savage synonymous terms. They are not, so now. We
realize more and more fully that man does not live by



24 AN INTRODUCTION TO ECONOMICS

bread alone. There are " longings, yearnings, striv-
ings " which must be satisfied. After all, man is a
social animal. He is interested not only in himself
but in his neighbors and in his surroundings. Mental
and social development can only be secured by a certain
amount of leisure, a leisure which is impossible when all
efforts must be devoted to wringing from a niggardly
nature the bare means of subsistence. Hence any-
thing which tends to subdue nature, to gain a greater
product with a smaller expenditure of effort, tends to
increase the amount of leisure which can be devoted
to the production of those things which contribute to
mental, social, and emotional development.

The love of knowledge must be fostered, not for the
sake of knowledge itself, but because each increase in
knowledge gives a greater command over nature and
a consequent increase in the satisfaction that man ob-
tains from life. In a struggle for existence there is no
place for beauty ; everything must be sacrificed to the
production of necessities. But in a full life, beauty
and art must have their place. A house must no
longer be a mere shelter, but a place with a beauty of
its own, a delight to the eye as well as a protection
from the elements. Music and literature are neces-
sities when the demands of the purely physical being
have been satisfied. Life consists more largely in the
exchange of thoughts, the influence of mind upon mind,
than we are sometimes inclined to believe. There
must be free provision for the communion of man with
man. In short, our " progress " is the growth of success
in developing the physical and mental man to the fullest
possible extent.



THE THEORY OF ECONOMIC DEVELOPMENT 25

The Economic Problem The problem which con-
fronts man, then, is this : Given a world whose re-
sources are infinite but not all discovered, how to make
use of the known resources and discover the unknown,
so that each may satisfy his desires to the fullest extent
without infringing upon those of his neighbors, and
without waste.

To say that this problem is solved is to say that per-
fection has been achieved and the millennium is at
hand. What we have to do in our succeeding study
is to examine how far we have succeeded, and, in so
far as we have failed, to see why we have failed and how
the failure may be remedied.



CHAPTER III

THE COMPETITIVE SYSTEM

In the last chapter we stated the problem which the
world has to solve the provision of the necessities
and conveniences of life in as full and free a manner as
possible to all its inhabitants, and without waste.
To say that this problem is absolutely solved is, of
course, untrue. But nevertheless the necessities and
conveniences are actually produced, perhaps not so
economically or so fully as is possible, and certainly
not without very great inecaialities in distribution.

The existing system of production and distribution
is extremely complex. Indeed it would seem at first
glance that there is no system at all, but merely a more
or less haphazard production which results in a certain
degree of efficiency. As a matter of fact the methods
of production and distribution at the present time do
not represent a conscious organization of the means of
production. They represent rather a gradual growth
and development from past times, helped here and there
by conscious attempts at remedying the structure of
the system as it broke down from time to time.

Still there seem to be certain principles which have
governed what arrangement there was in the different
periods of growth, and in the present chapter we shall
try to see if there are any which can be said to control
our present system.



THE COMPETITIVE SYSTEM 27

Economic Freedom The keynote to modern eco-
nomic life is found in the idea of economic freedom.
The phrase must be carefully explained, however,
for the idea involved is a direct revolution from that
which governed our organization a century ago. In
the older society which preceded ours it was believed
that each individual had his place. It was the duty of
the group to care for the individual and the individual
was responsible to the group. This idea may be
illustrated by the gild system, about which more will
be said later. The trade gild regulated the work
which each member was to perform and the remuner-
ation he was to receive. The style and quality of the
work was controlled to a very large extent and the
amount allotted to each member was arranged so that
the work should be divided as evenly as possible. In
case of the death of a breadwinner of a family, the gild
looked after the widow and provided for the care of the
children until they were old enough to enter the gild
and earn their own living.

When the gild system decayed and finally broke
down, the idea of a regulated industry did not dis-
appear, but rather was emphasized by governmental
action. Government controlled all industry by stipu-
lating, for instance, what industries should be carried
on and how they should be conducted. Industries
regarded as of national importance were encouraged
by the offer of bounties on the production of those
industries or by prohibiting the import of products of
competing industries in other countries. Inspectors
were appointed to examine the products of the indus-
tries to see that they were up to standard. Inspectors



28 AN INTRODUCTION TO ECONOMICS

in the wool trade, for example, enforced the govern-
mental prohibition of mixtures in wools. The cloth
must be of one grade of wool alone. It must be of a
certain width and the bolt a certain length. The very
dyes must be of standard quality and color.

Regulation of Industry Industries regarded as un-
suitable for the country were prohibited. In a word,
regulation was the main idea in industry. There was
not an occupation which in some way or other was not
subject to interference by the government.

When industry was revolutionized by the great
inventions of the latter part of the eighteenth and the
beginning of the nineteenth centuries, manufacturers
became more and more resentful of the control exer-
cised by government. They demanded the right to
make what products they chose and in the way they
chose. They asked that workmen should be allowed
to change their occupation as frequently as they wished
and to move from place to place at will. They did not
ask for bounties to produce their wares. They believed
that they had sufficient incentive to production in the
profits to be derived from the manufacture and sale of
the goods.

Production for Profit Most Satisfactory System -
In short they believed that the individual understood
his own business a great deal better than any possible
government, and a theory was developed to justify
their ideas. It is this theory which we must now
examine.

At its basis is the belief that the fundamental
incentive to all industry is the acquisition of property.
It was thought that a man would not work unless he



THE COMPETITIVE SYSTEM 29

were to receive for his own use the fruits of his industry.
The greater wealth to be achieved in an industry, the
more assiduously, would the workers in that industry
labor. Conversely, if there were no profit to be reaped,
the industry would languish and finally disappear.
The two propositions were sufficiently well illustrated
to give an apparent justification to the idea. In the
manufacturing business, notably the textile industries,
great profits were possible. These industries developed
rapidly from being carried on in private homes as a
part-time occupation, with agriculture as a mainstay,
to the manufacture in huge factories, with agriculture
as a separate industry. The converse was illustrated,
for example, in the Irish rack-renting system. In this
system the farm lands were rented by a species of
auction. The landowner offered his land to the farmer
who agreed to pay the highest rent. In actual opera-
tion rents were offered infinitely in excess of the total
possible production of the land. Naturally the farmer
when he obtained the land was not able to gain sufficient
to pay the rent, and consequently he immediately
began to fall into arrears with his payments. The
arrears mounted with each month of his occupation and
hence no increase in the harvest was sufficient to do
more than wipe out a portion of the arrears of rent.
If the farmer tried newer methods, or spent money on
manures or on additional labor, he reaped no reward,
for the increase in the product went directly to the
landlord. There was no stimulus to increased pro-
duction, therefore, and with the knowledge that he
could never secure more for himself than a bare sub-
sistence, the farmer sought no more than that. His



30 AN INTRODUCTION TO ECONOMICS

cultivation was slight and he made no attempts at
improvement. The Irish farming became perhaps the
worst in Europe, simply because of the withdrawal of
the property stimulus.

The contention that this property stimulus was
essential would seem to be proved, but at present we
are not concerned with a more careful examination.
Later on we shall see that there are other considerations
to be taken into account. For the present we shall
admit the contention for the sake of the argument.

The next point to be considered is the effect of this
indiscriminate production on the general welfare of the
community. Would the whole of the needs of the
community be satisfied if each individual were left
to himself to produce what he wished, how and where
he liked? Would there be greater production in va-
riety and extent if governmental control were re-
moved? These were considerations which had to be
dealt with.

Basis of Argument hi Favor of Production for Profit
Now we are not dealing with a primitive state, but with
an economic system which had reached a high degree of
specialization. Each man produced only a small part
of his own total needs and relied for the satisfaction of
his wants by exchanging his own surplus product for
the surplus of others. Naturally each individual
wanted to get as much as possible for his surplus, and
his gain therefore depended upon the demand which
existed for the particular product which he had to
exchange. If, for instance, a man was engaged in
producing knitting needles, he could only exchange
those needles to people who required them. If very



THE COMPETITIVE SYSTEM 31

few people wanted knitting needles, then he would
probably be left with a supply on his hands and he
would find little profit in the undertaking. If he were
producing wheat, on the other hand, there was bound
to be a great number of people who wished to ex-
change their products for the result of his harvesting.
Hence he would be able to exchange the great bulk of
his surplus comparatively easily.

Now the natural result of this method of production
would be that each individual in deciding his occupation
would look for some industry which would produce
something for which there was a great demand. Few
people would produce knitting needles and many
would produce wheat so that the demand for wheat,
which is general, would be satisfied simply because the
very extent of the demand would encourage a great
number to engage in farming. Similarly the demand
for clothes would encourage a great production of
clothing materials, whereas the small demand for,
let us say, picture frames, would only attract a small
number of producers.

Even if we admit this argument, however, there
would appear to be a danger that while the general
necessities would receive plenty of attention from
producers, the less essential but still desirable goods
would be neglected.

Limitation to Demand for Necessities The demand
even for necessities, however, is not unlimited. There
comes a time when the demand for food, even, slackens.
If every one is engaged in producing food, there will
only be food produced and consequently there will be
no production of clothing or other goods. How is the



32 AN INTRODUCTION TO ECONOMICS

proper relation between the production of different
requirements to be met?

The Idea of Competition Let us suppose that a
given individual is engaged in producing wheat. He
finds after a time that there is a great deal of other
wheat, besides his, in the market. If the total amount
is still insufficient for the needs of the community, he
can still reap all he requires in the way of exchange for
his surplus. But if the amount is greater than is
required, then he must tempt buyers to buy his own
particular portion. To do this, he must reduce his
price. But he is not the only one who has wheat for
sale. Others also are tempting buyers by reductions
in price. If the supply of wheat continues in excess
of the requirements of the buyers, the price will steadily
fall. A time will come when the price is reduced to a
point where the sales will not provide sufficient for his
own needs. In other words, his profit will disappear.
All wheat sellers' profit is not the same. Some have
better farms than others ; some are nearer the market
than others, or have some special advantage. Hence
some of the wheat producers can afford to take a
smaller price than others and still make a profit.
In the case of the individual with whom we are dealing,
we will suppose that the point of vanished profits is
reached. It does not pay him any longer to produce
wheat. He, therefore, turns his attention to some
other industry where there appears to be chance of a
greater profit.

The results of this change are twofold. First, there
is a falling off in the production of wheat. This is as it
should be, for it was evident that the supply o! wheat



THE COMPETITIVE SYSTEM 33

was too great for the market. There will be other
producers in the same position as the individual we have
been considering, so the fall in production will amount
to that portion of the wheat supply which was produced
by those who are now relinquishing farming. The
result will be that the others who still continue the
production of wheat will be enabled to gain a price
for their product sufficient to repay them for the
trouble and expense of producing it.

Second, there will be an increase in the production
of some other article, the price of which had formerly
been high. This is naturally the case, since those who
have given up farming will tend to choose that occupa-
tion which offers the greatest returns. The fact that
they so choose, however, means, as we have said, an
increase in the production of that article, and conse-
quently the buyers will have a larger supply to satisfy
their needs. As this supply increases, the producers
will bid against each other for the custom of the buyers
and there will, therefore, occur a fall in price.

Meaning of Competition It must be noted that
the competition which exists is between producers of
the same article and between buyers of that article.
The producers compete with each other when the supply
is large by reducing their prices, and so encouraging
buyers to satisfy their requirements from him who
offers the cheapest rate. When the supply is small,
on the other hand, the buyers compete with each other
by offering increased prices, and so lead the producers
to sell to him who offers the highest price. No com-
petition occurs between producer or seller and buyer.
They are in quite different categories.



34 AN INTRODUCTION TO ECONOMICS

Labor Viewed as a Commodity Now let us
consider this system from another point of view. How
does competition affect the relations between employer
and employee? For the moment we may consider
labor as being a commodity just as wheat is. Later
on we shall find that labor cannot be so treated entirely,
but in the meantime the supposition will not affect
our argument. If the supply of laborers is large, then
there will be a tendency for the laborers to compete
with each other for the existing jobs. Each looking
after his own interests will offer to work for a smaller
wage in order to obtain employment. If the supply
of labor should be small and less than the demand for
laborers, then the employers will compete with one
another for the laborers by offering higher wages. It
should be noticed here, again, that there is no com-
petition between laborer and employer. There is
competition between workman and workman, and again
between employer and employer.

Claims Made for the Competitive System It is
claimed for this system that a natural equilibrium will
be reached in which ultimately the price of all goods
offered for sale will be sufficient to remunerate the
producer fairly, neither giving him too high a profit nor
too small a return ; there will also be an equilibrium of
wages so that each laborer will obtain a sufficient sum
to keep him according to the existing standard of living.
It is further claimed that all the needs of society will be
satisfied in exactly the right degree, according to their
intensity. That is to say, those goods which are
absolutely essential in large quantities will attract
the greatest number of producers and those which



THE COMPETITIVE SYSTEM 35

are desirable but not necessary will attract compara-
tively few.

The system which we have described is known as the
competitive system. The main belief which lies behind
such an economic organization, or rather lack of
organization, is that each individual looks after his
own interests and in so doing the needs of society are
best met ; that if the natural selfishness of the individual
is allowed full play, the results to the community will
be better than if the governmental organization
attempts to regulate production. The system is
sometimes referred to as the laissez faire method.
The phrase arose from the expression of some French
economists, that each should be allowed to make
(laissez faire) what he pleased and allowed to go (laissez
oiler) where he wished.

Some Defects of the Competitive System Now it
will be at once recognized that the description given
above is not a satisfactory account of our present
organization. There are many modifications which
must be made. In the first place, it is assumed that
each individual is a capable judge of his own interests
and also of equal strength in the struggle. TTiis is
obviously not the case. In the early days of the
industrial revolution it was soon seen that the weaker
members of society were driven to the wall. The
wages of the father being reduced, instead of the
father seeking new employment in some other industry,
the labor of the children was called in to assist. Chil-
dren were set to work at as early an age as four years.
Hours of labor were extended to an almost unbelievable
degree. It was not uncommon for children five, six,



36 AN INTRODUCTION TO ECONOMICS

or seven years of age to work for sixteen hours a day.
Women's labor was also abused. We do not now
hear of women working as beasts of burden in the
coal mines.

Nor was the system satisfactory apart altogether
from the position of the laborer. In the manufacturing
world also the system failed to a very large degree.
A factory requires a considerable amount of capital
before it can be put in operation. If prices are so low
that profits disappear, the capital invested in the
business is to a very large extent lost. A cotton factory
cannot be turned into an engineering plant. It may
easily happen, for example, that many factories are
working close to the level at which profits vanish. If
prices continue to fall, not one factory, but many,
must close, and instead of production being reduced
merely to a natural level, the production will almost
cease only to increase to an undue extent when the
swollen markets are exhausted.

Failure of Competition The results of free com-
petition were seen best in the early part of the nine-
teenth century. Laborers were badly abused. Em-
ployment fluctuated rapidly between overwork and
no work at all. Profits also alternated between high
rates and the vanishing point. Waste of capital and
effort was the keynote to the system. Very soon it was
seen that competition did not pay. Manufacturers
made agreements among themselves to keep prices up,
and to keep costs (principally considered to be made
up of wage costs) down. Workmen endeavored to
do the same and keep wages up by combinations
amongst themselves. In other words, it was realized



THE COMPETITIVE SYSTEM 37

with more or less clearness that the individual could
not look after himself ; he was forced to associate with
others.

Nor did people find that governmental control or
other alleviation of the evils of the system could be
done away with. Private charity helped in a very
slight degree to remove the worst of the abuses resulting
from an unbridled individualism. Natural feelings of
sympathy revolted at the treatment of babies in
factories and domestic workshops. The government
was forced to institute or amend systems of poor relief
and to restrict the free action of individuals in the
conduct of their work. Factory acts and education
acts were passed to insure an improvement in the
treatment of workers. The acts limited hours of
labor, first for children and then for women, and
finally for men. They secured healthier conditions of
work and better protection from dangerous machinery,
and so forth.

Change in Principle of Government Regulation
In the main, however, there was a distinct change from
the form of governmental regulation of industry from
the older times. Instead of regulating the nature of
the product, government turned its attention to the
manner of production. There was still freedom to
produce what a person wished, although there is a
strong tendency for the government at present to
prohibit trades which are considered to be harmful to
the community.

This did not mean that the idea of economic freedom
was abandoned. It only meant a better interpretatipn
of the word freedom. Freedom can only exist accom-



38 AN INTRODUCTION TO ECONOMICS

panied with restraint. We do not consider the laws
against murder and theft to be breaches of our freedom.
We realize, on the contrary, that without such laws
we could not be free. Freedom means the right to do
as one pleases only so far as the exercise of that right
does not infringe upon the equal right of our neighbors.
This is true economically as well as generally. It is
not true freedom to permit one individual who happens
to possess certain peculiar advantages to impose his
will on all others. Government exists to take care of
the welfare of the community, and if it should occur
that the welfare of a few individuals is secured at the
expense of the rest, government must intervene to
protect the majority.

Experience has taught us that pure competition
does not lead to the best results in solving the world
problem. The system we now live under shows that
there is a definite, if gradual, elimination of the element
of competition and a substitution of cooperation. The
cooperation is not scientifically ordered as yet, however,
and it tends to show itself in the organization of laborers
into trade unions for the purpose of collective bargain-
ing, and of employers into associations tending toward
monopoly.

Summary We may sum up the description of the
modern economic system by saying that it is one of
modified and controlled competition. The argument
may be summarized thus :

1. The wants of society are best met by leaving to the
individual the complete right to produce what he will.

.2. In so doing, competition will regulate the production in
such a manner as to secure that all the wants of society are



THE COMPETITIVE SYSTEM 39

attended to in the proportion which they are desired, pro-
vided, however,

3. That the competition be restrained by various modify-
ing factors, as, for instance,

(a) The institution of private charity ;

(6) The institution of governmental charity in the form of
poor relief, public hospitals, etc. ;

(c) The protection of the weak (particularly women and
children) by governmental regulation of the conditions of
working ;

(d) Associations of workmen or employers for the mutual
protection of interests ;

(e) Government ownership and operation of industries
which, from their nature are best operated as monopolies
(as, for instance, the Post Office) ;

(/) Government control of industries which have tended to
become monopolies (railroads, banks, etc.).

A fuller account of the system will be developed in