The Unsolved Riddle of Social Justice
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But the central economic doctrine of cost can not be shaken by mere denunciation. Let us examine it and see what is the matter with it. We restate the equation.
Under perfectly free competition the value or selling price of everything equals, or is perpetually tending to equal, the cost of its production. This is the proposition itself, and the inferences derived from it are that there is a "natural price" of everything, and that all "natural prices" are proportionate to cost and to one another; that all wages, apart from temporary fluctuations, are derived from, and limited by, the natural prices paid for the things made: that all payments for the use of capital (interest) are similarly derived and similarly limited; and that consequently the whole economic arrangement, by giving to each person exactly and precisely the fruit of his own labor, conforms exactly to social justice.
Now the trouble with the main proposition just quoted is that each side of the equation is used as the measure of the other. In order to show what natural price is, we add up all the wages that have been paid, and declare that to be the cost and then say that the cost governs the price. Then if we are asked why are wages what they are, we turn the argument backward and say that since the selling price is so and so the wages that can be paid out of it only amount to such and such. This explains nothing. It is a mere argument in a circle. It is as if one tried to explain why one blade of a pair of scissors is four inches long by saying that it has to be the same length as the other. This is quite true of either blade if one takes the length of the other for granted, but as applied to the explanation of the length of the scissors it is worse than meaningless.
This reasoning may seem to many persons mere casuistry, mere sophistical juggling with words. After all, they say, there is such a thing as relative cost, relative difficulty of making things, a difference which rests upon a physical basis. To make one thing requires a lot of labor and trouble and much skill: to make another thing requires very little labor and no skill out of the common. Here then is your basis of value, obvious and beyond argument. A primitive savage makes a bow and arrow in a day: it takes him a fortnight to make a bark canoe. On that fact rests the exchange value between the two. The relative quantity of labor embodied in each object is the basis of its value.
This line of reasoning has a very convincing sound. It appears in nearly every book on economic theory from Adam Smith and Ricardo till to-day. "Labor alone," wrote Smith, "never varying in its own value is above the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared."
But the idea that quantity of labor governs value will not stand examination for a moment. What is quantity of labor and how is it measured? As long as we draw our illustrations from primitive life where one man's work is much the same as another's and where all operations are simple, we seem easily able to measure and compare. One day is the same as another and one man about as capable as his fellow. But in the complexity of modern industrial life such a calculation no longer applies: the differences of skill, of native ingenuity, and technical preparation become enormous. The hour's work of a common laborer is not the same thing as the hour's work of a watchmaker mending a watch, or of an engineer directing the building of a bridge, or of an architect drawing a plan. There is no way of reducing these hours to a common basis. We may think, if we like, that the quantity of labor ought to be the basis of value and exchange. Such is always the dream of the socialist. But on a closer view it is shattered like any other dream. For we have, alas, no means of finding out what the quantity of labor is and how it can be measured. We cannot measure it in terms of time. We have no calculus for comparing relative amounts of skill and energy. We can not measure it by the amount of its contribution to the product, for that is the very matter that we want to discover.
What the economist does is to slip out of the difficulty altogether by begging the whole question. He deliberately measures the quantity of labor by what is paid for it. Skilled labor is worth, let us say, three times as much as common labor; and brain work, speaking broadly, is worth several times as much again. Hence by adding up all the wages and salaries paid we get something that seems to indicate the total quantity of labor, measured not simply in time, but with an allowance for skill and technical competency. By describing this allowance as a coefficient we can give our statement a false air of mathematical certainty and so muddle up the essential question that the truth is lost from sight like a pea under a thimble. Now you see it and now you don't. The thing is, in fact, a mere piece of intellectual conjuring. The conjurer has slipped the phrase, "quantity of labor," up his sleeve, and when it reappears it has turned into "the expense of hiring labor." This is a quite different thing. But as both conceptions are related somehow to the idea of cost, the substitution is never discovered.
On this false basis a vast structure is erected. All prices, provided that competition is free, are made to appear as the necessary result of natural forces. They are "natural" or "normal" prices. All wages are explained, and low wages are exonerated, on what seems to be an undeniable ground of fact. They are what they are. You may wish them otherwise, but they are not. As a philanthropist, you may feel sorry that a humble laborer should work through a long day to receive two dollars, but as an economist you console yourself with the reflection that that is all he produces. You may at times, as a sentimentalist, wonder whether the vast sums drawn as interest on capital are consistent with social fairness; but if it is shown that interest is simply the "natural price" of capital representing the actual "productive power" of the capital, there is nothing further to say. You may have similar qualms over rent and the rightness and wrongness of it. The enormous "unearned increment" that accrues for the fortunate owner of land who toils not neither spins to obtain it, may seem difficult of justification. But after all, land is only one particular case of ownership under the one and the same system. The rent for which the owner can lease it, emerges simply as a consequence of the existing state of wages and prices. High rent, says the economist, does not make big prices: it merely follows as a consequence or result of them. Dear bread is not caused by the high rents paid by tenant farmers for the land: the train of cause and effect runs in the contrary direction. And the selling price of land is merely a consequence of its rental value, a simple case of capitalization of annual return into a present sum. City land, though it looks different from farm land, is seen in the light of this same analysis, to earn its rent in just the same way. The high rent of a Broadway store, says the economist, does not add a single cent to the price of the things sold in it. It is because prices are what they are that the rent is and can be paid. Hence on examination the same canon of social justice that covers and explains prices, wages, and interest applies with perfect propriety to rent.
Or finally, to take the strongest case of all, one may, as a citizen, feel apprehension at times at the colossal fortune of a Carnegie or a Rockefeller. For it does seem passing strange that one human being should control as property the mass of coin, goods, houses, factories, land and mines, represented by a billion dollars; stranger still that at his death he should write upon a piece of paper his commands as to what his surviving fellow creatures are to do with it. But if it can be shown to be true that Mr. Rockefeller "made" his fortune in the same sense that a man makes a log house by felling trees and putting them one upon another, then the fortune belongs to Mr. Rockefeller in the same way as the log house belongs to the pioneer. And if the social inferences that are drawn from the theory of natural liberty and natural value are correct, the millionaire and the landlord, the plutocrat and the pioneer, the wage earner and the capitalist, have each all the right to do what he will with his own. For every man in this just world gets what is coming to him. He gets what he is worth, and he is worth what he gets.
But if one knocks out the keystone of the arch in the form of a proposition that natural value conforms to the cost of production, then the whole edifice collapses and must be set up again, upon another plan and on another foundation, stone by stone.
IV.—Work and Wages
WAGES and prices, then, if the argument recited in the preceding chapter of this series holds good, do not under free competition tend towards social justice. It is not true that every man gets what he produces. It is not true that enormous salaries represent enormous productive services and that humble wages correspond to a humble contribution to the welfare of society. Prices, wages, salaries, interest, rent and profits do not, if left to themselves, follow the simple law of natural justice. To think so is an idle dream, the dream of the quietist who may slumber too long and be roused to a rude awakening or perish, perhaps, in his sleep. His dream is not so dangerous as the contrasted dream of the socialist, now threatening to walk abroad in his sleep, but both in their degree are dreams and nothing more.
The real truth is that prices and wages and all the various payments from hand to hand in industrial society, are the outcome of a complex of competing forces that are not based upon justice but upon "economic strength." To elucidate this it is necessary to plunge into the jungle of pure economic theory. The way is arduous. There are no flowers upon the path. And out of this thicket, alas, no two people ever emerge hand in hand in concord. Yet it is a path that must be traversed. Let us take, then, as a beginning the very simplest case of the making of a price. It is the one which is sometimes called in books on economics the case of an unique monopoly. Suppose that I offer for sale the manuscript of the Pickwick Papers, or Shakespere's skull, or, for the matter of that, the skull of John Smith, what is the sum that I shall receive for it? It is the utmost that any one is willing to give for it. That is all one can say about it. There is no question here of cost or what I paid for the article or of anything else except the amount of the willingness to pay on the part of the highest bidder. It would be possible, indeed, for a bidder to take the article from me by force. But this we presume to be prevented by the law, and for this reason we referred above not to the physical strength, but to the "economic strength" of the parties to a bargain. By this is meant the relation that arises out of the condition of the supply and the demand, the willingness or eagerness, or the sheer necessity, of the buyers and the sellers. People may offer much because the thing to be acquired is an absolute necessity without which they perish; a drowning man would sell all that he had for a life belt. Or they may offer much through the sheer abundance of their other possessions. A millionaire might offer more for a life belt as a souvenir than a drowning man could pay for it to save his life.
Yet out of any particular conjunction between desires on the one hand and goods or services on the other arises a particular equation of demand and supply, represented by a particular price. All of this, of course, is A. B. C., and I am not aware that anybody doubts it.
Now let us make the example a little more elaborate. Suppose that one single person owned all the food supply of a community isolated from the outside world. The price which he could exact would be the full measure of all the possessions of his neighbors up to the point at least where they would commit suicide rather than pay. True, in such a case as this, "economic strength" would probably be broken down by the intrusion of physical violence. But in so far as it held good the price of food would be based upon it.
Prices such as are indicated here were dismissed by the earlier economist as mere economic curiosities. John Stuart Mill has something to say about the price of a "music box in the wilds of Lake Superior," which, as he perceived, would not be connected with the expense of producing it, but might be vastly more or perhaps decidedly less. But Mill might have said the same thing about the price of a music box, provided it was properly patented, anywhere at all. For the music box and Shakespere's skull and the corner in wheat are all merely different kinds of examples of the things called a monopoly sale.
Now let us change the example a little further. Suppose that the monopolist has for sale not simply a fixed and definite quantity of a certain article, but something which he can produce in larger quantities as desired. At what price will he now sell? If he offers the article at a very high price only a few people will take it: if he lowers the price there will be more and more purchasers. His interest seems divided. He will want to put the price as high as possible so that the profit on each single article (over what it costs him to produce it) will be as great as possible. But he will also want to make as many sales as he possibly can, which will induce him to set the price low enough to bring in new buyers. But, of course, if he puts the price so low that it only covers the cost of making the goods his profit is all gone and the mere multiplicity of sales is no good to him. He must try therefore to find a point of maximum profit where, having in view both the number of sales and the profit over cost on each sale the net profit is at its greatest. This gives us the fundamental law of monopoly price. It is to be noted that under modern conditions of production the cost of manufacture per article decreases to a great extent in proportion as a larger and larger number is produced and thus the widening of the sale lowers the proportionate cost. In any particular case, therefore, it may turn out that the price that suits the monopolist's own interest is quite a low price, one such as to allow for an enormous quantity of sales and a very low cost of manufacture. This, we say, may be the case. But it is not so of necessity. In and of itself the monopoly price corresponds to the monopolist's profit and not to cheapness of sale. The price may be set far above the cost.
And now notice the peculiar relation that is set up between the monopolist's production and the satisfaction of human wants. In proportion as the quantity produced is increased the lower must the price be set in order to sell the whole output. If the monopolist insisted on turning out more and more of his goods, the price that people would give would fall until it barely covered the cost, then till it was less than cost, then to a mere fraction of the cost and finally to nothing at all. In other words, if one produces a large enough quantity of anything it becomes worthless. It loses all its value just as soon as there is enough of it to satisfy, and over-satisfy the wants of humanity. Thus if the world produces three and a half billion bushels of wheat it can be sold, let us say, at two dollars a bushel; but if it produced twice as much it might well be found that it would only sell for fifty cents a bushel. The value of the bigger supply as a total would actually be less than that of the smaller. And if the supply were big enough it would be worth, in the economic sense, just nothing at all. This peculiarity is spoken of in economic theory as the paradox of value. It is referred to in the older books either as an economic curiosity or as a mere illustration in extreme terms of the relation of supply to price. Thus in many books the story is related of how the East India Companies used at times deliberately to destroy a large quantity of tea in order that by selling a lesser amount they might reap a larger profit than by selling a greater.
But in reality this paradox of value is the most fundamental proposition in economic science. Precisely here is found the key to the operation of the economic society in which we live. The world's production is aimed at producing "values," not in producing plenty. If by some mad access of misdirected industry we produced enough and too much of everything, our whole machinery of buying and selling would break down. This indeed does happen constantly on a small scale in the familiar phenomenon of over-production. But in the organization in which we live over-production tends to check itself at once. If the world's machinery threatens to produce a too great plenty of any particular thing, then it turns itself towards producing something else of which there is not yet enough. This is done quite unconsciously without any philanthropic intent on the part of the individual producer and without any general direction in the way of a social command. The machine does it of itself. When there is enough the wheels slacken and stop. This sounds at first hearing most admirable. But let it be noted that the "enough" here in question does not mean enough to satisfy human wants. In fact it means precisely the converse. It means enough not to satisfy them, and to leave the selling price of the things made at the point of profit.
Let it be observed also that we have hitherto been speaking as if all things were produced under a monopoly. The objection might at once be raised that with competitive producers the price will also keep falling down towards cost and will not be based upon the point of maximum profit. We shall turn to this objection in a moment. But one or two other points must be considered before doing so.
In the first place in following out such an argument as the present in regard to the peculiar shortcomings of the system under which we live, it is necessary again and again to warn the reader against a hasty conclusion to the possibilities of altering and amending it. The socialist reads such criticism as the above with impatient approval. "Very well," he says, "the whole organization is wrong and works badly. Now let us abolish it altogether and make a better one." But in doing so he begs the whole question at issue. The point is, can we make a better one or must we be content with patching up the old one? Take an illustration. Scientists tell us that from the point of view of optics the human eye is a clumsy instrument poorly contrived for its work. A certain great authority once said that if he had made it he would have been ashamed of it. This may be true. But the eye unfortunately is all we have to see by. If we destroy our eyes in the hope of making better ones we may go blind. The best that we can do is to improve our sight by adding a pair of spectacles. So it is with the organization of society. Faulty though it is, it does the work after a certain fashion. We may apply to it with advantage the spectacles of social reform, but what the socialist offers us is total blindness. But of this presently.
To return to the argument. Let us consider next what wages the monopolist in the cases described above will have to pay. We take for granted that he will only pay as much as he has to. How much will this be? Clearly enough it will depend altogether on the number of available working men capable of doing the work in question and the situation in which they find themselves. It is again a case of relative "economic strength." The situation may be altogether in favor of the employer or altogether in favor of the men, or may occupy a middle ground. If the men are so numerous that there are more of them than are needed for the work, and if there is no other occupation for them they must accept a starvation wage. If they are so few in number that they can all be employed, and if they are so well organized as to act together, they can in their turn exact any wage up to the point that leaves no profit for the employer himself at all. Indeed for a short time wages might even pass this point, the monopolist employer being willing (for various reasons, all quite obvious) actually to pay more as wages than he gets as return and to carry on business at a loss for the sake of carrying it on at all. Clearly, then, wages, as Adam Smith said, "are the result of a dispute" in which either party must be pushed to the wall. The employer may have to pay so much that there is nothing or practically nothing left for himself, or so little that his workmen can just exist and no more. These are the upward and downward limits of the wages in the cases described.
It is therefore obvious that if all the industries in the world were carried on as a series of separate monopolies, there would be exactly the kind of rivalry or competition of forces represented by the consumer insisting on paying as little as possible, the producer charging the most profitable price and paying the lowest wage that he could, and the wage earner demanding the highest wage that he could get. The equilibrium would be an unstable one. It would be constantly displaced and shifted by the movement of all sorts of social forces—by changes of fashion, by abundance or scarcity of crops, by alterations in the technique of industry and by the cohesion or the slackening of the organization of any group of workers. But the balanced forces once displaced would be seen constantly to come to an equilibrium at a new point.
All this has been said of industry under monopoly. But it will be seen to apply in its essentials to what we call competitive industry. Here indeed certain new features come in. Not one employer but many produce each kind of article. And, as far as each employer can see by looking at his own horizon, what he does is merely to produce as much as he can sell at a price that pays him. Since all the other employers are doing this, there will be, under competition, a constant tendency to cut the prices down to the lowest that is consistent with what the employer has to pay as wages and interest. This point, which was called by the orthodox economists the "cost," is not in any true and fundamental sense of the words the "cost" at all. It is merely a limit represented by what the other parties to the bargain are able to exact. The whole situation is in a condition of unstable equilibrium in which the conflicting forces represented by the interests of the various parties pull in different directions. The employers in any one line of industry and all their wage earners and salaried assistants have one and the same interest as against the consumer. They want the selling price to be as high as possible. But the employers are against one another as wanting, each of them, to make as many sales as possible, and each and all the employers are against the wage earners in wanting to pay as low wages as possible. If all the employers unite, the situation turns to a monopoly, and the price paid by the consumer is settled on the monopoly basis already described. The employers can then dispute it out with their working men as to how much wages shall be. If the employers are not united, then at each and every moment they are in conflict both with the consumer and with their wage earners. Thus the whole scene of industry represents a vast and unending conflict, a fermentation in which the moving bubbles crowd for space, expanding and breaking one against the other. There is no point of rest. There is no real fixed "cost" acting as a basis. Anything that any one person or group of persons—worker or master, landlord or capitalist—is able to exact owing to the existing conditions of demand or supply, becomes a "cost" from the point of view of all the others. There is nothing in this "cost" which proportions to it the quantity of labor, or of time, or of skill or of any other measure physical or psychological of the effort involved. And there is nothing whatever in it which proportions to it social justice. It is the war of each against all. Its only mitigation is that it is carried on under the set of rules represented by the state and the law.
The tendencies involved may be best illustrated by taking one or two extreme or exaggerated examples, not meant as facts but only to make clear the nature of social and industrial forces among which we live.
What, for example, will be the absolute maximum to which wages in general could be forced? Conceivably and in the purest and thinnest of theory, they could include the whole product of the labor of society with just such a small fraction left over for the employers, the owners of capital and the owners of land to induce them to continue acting as part of the machine. That is to say, if all the laborers all over the world, to the last one, were united under a single control they could force the other economic classes of society to something approaching a starvation living. In practice this is nonsense. In theory it is an excellent starting point for thought.