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the making of the plow. It has become, therefore, a very compli-
cated process ; but anyone who will analyze the process will
find always the same two factors involved : namely, waiting
and working, the postponement of consumption, on the one
hand, and labor, on the other. No capital can ever come into
existence without this combination. It is merely obscured by the


intricacies of the modern industrial process, and it requires a
little more intelligence and study to see clearly where and how
the frugality and the labor are combined.

Separation of the functions of working and waiting. In the
highly complicated industrial system of the present, with its
increase of specialization, the two functions of waiting and
working are generally performed by different persons or classes
of persons. This has given rise to some of the most intricate
and most difficult of our social problems. In a simpler state, in
which the same individual exercised both functions, no social
or class antagonisms were developed. Even in the intermediate
stage, when the farmer bought his plow from the blacksmith
and then used it himself, and the blacksmith bought his own
tools and used them himself, we find both functions performed
by the same individuals. Class antagonisms could hardly develop
under these conditions. But when, as in the modern industrial
system, the capitalist lives mainly from the income of his capi-
tal, and the laborer mainly from the wages of labor (in other
words, when the two functions are sharply separated), class
feeling and class antagonism have developed. It has come
about in our urban industries that the average person who per-
forms manual labor receives his wages in weekly installments
and spends them mainly for consumers' goods, whereas the
very tools with which he works are owned by other men who
have specialized in the function of investing their money in
capital ; that is, in tools and equipment.

Separation of the function of the laborer and the capitalist.
Capital has existed, of course, as long as tools and equipment
have existed, but this separation of the two functions, that of
the laborer and that of the capitalist, has become general only
since the rise of machine production. Before that time the
function of the capitalist was not important enough to create
an opportunity for many men to live exclusively by the per-
formance of this function. Not enough capital was needed
in the primitive forms of industry which preceded the present,


to enable a large number of men to live on its earnings. It
is this fact which is probably meant when it is erroneously
stated that capital in the modern sense came into existence
with the rise of machinery. Capital in the modern sense does
not differ from capital in the former or capital in the ancient
sense ; it differs only in the sense that there is more of it and
more needed. This combination of facts the fact that there
is more needed than ever before and that there is more of it
supplied than ever before has created what we call the
capitalist class in modern industry, and that is a matter of the
very greatest importance.

Coordinating labor which is performed at different times. In
a somewhat special but very important sense we may say that
the function of capital is to aid in production by coordinating
labor which is performed at different times. In the chapter
on The Division of Labor it was pointed out that there are
two distinct forms of the division of labor ; namely, the con-
temporaneous and the successive. Under our modern indus-
trial system the successive division of labor has been greatly
lengthened out. In some cases many years elapse between the
beginning of a process and the final completion of the pro-
duction of a consumable article. There is a striking analogy
between the lengthening out of the successive division of
labor and the widening out of the contemporaneous division
of labor. The latter has been brought about through im-
proved means of communication and transportation. It is
literally true at the present time that thousands of miles or
even half the earth's circumference may separate men who
are working for the production of the same article. The
coordination of labor performed at such widely separated points
of space is one of the most important and striking aspects
of the modern industrial system. It is, however, no more
important or striking than the similar coordination which has
taken place between labor performed at widely separated points
of time.


There are various ways in which this coordination of labor
performed at different times may be presented to the mind.
In a primitive state of industry each unit of labor was per-
formed by men working with few and simple tools. The tools
may be said to represent labor performed in previous times.
When the worker uses tools, his work in the present time is
coordinated with the work of the man who made the tools.
But since the tools were very few and simple, it would be
correct to say that a given unit of present labor is being
coordinated with a very small amount of past labor. Under
modern conditions the average laborer is using more tools, as
well as larger and more complicated tools, than were used by
the primitive laborer. These large, and complicated tools, like
the primitive tools, represent labor performed at a previous
time. The labor of the workmen using them is literally being
coordinated with the labor of the men who made the tools.
Since the tools are so numerous, large, and complicated, it is
correct to say that a given unit of present labor is being
coordinated with a large amount of past labor.

One of the fundamental changes which have come about as
a result of the modern system of machine production is that
of coordinating a given quantity of present labor with a much
larger amount of past labor than was the case under simpler
conditions. That is to say, in a simple state of industry a given
quantity of present labor would work in coordination with a
small amount of past labor. At the present time, however,
a given quantity of present labor is found to be working in
coordination with a large quantity of past labor.

The coordination of labor performed at different points in
space does not take place of its own accord. It is done
through agencies of transportation and communication. Simi-
larly, the coordination of labor performed at different points of
time does not take place of itself; it takes place because
of the willingness of men to wait, to spend their money for
producers' goods rather than for consumers' goods. If no one


were willing to wait, if no one were willing to postpone con-
sumption, if everyone insisted on living from hand to mouth
as the spendthrift does, there could be no effective coordination
of labor performed at different times.

Lengthening the process of production. In order that there
may be tools, mines must be opened and ore extracted. No
one wants ore for its own sake ; it is desired because it is a
means of getting something in the distant future which will
be desirable for its own sake. Ore must therefore be smelted
and purified into iron and steel. Again, no one wants iron
and steel for their own sakes, but solely because in the distant
future these commodities will be the means of getting things
that are desirable in themselves. Again, iron and steel must be
made into tools. But no one wants tools for their own sakes.
Tools are wanted only as they will help to produce things
desirable for their own sakes. It is this constant looking
ahead and taking thought for the future, accompanied by the
postponing of present consumption in favor of future consump-
tion, that makes possible the coordination of labor performed
at different times.

Combination of factors. Something more than frugality,
thrift, and foresight are necessary, however. Without mechan-
ical ingenuity, however frugal, thrifty, and forethoughtful a
person might be, he would find it difficult to exercise these
qualities profitably. Unless someone were able to invent
superior methods of production which required the exercise of
those qualities, they would be of comparatively little economic
advantage to those who possess them.

Here we have an example" of a class of cases which con-
tinually perplex the amateur student of economics. There are
cases where two or more factors are absolutely necessary to
get a given result. Fundamentally the problem is no more
obscure than that involved in the formula 2 x 3 = 6. The
students will agree that 2 is just as essential as 3, and 3 as
essential as 2, in getting 6. Other problems of a similar kind


are found in every field of science as well as in arithmetic.
Oxygen and hydrogen are equally necessary to the formation
of water ; air and gasoline must be mixed in the carburetor in
order that there may be an explosion in the gasoline engine. One
is as essential as the other. The upper and the nether millstone
must work together in the old-fashioned mill to grind wheat.
Two sets of rollers are necessary in the modern flour mill.

In the higher realms of economics we find numerous exam-
ples of the same type of problem. Forethought and inventive-
ness are examples of mental qualities which are combined to
secure mechanical progress. However inventive men may be in
contriving mechanical improvements, unless someone is willing
to perform labor long in advance of the consumption of the
products of these mechanical improvements, or pay someone
else for performing that labor, all these mechanical contrivances
will remain either in the brains of the inventors or in museums.

When one has spent his money for iron ore, or for tools of
any kind, one has become a capitalist. He has bought some-
thing of no immediate use to him as a consumer, but something
which is a means by which in the future he may get consumers'
goods. Because there are, in any community, men who are will-
ing to do this, there is a market for the genius of the inventor.
Similarly, because inventors will devise mechanical appliances
and improvements, there is opportunity for the investor to
become a capitalist, a buyer of tools and contrivances.

These two functions, that of the inventor and that of the in-
vestor, are absolutely necessary, whatever the type of social organ-
ization may be. Even in a communistic society the work of the
inventor amounts to nothing unless the society as a whole
undertakes what, in the present order of society, the individual
capitalist undertakes ; namely, to set men to work at making
tools, and to pay them wages while they are about it. One im-
portant difference between socialism and individualism is this:
socialism proposes that society as a whole shall do precisely what
in an individualistic society the capitalist does as an individual.


The productivity of capital. There are some extreme social-
ists who deny that the capitalist performs any necessary func-
tion. If that were true, it would be hard to frame an argument
to show that society as a whole should do precisely what the
capitalist is doing. The socialist would then have to admit that
the capitalist, instead of performing a useless function, performs
a most important one, so important that society as a whole
should take it over. To say that society should do its own
investing is to say that it should become its own capitalist.
This would present a question to be debated. The question
might be stated as follows : Can the useful function of coordi-
nating labor performed at different times be done more economi-
cally and satisfactorily by the state, or by the society as a whole,
than by private individuals ? Or the question might be put in
this way : What forms of investment and ownership should
be undertaken by society as a whole, and what should be left to
private individuals ? Only extremists would refuse to discuss
this question. There are, however, some who are so very ex-
treme as to deny that the state or society should do any invest-
ing or own any capital. Others go to the opposite extreme by
denying that the individual should do any investing or own
any capital. Wisdom probably lies somewhere between the two
extremes. The real difference, therefore, between the reason-
able individualist and the reasonable socialist is one of degree.
The reasonable individualist will maintain that, in the absence
of a special or convincing reason to the contrary, the individual
should be allowed to invest and to own capital, and that the
case must be proved against him before he is forbidden to do
so. The reasonable socialist, on the other hand, holds that the
presumption is in favor of public and against private ownership
of capital, that unless special and convincing reason to the
contrary is shown, the public and not private individuals
should own capital. He places the burden of proof on the
one who wishes to own private capital.


Large capital necessary. The growth of machine production
has made necessary such large aggregations of capital as to
require the combined accumulations of numbers of men. In
comparatively few cases does a single individual possess enough
capital to equip a modern factory, railroad, steamship company,
mine, or even a large mercantile house. Were it not possible
to combine the capital of a number of individuals, large-scale
production would be the privilege of only a few very wealthy men.

Methods of combining capital. There are three distinct
methods of combining capital. One is known as the partner-
ship, another is the corporation, or joint-stock company, and
the third is the cooperative society. The partnership is a mere
combination of two or more individuals in the ownership and
management of a given business, in which each partner is
fully responsible for the acts and liabilities of the group. The
partnership is merely an enlargement of the individual. The in-
dividual who owns and operates his own business is of course
fully responsible for all debts and obligations, and, subject to
bankruptcy and homestead laws, all his property may be taken
in payment of any obligation incurred in the business. Where
two or more men join together in a partnership, each partner is
responsible in the same sense and to the same extent as he
would be if he were the sole owner.

Difficulties of partnership. Obviously a partnership on these
terms is possible only among men who are very intimately
acquainted with one another and who have complete confidence
in one another. Since each partner is fully responsible for the
acts of every other, it would be extremely hazardous, not to



say foolhardy, for anyone to form a partnership with an indi-
vidual with whom he was not intimately acquainted and concern-
ing whose honesty and solvency he had the slightest suspicion.
Incompetent or dishonest partners have caused the financial
ruin of many an otherwise sound and capable business man.

The corporation. The modern expansion of business would
hardly have been possible without some form of organization
which would permit the association of larger numbers of men
than are possible under a partnership. This has given rise to
the corporation, or the joint-stock company. The distinguishing
difference between the corporation and the partnership lies in
what is known as limited liability. In a corporation the liability
of each shareholder is strictly limited. The corporation may
become bankrupt, but the individual members or shareholders
can be called upon only for definite sums to make good the
debts of the corporation. In the ordinary case, each individual
puts a certain sum of money into the fund. This may be lost,
but he cannot be called upon for additional sums to make good
further losses. In other cases, such as our national banks,
the shareholder may not only lose what he has put into the
fund but may be assessed an equal amount in addition. This
is sometimes called double liability.

Suppose, for example, it were considered necessary to have
$100,000 of capital with which to start a business. This
capital may be divided into a thousand shares of $100 each.
(A larger number of shares of smaller denomination or a
smaller number of larger denomination may, of course, be
decided upon.) These shares are represented by bits of printed
paper which serve as evidence to show that the money has
been put into the fund. A thousand different individuals may
buy one share each or a smaller number may each buy a
different number of shares. For each $100 which any indi-
vidual puts in, he receives one of these bits of paper, which
come to be called shares or stock certificates or some other
such name. After the shares are all sold, there is the fund


of $100,000 in money available for starting the business. The
general rule is that each contributor shall have a vote for each
share which he has purchased. It would therefore be possible
for one individual to own more than half the shares, provided
he had invested more than $50,000 in the enterprise. Owning
more than half the shares, he could always cast the majority
vote and control the corporation, electing himself and his
particular friends to all the offices, and virtually controlling the
business. In some cases, however, such a concentration of
ownership is not permitted.

Limited liability. Only the officers of the corporation are
empowered to act for the corporation ; the individual share-
holder who is not an officer has no power to obligate the
corporation in any way. One therefore does not need to
scrutinize the solvency or the character of his fellow share-
holders as closely as would be necessary in a partnership.
Again, the individual shareholder has no responsibility for the
acts of the corporation beyond that which has already been
indicated ; that is, if the business fails, the affairs of the
corporation may be wound up, but he can lose only the sum
which he originally subscribed, or, in the case of double
liability, that sum plus an equal sum.

Some weaknesses of the corporation. This device of the
joint-stock company with limited liability has made possible
the aggregation of vast sums of capital, running up into mil-
lions and hundreds of millions of dollars, for the purpose of
carrying on great business enterprises. Individuals who never
saw or heard of one another, living in different parts of the
country, sometimes in different parts of the world, may own
shares in the same corporation, having contributed their capital
to the joint fund for the carrying on of the business. This
has been one of the great factors in building up all modern
enterprise. It is almost as important as some of the great
mechanical inventions. But, like all great inventions, it
carries with it certain difficulties. For example, it has made


individual enterprise a practical impossibility, except in those
cases where small-scale production is as efficient as large-
scale production. On the other hand, it has given individuals
with only small sums of capital to invest the opportunity to
participate in the profits of large-scale production. In the
latter sense it has been a democratic institution. The fact,
however, that individuals vote in proportion to the number
of shares which they own has tended to destroy some of the
democracy and, in some cases at least, to put the management
of the corporation into the hands of a plutocratic oligarchy ;
that is, a few large shareholders, who control the majority of
the stock, can always control the corporation, sometimes to the
disadvantage of the small shareholders, who can never cast a
majority vote. Various limitations upon the voting power have
been proposed and introduced for the purpose of curbing the
rapacity of the large shareholders. In spite of these, however,
many a fortune has been built up through the machinations
of large shareholders and the robbing of small shareholders.

Multiplied power and divided responsibility. Another dis-
advantage of the corporation is found in its impersonal character.
A decade or so ago the social psychologists were engaged
with the problem of the mob mind. Before the analysis was
carried very far, it was discovered that the mob mind did not
present any special mystery as distinct from the individual
mind. The mob thinks and acts precisely as any of its indi-
viduals would think or act were his power greatly increased
and his sense of responsibility greatly diminished. That is
precisely what the presence of numbers does for the individual
when they are all moved by a common impulse ; it gives him
a sense of power proportionate to the numbers, and at the
same time the very fact of numbers diminishes his own sense
of responsibility. That is why the mob is so like a monster,
for the difference between a man and a monster is precisely
that, the monster feels a sense of power and does not feel
a sense of responsibility.


Something of the same kind exists in the case of an indus-
trial corporation. There also you have the circumstance of
increased power combined with diminished responsibility. The
sense of power comes not so much from the presence of
numbers, as in the case of the mob, as from the larger fund
of competitive capital which is brought together. The dimin-
ished sense of responsibility comes partly from the mere fact
of numbers (no individual member of the corporation feels
the full responsibility for the acts of the whole), partly from
the impersonal character of the conduct of the corporation,
and partly from the limited-liability feature of most of the
charters. Most of the evils of corporation practice grow out
of this simple situation, and the remedy must be applied at this
point. The sense of responsibility must be made commensurate
with the sense of power.

This is to be accomplished, not by reducing the powers of
corporations so much as by increasing the sense of responsi-
bility of its individual members. If they can be made to feel
the same responsibility for the acts of the corporation which
they feel for their individual acts, the corporation problem as
such will be solved ; and it will be solved in no other way.
This means the frank adoption of the maxim that crime is
always personal, and that corporate law-breaking is to be dealt
with in precisely the same way as individual law-breaking.

Size a matter of importance. In fact, it may be necessary
to go even farther and enforce stricter responsibility upon
members of corporations, particularly the larger corporations,
than we do upcn individuals. If the principle we have laid
down is sound, it furnishes no support to the view that the mere
bigness of a corporation is not a matter for the law to take into
account. From our point of view, bigness is an important
factor in the problem ; for the bigger the corporation, the
greater its power and the less the sense of responsibility on
the part of each member. That situation alone calls more and
more for strict regulation and enforcement of responsibility, the


bigger the corporation becomes. Its increased power is a
good thing, provided that power be used productively and
not acquisitively ; but there is no certainty that it will be
used productively unless subjected to the strictest control.

This does not mean that large corporations have worse dis-
positions than small, or that their members are meaner men
than the members of small corporations. It only means that
the disproportion between power and responsibility increases
with the size of the corporation.

As a homely illustration let us take the common house
cat, whose diminutive size makes her a safe inmate of our
household in spite of her playful disposition and her liking
for animal food. If, without the slightest change of char-
acter or disposition, she were suddenly enlarged to the dimen-
sions of a tiger, we should at least want her to be muzzled
and to have her claws trimmed ; whereas if she were to
assume the dimensions of a mastodon, I doubt if any of us
would want to live in the same house with her. And it would
be useless to argue that her nature had not changed, that
she was just as amiable as ever, and no more carnivorous than
she always had been. Nor would it convince us to be told
that her productivity had greatly increased and that she could

Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 14 of 48)