establishment of the Co-operative Wholesale Society,
which does an enormous business with co-operative
stores throughout the country. In America there has
not been anything like the conspicuous success in such
co-operation as there has in the European countries,
for reasons which will be mentioned later.

One of the great difficulties which these co-operative
stores have had to solve is that of efficient management.
It does not pay to assume that any one can keep a store.
Yet at the beginning of the co-operative movement that
was the general assumption. In the Rochdale society
each of the twenty-eight members took turns in " mind-
ing the shop " and in keeping the simple accounts of the
store. As the movement developed, case after case of
failure was seen to be due to this amateur management,
and in Europe, at any rate, co-operators have realized
that management of a retail store calls for qualities
and knowledge which are not common property.
Hence the modern, well-organized co-operative store
is managed by expert retailers. As, however, paid
salesmen and managers have to be obtained, the diffi-
culty arose as to the status of these men in the co-
operative scheme. In some cases, the co-operators
have not recognized their employees as being in any
way partners in the organization, but have hired them
in exactly the same way as a commercial corporation.
In others the employees have been shareholders and
therefore had a right to a vote in the management.
Co-operative consumption has not met with much



398 AN INTRODUCTION TO ECONOMICS

success in the United States. The reasons for this are
various. In the first place co-operation, to be successful,
demands a certain amount of loyalty to the society
a sinking of the individual in the common organization.
This is not easy to obtain in America. The American
is almost aggressively individualistic. He is accus-
tomed to rely upon himself, and if for a while he
sees that it would pay him to co-operate, it is only
for a while, and very little is necessary to make him
give up the organization. Again there has been very
little community of action between the co-operative
societies when started. There has been no state
organization, much less national organization, so that
co-operative societies in one part of the country could
know of and appreciate the work done by others.
With this lack of co-ordination in the system the in-
dividual societies have been almost entirely at the
mercy of the wholesale dealers, whose largest revenue
came from the privately owned establishments. Hence
discrimination against co-operators became easy, and
was difficult to combat.

Co-operative Production As we have said, co-opera-
tive consumption is only one side of the matter. If
co-operation is to be really successful and to become
an important element in our economic organization, it
must not be confined to consumption. Production,
also, must be attempted. It is in the realm of co-
operative production that the most dismal failures have
been seen. Occasionally we see a success in this line,
but, as a rule, the result is more or less qualified failure.

Capital has almost always been too small to permit
of the introduction of the best methods. We have



DISTRIBUTION AND THE LABOR PROBLEM 399

seen in an earlier chapter that in the establishment of
productive businesses (using the word productive in
its ordinary colloquial meaning) the tendency is
strongly toward the increase of the amount of fixed
capital required. Usually this means a certain period
of waiting before results may be obtained which may
be regarded as profits. The average co-operator,
especially in America, is strongly inclined to be im-
patient. Hence there is no chance of the industry
being successful. Returns cannot be gained imme-
diately. If the machinery is not of the best and latest
models, the products are obtained at a disadvantage
which means that even when profits are made, they
are smaller than those of industries working under more
favorable conditions. The co-operative producing or-
ganization tends to exist near the margin of operation.
A little fall in the returns, and the profit line is over-
stepped.

Competition from the better organized factories, then,
can easily force the co-operator below the profit line
and then the end is not far off.

No space can be spared to give instances of co-
operative management, but a word or two as to the
relation between co-operation and the competitive
system will be of value. Co-operation, as it has been
practiced, accepts the competitive system. It fixes
its prices on the same basis that they are fixed in
ordinary commercial life, i.e., where there is a possi-
bility of gaining a monopoly price, that price is charged,
but where the price is fixed by the more or less free
interplay of the laws of supply and demand, the co-
operators accept that price. Experience has taught



400 AN INTRODUCTION TO ECONOMICS

them that under present conditions this has been the
best method to pursue. At times the experiment of
selling at cost (cost to include expense of management)
has been tried. Almost invariably, however, it has
been seen that where it was possible to charge thus,
the purchasers were not so pleased as when they paid
the ordinary price and received a dividend. In most
cases, however, it was impossible to charge thus. For
instance, under careful calculation the cost of a pound
of butter might amount to thirty-seven and one half
cents. The selling price, therefore, had to be at least
(on individual pounds) thirty-eight cents, or there
was a loss. Exaggerate this by applying it to all
the commodities stocked, and consider the difficulty
of estimating the exact share of overhead expense
and expense of selling of one commodity and another,
and the very great difficulty of instituting a cost price
becomes obvious.

Experience has also taught co-operative consumers'
associations that the purchasers were very interested
in dividends (" divvy-hunters " is a common expres-
sion among English co-operators) and did not object
even to an increase over the ordinary commercial
price, provided good dividends were paid. If attention
is paid to the dividend alone, the system merely becomes
one of compulsory saving, and ceases to have any of
the real benefits assumed to arise out of co-operation.

As there seems to be no possibility of the co-operative
system obtaining a strong hold on America, or indeed,
on the European countries, it is not worth while to
examine the result to be expected should the system be
extended to cover all industry and to eliminate all



DISTRIBUTION AND THE LABOR PROBLEM 401

competition. Co-operation is not a scheme for a re-
organization of the commercial system. It is a pallia-
tive of some of the evils of competition. As such it has
its uses, but it is in no way to be regarded as a solution
of the difficulty.

Equality of Taxation The third criticism which is
leveled at the existing distribution of wealth is to the
effect that the contributions paid toward the expenses
of government are not properly shared. The science of
taxation is very complicated, and we are compelled by
reasons of space to restrict our consideration of this
subject to the smallest compass.

We assume that government must exist. There is no
possibility of a great mass of people existing together
unless they agree upon rules of conduct, and provide
means for enforcing those rules. There are some forms
of economic activity which are essential to the well-
being of all, but which are not usually carried on by
private individuals. Questions of police, of sanitation,
of justice, of the safekeeping of the roads and of the
seas are all of great importance, but no one would
expect a private individual, acting under the com-
petitive system, to erect a lighthouse at his own expense,
without the privilege of collecting a toll from passing
ships. Nor would we expect him to pay a judge to
administer justice, unless, indeed, he expected that
judge to see the law from the point of view of the
interest of his employer. Without, at present, going
into the functions of government, it is sufficient to
assume its necessity. The question then arises of the
payment of the expenses of government. Under what
basis should they be distributed?



402 AN INTRODUCTION TO ECONOMICS

Should landowners only be taxed, and if so, how
much? Should corporations pay a share, and if so,
should it be based upon their capitalization or upon
their profits? Should the incomes of all be used as a
basis of taxation ? These and many other questions
must be solved. We cannot go into all of these
questions, but some of the principles which underlie
their solution can be discussed.

In the first place we must distinguish two points of
view. The secretary of the treasury or chancellor of
the exchequer, or whatever name may be given to the
individual responsible for the proposal of taxation,
has one distinct point of view. He must decide how he
can get the largest amount of tax revenue and how he
can obtain this with the least opposition. The tax-
payer, on the other hand, is interested in having his
own individual share reduced as low as possible, or at
least, if he is a little more altruistic than the ordinary
person, he wants the taxes to be distributed so that
the burden falls upon the back best able to bear it.

It is generally assumed, nowadays, that the burden
should be placed where it can most easily be borne,
rather than equally. Equality of sacrifice is sought,
rather than equality of amount in taxation. This is
extremely important in deciding on the imposition of
direct taxes, such as, for instance, the income tax.
Suppose a straight tax of five per cent were made upon
all incomes. From the arithmetical point of view that
would be a fair method. But it is not so from the more
human point of view, which takes into account the
sacrifice involved. Five per cent of a wage amounting
to $1000 per annum means a payment of $50. Five



DISTRIBUTION AND THE LABOR PROBLEM 403



per cent of a salary of $50,000 per annum is
The sacrifice of $2500 by the man with the large income
is hardly felt. One cannot think that he will give up
anything of importance through the diminution of his
income. On the other hand the man who pays 50 dollars
out of an income of 1000 dollars feels very keenly the
loss of the money. His sacrifice is very much greater
than that of the wealthier man.

The same thing is true of taxes levied not directly,
but on commodities. The man whose income is only
sufficient to supply him with the bare requisites of life
is bound to feel very severely anything which tends
to increase the cost of those requisites, while the
wealthier man feels them very slightly if at all.

It is sometimes argued, too, that taxes are the pay-
ment made for a definite service rendered by govern-
ment services like the securing of liberty, the pre-
vention of theft, the provision of sanitary cities, the
care of the sick in public hospitals, the protection of the
country against enemies. As all are supposed to be
equally benefited by these services, the payment from
each should be equal. Against this, however, it is
urged that the services are not the same to each. To
the poor, whose property is nothing, the protection
against theft is of slight importance, while it is of
great importance to the man of property. Hence
as the service is greater to the latter, he should pay
more.

Again, some of the services are distinctly personal.
For example, the machinery which safeguards patent
rights for inventors affects only the inventors. They
should be required to pay for those services much as the



404 AN INTRODUCTION TO ECONOMICS

person who rides in a municipal street car is made to
pay for the service rendered.

In actual practice a compromise is effected by the
tax makers. In some cases a specific charge is made
for the services rendered by the state. This class of
tax is usually referred to as a fee, and comes under
the same category as a fee charged by a doctor or
lawyer. In others, the tax is laid directly upon the
commodity, like the tax on tobacco, for example. In
this case each pays in proportion to the amount of the
commodity he uses.

As a matter of reform in the distribution of wealth,
it is doubtful whether improvement in tax methods
can be of any great service. It is, of course, true that a
great deal of injustice can be effected by changes in
the method of obtaining government revenue, but their
proportional effect upon distribution can be very much
overestimated. In exceptional times, of course, there
is opportunity for the government to obtain a greater
share from certain individuals than in normal times.
In the case of war time, for example, we have an
unusual situation where men in certain businesses have
reaped very great profits through the sudden increase
in demand for the commodities they manufacture.
Steel manufacturers, munitions makers, clothing con-
tractors, and each of the thousand and one different
trades which are affected by war requirements, have
been able to make enormous profits. As these profits
are directly a charge on the general community, a
charge due to the fact that the manufacturers concerned
have taken direct advantage of the government's
needs to increase their prices, the government is



DISTRIBUTION AND THE LABOR PROBLEM 405

certainly entitled to take, if not all the additional profit
above normal rates, at any rate the greater proportion.
Hence we see the institution of the excess profits tax,
which levies toll upon these abnormal profits. Heavy
as has been the taxation on this basis, it cannot be said
to have been too heavy and no one has worried much
about the opposition of certain interests to the im-
position or increase of such taxation.

Under the present system of economic organization,
where distribution is obviously unequal and inequitable,
there can be no doubt that the basis of equality of
sacrifice is the best upon which to work in securing
the funds necessary for the support of government.
Equality of sacrifice in taxation necessitates what may
be called progressive taxation. Taxation is pro-
portional when the rate levied varies arithmetically
with the amount to be taxed. That is, when the same
percentage is charged no matter how high the amount
be, the taxation is proportional. But we have already
seen that merely proportional taxation is not satis-
factory in securing equality of sacrifice. Hence in
direct taxation, particularly in regard to income taxes,
the best method is to increase the percentage paid as
the amount of income increases. It is impossible to
estimate mathematically how the taxation should be
graded, for each man's income has special considerations
which require to be regarded. Some men gain great
incomes by their own exertions successful lawyers,
doctors, actors, manufacturers,. for instance. Others
sit still and do nothing but draw dividends. In the
latter case, seeing that no duties are performed by the
individuals in question, it is right that they be called



406 AN INTRODUCTION TO ECONOMICS

upon to pay pretty heavily for their support in idleness.
In regard to the others, they are at least supplying some
demand directly, and in so far they are deserving of
encouragement by the community. This leads us to
the distinction between earned and unearned incomes,
the latter being taxed at a heavier rate.

As has been said, however, the distribution of wealth
will hardly be materially affected by reforms of taxation
while the taxation is levied with the pure aim of
securing sufficient and only sufficient revenue to run
the government of the country. A much more im-
portant suggestion is a revolution of the ideas as to the
economic functions of government. As a great many
of the schemes of economic reorganization are based
upon such a fundamental revision of our ideas on
these functions, it will be well to leave their con-
sideration to the next chapter.



CHAPTER XXIX

THE ECONOMIC FUNCTIONS OF GOVERNMENT

Most of the theories upon which are based the pro-
grams for redistribution of wealth have their origin
in the belief that the economic system under which we
live at present is wrongly founded. The suggestions
which have been discussed in the previous chapter are
considered as mere tinkering with the organization,
when what is required is a thorough rebuilding upon a
new foundation.

In nearly every case the suggestions for the new
foundation of economic society include a very con-
siderable increase in the economic functions of govern-
ment. It will be well, therefore, before we can deal
properly with the schemes of social and economic re-
construction which are of such enormous importance
at the present time, to analyze carefully the economic
functions of government as they now exist. We may
divide them into three classes, the protective func-
tions, the regulative functions, and the operative
functions.

Protective Functions Even the strongest believer
in the theory of laissez faire will be quite willing to
admit that government has certain duties to perform
which are of an economic nature. Free competition,
which is essential to the laissez faire system, cannot

407



408 AN INTRODUCTION TO ECONOMICS

exist unless the law of contract is made effective.
All our trade depends to a large extent upon the fact
that individuals on the whole are ready to fulfill their
obligations when and as they arise, but some compul-
sion must be exerted upon those who refuse to live up
to these obligations. The law must step in to protect
the individual against those who receive the benefit
of one part of the contract and refuse to perform the
per contra.

Again it is recognized that some parties to contracts
are not in a position to protect themselves against
exploitation by others. This is particularly the case
in labor contracts. Children are certainly not able to
secure just treatment themselves. If their parents
force them to work before they are really strong enough
to earn their own living, there is nothing, except
government action, which can prevent their exploitation
successfully. Child labor laws are essential to any well-
ordered state. But child labor laws only represent
the beginning of the government's protective work in
regard to labor. Women's labor must also be pro-
tected, and indeed men's labor as well. There was a
time when it was common to work for sixteen or more
hours per day. This is not the case now. Govern-
ment has stepped in, time after time, to restrict the
hours of labor. Government has also interfered, and
wisely so, in the manner in which workshops and
factories are conducted. Sanitary laws have been
passed, as also have laws against the use of unfenced
machinery, unsafe scaffoldings, and so forth.

The general security of the country against foreign
invasion is part of the function of government. This



THE ECONOMIC FUNCTIONS OF GOVERNMENT 409

is comparable, although it is on a larger scale, with
the police protection afforded the individual in our
cities.

Our ocean trade and coast trade are protected by
proper mapping of the harbors and sea passages.
Lighthouses are maintained at government expense.
It is obviously impossible to expect that private in-
terest will erect and maintain lighthouses, yet they are
necessary to safe trading.

Regulative Functions The history of government
economic activity since the industrial revolution is full
of examples of increase in the regulative functions of
government. It was pointed out in an earlier chapter
that a distinct change has taken place in the nature of
government regulation, however, and it is worth while
now to consider the change in some detail. The theories
of economic organization to which the name of laissez
faire has been attached, were very largely due to a
reaction against the old-fashioned method of govern-
ment regulation of trade and industry. Such regulation,
consisting as it did in laying down rules for the conduct
of industry, rules which were to guide the manu-
facturers in the methods to be used in industry and the
products to be manufactured, was felt to be interference
rather than regulation. With the advent of the new
machine production the irritating interferences of
government were bitterly resented.

As is quite often the case, it was not seen at the time
that a change in the nature of government regulation of
industry was required. The manufacturers demanded
the entire and complete abolition of all regulation.
Industry was best when it was left most alone ; govern-



410 AN INTRODUCTION TO ECONOMICS

ment which did the least governing was the best form
these were the cries.

Experience soon taught, however, that government
could not let industry alone. That selfishness which
was supposed to be the foundation of successful
economic organization showed, in practice, that it had
lost little of its ancient evil. While it did secure a
wonderful addition to the total wealth of the country,
it succeeded also in changing the relative distribution
to an enormous extent. The strong prospered and the
weak were driven to the wall. Modern feelings of
humanity prevent us from considering that the weak
are better killed off. We realize, and should realize
even more strongly than we do, that if the weak were
driven off and society consisted only of the strong, the
loss would be to society. This is especially so when
we consider economic strength. The ability to make
money is not the only ability of which society stands
in need. This is obvious if one considers for a moment
what life would be like if every one of us devoted his or
her attention solely to the purpose of gaining as much
wealth as possible. Our music would degenerate into
rag-time, our artists into poster painters, and our
actors into " movie artists." We are not decrying
any of these forms of self-expression, of course, but it
must be admitted that much of the best of life would
be lost if money were the only consideration.

In order to prevent a crude conception of economic
organization from ruining the world, government had to
step in to regulate the working of the system. It has
been shown in the previous pages that the tendency of
economic development is towards the elimination of



THE ECONOMIC FUNCTIONS OF GOVERNMENT 411

competition. But while that tendency exists to a very
strong degree there exists at the same time a strong
tendency for the control of the larger units which have
superseded the small competitive units, to pass into
the hands of a comparative few whose main idea is not
the service of the public, but the gaining of profit.

Large-scale production undoubtedly secures economy
of effort in production, but that economy is of no real
benefit to society unless society as a whole shares
in the profits. The dangers of powerful monopolies,
controlled by individuals whose concern is merely
profit making, are obvious and there is no need to labor
the point. Government must step in to see that the
monopolies or quasi-monopolies are so conducted that
benefit and not loss results to society.

It is for this reason that we have our railroad com-
missions and interstate commerce commissions our
anti-trust laws and bank acts. A point is reached,
however, when there is little real distinction between
control and ownership, except in operation. If the
trusts are so controlled that they cannot manipulate
prices to suit themselves, much of their value to those
who have organized them is lost. The public, however,
is benefited by the economies of production, provided,
of course, that the trusts have been organized on a
sound productive basis. But if the government does
so control the trusts, and profits to the owners sink to
the level of commercial interest, the trust owners
become practically shareholders in a government
organization.

Again, in the case of railroad regulation and control,
the control may be exercised so stringently that the



412 AN INTRODUCTION TO ECONOMICS

railroad owners are also in the position of government
bondholders.

The difficulty has been to decide where to stop.
It is not our intention to give details of control as
exercised by our government. It must be pointed out,
however, that there are certain industries which are of
the nature of monopolies. They cannot be successfully
operated unless they are worked on a very large scale.
These are the so-called " public utilities." Every one
recognizes that competing telephone systems are un-