necessaries and comforts that they have adopted. Their fund for the future is
already sufficient to meet all those needs which seem weightier than their
present unsatisfied wants. If the surplus in question is saved it will go to
supply future desires which are no more important than those for which it
might be expended now. In other words, the alternatives before the

prospective saver are to procure a given amount of satisfaction to-day, or to
defer the same degree of satisfaction to a distant day.
In this case the inducement of interest will undoubtedly be necessary to
bring about saving. As between equal amounts of satisfaction at different
times, the average person will certainly prefer those of the present to those
of the future. He will not decide in favour of the future unless the
satisfactions then obtainable are to be greater in quantity. To this situation
the rule that deferred enjoyments are worth less than present enjoyments, is
strictly applicable. The increased quantity of future satisfaction which is
necessary to turn the choice from the present to the future, and to determine
that the surplus shall be saved rather than spent, can be provided only
through interest. In this way the accumulations of interest and savings will
make the future fund equivalent to a larger amount of enjoyment or utility
than could be obtained if the surplus were exchanged for the goods of the
present. "Interest magnifies the distant object." Whenever this magnifying
power seems sufficiently great to outweigh the advantage of present over
future satisfactions, the surplus will be saved instead of spent.
Among the well-to-do there is probably a considerable number of persons
who take this attitude toward a considerable part of their savings. Since they
would not make these savings without the inducement of interest, they
regard the latter as a necessary compensation for the sacrifice of postponed
enjoyment. In a general way we may say that they have a strict right to this
interest on the intrinsic ground of sacrifice. Inasmuch as the community
benefits by the savings, it may quite as fairly be required to pay for the
antecedent sacrifices of the savers as for the inconvenience undergone by
the performer of any useful labour or service.
Summing up the matter regarding the intrinsic justification of interest, we
find that the titles of productivity and service do not conclusively establish
the strict right of the capitalist to interest, and that the title of abstinence is
morally valid for only a portion, probably a rather small portion, of the total
amount of interest now received by the owners of capital. Consequently
interest as a whole is not conclusively vindicated on individual grounds. If
it is to be proved morally lawful its justification must be sought in extrinsic
and social considerations. This inquiry will form the subject of the next
chapter.

CHAPTER XIII
SOCIAL AND PRESUMPTIVE JUSTIFICATIONS OF INTEREST

As we saw in the last chapter, interest cannot be conclusively justified on
the ground of either productivity or service. It is impossible to demonstrate
that the capitalist has a strict right to interest because his capital produces
interest, or because it renders a service to the labourer or the consumer. A
part, probably a small part, of the interest now received can be fairly
justified by the title of sacrifice. Some present owners of capital would not
have saved had they not expected to receive interest. In their case interest
may be regarded as a just compensation for the sacrifice that they
underwent when they decided to save instead of consuming.

Limitations of the Sacrifice Principle

Nevertheless these men would suffer no injustice if interest were now to be
abolished. Up to the moment of the change, they would have been in receipt
of adequate compensation; thereafter, they would be in exactly the same
position as when they originally chose to save rather than consume. They
would still be able to sell their capital, and convert the proceeds to their
immediate uses and pleasures. In this case they would obviously have no
further claim upon the community for interest. On the other hand, they
could retain the ownership of their capital, and postpone its consumption to
some future time. In making this choice they would regard future as more
important than present consumption, and the superiority of future
enjoyment as sufficiently great to compensate them for the sacrifice of
postponement. Hence they would have no moral claim to interest on the
ground of abstinence. In general, then, the sacrifice-justification of interest
continues only so long as the interest continues. It extends only to the
interest received by certain capitalists in certain circumstances, not to all
interest in all circumstances. Therefore, it presents no moral obstacle to the
complete abolition of interest.

Since probably the greater part of the interest now received cannot be
justified on intrinsic grounds, and since that part of it which is thus justified
could be abolished consistently with the rights of the recipients, let us see
whether it is capable of justification for reasons of social welfare. Would its
suppression be socially beneficial or socially detrimental?

The Value of Capital in a No-Interest Régime

The interest that we have in mind is pure interest, not undertaker's profit,
nor insurance against risk, nor gross interest. Even if all pure interest were
abolished the capitalist who loaned his money would still receive something
from the borrower in addition to the repayment of the principal, while the
active capitalist would get from the consumer more than the expenses of
production. The former would require a premium of, say, one or two per
cent. to protect him against the loss of his loan. The latter would demand
the same kind of insurance, and an additional sum to repay him for his
labour and enterprise. None of these payments could be avoided in any
system of privately directed production. The return whose suppression is
considered here is that which the capitalist receives over and above these
payments, and which in this country seems to be about three or four per
cent.
Would capital still have value in a no-interest régime, and if so how would
its value be determined? At present the lower limit of the value of
productive capital, as of all other artificial goods, is fixed in the long run by
the cost of production. Capital instruments that do not bring this price will
not continue to be made. In other words, cost of production is the governing
factor of the value of capital from the side of supply. It would likewise fix
the lower limit of value in a no-interest régime; only, the cost of producing
capital instruments would then be somewhat lower than to-day, owing to
the absence of an interest charge for the working capital during the
productive process.
But the cost of production is not a constant and accurate measure of the
value of artificial capital. The true measure is found in the revenue or
interest that a given piece of capital yields to its owners. If the current rate
of interest is five per cent., a factory that brings in ten thousand dollars net

return will have a value of about two hundred thousand dollars. This is the
governing factor of value from the side of demand. In a no-interest
economy the demand factor would be quite different. Capital instruments
would be in demand, not as revenue producers, but as the concrete
embodiments, the indispensable requisites of saving and accumulation. For
it is impossible that saving should in any considerable amount take the form
of cash hoards. In the words of Sir Robert Giffen: "The accumulations of a
single year, even taking it at one hundred and fifty millions only, ... would
absorb more than the entire metallic currency of the country [Great Britain].
They cannot, therefore, be made in cash."[142] The instruments of
production would be sought and valued by savers for the same reason that
safes and safety deposit boxes are in demand now. They would be the only
means of carrying savings into the future, and they would necessarily bring
a price sufficiently high to cover the cost of producing them. One man
might deposit his savings in a bank, whence they would be borrowed
without interest by some director of industry. When the owner of the
savings desired to recover them he could obtain from the bank the fund of
some other depositor, or get the proceeds of the sale of the concrete capital
in which his own savings had been embodied. Another man might prefer to
invest his savings directly in a building, a machine, or a mercantile
business, whence he could recover them later from the sale of the property.
Hence the absence of interest would not change essentially the processes of
saving or investment. Capital would still have value, but its valuation from
the demand side would rest on a different basis. It would be valued not in
proportion to its power to yield interest, but because of its capacity to
become a receptacle for savings, and to carry into the future the consuming
power of the present.
The question whether the abolition of interest by the State would be socially
helpful or socially harmful is mainly, though not entirely, a question of the
supply of capital. If the community would not have sufficient capital to
provide for all its needs, actual and progressive, the suppression of interest
would obviously be a bad policy. Most economists seem inclined to think
that this condition would be realised; that, without the inducement of
interest, men would neither make new savings nor conserve existing capital
in sufficient quantity to supply the wants of society. Very few of them,
however, pretend to be able to prove this proposition. So many complex

factors with regard to the possibilities of saving and the motives of savers,
enter into the situation that no opinion on the subject can have any stronger
basis than probability. As a preliminary to our consideration of the question
of abolition, let us inquire whether there exists any definite relation between
the present supply of capital and the current rate of interest.

Whether the Present Rate of Interest Is Necessary

It is sometimes contended that the interest rate must be kept up to the
present level if the existing supply of capital is to be maintained. The
underlying assumption is that some of the present savers would discontinue
that function at any lower rate, with the consequence that the supply of
capital would fall below the demand. Owing to this excess of demand over
supply, the rate of interest would rise, or tend to rise, to the former level.
Therefore, the rate existing at any given time is the socially necessary rate.
The rate of interest is said to be analogous to the rate of wages. For
example; of ten thousand men receiving five dollars a day, nine thousand
may be willing to work for four dollars rather than quit their present jobs.
But the other thousand set their minimum price at five dollars. If the wage
is reduced to four dollars these men will get employment elsewhere, thus
causing such an excess of demand over supply as to force the wage rate
back to five dollars. The same thing, it is contended, will happen when the
high-priced section of the savers, "the marginal savers," discontinue saving
on account of the artificial lowering of the rate of interest.
The analogy, however, is misleading. The "marginal" one thousand wage
earners refuse to work for four dollars a day because they can get better
compensation in some other occupation. This phenomenon has been proved
over and over again by observation and experience. On the other hand,
there is no experience, no positive evidence, which shows or tends to show
that any necessary group of present savers would discontinue or materially
reduce their accumulations if they were no longer able to secure the present
rate of interest. If the rate were lowered simultaneously in all civilised
countries the dissatisfied savers, unlike the dissatisfied labourers, would not
be able to get a better price for their capital elsewhere. Their only
alternative would be to spend their actual or potential savings for present
enjoyment. Now we have no empirical data to justify the assumption that

any considerable number of savers would choose this alternative in
preference to, say, three or two per cent. interest. The fact that any group of
savers at present gets and insists on getting a higher rate, merely proves that
they can get it, and that they are selfish enough to take advantage of the
possibility. We know that some men who now obtain six per cent. interest
would accept two rather than cease to save; yet they do not hesitate to
demand six per cent. So far as we know, all present savers might take the
same attitude. At any rate, we can not conclude that they would not take
less from the fact that they now get more. Why then does not the rate of
interest fall? If all present savers are getting a higher rate than is necessary
to induce them to save, why do they not increase their savings to such an
extent that the supply of capital will exceed the present volume of demand,
and thus lead to a decline in the rate of interest? This is what happens when
the price of consumption-goods rises appreciably above the minimum level
that satisfies the most high-priced or "marginal" producers. There is,
however, an important difference between the two cases. The capacity to
produce more goods is practically unlimited, and the corresponding desire
is also unlimited, so long as the price of the product exceeds the cost of
production. The capacity to save is not unlimited, and the desire to save is
neutralised and sharply restricted by other and more powerful desires.
Hence it is quite possible that the price of capital, i.e., interest, is
determined to only a slight degree by the "cost" of saving, being mainly
dominated and regulated from the side of demand.
Even though many of the present savers and owners of capital should
diminish or discontinue their functions on account of a fall in the rate of
interest, a reduction would not necessarily take place in the supply of
capital. The function of these "marginal savers" would in all probability be
performed by other persons, who would be compelled to increase their
accumulations in order to provide as well for the future as they had
previously been able to provide with a smaller capital at a higher rate of
interest.[143]

Whether at Least Two Per Cent. Is Necessary

While admitting that the present rate is unnecessarily high, Professor Cassel
maintains that a certain important class of savers would diminish very

considerably their accumulations if the interest rate should fall much below
two per cent. This class comprises those persons whose main object in
saving is a fund which will some day support them from its interest. At six
per cent. a person can accumulate in about twelve years a sum sufficient to
provide him with an interest-income equal to the amount annually saved.
For example; two thousand dollars put aside every year, and subjected to
compound interest, will aggregate in twelve years a principal capable of
yielding an annual income of two thousand dollars. At two per cent. the
same amount of yearly saving will not lead to the same income in less than
thirty-five years. If the rate be one and one-half per cent., forty-seven years
will be required to produce the desired income. Hence, concludes Cassel, if
the rate falls below two per cent. the average man will decide that life is too
short to provide for the future by means of an interest-income, and will
expect to draw upon his principal. This means that he will not need to save
as much as when he sought to accumulate a capital large enough to support
him out of its interest alone.
The argument is plausible but not conclusive. If the rate of interest is so low
that a man must save for forty-seven years in order to obtain a sufficient
interest-income to support him in his declining years, he will rarely attain
that end. In the great majority of instances men who are unable to save
more annually than the amount that they will need each year in old age, will
expect and be compelled to use up a part or all of their capital in the period
following the cessation of their economic usefulness. Nevertheless, it does
not follow that they will save less at one and one-half per cent. than at six
per cent. The determining factor in the situation is the attitude of the saver
toward the capital sum accumulated. He either desires or does not desire to
leave this behind him. In the latter case he will save only as much as is
necessary to provide an annual income composed partly of interest and
partly of the principal. If this contemplated income is two thousand dollars,
and the rate of interest is six per cent., he will not need to save that much
annually for as long a period as ten years. He can diminish either the yearly
amount saved or the length of time devoted to saving. On the other hand, if
the rate is only one and one-half per cent. he will be compelled to save a
larger total in order to secure an equal accumulation and an equal provision
for the future. In all cases, therefore, in which the saving is carried on

merely for the saver's own lifetime it will be increased instead of decreased
by a low rate of interest.
If the saver does desire to bequeath his capital he will not always be
deterred from this purpose merely because he is compelled to use some of
the capital for the satisfaction of his own wants. Take the man who can save
two thousand dollars a year, and with the rate of interest at six per cent.
assure himself an interest-income of the same amount, and who intends to
leave the principal (some thirty-three thousand dollars) to his children.
Should the rate fall to one and one-half per cent. he would be unable to
accumulate and bequeath nearly such a large sum. Surely this fact,
discouraging as it is, will not determine him to save nothing. He will not, as
Cassel's argument assumes, decide to leave nothing to his children, and
content himself with that amount of saving which will suffice to provide for
his own future. In all probability he will try to accumulate a sum which,
even when diminished by future deductions for his own wants, will
approximate as closely as possible the amount that he could have
bequeathed had the rate remained at six per cent. This means that he will
save more at the low than at the high rate of interest.
The relative insignificance of the sum which would be saved at a low rate
might sometimes, indeed, deter a person from saving for testamentary
purposes. With the rate at six per cent., a man might be willing to save six
hundred dollars a year for a sufficiently long period to provide a legacy of
twenty thousand dollars to an educational institution. With the rate at one
and one-half per cent., the amount that he could hope to accumulate would
be so much smaller that it might seem to him not worth while, and he would
decline to save the six hundred dollars annually. Cases of this kind,
however, always involve the secondary objects of saving, the luxuries rather
than the necessaries of testamentary transmission. They do not include such
primary objects as provision for one's family. When the average man finds
that he cannot leave to his family as much as he would desire, as much as
he would have bequeathed to them at a higher rate of interest, he will strive
to increase rather than decrease his efforts to save for this purpose.
Speaking generally, then, we conclude that the assumption underlying
Professor Cassel's theory is contradicted by our experience of human
motives and practices. Men who save mainly for a future interest-income, at

the same time wishing to keep the principal intact until death, and who
could have fully realised this desire under a high interest régime, will not
become entirely indifferent to it when they find that they cannot attain it
completely. They will ordinarily try to leave behind them as large a capital
or principal as they can. Hence they will save more rather than less.

Whether Any Interest Is Necessary

Perhaps the best known recent statement of the opinion that interest is
inevitable, appears in Professor Irving Fisher's "The Rate of Interest."[144]
While he does not assert explicitly that sufficient capital would not be
provided without interest, and even admits that in certain circumstances
interest might disappear, the general logic and implications of his argument
are decidedly against the supposition that society could ever get along
without interest. He lays such stress upon the factor of "impatience," i.e.,
man's unwillingness to wait for future goods, as to suggest strongly that
other causes of interest, and the number of savers free from "impatience,"
are quite insignificant. Now, if "impatience" were the only cause of interest
the latter must continue as long as "impatience" continues; and if practically
all savers, actual and possible, are completely dominated by "impatience"
the abolition of interest would be socially disastrous. However, neither of
these assumptions is demonstrable. We have just seen that the present rate
of interest has other causes than "impatience"; that a large proportion of
savers insist upon getting the present rate, not because they require it to
offset their "impatience," but simply because they can obtain it, and because
they prefer it to the lower rate. Therefore, the mere existence of the present
rate does not prove it to be necessary. By the same argument it is evident
that the existence of any interest does not demonstrate the necessity of some
interest. In the second place, the number of savers, present and prospective,
whose "impatience" is so weak as to permit them to save without interest, is
probably greater than the average reader of Professor Fisher's pages is led to
assume. The question whether interest is necessary cannot be answered by
reference to the general fact of human "impatience"; it demands a
preliminary analysis of the extent to which "impatience" affects the
different classes of savers.

With interest abolished, those persons who were willing to subordinate
present secondary satisfactions to the primary future needs of themselves
and their families, would save at least as much for these purposes as when
they could have obtained interest. Most of them would probably save more
in order to render their future provision as nearly as possible equal to what
it would have been had interest accrued on their annual savings. Whether a
person intended to leave all his accumulations, or part of them, or none of
them to posterity, he would still desire them to be as large as they might
have been in a régime of interest. In order to realise this desire, he would be
compelled to increase his savings. And it is reasonable to expect that this is
precisely the course that would be followed by men of average thrift and
foresight. Such men regard future necessaries and comforts, whether for
themselves or their children, as more important than present non-essentials
and luxuries. Interest or no interest, prudent men will subordinate the latter
goods to the former, and will save money accordingly.
When, however, both future and present goods are of the same order and
importance, the future is no longer preferred to the present. In that case the
preference is reversed. The luxuries of to-day are more keenly prized than
the luxuries of to-morrow. If the latter are to be preferred they must possess
some advantage over the luxuries that might be obtained here and now.
Such advantage may arise in various ways; for example, when a man
decides that he will have more leisure for a foreign journey two years hence
than this year, or when he prefers a large amount of future enjoyment at one
time to present satisfactions taken in small doses. But the most general
method of conferring advantage upon the secondary satisfactions of the
future as compared with those of the present, is to increase the quantity. The
majority of foreseeing persons are willing to pass by one hundred dollars'
worth of enjoyment now for the sake of one hundred and five dollars' worth
one year hence. This advantage of quantity is provided through the receipt
of interest. It affects all those persons whose saving, as noted in the last
chapter, involves a sacrifice for which the only adequate compensation is
interest, and likewise all those persons who are in a position to choose
between present and future luxuries. Were interest suppressed these classes
of persons would cease to save for this kind of future goods.
According to Professor Taussig, "most saving is done by the well-to-do and
the rich."[145] On this hypothesis it seems probable that the abolition of

interest would diminish the savings and capital of the community very
considerably; for the accumulations of the wealthy are derived mainly from
interest rather than from salaries. On the other hand, the suppression of
interest should bring about a much wider diffusion of wealth. The sums
formerly paid out as interest, would be distributed among the masses of the
population as increased wages and reduced costs of living. Hence the
masses would possess an immensely increased capacity for saving, which
might offset or even exceed the loss of saving-power among those who now
receive interest-incomes.[146]
To sum up the results of our inquiry concerning the necessity of interest:
The fact that men now receive interest does not prove that they would not
save without interest. The fact that many men would certainly save without
interest does not prove that a sufficient amount would be saved to provide
the community with the necessary supply of capital. Whether the savings of
those classes that increased their accumulations would counteract the
decreases in the saving of the richer classes, is a question that admits of no
definite or confident answer.

The State Is Justified in Permitting Interest

If we assume that the suppression of interest would cause a considerable
decline in saving and capital, we must conclude that the community would
be worse off than under the present system. To diminish greatly the
instruments of production, and consequently the supply of goods for
consumption, would create far more hardship than it would relieve. While
"workless" incomes would be suppressed, and personal incomes more
nearly equalised, the total amount available for distribution would probably
be so much smaller as to cause a deterioration in the condition of every
class. In this hypothesis the State would do wrong to abolish the system of
interest.
If, however, we assume that no considerable amount of evil would follow,
or that the balance of results would be favourable, the question of the
proper action of the State becomes somewhat complex. In the first place,
interest could not rightfully be suppressed while the private taking of rent
remained. To adopt such a course would be to treat the receivers of property

incomes inequitably. Landowners would continue to receive an income
from their property, while capital owners would not; yet the moral claims of
the former to income are no better than those of the latter. In the second
place, the State would be obliged to compensate the owners of existing
capital instruments for the decline in value which, as we have already seen,
would occur when the item of interest was eliminated from the cost of
reproducing such capital instruments. It would likewise be under moral
obligation to compensate landowners for whatever decrease in value befell
their property as a result of the abolition of rent.
Nevertheless, the practical difficulties confronting the legal abolition of
interest are apparently so great as to render the attempt socially unwise and
futile. In order to be effective the prohibition would have to be
international. Were it enforced in only one or in a few countries, these
would suffer far more through the flight of capital than they would gain
through the abolition of interest. The technical obstacles in any case would
be well nigh insuperable. If the attempt were made to suppress interest on
producing capital, as well as on loans, the civil authorities would be unable
to determine with any degree of precision what part of the gross returns of a
business was pure interest, and what part was a necessary compensation for
risk and the labour of management. Should the State try to solve this
problem by allowing the directors of industry varying salaries to correspond
with their comparative degrees of efficiency, and different rates of
insurance-payments to represent the different risks, it would inevitably
make some allowances so low as to discourage labour and enterprise, and
others so high as to give the recipients a considerable amount of pure
interest in the guise of profits and salaries. Should it fix a flat rate of
salaries and profits, the more efficient undertakers would refuse to put forth
their best efforts, and the more perilous enterprises would not be
undertaken. The supervision of expenses, receipts, and other details of
business that would be required to prevent evasion of the law, would not
improbably cost more than the total amount now paid in the form of
interest. On the other hand, if the method of suppression were confined to
loans it would probably prove only a little less futile than the effort to
abolish interest on productive capital. The great majority of those who were
prevented from lending at interest would invest their money in stocks, land,
buildings, and other forms of productive property. Moreover, it is probable

that a large volume of loans would be made despite the prohibition. In the
Middle Ages, when the amount of money available for lending was
comparatively small, and when State and Church and public opinion were
unanimous in favour of the policy, the legal prohibition of loans was only
partially effective. Now that the supply of and the demand for loans have
enormously increased, and interest is not definitely disapproved by the
Church or the public, a similar effort by the State would undoubtedly prove
a failure. Even if it were entirely successful it would only decrease, not
abolish, interest on productive capital.[147]
In view of the manifold and grave uncertainties of the situation, it is
practically certain that modern States are justified in permitting interest.

Civil Authorisation not Sufficient for Individual Justification

This justification of the attitude of the State does not of itself demonstrate
that the capitalist has a right to accept interest. The civil law tolerates many
actions which are morally wrong in the individual; for example, the
payment of starvation wages, the extortion of unjust prices, and the traffic
in immorality. Obviously legal toleration does not per se nor always
exonerate the individual offender. How, then, shall we justify the individual
receiver of interest?
As already pointed out more than once, those persons who would not save
without interest are justified on the ground of sacrifice. So long as the
community desires their savings, and is willing to pay interest on them, the
savers may take interest as the fair equivalent of the inconvenience that they
undergo in performing this social service. The precise problem before us,
then, is the justification of those savers and capitalists who do not need the
inducement of interest, and whose functions of saving and conserving
capital are sufficiently compensated without interest.
It is a fact that the civil law can sometimes create moral rights and
obligations. For example; the statute requiring a person to repair losses that
he has unintentionally inflicted upon his neighbour is held by the moral
theologians to be binding in conscience, as soon as the matter has been
adjudicated by the court. In other words, this civil regulation confers on the
injured man property rights, and imposes on the morally inculpable injurer

property obligations. The civil statutes also give moral validity to the title of
prescription, or adverse possession. When the alien possessor has complied
with the legal provisions that apply, he has a moral right to the property,
even though the original owner should assert his claim at a later time. Some
moral theologians maintain that a legal discharge in bankruptcy liberates the
bankrupt from the moral obligation of satisfying his unpaid debts. Several
other situations might be cited in which the State admittedly creates moral
rights of individual ownership which would have no definite existence in
the absence of such legal action and authorisation.[148]
This principle would seem to have received a particularly pertinent
application for our inquiry in the doctrine of præmium legale as a title of
interest on loans. In the "Opus Morale" of Ballerini-Palmieri can be found a
long list of moral theologians living in the seventeenth and eighteenth
centuries who maintained that the mere legal sanction of a certain rate of
interest was a sufficient moral justification for the lender.[149] While holding
to the traditional doctrine that interest was not capable of being justified on
intrinsic grounds, these writers contended that by virtue of its power of
eminent domain the State could transfer from the borrower to the lender the
right to the interest paid on a loan. They did not mean that the State could
arbitrarily take one man's property and hand it over to another, but only
that, when it sanctioned interest for the public welfare, this extrinsic
circumstance (like the other "extrinsic titles" approved by moralists)
annulled the claim of the borrower in favour of the lender. In other words,
they maintained that the money paid in loan-interest did not belong to either
borrower or lender with certainty or definiteness until the matter was
determined by economic conditions and extrinsic circumstances. Hence
legal authorisation for the common good was morally sufficient to award it
to the lender. More than one of them declared that the State had the same
right to determine this indeterminate property, to assign the ownership to
the lender, that it had to transfer property titles by the device of prescription.
And their general position seems to have been confirmed by the response of
the Congregation of the Poenitentiaria, Feb., 1832, to the Bishop of Verona,
the substance of which was that a confessor might adopt and act upon this
position.[150]

And yet, neither this nor any of the other precedents cited above, are
sufficient to give certain moral sanction to the practice of interest-taking by
those persons who would continue to save if interest were abolished. All the
acts of legal authorisation that we have been considering relate to practices
which are beneficial and necessary to society. Only in such cases has the
State the moral authority to create or annul property rights. In the
seventeenth and eighteenth centuries the legal authorisation of a certain rate
of interest made that rate morally lawful simply because this legal act gave
formal and authoritative testimony to the social utility of interest-taking.
The State merely declared the reasonableness, and fixed the proper limits of
the practice. The beneficent effect of interest-taking upon society was its
underlying justification, was the ultimate fact which made it reasonable,
and which gave to the action of the State moral value. Had the taking of
interest on loans not been allowed the bulk of possible savings would either
not have been saved at all, or would have been hoarded instead of converted
into capital. And that money was badly needed in the commercial and
industrial operations of the time. Hence the owners of it were in the position
of persons who regarded saving and investing as a sacrifice for which
interest was a necessary and proper compensation. To-day, however, there
are millions of persons who would continue to perform both these functions
without the inducement of interest. Therefore, the public good does not
require that they should receive interest, nor that the State should have the
power to clothe their interest-incomes with moral lawfulness. Inasmuch as
the State is not certain that the abolition of interest would be socially
expedient or practically possible, it is justified in permitting the institution
to continue; but it has no power to affect the morality of interest-taking as
an individual action.

How the Interest-Taker Is Justified

Although the interest received by the non-sacrifice savers is not clearly
justifiable on either intrinsic or social grounds, it is not utterly lacking in
moral sanctions. In the first place, we have not contended that the intrinsic
factors of productivity and service are certainly invalid morally. We have
merely insisted that the moral worth of these titles has never been
satisfactorily demonstrated. Possibly they have a greater and more definite
efficacy than has yet been shown by their advocates. In more concrete

terms, we admit that the productivity of capital and the service of the
capitalist to the community, are possible and doubtful titles to interest. A
doubtful title to property is, indeed, insufficient by itself. In the case of the
interest receiver, however, the doubtful titles of productivity and service are
reinforced by the fact of possession. Thus supplemented, they are sufficient
to justify the non-sacrifice saver in giving himself the benefit of the doubt
as regards the validity of his right to take interest. To be sure, this indefinite
and uncertain claim would be overthrown by a more definite and positive
title. But no such antagonistic title exists. Neither the consumer nor the
labourer can show any conclusive reason why interest should go to him
rather than to the capitalist. Hence the latter has at least a presumptive title.
In the circumstances this is morally sufficient.
To this justification by presumption must be added a justification by
analogy. The non-sacrifice savers seem to be in about the same position as
those other agents of production whose rewards are out of proportion to
their sacrifices. For example; the labourer of superior native ability gets as
much compensation for the same quality and quantity of work as his
companion who has only ordinary ability; and the exceptionally intelligent
business man stands in the same relation to his less efficient competitor; yet
the sacrifices undergone by the former of each pair is less than that suffered
by the latter. It would seem that if the more efficient men may properly take
the same rewards as those who make larger sacrifices, the non-sacrifice
capitalist might lawfully accept the same interest as the man whose saving
involves some sacrifice. On this principle the lenders who would not have
invested their money in a productive enterprise were nevertheless permitted
by the moralists of the post-mediæval period to take advantage of the title
of lucrum cessans. Although they had relinquished no opportunity of gain,
nor made any sacrifice, they were put on the same moral level as sacrificing
lenders, and were allowed to take the same interest.
As a determinant of ownership, possession is the feeblest of all factors, and
yet it is of considerable importance for a large proportion of incomes and
property. In the distribution of the national product, as well as in the
division of the original heritage of the earth, a large part is played by the
title of first occupancy. Much of the product of industry is assigned to the
agents of production mainly on the basis of inculpable possession. That is;
it goes to its receivers automatically, in exchange for benefits to those who

hand it over, and without excessive exploitation of their needs. Just as the
first arrival on a piece of land may regard it as a no-man's territory, and
make it his own by the mere device of appropriation, so the capitalist may
get morally valid possession of interest. Sometimes, indeed, this debatable
share, this no-man's share of the product of industry, is secured in some part
by the consumer of the labourer. In such cases their title to it is just as valid
as the title of the capitalist, notwithstanding the doubtful titles of
productivity and service which the latter has in his favour. First occupancy
and possession are the more decisive factors. In the great majority of
instances, however, the capitalist is the first occupant, and therefore the
lawful possessor of the interest-share.
The general justification of interest set forth in the immediately preceding
paragraphs is supplemented in the case of the great majority of capital
owners by the fact that their income from this source is relatively
insignificant. The average income of the farmers of the United States is
only 724 dollars per year, and of this 322 dollars is interest on the capital
invested in the farm.[151] Even when we make due allowance for the high
purchasing power of farm incomes, due to the lower cost of foodstuffs and
house rent, the total amount of 724 dollars provides only a very moderate
living. Consequently the great majority of farmers can regard the interest
that they receive as a necessary part of the remuneration that is fairly due
them on account of their labour, sacrifices, and risks. So far as they are
concerned, the justification of interest, as interest, is not a practical
question. The same observation applies to the majority of urban business
men, such as small merchants and manufacturers. Their interest can be
justified as not more than fair wages and profits.
Again, there is a large number of interest receivers who are entirely
dependent upon this kind of income, and who obtain therefrom only a
moderate livelihood. They are mainly children, aged persons, and invalids.
Unlike the classes just described, they cannot justify their interest as a fair
supplement to wages; however, they may reasonably claim it as their
equitable or charitable share of the common heritage of the earth. If they
did not receive this interest-income they would have to be supported by
their relatives or by the State. For many reasons this would be a much less
desirable arrangement. Consequently their general claim to interest is
supplemented by considerations of human welfare.

The difference between the ethical character of the interest discussed in the
last two paragraphs and of that received by persons who possess large
incomes, is too often overlooked in technical treatises. Every man owning
any productive goods is reckoned as a capitalist, and assumed to receive
interest. If, however, a man's total interest-income is so small that when
combined with all his other revenues it merely completes the equivalent of
a decent living, it is surely of very little significance as interest. It stands in
no such need of justification as the interest obtained by men whose incomes
amount to, say, ten thousand dollars a year and upwards.
Still another confirmatory title of interest is suggested by the following well
known declaration of St. Thomas Aquinas: "The possession of riches is not
in itself unlawful if the order of reason be observed: that a man should
possess justly what he owns, and use it in a proper manner for himself and
others."[152] Neither just acquisition nor proper use is alone sufficient to
render private possessions morally good. Both must be present. As we have
seen above, the capitalist can appeal to certain presumptive and analogous
titles which justify practically his acquisition of interest; but there can be no
doubt that his claim and his moral power of disposal are considerably
strengthened when he puts his interest-income to a proper use. One way of
so using it is for a reasonable livelihood, as exemplified in the case of the
farmers, business men, and non-workers whom we considered above. Those
persons who receive incomes in excess of their reasonable needs could
devote the surplus to religion, charity, education, and a great variety of
altruistic purposes. We shall deal with this matter specifically in the chapter
on the "Duty of Distributing Superfluous Wealth." In the meantime it is
sufficient to note that the rich man who makes a benevolent use of his
interest-income has a special reason for believing that his receipt of interest
is justified.
The decisive value attributed to presumption, analogy, possession, and
doubtful titles in our vindication of the capitalist's claim to interest, is no
doubt disappointing to those persons who desire clear-cut mathematical
rules and principles. Nevertheless, they are the only factors that seem to be
available. While the title that they confer upon the interest receiver is not as
definite nor as noble as that by which the labourer claims his wages or the
business man his profits, it is morally sufficient. It will remain logically and
ethically unshaken until more cogent arguments have been brought against

it than have yet appeared in the denunciations of the income of the
capitalist. And what is true of him is likewise true of the rent receiver, and
of the person who profits by the "unearned increment" of land values. In all
three cases the presumptive justification of "workless" incomes will
probably remain valid as long as the present industrial system endures.

CHAPTER XIV
CO-OPERATION AS A PARTIAL SOLVENT OF CAPITALISM

Interest is not a return for labour. The majority of interest receivers are,
indeed, regularly engaged at some active task, whether as day labourers,
salaried employés, directors of industry, or members of the professions; but
for these services they obtain specific and distinct compensation. The
interest that they get comes to them solely in their capacity as owners of
capital, independently of any personal activity. From the viewpoint of
economic distribution, interest is a "workless" income. As such, it seems to
challenge that ethical intuition which connects reward with effort and which
inclines to regard income from any other source as not quite normal.
Moreover, interest absorbs a large part of the national income, and
perpetuates grave economic inequalities.[153]
Nevertheless, interest cannot be wholly abolished. As long as capital
remains in private hands, its owners will demand and obtain interest. The
only way of escape is by the road of Socialism, and this would prove a
blind alley. As we have seen in a preceding chapter, Socialism is ethically
and economically impossible.
May not the burdens and disadvantages of interest be mitigated or
minimised? Such a result could conceivably be reached in two ways: the
sum total of interest might be reduced, and the incomes derived from
interest might be more widely distributed.

Reducing the Rate of Interest

No considerable diminution of the interest-volume can be expected through
a decline in the interest rate. As far back as the middle of the eighteenth
century, England and Holland were able to borrow money at three per cent.
During the period that has since intervened, the rate has varied from three to
six per cent. on this class of loans. Between 1870 and 1890, the general rate

of interest declined about two per cent., but it has risen since the latter date
about one per cent. The Great War now (1916) in action is destroying an
enormous amount of capital, and it will, as in the case of all previous
military conflicts of importance, undoubtedly be followed by a marked rise
in the rate of interest.
On the other hand, the only definite grounds upon which a decline in the
rate can be hoped for are either uncertain or unimportant. They are the rapid
increase of capital, and the extension of government ownership and
operation of natural monopolies.
The first is uncertain in its effects upon the rate of interest because the
increased supply of capital is often neutralised by the process of
substitution. That is, a large part of the new capital does not compete with
and bring down the price of the old capital. Instead, it is absorbed in new
inventions, new types of machinery, and new processes of production, all of
which take the place of labour, thus tending to increase rather than diminish
the demand for capital and the rate of interest. To be sure, the demand for
capital thus arising has not always been sufficient to offset the enlarged
supply. Since the Industrial Revolution capital has at certain periods and in
certain regions increased so rapidly that it could not all find employment in
new forms and in old forms at the old rate. In some instances a decline in
the rate of interest can be clearly traced to the disproportionately quick
growth of capital. But this phenomenon has been far from uniform, and
there is no indication that it will become so in the future. The possibilities
of the process of substitution have been by no means exhausted.
The effects of government ownership are even more problematical. States
and cities are, indeed, able to obtain capital more cheaply than private
corporations for such public utilities as railways, telegraphs, tramways, and
street lighting; and public ownership of all such concerns will probably
become general in the not remote future. Nevertheless the social gain is not
likely to be proportionate to the reduction of interest on this section of
capital. A part, possibly a considerable part, of the saving in interest will be
neutralised by the lower efficiency and greater cost of operation; for in this
respect publicly managed are inferior to privately managed enterprises.
Consequently, the charges to the public for the services rendered by these
utilities cannot be reduced to the same degree as the rate of interest on the

capital. On the other hand, the exclusion of private operating capital from
this very large field of public utilities should increase competition among
the various units of capital, and thus bring down its rewards. To what extent
this would happen cannot be estimated even approximately. The only safe
statement is that the decline in the general rate of interest would probably
be slight.

Need for a Wider Distribution of Capital

The main hope of lightening the social burden of interest lies in the possible
reduction in the necessary volume of capital, and especially in a wider
distribution of interest-incomes. In many parts of the industrial field there is
a considerable waste of capital through unnecessary duplication. This
means that a large amount of unnecessary interest is paid by the consumer
in the form of unnecessarily high prices. Again, the owners of capital and
receivers of interest constitute only a minority of the population of all
countries, with the possible exception of the United States. The great
majority of the wage earners in all lands possess no capital, and obtain no
interest. Not only are their incomes small, often pitiably small, but their
lack of capital deprives them of the security, confidence, and independence
which are required for comfortable existence and efficient citizenship. They
have no income from productive property to protect them against the
cessation of wages. During periods of unemployment they are frequently
compelled to have recourse to charity, and to forego many of the necessary
comforts of life. So long as the bulk of the means of production remains in
the hands of a distinct capitalist class, this demoralising insecurity of the
workers must continue as an essential part of our industrial system. While it
might conceivably be eliminated through a comprehensive scheme of State
insurance, this arrangement would substitute dependence upon the State for
dependence upon the capitalist, and be much less desirable than ownership
of income-bearing property.
The workers who possess no capital do not enjoy a normal and reasonable
degree of independence, self respect, or self confidence. They have not
sufficient control over the wage contract and the other conditions of
employment, and they have nothing at all to say concerning the goods that
they shall produce, or the persons to whom their product shall be sold. They

lack the incentive to put forth their best efforts in production. They cannot
satisfy adequately the instinct of property, the desire to control some of the
determining forms of material possession. They are deprived of that
consciousness of power which is generated exclusively by property, and
which contributes so powerfully toward the making of a contended and
efficient life. They do not possess a normal amount of freedom in politics,
nor in those civic and social relations which lie outside the spheres of
industry and politics. In a word, the worker without capital has not
sufficient power over the ordering of his own life.

The Essence of Co-operative Enterprise

The most effective means of lessening the volume of interest, and bringing
about a wider distribution of capital, is to be found in co-operative
enterprise. Co-operation in general denotes the unified action of a group of
persons for a common end. A church, a debating club, a joint stock
company, exemplifies co-operation in this sense. In the strict and technical
sense, it has received various definitions. Professor Taussig declares that it
"consists essentially in getting rid of the managing employer"; but this
description is applicable only to co-operatives of production. "A
combination of individuals to economise by buying in common, or increase
their profits by selling in common" (Encyclopedia Britannica) is likewise
too narrow, since it fits only distributive and agricultural co-operation.
According to C. R. Fay, a co-operative society is "an association for the
purpose of joint trading, originating among the weak, and conducted always
in an unselfish spirit." If the word, "trading" be stretched to comprehend
manufacturing as well as commercial activities, Fay's definition is fairly
satisfactory. The distinguishing circumstance, "originating among the
weak," is also emphasised by Father Pesch in his statement that the essence,
aim, and meaning of co-operation are to be found in "a combination of the
economically weak in common efforts for the security and betterment of
their condition."[154] In order to give the proper connotation for our
purpose, we shall define co-operation as, that joint economic action which
seeks to obtain for a relatively weak group all or part of the profits and
interest which in the ordinary capitalist enterprise are taken by a smaller
and different group. This formula puts in the foreground the important fact
that in every form of co-operative effort, some interest or profits, or both,

are diverted from those who would have received them under purely
capitalistic arrangements, and distributed among a larger number of
persons. Thus it indicates the bearing of co-operation upon the problem of
lightening the social burden of interest.
From the viewpoint of economic function, co-operation may be divided into
two general kinds, producers' and consumers'. The best example of the
former is a wage earners' productive society; of the latter, a co-operative
store. Credit co-operatives and agricultural co-operatives fall mainly under
the former head, inasmuch as their principal object is to assist production,
and to benefit men as producers rather than as consumers. Hence from the
viewpoint of type, co-operation may be classified as credit, agricultural,
distributive, and productive.

Co-operative Credit Societies

A co-operative credit society is a bank controlled by the persons who
patronise it, and lending on personal rather than material security. Such
banks are intended almost exclusively for the relatively helpless borrower,
as, the small farmer, artisan, shopkeeper, and the small man generally.
Fundamentally they are associations of neighbours who combine their
resources and their credit in order to obtain loans on better terms than are
accorded by the ordinary commercial banks. The capital is derived partly
from the sale of shares of stock, partly from deposits, and partly from
borrowed money. In Germany, where credit associations have been more
widely extended and more highly developed than in any other country, they
are of two kinds, named after their respective founders, Schulze-Delitzsch
and Raiffeisen. The former operates chiefly in the cities, serves the middle
classes rather than the very poor, requires all its members to subscribe for
capital stock, commits them to a long course of saving, and thus develops
their interest as lenders. The Raiffeisen societies have, as a rule, very little
share capital, exist chiefly in the country districts, especially among the
poorest of the peasantry, are based mostly on personal credit, and do not
profess to encourage greatly the saving and lending activities of their
members. Both forms of association loan money to their members at lower
rates of interest than these persons could obtain elsewhere. Hence credit co-
operation directly reduces the burden of interest.

The Schulze-Delitzsch societies have more than half a million members in
the cities and towns of Germany, sixty per cent. of whom take advantage of
the borrowing facilities. The Raiffeisen banks comprise about one-half of
all the independent German agriculturists. Some form of co-operative
banking is well established in every important country of Europe, except
Denmark and Great Britain. In the former country its place seems to be
satisfactorily filled by the ordinary commercial banks. Its absence from
Great Britain is apparently due to the credit system provided by the large
landholders, to the scarcity of peasant proprietors, and to general lack of
initiative. It is especially strong in Italy, Belgium, and Austria, and it has
made a promising beginning in Ireland. In every country in which it has
obtained a foothold, it gives indication of steady and continuous progress.
Nevertheless it is subject to definite limits. It can never make much
headway among that class of persons whose material resources are
sufficiently large and palpable to command loans on the usual terms offered
by the commercial banks. As a rule, these terms are quite as favourable as
those available through the co-operative credit associations. It is only
because the poorer men cannot obtain loans from the commercial banks on
the prevailing conditions that they are impelled to have recourse to the co-
operative associations.

Co-operative Agricultural Societies

The chief operations of agricultural co-operative societies are
manufacturing, marketing, and purchasing. In the first named field the most
important example is the co-operative dairy. The owners of cows hold the
stock or shares of the concern, and in addition to dividends receive profits
in proportion to the amount of milk that they supply. In Ireland and some
other countries, a portion of the profits goes to the employés of the dairy as
a dividend on wages. Other productive co-operatives of agriculture are
found in cheese making, bacon curing, distilling, and wine making. All are
conducted on the same general principles as the co-operative dairy.
Through the marketing societies and purchasing societies, the farmers are
enabled to sell their products to better advantage, and to obtain materials
needed for carrying on agricultural operations more cheaply than would be
possible by isolated individual action. Some of the products marketed by

the selling societies are eggs, milk, poultry, fruit, vegetables, live stock, and
various kinds of grain. The purchasing societies supply for the most part
manures, seeds, and machinery. Occasionally they buy the most costly
machinery in such a way that the association becomes the corporate owner
of the implements. In these cases the individual members have only the use
of the machines, but they would be unable to enjoy even that advantage
were it not for the intervention of the co-operative society. Where such
arrangements exist, the society exemplifies not only co-operative buying
but co-operative ownership.
Agricultural co-operation has become most widely extended in Denmark,
and has displayed its most striking possibilities in Ireland. Relatively to its
population, the former country has more farmers in co-operative societies,
and has derived more profit therefrom, than any other nation. The rapid
growth and achievements of agricultural co-operation in the peculiarly
unfavourable circumstances of Ireland constitute the most convincing proof
to be found anywhere of the essential soundness and efficacy of the
movement. Various forms of rural co-operative societies are solidly
established in Germany, France, Belgium, Italy, and Switzerland. In recent
years the movement has made some progress in the United States,
especially in relation to dairies, grain elevators, the marketing of live stock
and fruit, and various forms of rural insurance. The co-operative insurance
companies effect a saving to the Minnesota farmers of $700,000 annually,
and the co-operative elevators handle about 30 per cent. of the grain
marketed in that state. In 1915 the business transacted by the co-operative
marketing and purchasing organisations of the farmers of the United States
amounted to $1,400,000,000.
The transformation in the rural life of more than one European community
through co-operation has amounted to little less than a revolution. Higher
standards of agricultural products and production have been set up and
maintained, better methods of farming have been inculcated and enforced,
and the whole social, moral, and civic life of the people has been raised to a
higher level. From the viewpoint of material gain, the chief benefits of
agricultural co-operation have been the elimination of unnecessary
middlemen, and the economies of buying in large quantities, selling in the
best markets, and employing the most efficient implements. As compared
with farming conducted on a large scale, the small farm possesses certain

advantages, and is subject to certain disadvantages. It is less wasteful,
permits greater attention to details, and makes a greater appeal to the self
interest of the cultivator; but the small farmer cannot afford to buy the best
machinery, nor is he in a position to carry on to the best advantage the
commercial features of his occupation, such as borrowing, buying, and
marketing. Co-operation frees him from all these handicaps. "The co-
operative community ... is one in which groups of humble men combine
their efforts, and to some extent their resources, in order to secure for
themselves those advantages in industry which the masters of capital derive
from the organisation of labour, from the use of costly machinery, and from
the economies of business when done on a large scale. They apply in their
industry the methods by which the fortunes of the magnates in commerce
and manufacture are made." These words, uttered by a prominent member
of the Irish co-operative movement, summarise the aims and achievements
of agricultural co-operation in every country of Europe in which it has
obtained a strong foothold. In every such community the small farm has
gained at the expense of the large farm system. Finally, agricultural co-
operation reduces the burden of interest by eliminating some unnecessary
capital, stimulates saving among the tillers of the soil by providing a ready
and safe means of investment, and in manifold ways contributes materially
toward a better distribution of wealth.

Co-operative Mercantile Societies

Co-operative stores are organised by and for consumers. In every country
they follow rather closely the Rochdale system, so called from the English
town in which the first store of this kind was established in 1844. The
members of the co-operative society furnish the capital, and receive thereon
interest at the prevailing rate, usually five per cent. The stores sell goods at
about the same prices as their privately owned competitors, but return a
dividend on the purchases of all those customers who are members of the
society. The dividends are provided from the surplus which remains after
wages, interest on the capital stock, and all other expenses have been paid.
In some co-operative stores non-members receive a dividend on their
purchases at half the rate accorded to members of the society, but only on
condition that these payments shall be invested in the capital stock of the
enterprise. And the members themselves are strongly urged to make this

disposition of their purchase-dividends. Since the latter are paid only
quarterly, the co-operative store exercises a considerable influence toward
inducing its patrons to save and to become small capitalists.
In Great Britain the vast majority of the retail stores have been federated
into two great wholesale societies, one in England and the other in
Scotland. The retail stores provide the capital, and participate in the profits
according to the amounts purchased, just as the individual consumers
furnish the capital and share the profits of the retail establishments. The
Scottish Wholesale Society divides a part of the profits among its employés.
Besides their operations as jobbers, the wholesale societies are bankers for
the retail stores, and own and operate factories, farms, warehouses, and
steamships. Many of the retail co-operatives likewise carry on productive
enterprises, such as milling, tailoring, bread making, and the manufacture of
boots, shoes, and other commodities, and some of them build, sell, and rent
cottages, and lend money to members who desire to obtain homes.
The co-operative store movement has made greatest progress in its original
home, Great Britain. In 1913 about one person in every three was to some
degree interested in or a beneficiary of these institutions. The profits of the
stores amounted to about $71,302,070, which was about 35 per cent. on the
capital. The employés numbered about 145,000, and the sales for the year
aggregated $650,000,000. The English Wholesale Society was the largest
flour miller and shoe manufacturer in Great Britain, and its total business
amounted to $150,000,000. Outside of Great Britain, co-operative
distribution has been most successful in Germany, Belgium, and
Switzerland. It has had a fair measure of development in Italy, but has failed
to assume any importance in France. "There is every sign that within the
near future—except in France—the stores will come to include the great
majority of the wage earning class, which is a constantly growing
percentage of the total population."[155] Within recent years a respectable
number of stores have been established on a sound basis in Canada and the
United States. Owing, however, to the marked individualism and the better
economic conditions of these two countries, the co-operative movement
will continue for some time to be relatively slow.
As in the case of agricultural co-operation, the money benefits accruing to
the members of the co-operative stores consist mainly of profits rather than

interest. In the absence of the store societies, these profits would have gone
for the most part to middlemen as payments for the risks and labour of
conducting privately owned establishments. Forty-seven of the sixty million
dollars profits of the British co-operative stores in 1910 were divided
among more than two and one-half million members of these institutions,
instead of going to a comparatively small number of private merchants. The
other thirteen million dollars were interest on the capital stock. Had the
members invested an equal amount in other enterprises they could, indeed,
have obtained about the same rate and amount of interest, but in the absence
of the co-operative stores their inducements and opportunities to save
would have been much smaller. For it must be kept in mind that a very large
part of the capital stock in the co-operative stores is derived from the
members' dividends on their purchases at such stores, and would not have
come into existence at all without these establishments. The gains of the co-
operative stores, whether classified as profits or as interest, are evidently a
not inconsiderable indication of a better distribution of wealth.

Co-operation in Production

Co-operative production has occasionally been pronounced a failure. This
judgment is too sweeping and too severe. "As a matter of fact," says a
prominent London weekly, "the co-operators' success has been even more
remarkable in production than in distribution. The co-operative movement
runs five of the largest of our flour mills; it has, amongst others, the very
largest of our boot factories; it makes cotton cloth and woollens, and all
sorts of clothing; it has even a corset factory of its own; it turns out huge
quantities of soap; it makes every article of household furniture; it produces
cocoa and confectionery; it grows its own fruit and makes its own jams; it
has one of the largest tobacco factories, and so on." Obviously this passage
refers to that kind of productive co-operation which is carried on by the
stores, not to productive concerns owned and managed by the workers
therein employed. Nevertheless the enterprises in question are co-
operatively managed, and hence exemplify co-operation rather than private
and competitive industry. They ought not to be left out of any statement of
the field occupied by co-operative production. The limitations and
possibilities of co-operation in production can best be set forth by
considering its three different forms separately.

The "perfect" form occurs when all the workers engaged in a concern own
all the share capital, control the entire management, and receive the whole
of the wages, profits, and interest. In this field the failures have been much
more numerous and conspicuous than the successes. Godin's stove works at
Guise, France, is the only important enterprise of this kind that is now in
existence. Great Britain has several establishments in which the workers
own a large part of the capital, but apparently none in which they are the
sole proprietors and managers. The "labour societies" of Italy, consisting
mostly of diggers, masons, and bricklayers, co-operatively enter into
contracts for the performance of public works, and share in the profits of
the undertaking in addition to their wages; but the only capital that they
provide consists of comparatively simple and inexpensive tools. The raw
material and other capital is furnished by the public authority which gives
the contract.
A second kind of productive co-operation is found in the arrangement
known as co-partnership. This is "the system under which, in the first place,
a substantial and known share of the profit of a business belongs to the
workers in it, not by right of any shares they may hold, or any other title,
but simply by right of the labour they have contributed to make the profit;
and, in the second place, every worker is at liberty to invest his profit, or
any other savings, in shares of the society or company, and so become a
member entitled to vote on the affairs of the body which employs him."[156]
So far as its first, or profit sharing, feature is concerned, co-partnership is
not genuine co-operation, for it includes neither ownership of capital nor
management of the business. Co-operative action begins only with the
adoption of the second element. In most of the existing co-partnership
concerns, all the employés are urged, and many of them required to invest
at least a part of their profits in the capital stock. The most notable and
successful of these experiments is that carried on by the South Metropolitan
Gas Company of London. Practically all the company's 6,000 employés are
now among its stockholders. Although their combined holdings are only
about one-twenty-eighth of the total, they are empowered to select two of
the ten members of the board of directors. Essentially the same co-
partnership arrangements have been adopted by about one-half the privately
owned gas companies of Great Britain. In none of them, however, have the
workers obtained as yet such a large percentage of either ownership or

control as in the South Metropolitan. Co-partnership exists in several other
enterprises in Great Britain, and is found in a considerable number of
French concerns. There are a few instances in the United States, the most
thoroughgoing being that of N. O. Nelson & Co. at Le Claire, Ill.
As already noted, the co-operative stores exemplify a third type of co-
operative production. In some cases the productive concern is under the
management of a local retail establishment, but the great majority of them
are conducted by the English and Scottish Wholesale Societies. As regards
the employés of these enterprises, the arrangement is not true co-operation,
since they have no part in the ownership of the capital. The Scottish
Wholesale Society, as we have seen, permits the employés of its productive
works to share in the profits thereof; nevertheless it does not admit them as
stockholders, nor give them any voice in the management. In all cases the
workers may, indeed, become owners of stock in their local retail stores.
Since the latter are stockholders in the wholesale societies, which in turn
own the productive enterprises, the workers have a certain indirect and
attenuated proprietorship in the productive concerns. But they derive
therefrom no dividends. All the interest and most of the profits of the
productive establishments are taken by the wholesale and retail stores. For
it is the theory of the wholesale societies that the employés in the works of
production should share in the gains thereof only as consumers. They are to
profit only in the same way and to the same extent as other consumer-
members of the local retail establishments.
The most effective and beneficial form of co-operative production is
evidently that which has been described as the "perfect" type. Were all
production organised on this plan, the social burden of interest would be
insignificant, industrial despotism would be ended, and industrial
democracy realised. As things are, however, the establishments
exemplifying this type are of small importance. Their increase and
expansion are impeded by lack of directive ability and of capital, and the
risk to the workers' savings. Yet none of these obstacles is necessarily
insuperable. Directive ability can be developed in the course of time, just as
it was in the co-operative stores. Capital can be obtained fast enough
perhaps to keep pace with the supply of directive ability and the spirit of co-
operation. The risk undertaken by workers who put their savings into
productive concerns owned and managed by themselves need not be greater

than that now borne by investors in private enterprises of the same kind.
There is no essential reason why the former should not provide the same
profits and insurance against business risks as the latter. While the employés
assume none of the risks of capitalistic industry, neither do they receive any
of the profits. If the co-operative factory exhibits the same degree of
business efficiency as the private enterprise it will necessarily afford the
workers adequate protection for their savings and capital. Indeed, if
"perfect" co-operative production is to be successful at all its profits will be
larger than those of the capitalistic concern, owing to the greater interest
taken by the workers in their tasks, and in the management of the business.
For a long time to come, however, it is probable that "perfect" co-operative
production will be confined to relatively small and local industries. The
difficulty of finding sufficient workers' capital and ability to carry on, for
example, a transcontinental railroad or a nationwide steel business, is not
likely to be overcome for one or two generations.[157]
The labour co-partnership form of co-operation is susceptible of much
wider and more rapid extension. It can be adapted readily to the very large
as well as to the small and medium sized concerns. Since it requires the
workers to own but a part of the capital, it can be established in any
enterprise in which the capitalists show themselves willing and
sympathetic. In every industrial corporation there are some employés who
possess savings, and these can be considerably increased through the profit
sharing feature of co-partnership. A very long time must, indeed, elapse
before the workers in any of the larger enterprises could get possession of
all, or even of a controlling share of the capital, and a considerable time
would be needed to educate and fit them for successful management.
Production under the direction of the co-operative stores can be extended
faster than either of the other two forms, and it has before it a very wide
even though definitely limited field. The British wholesale societies have
already shown themselves able to conduct with great success large
manufacturing concerns, have trained and attracted an adequate number of
competent leaders, and have accumulated so much capital that they have
been obliged to invest several million pounds in other enterprises. The
possible scope of the stores and their co-operative production has been well
described by C. R. Fay: "distribution of goods for personal consumption,

first, among the working class population, secondly, among the salaried
classes who feel a homogeneity of professional interest; production by
working class organisations alone (with rare exceptions in Italy) of all the
goods which they distribute to their members. But this is its limit.
Distribution among the remaining sections of the industrial population;
production for distribution to these members; production of the instruments
of production, and production for international trade; the services of
transport and exchange: all these industrial departments are, so far as can be
seen, permanently outside the domain of a store movement."[158]
The theory by which the stores attempt to justify the exclusion of the
employés of their productive concerns from a share of the profits thereof is
that all profits come ultimately from the pockets of the consumer, and
should all return to that source. The defect in this theory is that it ignores
the question whether the consumers ought not to be required to pay a
sufficiently high price for their goods to provide the producers with profits
in addition to wages. While the wholesale stores are the owners and
managers of the capital in the productive enterprises, and on the capitalistic
principle should obtain the profits, the question remains whether this is
necessarily a sound principle, and whether it is in harmony with the theory
and ideals of co-operation. In those concerns which have adopted the labour
co-partnership scheme, the workers, even when they own none of the
capital, are accorded a part of the profits. It is assumed that this is a fairer
and wiser method of distribution than that which gives the labourer only
wages, leaving all the profits to the manager-capitalist. This feature of co-
partnership rests on the theory that the workers can, if they will, increase
their efficiency and reduce the friction between themselves and their
employer to such an extent as to make the profit sharing arrangement a
good thing for both parties. Consequently the profits obtained by the
workers are a payment for this specific contribution to the prosperity of the
business. Why should not this theory find recognition in productive
enterprises conducted by the co-operative stores?
In the second place, the workers in these concerns ought to be permitted to
participate in the capital ownership and management. They would thus be
strongly encouraged to become better workers, to save more money, and to
increase their capacity for initiative and self government. Moreover, this
arrangement would go farther than any other system toward reconciling the

interests of producer and consumer. As producer, the worker would obtain,
besides his wages, interest and profits up to the limit set by the competition
of private productive concerns. As consumer, he would share in the profits
and interest which would otherwise have gone to the private distributive
enterprises. In this way the producer and consumer would each get the gains
that were due specifically and respectively to his activity and efficiency.

Advantages and Prospects of Co-operation

At this point it will perhaps be well to sum up the advantages and to
estimate the prospects of the co-operative movement. In all its forms co-
operation eliminates some waste of capital and energy, and therefore
transfers some interest and profits from a special capitalist and undertaking
class to a larger and economically weaker group of persons. For it must be
borne in mind that all co-operative enterprises are conducted mainly by and
for labourers or small farmers. Hence the system always makes directly for
a better distribution of wealth. To a considerable extent it transfers capital
ownership from those who do not themselves work with or upon capital to
those who are so engaged; namely, the labourers and the farmers; thus it
diminishes the unhealthy separation now existing between the owners and
the users of the instruments of production. Co-operation has, in the second
place, a very great educational value. It enables and induces the weaker
members of economic society to combine and utilise energies and resources
that would otherwise remain unused and undeveloped; and it greatly
stimulates and fosters initiative, self confidence, self restraint, self
government, and the capacity for democracy. In other words, it vastly
increases the development and efficiency of the individual. It likewise
induces him to practise thrift, and frequently provides better fields for
investment than would be open to him outside the co-operative movement.
It diminishes selfishness and inculcates altruism; for no co-operative
enterprise can succeed in which the individual members are not willing to
make greater sacrifices for the common good than are ordinarily evoked by
private enterprise. Precisely because co-operation makes such heavy
demands upon the capacity for altruism, its progress always has been and
must always continue to be relatively slow. Its fundamental and perhaps
chief merit is that it does provide the mechanism and the atmosphere for a

greater development of the altruistic spirit than is possible under any other
economic system that has ever been tried or devised.
By putting productive property into the hands of those who now possess
little or nothing, co-operation promotes social stability and social progress.
This statement is true in some degree of all forms of co-operation, but it
applies with particular force to those forms which are carried on by the
working classes. A steadily growing number of keen-sighted social students
are coming to realise that an industrial system which permits a
comparatively small section of society to own the means of production and
the instrumentalities of distribution, leaving to the great majority of the
workers nothing but their labour power, is fundamentally unstable, and
contains within itself the germs of inevitable dissolution. No mere adequacy
of wages and other working conditions, and no mere security of the
workers' livelihood, can permanently avert this danger, nor compensate the
individual for the lack of power to determine those activities of life which
depend upon the possession of property. Through co-operation this
unnatural divorce of the users from the owners of capital can be minimised.
The worker is converted from a mere wage earner to a wage earner plus a
property owner, thus becoming a safer and more useful member of society.
In a word, co-operation produces all the well recognised individual and
social benefits which have in all ages been evoked by the "magic of
property."
Finally, co-operation is a golden mean between individualism and
Socialism. It includes all the good features and excludes all the evil features
of both. On the one hand, it demands and develops individual initiative and
self reliance, makes the rewards of the individual depend upon his own
efforts and efficiency, and gives him full ownership of specific pieces of
property. On the other hand, it compels him to submerge much of the
selfishness and indifference to the welfare of his fellows which characterise
our individual economy. It embraces all the good that is claimed for
Socialism because it induces men to consider and to work earnestly for the
common good, eliminates much of the waste of competitive industry,
reduces and redistributes the burdens of profits and interest, and puts the
workers in control of capital and industry. At the same time, it avoids the
evils of an industrial despotism, of bureaucratic inefficiency, of individual
indifference, and of an all pervading collective ownership. The

resemblances that Socialists sometimes profess to see between their system
and co-operation are superficial and far less important than the differences.
Under both arrangements the workers would, we are told, own and control
the means of production; but the members of a co-operative society directly
own and immediately control a definite amount of specific capital, which is
essentially private property. In a Socialist régime the workers' ownership of
capital would be collective not private, general not specific, while their
control of the productive instruments with which they worked would be
shared with other citizens. The latter would vastly outnumber the workers in
any particular industry, and would be interested therein not as producers but
as consumers. No less obvious and fundamental are the differences in
favour of co-operation as regards the vital matters of freedom, opportunity,
and efficiency.
In so far as the future of co-operation can be predicted from its past, the
outlook is distinctly encouraging. The success attained in credit, agriculture,
and distribution, is a sufficient guarantee for these departments. While
productive co-operation has experienced more failures than successes, it has
finally shown itself to be sound in principle, and feasible in practice. Its
extension will necessarily be slow, but this is exactly what should be
expected by any one who is acquainted with the limitations of human
nature, and the history of human progress. If a movement that is capable of
modifying so profoundly the condition of the workers as is co-operative
production, gave indications of increasing rapidly, we should be inclined to
question its soundness and permanence. Experience has given us abundant
proof that no mere system or machinery can effect a revolutionary
improvement in economic conditions. No social system can do more than
provide a favourable environment for the development of those individual
capacities and energies which are the true and the only causal forces of
betterment.
Nor is it to be expected that any of the other three forms of co-operation
will ever cover the entire field to which it might, absolutely speaking, be
extended; or that co-operation as a whole will become the one industrial
system of the future. Even if the latter contingency were possible it would
not be desirable. The elements of our economic life, and the capacities of
human nature, are too varied and too complex to be forced with advantage
into any one system, whether capitalism, Socialism, or co-operation. Any

single system or form of socio-economic organisation would prove an
intolerable obstacle to individual opportunity and social progress.
Multiplicity and variety in social and industrial orders are required for an
effective range of choices, and an adequate scope for human effort. In a
general way the limits of co-operation in relation to the other forms of
economic organisation have been satisfactorily stated by Mr. Aneurin
Williams: "I suggest, therefore, that where there are great monopolies,
either natural or created by the combination of businesses, there you have a
presumption in favour of State and municipal ownership. In those forms of
industry where individuality is everything; where there are new inventions
to make, or to develop or put on the market, or merely to adopt in some
rapidly transformed industry; where the eye of the master is everything;
where reference to a committee, or appeals from one official to another,
would cause fatal delay: there is the natural sphere of individual enterprise
pure and simple. Between these two extremes there is surely a great sphere
for voluntary association to carry on commerce, manufacture, and retail
trade, in circumstances where there is no natural monopoly, and where the
routine of work is not rapidly changing, but on the whole fairly well
established and constant."[159]
The province open to co-operation is, indeed, very large. If it were fully
occupied the danger of a social revolution would be non-existent, and what
remained of the socio-industrial problem would be relatively undisturbing
and unimportant. The "specialisation of function" in industrial organisation,
as outlined by Mr. Williams, would give a balanced economy in which the
three great socio-economic systems and principles would have full play, and
each would be required to do its best in fair competition with the other two.
Economic life would exhibit a diversity making strongly for social
satisfaction and stability, inasmuch as no very large section of the industrial
population would desire to overthrow the existing order. Finally, the choice
of three great systems of industry would offer the utmost opportunity and
scope for the energies and the development of the individual. And this,
when all is said, remains the supreme end of a just and efficient socio-
industrial organisation.

REFERENCES ON SECTION II

Fisher: The Rate of Interest. New York; 1907.
Cassel: Nature and Necessity of Interest. London; 1903.
Gonner: Interest and Saving. London; 1906.
Landry: L'Intérêt du Capital. Paris; 1904.
Menger: The Right to the Whole Produce of Labour. London; 1899.
Cathrein-Gettelman: Socialism. St. Louis; 1904.
Skelton: Socialism: A Critical Analysis. New York; 1911.
Spargo: Socialism. Macmillan; 1906.
Walling: Socialism As It Is. New York; 1912.
Hillquit-Ryan: Socialism: Promise or Menace? Macmillan; 1914.
Savatier: La Théorie Moderne du Capital et la Justice. Paris; 1898.
Garriguet: Régime du Travail. Paris; 1908.
Funk: Zins und Wucher. Tübingen; 1868.
Holyoake: The History of Co-operation. London; 1906.
Fay: Co-operation at Home and Abroad. London; 1908.
Williams: Copartnership and Profit-Sharing. Henry Holt & Co.; 1913.
Mann, Sievers, Cox: The Real Democracy. London; 1913.
Also the works of Taussig, Devas, Antoine, Hobson, Nearing,
Willoughby, and Hitze, which were given at the end of the introductory
chapter.

SECTION III

THE MORAL ASPECT OF PROFITS

CHAPTER XV
THE NATURE OF PROFITS

We have seen that rent goes to the landlord as the price of land use, while
interest is received by the capitalist as the return for the use of capital. The
two shares of the product which remain to be considered include an element
which is absent from both rent and interest. The use for which profits and
wages are paid comprises not merely the utilisation of a productive factor,
but the sustained exertion of the factor's owner. Like the landowner and the
capitalist, the business man and the labourer put the productive factors
which they control at the disposal of the industrial process; but they do so
only when and so long as they exercise human activity. The shares that they
receive are payments for the continuous output of human energy. No such
significance attaches to rent or interest.

The Functions and Rewards of the Business Man

Who is the business man, and what is the nature of his share of the product
of industry? Let us suppose that the salaried manager of a hat factory
decides to set up a business of the same kind for himself. He wishes to
become an entrepreneur, an undertaker, a director of industry, in more
familiar language, a business man. Let us assume that he is without money,
but that he commands extraordinary financial credit. He is able to borrow
half a million dollars with which to organise, equip, and operate the new
enterprise. Having selected a favourable site, he rents it on a long term
lease, and erects thereon the necessary buildings. He installs all the
necessary machinery and other equipment, hires capable labour, and
determines the kinds and quantities of hats for which he thinks that he can
find a market. At the end of a year, he realises that, after paying for labour
of all sorts, returning interest to the capitalist and rent to the landowner,
defraying the cost of repairs, and setting aside a fund to cover depreciation,
he has left for himself the sum of ten thousand dollars. This is the return for

his labour of organisation and direction, and for the risk that he underwent.
It constitutes the share called profits, sometimes specified as net profits.
This case is artificial, since it assumes that the business man is neither
capitalist nor landowner in addition to his function as director of industry. It
has, however, the advantage of distinguishing quite sharply the action of the
business man as such. For the latter merely organises, directs, and takes the
risks of the industrial process, finds a market for the product, and receives
in return neither rent nor interest but only profits. In point of fact, however,
no one ever functions solely as business man. Always the business man
owns some of the capital, and very often some of the land involved in his
enterprise, and is the receiver not only of profits but of interest and rent.
Thus, the farmer is a business man, but he is also a capitalist, and frequently
a landowner. The grocer, the clothier, the manufacturer, and even the lawyer
and the doctor own a part at least of the capital with which they operate,
and sometimes they own the land. Nevertheless their rewards as business
men can always be distinguished from their returns as capitalists and
landowners by finding out what remains after making due allowance for
rent and interest.
It is a fact that many business men, especially those directing the smaller
establishments, use the term profits to include rent and interest on their own
property. In other words, they describe their entire income from the
business as profits. In the present discussion, and throughout this book
generally, profits are to be understood as comprising merely that part of the
business man's returns which he takes as the reward of his labour, and as
insurance against the risks affecting his enterprise. Deduct from the
business man's total income a sum which will cover interest on his capital at
the prevailing rate and rent on his land, and you have left his income as
business man, his profits.

The Amount of Profits

In a preceding chapter we have seen that where the conditions of capital are
the same, there exists a fairly uniform rate of interest. No such uniformity
obtains in the field of profits. Businesses subject to the same risks and
requiring the same kind of management yield very different amounts of

return to their directors. In a sense the business man may be regarded as the
residual claimant of industry. This does not mean that he takes no profits
until all the other agents of production have been fully remunerated, but that
his share remains indeterminate until the end of the productive period, say,
six months or a year, while the shares of the other agents are determined
beforehand. At the end of the productive period, the business man may find
that his profits are large, moderate, or small, while the landowner, the
capitalist, and the labourer ordinarily obtain the precise amounts of rent,
interest, and wages that they had expected to obtain. That there exists no
definite upper limit to profits is proved by the history of modern
millionaires. That there exists no rigid lower limit is proved by the large
proportion of enterprises that meet with failure.
Nevertheless it would be wrong to infer that the volume of profits is
governed by no law whatever, or that they show no tendency toward
uniformity in any part of the industrial field. There is a calculated or
preconceived minimum. No man will embark in business for himself unless
he has reason to expect that it will yield him, in addition to protection
against risks, an income as large as he could obtain by hiring his services to
some one else. In other words, contemplated profits must be at least equal
to the income of the salaried business manager. No tendency toward
uniformity of profits exists among very large enterprises nor among
industries which are constantly adopting new methods and new inventions.
In businesses of small and moderate size, and in those whose methods have
become standardised, such as a retail grocery store, or a factory that turns
out staple kinds of shoes, profits tend to be about the same in the great
majority of establishments. In such industries the profits of the business
man do not often exceed the salary that he could command as general
manager for some one else in the same kind of business.
Professor King estimates the total volume of profits in the United States in
1910 as almost eight and one-half billion dollars. This was 27.5 per cent. of
the national product, as against 24.6 per cent. in 1890 and 30 per cent. in
1900.[160] He interprets the fall in the wage earners' share which has taken
place since 1890 (53.5 to 46.9 per cent.) as indicating a considerable
increase in the share of those business men who control the very large
industries. "The promoters and manipulators of these concerns have
received, as their share of the spoils, permanent income claims, in the shape

of securities, large enough to make Crœsus appear like a pauper."[161]
Moreover, even outside this monopoly field, the more able and successful
business men seem to have obtained in recent years what might be termed a
relatively large share of the product of industry. The exceptionally efficient
undertakers, those possessing the imagination, foresight, judgment, and
courage to take full advantage of the recent improvements in the industrial
arts, and in the methods of production generally, seem to have advanced in
wealth and income more rapidly than any other class that has been subject
to the operation of competition.

Profits in the Joint-Stock Company

Up to this point we have been considering the independent business man,
the undertaker who manages his enterprise either alone or as a member of a
partnership. In all such concerns it is easy to identify the business man.
Who or where is the business man in a joint stock company? Where are the
profits, and who gets them?
Strictly speaking, there is no undertaker or business man in a corporation.
His functions of ownership, responsibility, and direction are exercised by
the whole body of stockholders through the board of directors and other
officers. It is true that in very many, probably in most corporations, one or a
very few of the largest stockholders dominate the policies of the concern,
and exercise almost as much power and authority as though they were the
sole owners. Neither these, however, nor any other officer in a corporation
receives profits in the same sense as the independent owner of a business.
For their active services the officers of the corporation are given salaries;
for the risks that they undergo as owners of the stock they are compensated
in the same way as all the other stockholders, that is, through a sufficiently
high rate of dividend. For example, in railroads the bonds usually pay from
four to five per cent., the stock from five to six per cent. The bonds
represent borrowed money, and are secured by a mortgage on the physical
property. The stock represents the money invested by the owners, and is
subject to all the risks of ownership; hence its holders require the protection
which is afforded by the extra one per cent. which they obtain over that paid
to the bondholders.

While a corporation has no profits in the sense of a reward for directive
activity or a protection against risk, it frequently possesses profits in the
sense of a surplus which remains after costs and expenses of every kind
have been defrayed. These profits are ordinarily distributed pro rata among
the stockholders, either outright in the form of an extra dividend, or
indirectly through enlargement of the property and business of the
company. They are surplus gains or profits having the same intermittent and
speculative character as the extra gains which the individual business man
sometimes obtains in addition to those profits which are necessary to
remunerate him for his labour, and protect him against risks. They are not
profits in the ordinary economic sense of the term.

CHAPTER XVI
THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE

Before taking up the question of the morality of profits, it will be helpful, if
not necessary, to consider the chief rules of justice that have been or might
be adopted in distributing the product of industry among those who
participate actively in the productive process. While the discussion is
undertaken with particular reference to the rewards of the business man, it
will also have an important bearing on the compensation of the wage earner.
The morality of rent and interest depends upon other principles than those
governing the remuneration of human activity; and it has been sufficiently
treated in chapters xii and xiii. The canons of distribution applicable to our
present study are mainly six in number: arithmetical equality; proportional
needs; efforts and sacrifices; comparative productivity; relative scarcity;
and human welfare.

The Canon of Equality

According to the rule of arithmetical equality, all persons who contribute to
the product should receive the same amount of remuneration. With the
exception of Bernard Shaw, no important writer defends this rule to-day. It
is unjust because it would treat unequals equally. Although men are equal as
moral entities, as human persons, they are unequal in desires, capacities,
and powers. An income that would fully satisfy the needs of one man would
meet only 75 per cent., or 50 per cent., of the capacities of another. To allot
them equal amounts of income would be to treat them unequally with
regard to the requisites of life and self development. To treat them
unequally in these matters would be to treat them unequally as regards the
real and only purpose of property rights. That purpose is welfare. Hence the
equal moral claims of men which admittedly arise out of their moral
equality must be construed as claims to equal degrees of welfare, not to
equal amounts of external goods. To put the matter in another way, external
goods are not welfare; they are only means to welfare; consequently their

importance must be determined by their bearing upon the welfare of the
individual. From every point of view, therefore, it is evident that justice in
industrial distribution must be measured with reference to welfare rather
than with reference to incomes, and that any scheme of distribution which
provided equal incomes for all persons would be radically unjust.
Moreover, the rule of equal incomes is socially impracticable. It would
deter the great majority of the more efficient from putting forth their best
efforts and turning out their maximum product. As a consequence, the total
volume of product would be so diminished as to render the share of the
great majority of persons smaller than it would have been under a rational
plan of unequal distribution.

The Canon of Needs

The second conceivable rule is that of proportional needs. It would require
each person to be rewarded in accordance with his capacity to use goods
reasonably. If the task of distribution were entirely independent of the
process of production, this rule would be ideal; for it would treat men as
equal in those respects in which they are equal; namely, as beings endowed
with the dignity and the potencies of personality; and it would treat them as
unequal in those respects in which they are unequal; that is, in their desires
and capacities. But the relation between distribution and production cannot
be left out of account. The product is distributed primarily among the agents
of production only, and it must be so distributed as to give due
consideration to the moral claims of the producer as such. The latter has to
be considered not merely as a person possessing needs, but as a person who
has contributed something to the making of the product. Whence arise the
questions of relative efforts and sacrifices, and relative productivity.
Since only those who have contributed to the product participate in the
distribution thereof, it would seem that they should be rewarded in
proportion to the efforts and sacrifices that they exert and undergo. As an
example of varying effort, let us take two men of equal needs who perform
the same labour in such a way that the first expends 90 per cent. of his
energy, while the second expends 60 per cent. As an example of varying
sacrifice, let us take the ditch digger, and the driver who sits all day on the

dump wagon. In both these examples the first man expends more painful
exertion than the second. This would seem to make a difference in their
moral desert. Justice would seem to require that in each case compensation
should be proportionate to exertion rather than to needs. At any rate, the
claims of needs should be modified to some extent in favour of the claims
of exertion. It is upon the principle of efforts and sacrifices that we expect
our eternal rewards to be based by the infinitely just Rewarder. The
principle of needs is likewise in conflict with the principle of comparative
productivity. Men generally demand rewards in proportion to their products.
The validity of this demand we shall examine in a subsequent paragraph.
Like the rule of arithmetical equality, the rule of proportional needs is not
only incomplete ethically but impossible socially. Men's needs vary so
widely and so imperceptibly that no human authority could use them as the
basis of even an approximately accurate distribution. Moreover, any attempt
to distribute rewards on this basis alone would be injurious to social
welfare. It would lead to a great diminution in the productivity of the more
honest, the more energetic, and the more efficient among the agents of
production.

The Canon of Efforts and Sacrifice

The third canon of distribution, that of efforts and sacrifices, would be
ideally just if we could ignore the questions of needs and productivity. But
we cannot think it just to reward equally two men who have expended the
same quantity of painful exertion, but who differ in their needs and in their
capacities of self development. To do so would be to treat them unequally in
the matter of welfare, which is the end and reason of all distribution.
Consequently the principle of efforts and sacrifices must be modified by the
principle of needs. Apparently it must also give way in some degree to the
principle of comparative productivity. When two men of unequal powers
make equal efforts, they turn out unequal amounts of product. Almost
invariably the more productive man believes that he should receive a
greater share of the product than the other. He believes that the rewards
should be determined by productivity.

It is evident that the rule of efforts and sacrifices, like those of equality and
needs, could not be universally enforced in practice. With the exception of
cases in which the worker is called upon regularly to make greater
sacrifices owing to the disagreeable nature of the task, attempts to measure
the amounts of effort and painful exertion put forth by the different agents
of production would on the whole be little more than rough guesses. These
would probably prove unsatisfactory to the majority. Moreover, the
possessors of superior productive power would in most instances reject the
principle of efforts and sacrifices as unfair, and refuse to do their best work
under its operation.
The three rules already considered are formally ethical, inasmuch as they
are directly based upon the dignity and claims of personality. The two
following are primarily physical and social; for they measure economic
value rather than ethical worth. Nevertheless, they must have a large place
in any system which includes the factor of competition.

The Canon of Productivity

According to this rule, men should be rewarded in proportion to their
contributions to the product. It is open to the obvious objection that it
ignores the moral claims of needs and efforts. The needs and use-capacities
of men do, indeed, bear some relation to their productive capacities, and the
man who can produce more usually needs more; but the differences
between the two elements are so great that distribution based solely upon
productivity would fall far short of satisfying the demands of needs. Yet we
have seen that needs constitute one of the fundamentally valid principles of
distribution. Between productivity on the one hand and efforts and
sacrifices on the other, there are likewise important differences. When men
of equal productive power are performing the same kind of labour, superior
amounts of product do represent superior amounts of effort; when the tasks
differ in irksomeness or disagreeableness, the larger product may be
brought into being with a smaller expenditure of painful exertion. If men
are unequal in productive power their products are obviously not in
proportion to their efforts. Consider two men whose natural physical
abilities are so unequal that they can handle with equal effort shovels
differing in capacity by fifty per cent. Instances of this kind are innumerable

in industry. If these two men are rewarded according to productivity, one
will get fifty per cent. more compensation than the other. Yet the surplus
received by the more fortunate man does not represent any action or quality
for which he is personally responsible. It corresponds to no larger output of
personal effort, no superior exercise of will, no greater personal desert. It is
based solely upon a richer physical endowment by the Creator.
It is clear, then, that the canon of productivity cannot be accepted to the
exclusion of the principles of needs and efforts. It is not the only ethical rule
of distribution. Is it a valid partial rule? Superior productivity is frequently
due to larger effort and expense put forth in study and in other forms of
industrial preparation. In such cases it demands superior rewards by the title
of efforts and sacrifices. Where, however, the greater productivity is due
merely to higher native qualities, physical or mental, the greater reward is
not easily justified on purely ethical grounds. For it represents no personal
responsibility, will-effort, or creativeness. Nevertheless, the great majority
of the more fortunately endowed think that they are unfairly treated unless
they are recompensed in proportion to their products. Sometimes this
conviction is due to the fact that such men wrongly attribute their larger
product to greater efforts. In very many cases, however, the possessors of
superior productive power believe that they should be rewarded in
proportion to their products, regardless of any other principle or factor.
Probably the true explanation of this belief is to be found in man's innate
laziness. While the prevalence of the conviction that superior productivity
constitutes a just title to superior compensation, does create some kind of a
presumption in favour of its correctness, it must be remembered that
presumption is not proof. Weighing this presumption against the objective
considerations on the opposite side of the argument, we take refuge in the
conclusion that the ethical validity of the canon of comparative productivity
can neither be certainly proved nor certainly disproved.
Like the rules of equality, needs, and efforts, that of productivity cannot be
universally enforced in practice. It is susceptible of accurate application
among producers who perform the same kind of work with the same kind of
instruments and equipment; for example, between two shovellers, two
machine operators, two bookkeepers, two lawyers, two physicians. As a
rule, it cannot be adequately applied to a product which is brought into
existence through a combination of different processes. The engine driver

and the track repairer contribute to the common product, railway
transportation; the bookkeeper and the machine tender co-operate in the
production of hats; but we cannot tell in either case whether the first
contributes more or less than the second, for the simple reason that we have
no common measure of their contributions. Sometimes, however, we can
compare the productivity of individuals engaged in different processes; that
is, when both can be removed from the industry without causing it to come
to a stop. Thus, it can be shown that a single engine driver produces more
railway transportation than a single track repairer, because the labour of the
latter is not indispensable to the hauling of a given load of cars. But no such
comparison can be made as between the whole body of engine drivers and
the whole body of track repairers, since both groups are indispensable to the
production of railway transportation. Again, a man can be shown to exert
superior productivity because he affects the productive process at more
points and in a more intimate way than another who contributes to the
product in a wholly different manner. While the surgeon and the attendant
nurse are both necessary to a surgical operation, the former is clearly more
productive than the latter. When due allowance is made for all such cases,
the fact remains that in a large part of the industrial field it is simply
impossible to determine remuneration by the rule of comparative
productivity.

The Canon of Scarcity

It frequently happens that men attribute their larger rewards to larger
productivity, when the true determining element is scarcity. The immediate
reason why the engine driver receives more than the track repairer, the
general manager more than the section foreman, the floorwalker more than
the salesgirl, lies in the fact that the former kinds of labour are not so
plentiful as the latter. Were general managers relatively as abundant as
section foremen their remuneration would be quite as low; and the same
principle holds good of every pair of men whose occupations and products
are different in kind. Yet the productivity of the general managers would
remain as great as before. On the other hand, no matter how plentiful the
more productive men may become, they can always command higher
rewards than the less productive men in the same occupation, for the simple
reason that their products are superior either in quantity or in quality. Men

engaged upon the more skilled tasks are likewise mistaken when they
attribute their greater compensation to the intrinsic excellence of their
occupation. The fact is that the community cares nothing about the relative
nobility, or ingenuity, or other inherent quality of industrial tasks or
functions. It is concerned solely with products and results. As between two
men performing the same task, superior efficiency receives a superior
reward because it issues in a larger or better product. As between two men
performing different tasks, superior skill receives superior compensation
simply because it can command the greater compensation; and it is able to
do this because it is scarce.
In most cases where scarcity is the immediate determinant of rewards, the
ultimate determinant is, partly at least, some kind of sacrifice. One reason
why chemists and civil engineers are rarer than common labourers is to be
found in the greater cost of preparation. The scarcity of workers in
occupations that require no special degree of skill is due to unusual hazards
and unpleasantness. In so far as scarcity is caused by the uncommon
sacrifices preceding or involved in an occupation, the resulting higher
rewards obviously rest upon most solid ethical grounds. However, some
part of the differences in scarcity is the result of unequal opportunities. If all
young persons had equal facilities of obtaining college and technical
training, the supply of the higher kinds of labour would be considerably
larger than it now is, and the compensation would be considerably smaller.
Scarcity would then be determined by only three factors; namely, varying
costs of training, varying degrees of danger and unattractiveness among
occupations, and inequalities in the distribution of native ability. As a
consequence, competition would tend to apportion rewards according to
efforts, sacrifices, and efficiency.
How can we justify the superior rewards of that scarcity which is not due to
unusual costs of any sort, but merely to restricted opportunity? So far as
society is concerned, the answer is simple: the practice pays. As to the
possessors of the rarer kinds of ability, they are in about the same ethical
position as those persons whose superior productivity is derived entirely
from superior native endowment. In both cases the unusual rewards are due
to factors outside the control of the recipients; to advantages which they
themselves have not brought into existence. In the former case the decisive
factor and advantage is opportunity; in the latter it is a gift of the Creator.

Now we have seen that this sort of productivity cannot be proved to be
immoral as a canon of distribution; consequently the same statement will
hold good of this sort of scarcity.

The Canon of Human Welfare

We say "human" welfare rather than "social" welfare, in order to make clear
the fact that this canon considers the well being of men not only as a social
group, but also as individuals. It includes and summarises all that is
ethically and socially feasible in the five canons already reviewed. It takes
account of equality, inasmuch as it regards all men as persons, as subjects of
rights; and of needs, inasmuch as it awards to all the necessary participants
in the industrial system at least that amount of remuneration which will
meet the elementary demands of decent living and self development. It is
governed by efforts and sacrifices, at least in so far as they are reflected in
productivity and scarcity; and by productivity and scarcity to whatever
extent is necessary in order to produce the maximum net results. It would
give to every producer sufficient remuneration to evoke his greatest net
contribution to the productive process. Greatest "net" contribution; for a
man's absolute maximum product may not always be worth the required
price. For example: a man who for a salary of 2500 dollars turns out a
product valued at 3000 dollars, should not be given 3000 dollars in order to
induce him to bring forth a product worth 3300 dollars. In this case a salary
of 2500 dollars evokes the maximum net product, and represents the reward
which would be assigned by the canon of human welfare. Once the vital
needs of the individual have been safeguarded, the supreme guide of the
canon of human welfare is the principle of maximum net results, or the
greatest product at the lowest cost.
It is not contended here that this canon ought never to undergo modification
or exception. Owing to the exceptional hazards and sacrifices of their
occupation, a combination of producers might be justified in exacting larger
compensation than would be accorded them by the canon of human welfare
on the basis of net results in the present conditions of supply and scarcity.
Unusual needs and capacities might also justify a strong group in pursuing
the same course. All that is asserted at present is that in conditions of

average competition the canon of human welfare is not unjust. And this is
all that is necessary as a preliminary to the discussion of just profits.[162]

CHAPTER XVII
JUST PROFITS IN CONDITIONS OF COMPETITION

We have seen that profits are that share of the product of industry which
goes to the business man. They comprise that residual portion which he
finds in his hands after he has made all expenditures and allowances for
wages, salaries, interest at the prevailing rate on both his own and the
borrowed capital, and all other proper charges. They constitute his
compensation for his labour of direction, and for the risks of his enterprise
and capital.
In the opinion of most Socialists, profits are immoral because they are an
essential element of an unjust industrial system, and because they are not
entirely based upon labour. Under Socialism the organising and directing
functions that are now performed by the business man, would be allotted to
salaried superintendents and managers. Their compensation would include
no payment for the risks of capital, and it would be fixed instead of
indeterminate. Hence it would differ considerably from present-day profits.
To the assertion that profits are immoral a sufficient reply at this time is that
Socialism has already been shown to be impracticable and inequitable.
Consequently the system of private industry is essentially just, and profits,
being a necessary element of the system, are essentially legitimate. The
question of their morality is one of degree not of kind. It will be considered
under two principal heads: the right of the business man to obtain
indefinitely large profits; and his right to a certain minimum of profits.

The Question of Indefinitely Large Profits

As a general rule, business men who face conditions of active competition
have a right to all the profits that they can get, so long as they use fair
business methods. This means not merely fair and honest conduct toward
competitors, and buyers and sellers, but also just and humane treatment of

labour in all the conditions of employment, especially in the matter of
wages. When these conditions are fulfilled, the freedom to take indefinitely
large profits is justified by the canon of human welfare. The great majority
of business men in competitive industries do not receive incomes in excess
of their reasonable needs. Their profits do not notably exceed the salaries
that they could command as hired managers, and generally are not more
than sufficient to reimburse them for the cost of education and business
training, and to enable them to live in reasonable conformity with the
standard of living to which they have become accustomed.
Efforts and sacrifices are reflected to some extent in the different amounts
of profits received by different business men. When all due allowance is
made for chance, productivity, and scarcity, a considerable proportion of
profits is attributable to harder labour, greater risk and worry, and larger
sacrifices. Like the principle of needs, that of efforts and sacrifices is a
partial justification of the business man's remuneration.
Those profits which cannot be justified by either of the titles just
mentioned, are ethically warranted by the principles of productivity and
scarcity. This is particularly true of those exceptionally large profits which
can be traced specifically to that unusual ability which is exemplified in the
invention and adoption of new methods and processes in progressive
industries. The receivers of these large rewards have produced them in
competition with less efficient business men. While the title of productivity
does not entirely satisfy the seeker for decisive ethical sanctions, it is
stronger morally than any opposing considerations that can be invoked. It is
probably as strong as some other principles that we have to accept as the
best attainable in the very difficult field of industrial ethics.
Nevertheless, it would seem that those business men who obtain
exceptionally large profits could be reasonably required to transfer part of
their gains to their employés in the form of higher wages, or to the
consumers in the form of lower prices. Both of these methods have been
followed by Henry Ford, the automobile manufacturer. Neither of them is
certainly demanded by the principles of strict justice; they rest upon the
feebler and less decisive principle of general equity or fairness.[163] This
concept is less definite than those of charity and justice, and stands midway
between them. It comes into operation when an action is obligatory on

stricter grounds than those of charity, and yet cannot with certainty be
required on grounds of justice. Notwithstanding its vagueness, it is
sufficiently strong to make the average conscientious man feel
uncomfortable if he neglects its prescriptions entirely. It has, therefore,
sufficient practical value to deserve a place in the ethics of distribution. And
it seems to have sufficient application to the problem before us to justify the
statement that the receivers of exceptionally large profits are bound in
equity to share them with those persons who have co-operated in producing
and providing them, namely, wage earners and consumers.
In the field of profits the canon of human welfare is not only sound
ethically but expedient socially. It permits the great majority of business
men to obtain, if they can, sufficient remuneration to meet their reasonable
needs. Whether it requires society to guarantee at least this amount of
profit-income is a question that we shall examine presently. It encourages
efforts, and makes for the maximum social product by permitting business
men to retain all the profits that they can get in conditions of fair
competition. Does it forbid any attempt by society to limit exceptionally
large profit-incomes? If the limit were placed very high, say, at 50,000
dollars per year, it would not apparently check the productive efforts of the
great majority of business men, since they never hope to pass that figure.
Whether it would have a seriously discouraging effect upon the activity and
ambition of those who do hope to reach, and of those who have already
reached that level, is uncertain. Among business men who are approaching
or who have passed the 50,000 dollars annual profit-income mark, the
desire to possess more money is frequently weaker as a motive to business
activity than the longing for power and the driving force of habit. At any
rate, the question is not very practical. Any sustained attempt to limit profits
by law would require such extensive and minute supervision of business
that the policy would prove to be socially intolerable and unprofitable. The
espionage involved in the policy would provoke general resentment, and the
amount of profits that could be diverted either to the State or to private
persons would be relatively insignificant.
Thus far we have been considering the independent business man and
business firm, not the joint stock company or corporation. In the latter form
of organisation, the labour of direction is remunerated by fixed salaries to
the executive officers, while the risks of enterprise and capital are covered

by the regular dividends received by the whole body of stockholders.
Consequently the only revenues comparable to profits are the surplus gains
that remain after wages, salaries, interest, dividends, rent, and all other
expenses and charges have been met. These are apportioned through one
process or another among the stockholders. On what ethical principle can
they be thus distributed? The general principle of productivity, or superior
productivity, is the only one available. If a corporation which uses fair
methods of competition can obtain surplus gains, while the majority of its
competitors fail to do so, the cause must be sought in its superior business
management. This superiority must be credited to the whole body of
stockholders, even though the great majority of them are responsible for it
only in a very remote way, through their selection of the executive officers.
The stockholders surely have a better claim to these surplus gains than any
other group in the community. At the same time, they are, like the
independent business man, bound by the principle of equity to share the
surplus with the labourers and consumers.

The Question of Minimum Profits

Has the business man a strict right to a minimum living profit? In other
words, have all business men a right to a sufficient volume of sales at
sufficiently high prices to provide them with living profits or a decent
livelihood? Such a right would imply a corresponding obligation upon the
consumers, or upon society, to furnish the requisite amount of demand at
the required prices. Is there such a right, and such an obligation?
No industrial right is absolute. They are all conditioned by the possibilities
of the industrial system, and by the desires, capacities, and actions of the
persons who enter into industrial relations with one another. As we shall see
later, this statement is true even of the right to a living wage. When the
industrial resources are adequate, all persons of average ability who
contribute a reasonable amount of labour to the productive process have a
right to a decent livelihood on two conditions: first, that such labour is their
only means of sustenance; and, second, that their labour is economically
indispensable to those who utilise it or its product. "Economically
indispensable" means that the beneficiary of the labour would rather give
the equivalent of a decent livelihood for it than go without it. While both

these conditions are apparently fulfilled in the case of the great majority of
wage earners, they are only rarely realised with regard to business men. In
most instances the business man who is unable to make living profits could
become an employé, and thus convert his right to a decent livelihood into a
right to a living wage. Even when no such alternative is open to him, he
cannot claim a strict right to living profits, for the second condition stated
above remains unfulfilled. The consuming public does not regard the
business function of such men as economically indispensable. Rather than
pay the higher prices necessary to provide living profits for the inefficient
business men, consumers will transfer their patronage to the efficient
competitors. Should the retail grocer, for example, raise his prices in the
effort to get living profits, his sales would fall off to such an extent as to
reduce his profits still lower. While the consumers may be willing to fulfil
their obligation of furnishing living profits for all necessary grocers, they
are not willing, nor are they morally bound, to do so in the case of grocers
whose inability to command sufficient patronage at remunerative prices
shows that they are not necessary to the community. The consuming public
does not want to employ such business men at such a cost.
Nor is the State under obligation to ensure living profits for all business
men. To carry out such a policy, either by enforcing a sufficiently high level
of prices, or by subsidising those who fail to obtain living profits, would be
to compel the public to support inefficiency.
In the foregoing paragraphs we have assumed that the inability of the
business men under consideration to get living profits is due to their own
lack of capacity as compared with their more efficient competitors. When,
however, their competitors are not more efficient, but are enabled to
undersell through the use of unfair methods, such as adulteration of goods
and oppression of labour, a different moral situation is presented. Honest
and humane business men undoubtedly have a claim upon society to
protection against such unfair competition. And the consumers are under
obligation to make reasonable efforts to withhold their patronage from those
business men who practise dishonesty and extortion.

The Question of Superfluous Business Men

Although we have rejected as impractical the proposal to set a legal limit to
profit-incomes, we have to admit that many of the abler business men
would continue to do their best work even if the profits that they could hope
to obtain were considerably smaller in volume. These men hold a strategic
position in industry, inasmuch as they are not subject to the same degree of
constant competition as the other agents of production.[164] Were the supply
of superior business capacity more plentiful, their rewards would be
automatically reduced, and the burden of profits resting upon society would
be to that extent diminished. On the other hand, the number of mediocre
business men, especially in the distributive industries, is much larger than is
necessary to supply the wants of the community. This constitutes a second
unnecessary volume of payments under the head of profits. Is there no way
by which these wastes can be reduced?
The volume of exceptionally large profits could be diminished by an
extension of the facilities of technical and industrial education. Thus the
number of persons qualifying as superior business men could be gradually
increased, competition among this class of men would be intensified, and
their rewards correspondingly diminished.
The profits that go to superfluous business men, especially in the class
known as middlemen, can be largely eliminated through combination and
co-operation. The tendency to unite into a single concern a large number of
small and inefficient enterprises should be encouraged up to the point at
which the combination threatens to become a monopoly. That this process is
capable of effecting a considerable saving in business profits as well as in
capital, has been amply demonstrated in several different lines of enterprise.
As we have seen in a preceding chapter, the co-operative movement,
whether in banking, agriculture, or stores, has been distinctly successful in
reducing profits. Millions of dollars are thus diverted every year from
unnecessary profit-receivers to labourers, consumers, and to the man of
small resources generally. Yet the co-operative movement is only in its
infancy. It contains the possibility of eliminating entirely the superfluous
business man, and even of diminishing considerably the excessive profits of
the exceptionally able business man.

CHAPTER XVIII
THE MORAL ASPECT OF MONOPOLY

The conclusion was drawn in the last chapter that the surplus gains of
corporations operating in conditions of competition, can justly be retained
by the stockholders as the remuneration of exceptional productive
efficiency. It is, of course, to be understood that the proper allowance for
interest on the capital is not necessarily the amount authorised by the
stipulated rate of dividend on the stock, but the prevailing or competitive
rate of interest plus an adequate rate of insurance against the risks of the
enterprise. If the prevailing rate of interest is five per cent., and the risk is
sufficiently protected by an allowance of one per cent., the fair rate of
return on the investment is six per cent. The fact that a concern may
actually award its stockholders ten per cent. dividends, has no bearing on
the determination of the genuine surplus. If the actual surplus that remains
after paying all other charges and allowing ten per cent. on the stock, is only
50,000 dollars, whereas it would be 100,000 dollars with an allowance of
only six per cent., then the true surplus gains, or profits, are the latter
amount not the former. No part of the 100,000 dollars can be justified as
interest on capital. It must all find its justification as profits proceeding
from superior productivity.
Bearing in mind this distinction between the actual rate of dividend and the
proper allowance for interest on capital, we take up the question of the
morality of profits or surplus gains in conditions of monopoly.

Surplus and Excessive Profits

Several of the great industrial combinations of the United States have
obtained profits which are commonly stigmatised as "excessive." For
example, the Standard Oil Company paid, from 1882 to 1906, an average
annual dividend of 24.15 per cent. on the capital stock, and had profits in
addition at the rate of about 8 per cent. annually;[165] from 1904 to 1908 the

American Tobacco Company averaged 19 per cent. on its actual investment;
[166]
and the United States Steel Corporation obtained an average annual
return of 12 per cent. on its investment from 1901 to 1910.[167] A complete
list of the American monopolies that have reaped more than the competitive
rate of return on their capital would undoubtedly be a very long one.
Is it possible to justify such returns? Has a monopoly a right to take surplus
gains? Let us suppose a concern which is getting 15 per cent. on its
investment. Inasmuch as the risks are smaller than in competitive
enterprises, six per cent. is an ample allowance for interest. Of the
remaining 9 per cent., 4 per cent., we shall assume, is derived from
economies of production as compared with the great majority of
competitive concerns. This portion of the surplus, being the reward of
superior efficiency, may be retained by the owners of the monopoly quite as
justly as similar gains are taken by the exceptionally efficient corporation in
conditions of competition. The objection that the monopoly ought to share
these gains with the public, since it limits individual opportunity in a
socially undesirable way, has some merit, but it can scarcely be urged on
grounds of strict justice. At most it points only to an obligation in equity.
By what canon of distribution can the retention of the other 5 per cent. of
surplus gain be justified? Not by the titles of needs and efforts, for these
have already been satisfied through the salaries paid to those stockholders
who perform labour in the management of the concern. These titles afford
no basis for any other claim than that which proceeds from labour. They
cannot be made to justify claims made on behalf of capital. Not by the title
of productivity, for this has already been remunerated in the 4 per cent. just
considered. Not as interest on capital, for ample allowance has already been
made under this head in the original 6 per cent. As we have seen in an
earlier chapter, the only reasons that give ethical support to interest on
capital are the sacrifice that is involved in some kinds of saving, the
possibility that interest is necessary in order to induce the provision of
sufficient capital, the certainty that the State would be unable to enforce the
abolition of interest, and some presumptive considerations. Since all of
these reasons and ends are satisfied by the competitive rate of interest, none
of them will justify the exaction of more than the competitive rate. It is not
possible to justify a higher rate on either social or individual grounds.
Therefore, the only basis that is left upon which to defend the retention of

the five per cent. surplus that we are discussing, is the power of
appropriation. The monopoly possesses the economic strength to take this
five per cent. because it is able to impose higher than competitive prices
upon the consumer. Obviously such power has no greater ethical sanction or
validity than the pistol of the highwayman. In both cases the gains are the
product of extortion.
The conclusion that men have no right to more than the competitive rate of
interest, as interest, on their capital, and that a monopoly has consequently
no right to those surplus gains that are not produced by superior efficiency,
is confirmed by public opinion and by the decisions of the courts. The
monopolistic practice of taking more than the usual rate of returns on
capital merely because there exists the power to take it, is universally
condemned as inequitable. In fixing the charges of public service
corporations, the courts with practical unanimity allow only the rate of
return that is obtainable in competitive conditions of investment.
The statement that the monopoly may retain those surplus gains which are
derived from superior efficiency assumes, of course, that fair wages have
been paid to employés, and fair prices to the sellers of materials, and that
fair methods have been used toward competitors. In so far as any of these
conditions is not met, the monopolistic concern has no right to surplus gains
of any sort. All three of the claims just mentioned are morally stronger than
the claim to superior rewards because of superior efficiency.

The Question of Monopolistic Efficiency

So much for the moral principle. What proportion of the surplus gains of
monopoly are due to extortionate prices rather than to economies in
production, cannot be known even approximately. According to Justice
Brandeis, who is one of the most competent authorities in this field, only a
very small part of these gains are derived from superior efficiency.[168]
Professor E. S. Meade writes: "During a decade [1902-1912] of
unparalleled industrial development, the trusts, starting with every
advantage of large capital, well-equipped plants, financial connections, and
skilled superintendence, have not succeeded."[169] On the other hand,
President Van Hise thinks that, "the weight of argument is strongly in

favour of the increased efficiency of large combinations of industry on the
average."[170] The difference of opinion existing among students of this
subject is due to lack of adequate data, particularly to the absence of such
uniform and comprehensive systems of accounting as would be required to
provide a basis for reliable general conclusions. Opposing particular
statements may be equally true, because based upon different instances; but
general statements are little better than guesses.
Let us approach the question from another side, that of prices. Whenever
the charges imposed by monopolistic concerns upon their products are
higher than those that would have prevailed under competition, the surplus
gains are obviously to that extent not due to superior efficiency. They have
their source in the arbitrarily made prices. The Final Report of the United
States Industrial Commission, which was made at the beginning of the year
1902, declared that, "in most cases the combination has exerted an
appreciable power over prices, and in practically all cases it has increased
the margin between raw materials and finished products."[171] Since the cost
of production had decreased during the preceding decade, this increase in
the margin, and the ensuing increased profits, necessarily involved an
increase in prices to the consumer. Taking the period of 1897-1910, and
comparing the movement of prices between eighteen important trust-
controlled products, and the same number of important commodities not
produced by monopolistic concerns, Professor Meade concluded that the
former were sold at a "much lower" relative level than the latter.[172] His
computations were based upon figures compiled by the Bureau of Labour.
According to the Commissioner of Corporations, the Standard Oil
Company "has taken advantage of its monopoly power to extort prices
much higher than would have existed under free competition."[173] The
same authority shows that the American Tobacco Company used its power
to obtain considerably more than competitive prices on some of its
products.[174] Excessive prices, as measured by the standards of
competition, were also established by the United States Steel Corporation,
the American Sugar Refining Company, and the combinations in meat
packing and in lumber.[175]
A safe statement would probably be that the greater part of the surplus gains
of the most conspicuous American monopolies have been due to excessive

prices rather than to economies of production.
Let us turn from the subject of unjust monopoly gains to that of unfair
methods used by the great combinations toward their competitors. These
methods are mainly three: discriminative underselling, exclusive-selling
contracts, and advantages in transportation.

Discriminative Underselling

The first of these practices is exemplified when a monopoly sells its goods
at unprofitably low rates in competitive territory, while maintaining higher
prices elsewhere; and when it offers at very low prices those kinds of goods
which are handled by competitors, while holding at excessively high prices
the kinds of commodities over which it has exclusive control. Both forms of
the practice seem to have been extensively used by most of the
monopolistic concerns of America.[176] The Standard Oil Company has
been perhaps the most conspicuous offender in this field.[177] This practice
is unjust because it violates the fundamental moral principle that a man has
a right to pursue a lawful good without hindrance through illicit means.
Among the illicit means enumerated by the moral theologians are force,
fraud, deception, lying, slander, intimidation, and extortion.[178]
The illicit means employed in discriminative underselling are chiefly
extortion and deception. If the very low prices at which the monopoly sells
in the field which contains competitors were maintained outside of that field
also, and if they were continued not merely until the independent concerns
were driven out of business, but indefinitely afterward, no injustice would
be done the latter. For no man has a natural right to any particular business.
If a powerful concern can eliminate competitors through low prices made
possible by superior efficiency, the competitors are not unjustly treated.
They have no more just cause of complaint than the inefficient grocer
whose custom is attracted from him by other and more efficient merchants.
The offence is at the worst contrary to charity. But when the monopoly
maintains the low and competition-eliminating prices only locally and
temporarily, when it is enabled to establish and continue these prices only
because it sells its goods at extortionate rates elsewhere, the latter prices are
evidently the instrument or means by which the competitors are injured and

eliminated. In that case the monopoly violates the right of the competitors
to pursue a lawful good immune from unfair interference. The lawful good
is a livelihood from this kind of business; and the illicit interference is the
unjust prices maintained outside the competitive field.
In the preceding paragraph we have assumed that the extortionate prices are
operative at the same time as the excessively low prices, but in a different
place. Suppose that the former are imposed only after the independent
concerns are eliminated. The injustice to the competitors remains the same
as in the preceding case. Although the extortionate prices are later in time,
they are the instrumental cause of the destructive low prices through which
the competitors were driven out of business. If the owners of the monopoly
were not certain of their ability to establish the subsequent extortionate
prices, they would not have put into effect the unprofitably low prices.
Hence there is a true causal connection between the former and the latter.
Although the connection is mainly psychical, through the consciousness of
the monopoly owners, it is none the less real and effective. Its practical
effectiveness is seen in the fact that the subsequent possibility of imposing
extortionate prices will induce men to lend the monopoly money to carry on
the process of exterminating competition. The process is maintained by
means of the extortionate prices quite as effectively as though the two
things were simultaneous.
In so far as the patrons of the independent concerns are deceived into
expecting that the very low prices will be permanent, and in so far as this
impression causes them to withdraw their patronage from the independents,
the latter are injured through another illicit means, namely, deception. The
competitors have a right not to be deprived of their customers through
imposture.
What is the measure of extortionate prices in this connection? How can we
know that the high, competition-eliminating prices are really extortionate?
There are only two possible tests of just price. The first is the proper cost of
production,—fair wages to labour, fair prices for materials, and fair interest
on capital. If the monopoly does not raise prices above this level, it
obviously does not impose extortionate prices, nor inflict injustice upon the
eliminated competitor. Moreover, if the monopoly has introduced
economies of production it may, as we have seen, justly charge prices

somewhat above the cost-of-production level. But it may not raise them
above the level that would have prevailed under competition. This is the
second test of just price. No possible justification can be found, except one
to be mentioned presently, for charging the consumers higher prices than
they could have obtained under competitive conditions. At such prices the
monopoly will be able to secure the prevailing rate of interest on its capital,
and all the surplus gains that proceed from superior efficiency. A higher
scale of prices will be, therefore, extortionate, and the competitors who are
eliminated through its instrumentality will be the victims of injustice.[179]
The exception alluded to above occurs when the monopoly uses the excess
which it obtains over the competitive price to pay fair wages to those
labourers who were insufficiently compensated in competitive conditions.
In such a case the eliminated competitors would have no just claim against
the monopoly; for their elimination took place in the just interest of the
producers. The case, however, is purely academic, since the discriminative
underselling practised by our monopolistic concerns has not been impelled
by any such motive, nor has it achieved any such result.

Exclusive-Sales Contracts

The second unfair method employed by monopolies toward competitors is
that of exclusive-selling contracts, sometimes called the "factor's
agreement." It requires the dealer, merchant, or jobber to refrain from
selling the goods produced by independent concerns, on penalty of being
refused the goods produced by the monopoly. The merchant is compelled to
choose between the less important line of wares to be had from the former,
and the more important line obtainable from the latter. He will not be
permitted to handle both. "Here is somebody who has been buying goods,
let us say, by way of illustration, from the American Tobacco Company, and
a rival producer comes in whom the merchant likes to patronise. He buys
goods for a time from the rival, and an agent of the trust sends him a note to
the effect that he must not buy any more from that rival corporation; that, if
he does so, the trust will give all of its own goods, some of which the
merchant is obliged to have, to another agent. That will probably bring him
to terms."[180] By this method the independent manufacturer can be

deprived of sufficient patronage to injure him seriously, and perhaps to
drive him out of business.
This process is one of intimidation brought to bear upon the merchant.
Through fear of loss he is compelled to discontinue selling the goods of the
competing manufacturer. It is a kind of secondary boycott. As such, it is an
unreasonable interference with the liberty of the merchant unless its object
is to compel him to do something that he may be reasonably required to do.
In the case that we are considering, the object of the pressure is not of that
character; for to drive the rival manufacturer out of business, or to assist in
his expulsion, is not a reasonable thing. The exclusive-selling contract
which is forced upon the merchant is quite as unreasonable as though its
purpose were to prevent him from, say, patronising manufacturers having
red hair. Being thus unreasonable, thus injurious to individual liberty, it
violates not only the law of charity but that of justice. It transgresses the
merchant's right to enter reasonable contracts with the rival manufacturer,
and if it results in a pecuniary loss to the former it is an invasion of his
rights of property. It likewise violates the rights of the competitive
manufacturer, since it is among the unfair means which may not be used to
prevent a man from pursuing a legitimate good. It is an unfair means
because it involves unreasonable intimidation, uncharity, and injustice
toward the merchant. When the independent manufacturer is injured
through such an instrumentality, he suffers injustice quite as certainly at the
hands of the monopoly as though his property were destroyed through the
strong-arm methods of hired thugs.

Discriminative Transportation Arrangements

Concerning the third unfair method, discriminative advantages in
transportation, the United States Industrial Commission declared: "It is
incontestable that many of the great industrial combinations had their origin
in railroad discrimination. This has been emphasised many times in the
history of the Standard Oil Company, and of the great monopolies dealing
in live stock, dressed beef, and other products."[181] The American Sugar
Refining Company has been several times convicted of receiving illegal
favours from railroads, and has paid in fines thousands upon thousands of
dollars. Sometimes the monopoly has openly been accorded lower freight

rates than its competitors, and sometimes it has paid the regular charges,
and then received back a part of them as a refund or rebate. At one time the
Standard Oil Company obtained rebates not only on its own shipments, but
on those of its rivals![182]
Special advantages of this sort necessarily involve injustice to the
competitors of the monopoly. If the low rates given to the monopolistic
concern are a sufficiently high price for the service of carrying freight, the
higher charges imposed upon the competing concerns are extortionate; if
the former rates are unprofitably low, the difference between sufficient and
insufficient freight charges is made up by the independent concerns. In the
former case the independents pay the railroad too much; in the latter case
they bear burdens that should properly rest upon the monopoly. The
monopolistic concern is partly responsible for this injustice inasmuch as it
urges and often intimidates the railroad to establish the discriminating rates.
All three of the practices that we have been considering are universally
condemned by public sentiment. They are all likewise under the ban of
statutory law. The first two have recently received detailed and explicit
prohibition in the Clayton Anti-Trust Act.

Natural Monopolies

Up to this point we have been dealing with private and artificial
monopolies. We turn now to consider briefly those natural and quasi-public
monopolies which are either tacitly or explicitly recognised as monopolies
by public authority, and whose charges are to a greater or less extent
regulated by some department of the State. Such are, for example; steam
railroads and municipal utilities. When the charges made for the services of
these corporations are adequately regulated by public authority, the owners
of such concerns will have a right to all the surplus gains that they can
obtain. In that case a contract is made between the corporation and the
public which is presumably fair to both parties, and which represents the
social estimate of what is just. If the public authorities have not sufficiently
safeguarded the interests of the people, if they have permitted the charges to
be so high as to provide excessive returns for the corporation, the latter is
under no moral obligation to refrain from reaping the full benefit of the

State's negligence or incompetence. If, however, the unduly high rates have
been brought about through bribery, extortion, or deception practised by the
corporation, the inequitable contract thus arranged will not justify the
surplus gains thus produced. For example; if the corporation deliberately
and effectively conceals the real value of its property through
stockwatering, and thus misleads the public authority into permitting
charges which return twelve instead of six per cent. on the actual
investment, the corporation cannot forthwith justly claim the surplus gain
represented by the extra six per cent.
When the public authorities either fail entirely to regulate charges, or do so
only spasmodically and partially, the quasi-public monopoly will not
necessarily have a right to all the obtainable surplus gains. For a long time
the express companies of the United States were permitted to exact what
charges they pleased, and even yet the rates on some of our railroads are not
adequately regulated by the State. In such cases the charges imposed on the
public are not an adequate expression of the social estimate of justice, nor
an adequate basis of legitimate surplus gains. In the absence of sufficient
public regulation, a quasi-public monopoly is morally bound to fix its
charges at such a level as will enable it to obtain only the prevailing rate of
interest on the investment, and such surplus gains as it can produce through
exceptional efficiency. In all such cases the public service corporation is in
the same moral position as the artificial monopoly: it has no possible basis
except superior efficiency for claiming or getting any returns above the
competitive rate of interest on its capital. Its only possible reason for
obtaining more is the fact that it has the power to take more. This fact has
obviously no moral validity.

Methods of Preventing Monopolistic Injustice

How shall the injustices of monopoly be prevented in the future? So far as
quasi-public monopolies are concerned, all students of the subject are now
agreed that these should be permitted to exist under adequate governmental
regulation as to prices and service. The reason is that in this field successful
and useful competition is impossible. Public utility corporations are natural
monopolies, and must be dealt with by the method of regulation until such
time as they are brought under the ownership and operation of the State.

With regard to the great industrial combinations which have become or
threaten to become artificial monopolies, there exists substantial agreement
among competent authorities on one point, and disagreement on another
point. All admit that the unfair competitive methods described in an earlier
part of this chapter should be stringently prohibited. No possible reason can
be found for legal toleration of these or any other discriminative,
uncharitable, or unjust practices on the part of stronger toward weaker
competitors.
The disagreement among students of monopoly relates to the fundamental
question of permitting or not permitting these combinations to exist.
According to the first theory, of which Mr. Justice Brandeis is the most
distinguished exponent, no new industrial monopolies should be permitted,
and those that we have should be dissolved. The basis of this theory is the
assumption that all the economies and all the productive efficiency found in
monopolistic concerns can be developed and maintained in smaller business
organisations, and that the method of prevention and dissolution is the
simplest means of protecting the public against the danger of extortionate
monopoly prices. Attention has been called in a preceding paragraph to the
impossibility of determining whether the great monopolistic combinations
have on the average shown themselves to be more efficient than concerns
subject to active and adequate competition. It is significant, however, that in
the discussion of this subject which took place at the twenty-sixth annual
meeting of the American Economic Association, at Minneapolis in 1913,
the economists who participated were practically unanimous in holding that
the superior efficiency of the trusts had not been demonstrated, but was a
matter of serious doubt, and that the burden of proof of their alleged
superiority had been definitely shifted upon those who maintained the
affirmative.[183] Probably the great majority of the whole body of American
economists would share these conclusions.
On the other hand, the opponents of prevention and dissolution, of whom
Mr. George W. Perkins is probably the most conspicuous, point to the
obvious economies of large-scale over small-scale production, and contend
that these are sufficient reason for permitting and even encouraging the
great combinations. The power to oppress competitors by unjust methods of
business, and the public by extortionate prices, should be kept under rigid
control by supervision, and government regulation of maximum prices. But