The Case for Capitalism/Chapter 3
It has been shown that under the competition which is, or has been, the corner-stone of Capitalism, the value or price of articles sold is finally decided by the consumer. (Whether Capitalism is committing suicide by destroying competition is a point that will have to be discussed later.) But the price obtained has to be shared among several parties who, under modern conditions, work together on the process of production. And so before we proceed to consider in greater detail the case for Capitalism as compared with its suggested rivals, it is better for us to arrive at an understanding of the essential articles and qualities which are required for production, and have to be paid for, under whatever system production is carried on. These may be tabulated as follows:—
1. Strength and skill.
2. Tools, material and time.
3. Management.
4. Readiness to face failure.
Concerning No. 1 there is no need to waste many words. Under the curse of Adam, a certain amount of toil, involving physical strength and aptitude for the task in hand, is involved continually in mankind's effort to improve the productive powers of nature by working on them. As mankind improves the machinery and equipment which it brings to bear upon this problem, the need for physical strength is lessened, and the need for skill is varied. Less craftsmanship is required now in making a pair of boots than was the case three centuries ago, but more mechanical skill is needed in the management and application of machinery.
Under our second heading—Tools, Material and Time—very important considerations are included. The word tools is used in the widest sense of the word, implying not only all forms of machinery, but the factories in which they are set to work, and the ships, railways, wagons and other equipment of transport by which the raw material is brought from the place where it is grown or produced, and the finished product is carried to the consumer. These tools have not only to be provided in order that industry may start, but also to be maintained in working order, and provision has to be made for their renewal when they are worn out or superseded by a new invention. Time is also a highly important element, because this need for time is one of the most striking requirements which mark the work of man as an industrial animal. The wild beast gets its food and eats it. In providing its material needs, it makes no alteration in the stuff which nature or its hunting skill provides, but consumes it then and there. It may watch for days for its prey, but having caught its hare it confines its further efforts to eating and digesting it. Man takes the goods which nature provides, and subjects them to an elaborate and often very lengthy process before he has changed them into articles which he regards as desirable for consumption. He builds ships that sail the seas for years, and railways that may last for centuries, to carry materials and goods from place to place. Nearly everything that we consume is provided for us and despatched to us with the help of work that has been done long ago, perhaps before we were born. There is then the necessity that during the process of production those who are at work on it should be fed, clothed, housed and otherwise provided for out of some accumulated store; because the work that they are actually doing is not yet turning out an article ready for consumption, and may only be producing articles, such as machinery or ships, that will not be consumed, in the ordinary sense of the word, but used in the processes of further production, or of distribution.
The third heading, Management, implies the precious quality of judgment concerning the purpose for which the machinery of production is set going, the organization by which it is made most efficient, and the means to be taken for disposing of the product in the market where it is most wanted and will fetch the best price. In the complications of modern industry, this is an affair requiring the highest possible skill and foresight. It is not enough to set a large number of people to work to produce an article; the manager or designer has to do his utmost to be sure that the article as produced will be such that somebody else will want, and also to see that it is brought within the reach of the possible buyer. If it is not wanted, it will have no economic value, because nobody will give goods and services in exchange for it, and the whole process by which it has been produced will have been a waste of labour, materials and time. If the article is wanted, Lut those who want it do not know how and where to get it, the same result occurs; and under modern conditions the selling of an article is often a more difficult and costly business than producing it. (See The Laws of Supply and Demand, by G. B. Dibblee.)
This brings us to our fourth heading—Readiness to Face Failure. This risk of failure is clearly involved in any process of production; it may happen either because, owing to faulty organization or lack of skill in applying the tools to the raw material, the process of producing the required article has failed. Again, it may happen that, though on the mechanical side the process has been entirely successful, yet, owing to a change in demand on the part of consumers, the product is not wanted. Or a miscalculation concerning the cost of making, or the price that buyers will be prepared to pay, may make the whole work unprofitable, because the article cannot be sold to the consuming public at a price which will repay the efforts of those who have put their work into its production.
Under whatever system production is carried on, these items in the bill have to be met in one form or another.
Under our present organization, No. 1, Strength and Skill, are provided by labour in return for wages. One of the most hopeful signs of the soundness of present public feeling, in spite of hysterical symptoms on the surface, is the general recognition that hitherto—before the war—the wages of labour were on the whole inadequate and that there can and should be no return to the pre-war level. The question of the claims of the wage-earner will be dealt with in a chapter to itself.
No. 2, Tools, Material and Time, are provided by capitalists in return for interest.
No. 3, Management, by organizers and managers in return for salaries; and
No. 4, Readiness to Face Failure, by capitalists of a venturesome type, adventurers and ordinary shareholders, in return for profits and dividends.
Labour and management are paid first; then capital takes interest; then the ordinary shareholder or whoever divides the balance takes what is left, if any, or goes without profit if the enterprise fails.
Payment for all four is provided by the consumer, if he consumes. If he does not, and failure is so complete that not even wages of labour and salary of management are provided by sales of the goods produced, then the adventurer or shareholder has to make this gap good besides losing all his profit. The providers of Nos. 2, 3 and 4 shade into one another, and are often Jumped together as capitalists. It may sometimes happen that they are all provided by the same person, who puts capital into a business by owning the factory, machinery and tools required for producing the necessary article, organizes and manages the industry, sees to the selling of the product, advances the money out of which the wage-earners are paid during the process of production, and takes upon himself the risk of the whole loss, in case of mistake or miscalculation, claiming in return for this risk the whole profit, if any, that is left over, after paying for the raw material, providing for the depreciation of tools and machinery, and paying the wages of those who work for him. Nevertheless though these things may all be done by one individual, the earnings that he finally puts into his pocket, if any, are still derived from three different sources, that is to say, interest on capital, salary for his work as organiser, and profit as reward for the risk which he has run.
It is very necessary to get these distinctions clear, because a great deal of fallacious theory has been based upon the assumption that capital and labour are the only essentials required in production. Labour is frequently used in different senses, according to the confused and confusing habit of economists of using the same word in different meanings in different parts of their work. Adam Smith apparently used it as covering all the activities of mind and body required for production. In this sense it covers, of course, the work of the unskilled labourer, the skill of the skilled labourer, and the organizing capacity of the manager. In these days when people talk of labour they more commonly mean the labour of the weekly wage-earners, skilled and unskilled, applied to production. In this meaning of the word the claim that is often made that labour is entitled to the whole of its product is clearly an absurdity, if it means that manual labour can by itself be considered responsible for the whole of an article produced under modern conditions. If it only means that labour is entitled to all that it, by itself, produces, then, as we shall find later, labour gets all this and a great deal more.
Capital we had to divide into two classes according to the extent of the risk that it takes. In fact a certain amount of risk is involved by every investment in industry. But the risk may be reduced to a negligible minimum, in the case of a first charge on the earnings of a great railway company, and may range up to a level requiring a great deal of speculative courage, or recklessness, in facing it, as in the case of the shares in a mining company or in a company formed to work a new patent or an untried industry. Capitalism has ingeniously provided different kinds of securities to suit the taste of investors and speculators. For those who want security chiefly it gives what are called mortgage bonds and debentures, investors in which are not shareholders in, but creditors of, the company which issues them. In this case, if the company is prosperous and sound the risk attached is almost nil and the rate of interest is accordingly low. Preference securities are a compromise, ranking behind the creditors and before the ordinary shareholders, who usually come last and take whatever profit is left after all claims on the company have been met, or pocket the loss of their profit and their capital if the company is a failure. They are thus adventurers and speculators, risking what they put into industry on the chance of a fat reward in case of success.
It has been wittily said that the speculative investor dines well but sleeps badly, while the prudent investor, who takes low interest and little risk, sleeps well but dines badly. If there were not plenty of people prepared to take speculative risks, industrial progress would be impossible because no new venture could be tried. Capitalism is sometimes criticized because of its long tale of unsuccessful ventures. If their failure is due, as it often is, to swindling or recklessness, the criticism is sound. But in so far as it is due to genuine attempts at new ventures that fail, this failure is the price that is paid for progress. Under Capitalism this price is paid by speculators. Under the various suggested forms of Socialism it would have to be paid by the community, and there is consequently some danger that it would not be paid readily, and that therefore there would be little progress; because officials, with no incentive in the shape of profit before them, would be very shy about embarking the labour of the community, or of Guilds, in ventures whose failure would involve them in blame.
After what has been said above about the difficult task of the manager there is no need to insist on the necessity for paying for his services. Business men continually complain nowadays of the difficulty of finding men with initiative and readiness to take responsibility. Under any system this need to reward good management would have to be met, or the community which failed to meet it would very soon find that it had perpetrated a bad economy.
Whatever analysis one adopts in trying to arrive at all the factors which have to be put into an article of modern consumption, it is always impossible to avoid a certain amount of confusion, owing to the complications which make one item shade into another. Perhaps we shall get a clearer vision of the matter if we imagine what might have been possible under primitive conditions of production, with one single individual providing or undertaking all the four essentials that have been enumerated above, and also being himself the consumer of the product when turned out.
In other words, we have to go back to Robinson Crusoe, and though there are very sound objections to what is called Crusoe economics, it does seem to be possible to get some clearness in that way before the problem is complicated by a considerable number of people being involved in the difficult question of sharing the product or its price when produced. We can then imagine Robinson Crusoe on his island fishing off the rocks with a string and a hook and a bait, with more or less success, for the fish which come inshore. He then comes to the conclusion that it will be worth while for him, in order to fish more easily and quickly, to build himself a boat; but first of all he has to consider whether the work which he will put into making the boat might not be better applied to tilling his land, and so improving its output of cereals, or into improving his bows and arrows, or any other weapons with which he goes hunting, or whether it would not on the whole be better to continue to go on as he is, and trust to the variation of his diet by the simple method of fishing off the rocks as he has done before. In other words, he has to consider whether the time and work that he is going to put into the project will repay him, whether the boat which he is going to try to build is likely to be seaworthy, and whether it will really be true that by going a little further away from the shore he will be able to increase materially his power to catch fish.
If he decides that on the whole it is worth while to carry out his design, he will have to make himself the best apology he can for the necessary tools, put his boat together out of the rough planks which he is able to fashion, get his boat into the sea, himself into the boat, do his fishing and bring the fish home and eat them. He will then have applied strength and skill, will have got the raw material, made his tools, and given up his time during the passing of which he will have to be feeding himself out of accumulated stores of food. He will have taken the risk of the boat being unseaworthy, and of the fish being no more amenable a little way out from the shore, and of their being less pleasant to eat than those which he caught inshore. When a man is thus working on his own account, he is as near economic freedom as any one can expect to be in this world, who has not a store of accumulated capital to live on. He would only have to consider his own tastes and his own inclinations in organizing his economic activities; and yet we find that even in these circumstances, he is not able to free himself from any of the complications of production that have been enumerated above.
Although he knew when he started out on this project for improving his supply of fish that his desire for this form of diet was sufficiently strong to make him do the work and give the necessary time, it is still possible that when he has done it, some change in the condition of his gastric juices, or perhaps the chance discovery of a pleasant fruit that he finds growing freely on the island, might make him much less eager for fish than he was, and may thus induce him to leave the boat to rot which he had so painfully produced at the expense of his leisure, or of economic activity, which he might have put into other enterprises. Thus even though the whole project as he thought it out was perfectly sound from his point of view, yet even the economic Crusoe, working with no one's feelings to consider but his own, cannot free himself from the possibility of failure, owing to a miscalculation of his own market. Complete freedom in an economic sense is in fact very rarely obtainable for any individual, with the exception, as we shall see, of the modern capitalist under certain unusual circumstances.
It is important that these truisms should be borne in mind, because there is a tendency in these times to blame the framework of society as it is at present constructed, for the lack of economic freedom enjoyed by the vast majority of its members. Crusoe's case has shown us that under what are called natural conditions, economic freedom is almost impossible. Except in climates where food is provided by nature and clothes and shelter are unnecessary, a man must work to live. A great deal of bitterness between one class and another has been caused by the frequent use of the phrase "wage slaves," as describing the position of the manual workers who work for weekly wages. The wage slave in fact works side by side with the salaried slave, who depends upon his employers, and finally upon the public, for earning his salary, the professional slave, who depends on his patients or his pupils or his clients for his fees, and the interest slave, who depends on those who make use of the capital which he advances to industry for the earning of the interest on which he lives, and with the profit slave, who depends more precariously than any of them on the success of the project which he has financed, in earning from the public a price which will satisfy all the charges which have been put into producing it, and leave something over for him who takes the balance.
Among these various classes of "slaves," the least risk is taken by the capitalist pure and simple—that is to say, by the investor who confines himself in his choice of invest ments to debentures and other first-charge investments. If he is careful enough, he may for all practical purposes eliminate all risk from his investments, and so secure himself complete economic freedom, subject always to any violent change in the constitution of the economic society which might deprive him of all his property, and of all claim upon the industry which he has helped to create. Apart from this risk, we may say that the capitalist who is really cautious and careful in his selection of investments in industry from the point of view of security alone, and gives up all thought of any share in any extra prosperity in the business, may come as near as possible to securing economic freedom. But this freedom would only be attained by earning a comparatively low rate of interest on his capital, and he would still be liable to considerable variations in the actual buying-power of his income, owing to changes that might happen to the general level of prices owing to currency arrangements or failures in production. In fact, the experience of the War has shown how great is the risk to which even the "gilt-edged" investor is exposed. For it is those who had to live on fixed incomes, who have suffered most severely from the rise in the prices of all that they had to buy, the great increase in direct taxation, and the great fall in the market value of their securities. But the question of the capitalist's claim to the limited but substantial economic freedom that is his, is big enough for a chapter to itself.