Hate CfnlUge of Agriculture At CJartteU 3llnt»etattg atljara, Sf. f . Htbrarji Cornell university Library HB 221-M3 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013686591 THE FLOW OF VALUE THE FLOW OF VALUE BY LOGAN GRANT McPHERSON Author of "How thk Would Makes its Living," etc. r '■,',. \- r,/ C r 'T NEW YORK THE CENTURY CO. 1919 '^r-:^r. / ' .<■ Copyright, 1919, by The Centtjby Co. Published, Octoler, 1919 PREFACE The "World War has given impetus to the con- viction, the growth of generations, that human en- ergy ought to be directed to the service of human kind. The conversion of the combatant nations into unified organizations for the conduct of war ^has tended toward an unprecedented coordination of the activities of their peoples. This gives force to the conclusion that there ought to be the coor- dination of their activities for the general good, not only in time of war but in time of peace. Although there is wide concurrence in the opin- ion that there will never be a reversion to the old conditions, there is lack of concurrence as to the changes that ought to be made in institutions and practices of the past. There are those who believe that there must be a radical transformation: others hold that modification of the status at- tained through the age-long development of civilization ought not to be abrupt. Of foremost importance will be the solution of the problems concerning the determination of wages, of prices, and the acquisition and tenure of property. There can not be adequate grasp of all that will need to be taken into account without com- prehension of the effect of procedure that has had the sanction of custom and of law. viii PREFACE In the following pages is an attempt to set forth in general and in broad outlines the sequence of cause and effect in the determination of prices. There is no endeavor to trace this sequence in its relation to any specified price at any specified time or place. This would compel an immediate study of the particular incidence of the particular forces involved. The meteorologist knows that the frost upon the window-pane is due to the temperature without and that within, to the thickness and texture of the glass, the character of its surface, the degree of moisture in the air. If he could in any given case measure each of these factors and the effect of each in their interrelation, he might be enabled to draw in simple outline the pattern that would be formed by their reaction and interaction, pro- vided the glass were clean. But a window-pane, even in a well-ordered household, is seldom, if ever, absolutely clean. Attached to it are nearly always extraneous particles, watery, oily, or dusty, which have a marked influence upon, or may even dominate, the hoary figuration. So also, while cognizance of the primary factors may make it possible to denote the course of prices, there can not, without other data, be ascertainment of just why there is a particular price for a particu- lar thing at a given time and place. The overwhelming importance of the problem makes it imperative to surmount the difficulties PREFACE ix that beset its solution. As the patient investiga- tion of phenomena of animate and inanimate na- ture in mass and in detail by astronomers, geolo- gists, physicists, chemists, and biologists has given rise to conclusions of vast benefit, so also must there be persevering study by economists of all that pertains to price. They may discover and isolate many a malignant sociological or psycho- logical bacillus and thus be led to find and apply an antitoxin. In the practice of medicine no more than a few decades ago it was chiefly through long experience that a physician acquired the insight which en- abled him to diagnose a disease, and the skill which enabled him to combat its progress. Now the stu- dent, grounded in anatomy, physiology, and or- ganic chemistry, gains in hospital and clinic that acquaintance with the various stages of every mal- ady which qualifies him, in practice in the outer world, to detect the nature of a disease, the degree of its advancement, and to apply the remedy — in the extreme, to resort to surgery. So also it may come about that economists, trained in the fundamentals of their science, cognizant of re- search into economic phenoniena, with perception developed by the study of the actual course of business, may, when they take part in the affairs of the world, be enabled promptly to recognize a pathological condition of industry or commerce, to decide upon the course requisite to overcome X PREFACE the plethora of overproduction and its ensuing un- employment, or the anemia of underproduction and the consequent deprivation, to dissolve the irritation that may culminate in cancerous growth, and thus to reduce to a minimum the resort to the excision of bankruptcy and foreclosure. Moreover, the time is inevitably approaching when the most complete information as to the ef- fect upon the general welfare of all of the ramifi- cations of any economic juncture will be indis- pensable as an aid to the judgment of any tribunal charged with the settlement of economic dissen- sion. In the past the procedure of such a tribunal has been very much like that of a court of law. Disputants have been heard, and decision often has been in favor of the side making the more skil- ful and forceful presentation. It may be, how- ever, that compliance with the petition of one who feels that he suffers unjustly may militate against the weal of many others not in evidence, or who indeed may not even be aware of the bearing of the dispute upon their activities or upon the re- ward for their activities. Legislators also have often made enactment in behalf of those who have raised the loudest clamor. Then when the enact- ment has worked to the disadvantage of others, they in turn have engaged in like vociferation, and it has been modified in their favor. In the long reach of time such pulling and tugging back and forth now and then may result in an equitable PREFACE XI equilibrium that could the better have been at- tained and adjusted to changing conditions were there continuing complete consideration, not only of contention but of the general welfare. It must be said that the analysis in these pages is, in a way, a continuation of the presentation em- bodied in a previous volume entitled "How The World Makes Its Living." It is the writer's de- sire, however, that each exposition be complete in itself. To this end there is here and there in this book a limited and condensed restatement of cer- tain of the premises and deductions of the earlier volume. Certain subjects there treated, as, for example, speculation, crises and panics, inherit- ance, and charity, are not here discussed. "How The World Makes Its Living" presents the evo- lution of the entire economic structure ; ' ' The Flow of Value," the sequence of cause and effect in determining prices, wages, and profit. It is further to be stated that this discussion is of the physiology of the economic structure, with little reference to its pathology. Definite knowl- edge of the physiology of the human body led to the perception that many manifestations long re- garded as pathological are indications of healthy development. So also it may be with the eco- nomic structure, as we attain a more thorough comprehension of the significance of its working. ACKNOWLEDGMENT It was the desire of the author that the manu- script of this book be scrutinized from the stand- point of the exposition in general, from the stand- points of the professional teacher of economics, of the practical philosopher of business, and of the practical philosopher of finance. This desire has been kindly and painstakingly fulfilled by Fabian Franklin, editor of the "Eeview" ; by Wal- ter W. McLaren, professor of Economics in Wil- liams College; by Leonor F. Loree, president of the Delaware and Hudson Company, whose ines- timable offices in manifold ways have forwarded the preparation of this volume; and by Paul M. Warburg, formerly vice-governor of the Federal Eeserve Board. Byron J. Eees, professor of English in Williams College, has obligingly read the proof. While each of these gentlemen has made suggestions toward the improvement of the discussion of which the author has gratefully availed himself, it is explicitly to be understood that no one of them is to be held responsible for, or is committed to concurrence in, any opinion ex- pressed in these pages. The author thanks the faculty of Williams Col- lege and the residents of Williamstown for many courtesies extended to him during his sojourn in that charming village where this book was written. CONTENTS ihapteb page Preface . . v I Human Efpoet and Human Wants . . 3 II Property in Matter and Property in Force 18 III Utility and Utilities 23 IV The Exchange op Utilities and the Unit OF Exchange 34 V A Hypothetical Development of Prices FOR Foodstuffs — the Emergence op Profit 52 VI A Hypothetical Development op Prices for the Products of Artisans, for Substance and of Wages .... 64 VII A Hypothetical Development op Prices for Sources op Substance and Instru- ments OF Production 84 VIII A Continuation of the Hypothetical Development op Prices and Profit . 93 IX The Effect op the Introduction and Use op Machines Upon Prices and Profit 114 X The Actual Development op Industry and Commerce in the United States . 136 XI The Relativity op Human Effort and THE Relativity of Human Wants . . 143 XII The Relativitt of Prices 154 XIII The Relativity op Profit 175 XIV The Interrelations op Effort, Prices, AND Profit 188 XV The Flow of Debits and Credits . . . 213 XVI Value 232 CONTENTS CKAFTEB PAGE XVII Capital 252 XVIII The Ultimate Units op Production and Consumption 266 XIX A Summary, Restatement and Further Analysis 286 Production, Buying, and Selling by- Individuals 286 Production by Organizations of Em- ployer and Employees .... 299 Man-hours and Want-units . . . 303 Rising and Falling Prices .... 311 The Distinction Between Capital and Labor 314 The Securing of Profit 318 Greater Reward for Greater Service Entails No Deprivation .... 324 Value Depends Upon Return . . . 329 Living Upon Rent, Interest, or Profit 334 Man-hours for Man-hours .... 338 The True Significance of the Ratio of Exchange 345 The Synthesis of Production . . . 352 Waiting for Payment 359 The Retention of Credits .... 364 Variation in Purchasing Power of the Dollar 368 XX Money 377 XXI Developed Functions op a Modern Bank 402 XXII The Trend op the Monetary and Bank- ing System 424, XXIII Sound Minds in Sound Bodies .... 437 Index 463 THE FLOW OF VALUE THE FLOW OF VALUE HUMAN EFFOET AND HUMAN WANTS It is an every-day saying that if we want to understand a thing we must look at it from a de- tached point of view. This means that in order to obtain full enlightenment in regard to a sub- ject it must be considered in all its relations and without bias. It is difficult for a person to take such a view of a matter in which he has an immediate self-interest; difficult for any one, reared in an environment that has engendered certain preconceptions, to take such a view of any problem affected by them. In the endeavor to lead to a completely detached judgment, earthly events are sometimes presented as they con- ceivably might appear to a being from another planet, typified by the Man from Mars. The presumption is that the Man from Mars is ut- terly unfamiliar with the course of things in this world but is the personification of that intelligence which enables him to perceive, prompts him to in- quire, and impels him to logical conclusion. Let 4 THE FLOW OF VALUE us attempt to outline certain phases of human ex- istence as they would have appeared to him had he arrived on this earth at any time during the years which preceded the outbreak of the war of 1914, and soared above, around, and among mankind. The Man from Mars would have perceived that all human beings consume food, that under the conditions of civilization they wear clothes and live in houses wherein are things they use and things that adorn. He would perceive that a large por- tion of the population spends hours of the day at work on the farm, in the forest, in mine, mill, fac- tory, office, and store, in propelling vehicle and vessel. His intelligence would lead to the prompt discernment of the fundamental fact that the pur- pose of all of this activity of those who work is to provide the food, the clothing, the shelter, and other things and services which minister to all who are living. He would perceive that human effort is put forth to meet human wants. He would perceive that human wants can not be met without the putting forth of human effort. The Man from Mars would perceive that for the satisfaction of his wants every person is dependent upon the efforts of others, that no one family can under the conditions of modern civilization pro- vide even the things essential to its existence en- tirely and exclusively through the exertions of its own members. HUMAN EFFORT AND HUMAN WANTS 5 A more searching survey of this activity would reveal that a multitude of persons are engaged in a multitude of pursuits — ^in plowing, sowing, reap- ing, threshing, in converting grain into its prod- ucts, in preparing these products for the table ; in planting and gathering vegetables, nourishing trees, gathering fruits; in raising food animals, in transforming their flesh into forms of food, and horn, hide, and hoof into forms of use ; in felling trees and sawing logs, in fashioning the logs into boards, beams, and shingles, doors, and window- frames, in placing these forms in structures; in extracting minerals, in loading and preparing coal, in smelting ores, making them into mattes, bars, and billets, and working these into the final forms of use; in gathering and preparing cotton, wool, silk, and linen, in transforming fabrics into gar- ments ; in the transportation of persons and things by land and sea; in storing and marketing the things that others have prepared; in the exten- sion of knowledge and the diffusion of intelligence ; in the practice of the professions and the arts. The exertion of this activity means that there are always the application of human effort and that to which it is applied. Human effort is force emanating from the body and the brain. It is ap- plied to that which exists in man's environment. This is the universe— the cosmos— throughout which there is the perpetual reaction and inter- action of the cosmic forces. His more immediate 6 THE FLOW OF VALUE environment is the earth, the air, the water, and all that in them is — the matter of which they are com- posed and the forces which play upon that matter. His effort may be applied directly in transforming matter into the things that meet his wants or in directing the application of cosmic force in that transformation. Thus man's activity in provid- ing the things that meet his wants consists in the application of force to matter. Further penetration of his intelligence would disclose to the Man from Mars that the matter to which man applies force is substance, such as the ores, woods and fibers, the grains and fruits, so wrought by cosmic force that it meets his wants or can be transformed to meet his wants. He would perceive that different substances are com- bined and fused to serve respective ends. Nearly every viand is of many ingredients. Few of the materials for clothing are composed entirely of one original substance. Silk from the cocoon, cot- ton from the boll, wool from the sheep, leather from the hide, are treated with a variety of sub- stances to give them durability, luster, color, and pattern: wool, silk, and cotton are combined in different fabrics in varying proportions. Even modest dwellings have foundations of brick, stone, or cement joined with mortar, a composite sub- stance. In the superstructures are divers woods, iron and steel in different forms; roof, cornices, and spouts may be of wood, slate, tin, or copper. HUMAN EFFORT AND HUMAN WANTS 7 The paint and varnish are composed of ore, oil, and other ingredients. In many structures are brass made by fusing copper and zinc, bronze made of copper and tin. The glass of the win- dows has been made of two or three or more sub- stances. In the furniture, woods of different kinds are often combined. The books on the shelves may be of paper made from discarded gar- ments or of pulp from the forests, of printers' ink compounded of several substances, and the bind- ing is often of different substances in combination. This fusing and combining of substance is ef- fected by the fused and combined effort of many men. Nearly all existing forms of matter that were fashioned by human effort were wrought by the conjoint effort of many men, and their utiliza- tion in further production is by the conjoint effort of many men. In the operation of machines there is the conjoint application of human effort and cos- mic force. Their effect is exemplified in purging ores of dross, transforming them into billets and bars, and finally into wire, into nails, and other forms of use. Their effect is exemplified by the modern ocean liner, in the construction of which there has been the application of every kind of force to every staple substance. It embodies the results of the joint effort of thousands, perhaps of hundreds of thousands, of men. Thus there is the convergence of force from different sources. The examples that have been given of this convergence 8 THE FLOW OF VALUE throughout the United States might be multiplied by examples of such convergence throughout the world. There is also the world-wide divergence of force in that each measure exerted in produc- tion may have effect in incalculable ramification. The stationary engine in a building devoted to miscellaneous manufacture may supply the power that drives many machines utilized respectively in making, for example, letter presses, cutlery, hand-bags, paper boxes. A locomotive engine may haul a train containing fertilizer, lumber, agricultural implements, dry goods, shoes, and carpets. The stationary engine and the locomo- tive engine contribute to the production of dif- ferent kinds of things that are used to divers ends by a multitude of persons. Wheat from the grain-growing regions may be transported to a mill in any of a hundred cities, and there transformed into flour. That flour may be trans- ported for consumption in the United States, or it may be conveyed across the Atlantic to the people of Europe, or across the Pacific to the peo- ple of Asia. To the making of every barrel of flour have contributed the efforts of farmers, farm- hands, of the makers of agricultural implements, of those engaged in transportation, of the men in mills, and of the men who made the machinery used in the mills. The flour in even a single barrel may find its way to the tables of many households. HUMAN EFFORT AND HUMAN WANTS 9 The results of the efforts of the lumbermen who may have felled trees in Texas and of those who have sawn them into logs are diffused in reaction and interaction with the results of the efforts of others in fashioning the door-frames and sills that may be placed in a residence of an eastern city, the barrels in which sugar is shipped from New Orleans to Chicago, the tubs . in which is packed the butter conveyed from Wisconsin to New York, the boxes containing garments worn by the young ladies of a New England college. If a seamstress do no more all day long and day after day than to sew buttons on trousers, coats, and waistcoats, she is giving the garments the potentiality of being fastened around the body, without which they would not be of service. But her effort is not effective without the conjoint ef- fort of her fellow-seamstress who makes the but- ton-holes. Sheep have been nourished on the plains and shorn; cotton has been planted and picked on the plantation; wool and cotton have been transported to factories, carded, spun, and woven into cloth, which has been transported to the wholesale establishments; thence conveyed to the clothing factory where designers have made the patterns and cutters have cut the fabrics into the pieces which have been placed in the hands of the contract tailor who employs tailors to sew them together, seamstresses to sew on buttons and to make button-holes. The completed garments 10 THE FLOW OF VALUE are returned by the contract tailor to the clothing factory, whence they are transported to the retail store, whence they pass into the possession of the wearer. These garments may clothe clerks in the shops of San Francisco, farmers in the Mississippi Valley, operatives in the mills of the Carolinas. Each and every wearer benefits by the application of effort by every one, from the ranchman who attended the sheep and the negro who picked the cotton to the seamstress who sewed on the buttons. It may seem that the effort of the domestic servant who cooks and sweeps does no more than minister to the comfort of the household. Yet that ministration contributes to promote 'the vi- tality of her employer and therefore in a measure to his putting forth effort toward results that may diffuse throughout the world. Through intricate and ramifying processes are brought to that servant her food, her clothing, and her shelter. From an electric power-house emanate the waves of the mysterious force that illumines the night and gives motion to the cars that carry passengers to and fro, thus contributing to the putting forth of effort by persons of all sorts and conditions. Through the application of force, substance is transformed into forms to which force is applied in further transformation, and so on in infinite series. From every man the results of his efforts extend as ripples extend from a cen- ter in a lake : they are interlaced with the results HUMAN EFFORT AND HUMAN WANTS 11 of the efforts of others as the ripples from many centers in a lake are intermingled. • As his sojourn upon this earth continued, the Man from Mars would perceive that instant by in- stant human beings are being born into this world, instant by instant human beings pass out of this world ; that the current of human existence is in ceaseless flow. He would perceive that the wants of the living are met in greatest measure by the activity of the living, that in part they are met by the results of the efforts of those who have passed away, and that the activity of the living will fur- ther the existence of those who are to come. He would reflect that, as it is necessary for men to put forth effort in order to obtain the things and services necessary to their existence, it fol- lows that they are impelled continually to put forth effort in order that their existence may con- tinue. If production suddenly were to cease there would be no food and it would not be very long before all clothing were worn out : there would be no use for structures of any kind or machines and appliances. Thus it is that food is now in prepa- ration for future consumption ; cotton, wool, linen, and leather are now being transformed into cloth- ing to be worn in the future; coal is now being taken from the mines for subsequent combustion ; woods are being cut from the forests, and ores taken from their beds for transformation; by 12 THE FLOW OF VALUE means of structures, macMnes, and appliances, substances are now being transformed into things that will be used hereafter, and into materials which will enter into the future construction of structures, machines, and appliances. This means that there must be continual re- placement of that which is used and consumed. As bone and tissue of the body wear away they must be repaired; as crops are harvested new crops must be sown; as timber is cut new trees must be grown or additional forests brought into use ; as ores are extracted additional beds of min- erals must be acquired; as substance passes through stages of transformation new substance must be provided; structures, machines, and ap- pliances must be repaired, renewed, and finally replaced. Replacement need not always be exact in kind but must furnish that which will serve the purpose. As food is consumed additional stocks of food- stuffs must be provided, but the elements that are transformable into organic tissue are found in differing proportions in different substances. Wholesome and adequate diet may be provided by a great variety of selections from different kinds of grain, different species of fish, flesh, and fowl, different kinds of vegetables and fruits. Sub- stance for clothing must be soft, pliable, durable, of different degrees of warmth. There are divers kinds and grades of wool, of cotton, of silk, of HUMAN EFFORT AND HUMAN WANTS 13 linen, of fur, and of leather that meet these re- quirements ; paper is coming into use for garments as are the fibers of plants not hitherto so used. Substance for buildings must be hard, durable, resistant to weather, susceptible of being wrought into shape and placed as required. Various kinds of wood, of stone, of clay, of ores are thus adapt- able. Substance for engines, machines, tools, and appliances must be suited to the divers purposes — to bore, cut, drill, turn, and lift. Numerous woods, metals, and stones can be fashioned to serve these ends. Not only is one substance substituted for an- other but substance of one kind is continually be- ing substituted for substance of another kind, new uses are ever being found for substances known to man throughout the ages, and substances such, for example, as platinum, aluminum, and rubber are brought into a more extended and varied use. As we reflect upon all that furthers the life of mankind, we comprehend the meaning of the work of man. Impressive are the manifestations of ex- istence in which he has no part. There is sublim- ity in regions of arctic ice, grandeur in mountain forest; and fascinating is the teeming plant and animal life of tropical jungle. We perceive the effect of man's reaction upon his environment in the vast areas where soil is tilled, flocks are herded, forests are cut, and minerals taken from the 14 THE FLOW OF VALUE earth. His work is more in evidence in town and city. After the sunlight wanes, street and dwell- ing and place of assembly are made almost as available for his pursuits as before by the light his effort provides. In response to the play of cosmic force, the air ebbs and swirls, water rises to the clouds and falls to the earth again, but he regulates the course of the air and conveys water for his use through dwelling and work-place, through church, theater, and hospital, which likewise by means of his effort are suffused with warmth when the win- ter rages. In the light of this reflection, no longer are the great buildings and the avenues of the city of the same character in the landscape as are hill, plain, and river. Wood, brick, stone, and steel were once in the forest and in the earth. Through the application of human effort these substances were made into buildings. The texture, form, and color of all the wares displayed in all the shops have been due to human effort. Within the home, desk, table, and chair, the shelves and their books, the coverings of floor and wall, and the pic- tures that hang upon the wall have been given form and place by the effort of man. Without are the streets that have been paved and the park that has been cultivated by him. There comes an awing and reverent sense of the thought of the brain and the work of the hand of the innumerable throng who have ministered unto us. HUMAN EFFORT AND HUMAN WANTS 15 If after perceiving things as they are, or rather as they were prior to the outbreak of the war, the Man from Mars should try to learn how they came to be as they then were, there would arise the thought that that which was of the day was in sequence to that which was of the yester- day. And thus from yesterday to yesterday throughout the centuries, throughout the ages, has flowed the sequence of cause and effect through which human beings, their activities, their affairs, their creeds, their institutions, their wants, and their efforts in supplying these wants came to be as they were before the war began. As the animal with four legs came to stand on two, the fore-limbs were free for other use. Thus as man evolved, there developed the hand of man. This he used in pushing, pulling, lifting, and carrying. But little mental effort is required in directing the muscles of the body in such exer- tion, and therefore those of the lowest intelligence to-day can do little more with their hands than this. In higher application, the hand of man takes things apart and puts them together in forms in- tricate and manifold. To this developing dexter- ity is necessary an increasing delicacy of percep- tion and a more determinate guidance by the brain. In the course of time the human being made the lower animals push and pull and carry for him. 16 THE FLOW OF VALUE He learned to bring the force of gravity to his aid, and to make the currents of the winds and waters work his will. To this achievement was requisite the intelligence, developed after he had been on this earth millions of years, to make steam serve as power, the all-pervading electricity serve his purposes, chemical force to dissolve forms of matter into their elements and to com- bine these elements into other forms of use to him. Until about the beginning of the nineteenth cen- tury there were few tools other than those which directly enhanced the power of the hand. In the last one hundred years man has come to provide structures, machines, and appliances used in the transformation of substance. Cosmic force may be applied through tools and machines to push, pull, lift, and carry, in taking things apart and putting them together, in the fashioning of things ponderous and massive, delicate and intricate, not only in fashioning concrete things but in the pro- vision of intangible service — power, heat, and light. Human progress is marked by the triumph of mind over matter, and by the triumph of mind over force. As men work together, their efforts must be directed and coordinated. To the direction of the efforts of others and to the application of cosmic force is requisite the brain capable of conceiving the thing it is desired to produce, and the mental force competent to direct that application of force HUMAN EFFORT AND HUMAN WANTS 17 to matter which results in its production. In an ascending scale there is the triumph of the minds of men over the force emanating from the lower animals, of minds of a higher order over the force emanating from men with minds of a lower order, and over the cosmic forces that play throughout the universe. With the growth of civilization has come the thirst for knowledge : the developing appreciation of form, color, and harmony has brought the de- sire for works of art and the impulse that prompts their production. There must be the exertion of human effort in meeting the wants of the mind and of the soul as well as those of the body. II PROPERTY IN MATTER AND PROPERTY IN FORCE As the wants of each person are met by the re- sults of the efforts of others, there must be the exchange of the results of eifort between different persons. As there is this exchange between per- sons living in one place and those living in an- other, there is the exchange of the results of ef- fort through space. As there is the exchange of the results of effort produced at one time for those produced at another, there is the exchange of the results of effort through time. Exchange implies possession, and possession implies property. The essence of property is the right to hold, use, and dispose at will. It has been held for the common good that rights to property shall be protected by law. This means that no'one shall be dispossessed of that in which he has prop- erty except for the common good as prescribed by law, and in no event unless he is accorded just compensation. During the ages throughout which the law of property developed, it was not understood that all forms of existence are due to the reaction and 18 PROPERTY IN MATTER AND FORCE 19 interaction between force and matter. The con- ception of the rights of property applied to con- crete things— to forms of matter— and the con- ception of the rights to property in the main so applies to-day. Essential to property is the application of hu- man effort, which first brings into possession that in which there is property, and the putting forth of effort when necessary to protect the rights of property in that which has been brought into pos- session. Such effort is primarily exerted by the person in protecting his rights. It is reinforced by effort applied through governmental agencies — through the administration and enforcement of the law which rests upon the consensus of public opinion that rights in property must be recognized and maintained. There may be property in land itself and in that which exists in or grows out of the land — in timber in the forest, minerals in their beds, in the birds and beasts that inhabit the land. There may be property in water, in the things, ani- mate and inanimate, that exist therein. The right to property is not only the right to hold, use, and dispose of that in which a person has property, but also to hold, use, and dispose of that which is produced through the utilization of that in which he has property. Thus man has property not only in the soil but also in the crops yielded by the soil, not only in animals but also in their young; he has property in the substance 20 THE FLOW OF VALUE which he transforms and in the things into which it is transformed. Man not only uses and disposes of forms of matter but he uses and disposes of measures of force. The very use and disposition of matter necessarily involves the use and disposition of force. The results of his efforts are due as much to the application of force as to the matter to which force is applied. The right to property in the force which man directs to his ends has an implied recognition in the law. In the sense that a man has the right either to use or to dispose of the right to use the force thereof, he has property in his body and his brain. There is also the potentiality of such force. A man may use and dispose of his effort to-day. He may determine thus to put forth effort to-mor- row or not to do so. Men who direct and co- ordinate the efforts of other men do not have property in the bodies and brains of these other men, although the former may have property in the results obtained by the application of their efforts. Property in a waterfall certainly in- cludes the right to use and dispose of the force generated by the water. As there is property in the steam-engine, the gas-engine, the dynamo, and in the substances utilized in the generation of force by them, it would seem that there is property in the force generated and applied. This force may be used, or the right to its utilization. may be dis- PROPERTY IN MATTER AND FORCE 21 posed of. There is also the potentiality of such force. Through engine and machinery the owner may generate and apply force to-day. He may determine so to generate and apply force to-mor- row or not to do so. Concrete things are of definite measurement; therefore the property of persons in them may be exactly defined and limited. The limit within which man exercises control and beyond which he does not exercise control over the forces that per- vade the universe is often difficult of perception, and, therefore, the degrees of his property in force may not always be susceptible of exact defini- tion. In a measure he makes the force of gravity serve his ends, but in vastly greater measure it is beyond his control. The force of wind and wave to a degree he utilizes, but the ebb and flow of their mighty currents is regardless of his will. Although the essential processes of organic life are even beyond his knowledge, by planting seed of a given kind in soil in which he has property he determines the kinds of crops that will be yielded, in large measure their quality and quantity; by the manner of breeding animals he determines the kinds that will be propagated, and in large meas- ure their qualities and their number. He thus to an extent directs the manifestation of the life- giving forces themselves. The written law has defined the rights to prop- erty in matter; it has not as yet fully defined the 22 THE FLOW OF VALUE rights to property in force. The law of copyright and the patent law affirm the right to property in composition or invention, the result of force em- anating from the human hrain; and the mechan- ic's lien protects the right to the wage due in return for the effort of the artisan. There is, however, lack of general recognition, of the fact that to the mental effort of those who direct and coordinate the application of force, is due the pro- duction in greater volume than otherwise would be possible of the things that men use and consume. It is not only the concrete things in which a man or a business organization has property that con- duce to the most effective production of things and services that meet the wants of human kind, but in greater measure the brains of those who give that arrangement to these concrete things which en- ables their most effective utilization, and so direct and coordinate the application of force to them and through them that the most effective result is obtained. Ill UTILITY AND UTILITIES Tn this chapter necessarily begins the formation of definitions and use of the terms defined. There can not be discussion, or even expression, with- out designation. The use of a designation im- plies cognizance of that to which it is applied and of all to which it may be applied. Therefore definition and classification are correlative with designation. Much of discussion is futile because those tak- ing part ascribe different meanings to the same term: not infrequently the same term may be used in different meanings by the same person, and not always because of mental confusion. In greater part, perhaps, it is due to what is com- monly said to be the diflBculty of arriving at clear- cut definition and exact classification. When there is the attempt to define or classify different phases of the flow of existence the difficulty becomes an impossibility. One phase so merges into another that there can not be a definition or a classification that will include all it is desired to include, or ex- clude all it is desired to exclude. There is evi- 23 24. THE FLOW OF VALUE dence of this in the uncertain distinction between hununock and hill, hill and mountain, between brook, creek, and river. This impossibility is a correlative of evolution and incidentally affords a degree of verification of the theory of evolution. All of the forms of ex- istence proceed from the transmutation of force and the transformation of matter. As there is this transmutation and transformation, forms of existence are derived from preceding forms. Dif- ferentiation proceeds through a succession of phases before there is a clear-cut distinction be- tween different forms that have developed from a common antecedent. There can not be clear-cut definition where there is not clear-cut distinction. For example, although every one knows what is a plant and what is an animal, there are organisms that have characteristics of both and thus can not clearly be placed in one group or the other. Of these are certain kinds of bacteria that are said by zoologists to be animals and by botanists to be plants. The presence of chlorophyll or of cellu- lose is supposed to be a distinguishing character- istic of plants, yet there are forms of animal life that have chlorophyll and others that have cellu- lose. The power of locomotion is presumably a characteristic of the animal, yet there are forms of plant life having this power. Indeed there are biologists who tell us there is no conclusive justi- fication for the grouping of living things as be- , UTILITY AND UTILITIES 25 longing to the so-called plant kingdom or the so- called animal kingdom. Another example. There apparently is a palp- able distinction between the ground surrounding a dwelling and a farm. The householder may de- vote part of the ground to raising garden truck for his own use ; he may give a portion of the truck to a neighbor or sell portions to one or more neigh- bors or to the grocer for resale. The ground may be a quarter acre or less, a half acre, an acre, or more. He may employ a gardener, whether or not he sell any of the produce. What is a farm? The census bureau has had difficulty in determin- ing and has not always adhered to the same defini- tion from one census to another. Again, every one knows the difference between a locomotive and a train of cars. Yet when a locomotive is run- ning on a main railroad track it must have signals at front and rear, and a train number for record and the reception of running orders, the same as though it pulled a number of cars. Every one knows the difference between a passenger train and a freight teain, yet there are trains composed of both passenger cars and freight cars, and these "mixed trains" have been a bothersome item in railroad statistics. Then again, new words have not always come into use as the mind has progressed in discriminat- ing perception. A word that has had a simple meaning may come to be used in various senses 26 THE FLOW OF VALUE related to the original significance. For example, impact of the hand is a blow, and motion of the air that may give impact is the blowing of the wind. There is the sense of shock. This leads in one direction to the designation of the weighty impact of a steam hanamer as a blow, and in an- other direction to the designation of a sudden pain, disappointment, or grief as a blow. As the blowing of the wind typifies the unsubstantial, boasting comes to be designated as blowing, and the braggart as a blow or a blow hard. The dic- tionary presents a multitude of examples of this differing use of the same word. Therefore all that can be expected of a defini- tion or a classification is that it applies to forms of matter or kinds of force that are so differen- tiated as to be distinguishable in the main from other forms or kinds ; that is, that a term be of the utmost serviceableness which the persistent blend- ing of one phase of existence into another permits. The enunciation of a principle, a rule, or a law is beset with similar limitations. The flow of cause and effect is in such ramifications that there will be exceptions to any formula, save in the ex- actness of mathematical abstraction. Yet there may be such perception of a certain sequence in great groups of phenomena as to justify general- ization. All that can be expected of such general- ization is that it will be serviceable in determining the flow of phenomena in an overwhelmingly pre- UTILITY AND UTILITIES 27 ponderan-t number of the cases to wMch it is ap- plied. Toward meeting his wants man utilizes matter in vast aggregates, in manifold combinations, and in minute subdivisions. He utilizes force in mighty currents and in infinitesimal pulsation. Matter is of infinite variety and innumerable designations : force is of many kinds and many designations. There needs to be a term for the designation in common of every form of matter and every form of force that man uses for his purposes. That which meets a want is utilized : that which serves as an instrumentality toward meeting a want is utilized. Therefore the term that has been generally adopted to signify any thing or any service utilized is a "utility." Anything that man uses, no matter how large or how small, is a utility. An aggregate that he uses is a utility: a component part of that aggregate which he uses is a utility. A thing or a service utilized in pro- duction is a utility, and a thing or a service pro- duced is a utility. Any thing or service that man uses, no matter for what purpose, is a utility. That is, a thing or a service used because it is needed is a utility; a thing or a service used be- cause of the gratification it affords is a utility, whether or not it conduces to well-being. Industry and commerce have to do with the pro- 28 THE FLOW OF VALUE duction and exchange of things and services for the purpose of satisfying needs or gratifying de- sires; that is, for the purpose of meeting wants. Science has been defined as organized knowledge. The science of economics is concerned with the organization of knowledge that pertains to th^ production and exchange of things and services. Thus industry and conunerce in the concrete and the science of economics in the abstract are con- cerned with the production and exchange of utili- ties. A utility for which another utility or other utilities are or can be obtained is an "economic utility." Inasmuch as nearly all utilities are eco- nomic utilities, the term utility will be used throughout this volume, as a rule, in the sense of an economic utility. Where distinction or em- phasis seems desirable, the terms utility and eco- nomic utility will be used in their strict meaning ; in other cases it is believed that the context will indicate the significance. Utilities are susceptible of different classifica- tions from different standpoints. They may be classified as beneficial if they promote human wel- fare, as deleterious if they conduce to physical, mental, or moral impairment. As there may be utilities in the form of force and utilities in the form of matter, there may be a broad distinction between "matter-utilities" and UTILITY AND UTILITIES 29 "force-utilities." Matter-utilities are measured by units of area, length, and weight, number and quantity. The significance of these units is heightened when there is indication not only of the kind but of the quality of matter-utilities by which they are measured. For example, a bushel measure indicates a receptacle that will hold a certain quantity; a bushel of wheat indicates a definite measure of a specified commodity; a bushel of No. 1 Northern wheat indicates a definite measure of a specified commodity of a specified quality. External force applied by man is meas- ured by such units as foot-pounds, horse-power, the kilowatt-hour. Force in the form of human effort may be measured by its application during a period of time — an hour, a day, a week, a month, a year. The significance of such measurement is heightened by indication of the quality of the ef- fort. For example, a week's work of a first class carpenter is more effective than that of an ap- prentice. Or it may be measured by the result immediately traceable to its exertion; for ex- ample, in simple physical manifestation by the pound of cotton picked; in physical and mental manifestation by the number of pages typewrit- ten; in mental and emotional manifestation by the quality of a picture, a manuscript, of the de- livery of an address, of the performance of a mu- sical composition, or of a part in a play. A meas- ure of human force is also afforded by the results 30 THE FLOW OF VALUE traceable to the effort of the brain in coordinating the application of human effort and cosmic force. For example, there may be two mills with exactly the same equipment and yet the manager of one, by the skilful handling of men, substance, and machinery, may produce a greater output in a given time than the other, or an equal output with fewer employees. Under skilful management a factory, a department store, a hotel, a railroad may be operated at a profit, although under less efficient management a loss would be incurred. Thus the mental effort which conceives, designs, guides, and directs is certainly of higher im- portance than the force which it applies or the matter to which it is applied. The classification of matter-utilities that will be most serviceable in this discussion is into final utilities, sources of substance, substance, inter- mediate utilities, and instruments of production. Utilities which through immediate use or con- sumption directly minister to physical or mental wants of the individual may be designated as "final utilities." Of such are food, clothing, shel- ter, books, pictures, personal service. With the exception of food, such utilities are susceptible of utilization throughout varying periods and, there- fore, each measure of satisfaction afforded is a utility. Such a utility was an economic utility when the owner obtained it in exchange. It con- UTILITY AND UTILITIES 31 tinues to be an economic utility as long as other utilities can be obtained in exchange for it. Each measure of satisfaction afforded is an economic utility if other utilities can be obtained in exchange for it. For example, the right to utilize a dwell- ing may be disposed of for a year, of a room for a week, of a bed in a lodging house for a night. Utilities from which utilities in the form of sub- stance are gathered or extracted for transforma- tion may be classified as "sources of substance." Of such are farms, forests, and mines. Utilities composed of forms of matter extracted from or growing out of the lands and waters that are suitable for transformation into other utilities may be classified as "substance." Of such are timber, grain, and minerals, cotton and flax, the animals whose flesh is transformed into food, and covering into clothing and other forms of use. Utilities in the form of substance in one or an- other stage of transformation may be classified as "intermediate utilities." Of such are flour, wool, leather, logs, and ingots. Utilities which do not directly minister to the wants of the individual but are utilized in the pro- duction of other utilities may be classified as "in- struments of production." Of such are struc- tures, machines, and appliances. Each measure of matter and each measure of force flowing from their utilization may be a utility. 32 THE FLOW OF VALUE In the light of these definitions we perceive that all the activity outlined in the first chapter is ex- erted in the production of utilities. Instant by instant, there is the transmutation of force and the transformation of matter in every phase of the production of all kinds of utilities. Every phase and stage of production requires time that varies with utilities of different kinds. Existing utili- ties have been produced by the application of force to matter in the past. The application of force to them in the present results in the production of utilities in the future. To these future utilities force may be applied in the production of utilities for use in the more remote future, and so on in unending series. Utilities are produced and are consumed, but that which constitutes a utility can not come from nothing and can not pass into nothing. As a util- ity is used and consumed, it disintegrates and is resolved again into elements of matter and force. Utilities in the form of food pass out of existence as utilities when they are consumed, but their con- sumption promotes vitality. Human effort arises from vitality. Human effort becomes a utility when exerted in the production of future utilities. In all utilities there is property. If every per- son could provide all of the utilities that meet his wants entirely and exclusively through the exer- tion of his own efforts, he might have property in utilities utilized in such production and in the UTILITY AND UTILITIES 33 utilities produced, but there would -be no transfer of property. Inasmuch as all persons engaged in production are continually providing utilities that other per- sons use, it follows that there must be continual transfer of property in order that utilities may come into the possession of those whose wants they serve, or of those who utilize them toward serving wants. Obviously there must be some means for effecting this transfer, of exchanging utilities of the past, the present, and the future. IV THE EXCHANGE OF ITTILITIES AND THE UNIT OF EXCHANGE Inasmuch as every person is dependent upon the efforts of others for the maintenance of a civilized existence, one who renders no return for the benefits he receives certainly leads a selfish life, and selfishness is universally condemned. It is the precept of philosophy and religion that each person do as much as he can for others. If every person does as much as he can for others, every person is contributing to the benefit of others in the fullest measure that is possible for him. This means that as a person is contributing to the ben- efit of others, they are contributing to his benefit : there is an exchange of benefits. It was not, however, because of precept of phi- losopher or priest that the exchange of the results of efforts began. Primitive man, in common with the lower animals, was obliged to look out for him- self. He took what he wanted, when and where he found it. Selfishness necessarily was of the essence of his nature, tempered by the need and the developing desire to care for his family. Thus it was that things were owned in common by a 34 THE EXCHANGE OF UTILITIES 35 family, and as the family developed into the tribe things were owned in common by the tribe. This was the state of self-sufficiency. When a tribe had more things of a kind than it wanted, the patriarch was not prompted to give of the abundance to another. Tribes were then more inclined to fight. But in the long course of time it was found that when one tribe had more things of a kind than it wanted and another had more things of a kind than it wanted, each could benefit by the exchange of its surplus. As the tribal relation dissolved, exchange developed between individuals. Ex- change served a selfish end in that each obtained something he wanted: it served an altruistic end in that each rendered to the other something he wanted. There can not be the exchange of utilities un- less each party has that which the other wants. Thus in economic parlance "want" signifies not only that a person desires a thing but that he has that in exchange for which it may be obtained. This excludes want in the sense of desire for a thing which may be unattainable. Similarly in economic parlance "demand" signifies the offer- ing of that in return for which that which meets a want may be obtained. This excludes demand in such a sense as that of the highwayman who de- mands that a traveler give his purse. Therefore throughout this volume "want" will be used in the sense of potential ' ' demand. ' ' 36 THE FLOW OF VALUE It is a principle rooted in human nature that in an exchange each person yields as little as he can in return for that which he acquires — each person seeks to obtain as much as he can in return for that with which he parts. This gives rise to bargaining. Men seek to obtain that which they want, from him who will accept the least in ex- change for it; men seek to dispose of that with which they are willing to part, to him who will yield the most in return for it. Therefore this un- derlying principle also gives rise to competition; or, rather, bargaining and competition are cor- relative. Bargaining serves a selfish end in that it tends to each parting with the least and receiving the most he can. It also serves an altruistic end in that it tends to each rendering to the other the largest measure of that which he wants in return for the smallest measure of that with which he will part. Demand for utilities leads men to supply utili- ties. Bach must supply that for which there is demand in order that he may obtain that which he demands himself. The form and functions of the body developed before there was a pronounced advance in the growth of the mind. Therefore the earliest hu- man effort was that of the body directed by a rudi- mentary intelligence. As food is the primary ne- THE EXCHANGE OF UTILITIES 37 cessity to animate existence, effort was instinct- ively put forth in procuring food. First man hunted; then he domesticated animals and tilled the soil. By slow degrees he learned to make tools and to make things with tools. For ages self-suflBciency enveloped the family and the tribe. The industry and commerce of the western world evolved out of the self-sufficiency of the medieval communities. There emerged from the tiUers of the soil the artisan, who went from house to house, working the substance furnished by his patron into the forms desired. His effort was applied in ex- change for the food and clothing also provided by his patron; that is, he was paid "in kind." Then evolved the craftsman, who worked in his own shop with his own tools and supplied the substance which he wrought into the form desired by his customers. Then craftsmen came to make wares in excess of tliose for which they had definite or- der and took them to the fairs. Then traders bought wares from the craftsmen for sale at the fairs and elsewhere. Then, whether craftsmen employed a factor to sell the wares they produced, or whether a trader employed craftsmen to pro- duce the wares he sold, there evolved the mer- chant with a fixed place of business. Although the medieval wares were of no great variety, as the number of producers and the num- ber of purchasers increased there came to be some- 38 THE FLOW OF VALUE thing like definiteness in the ratios in which things of one kind were exchanged for things of another kind. In every exchange each party renders utilities to the other in exchange for the utilities he re- ceives. Thus he sells the utilities with which he parts and is paid for them. Likewise he buys the utilities he receives and pays for them. Ob- viously there must be a term to designate that which is paid and that which is received. This is price. Price is that paid for a utility when it is bought, or obversely that which is received for a utility when it is sold. Therefore the price of a utility cannot be indicated in terms of that utility. It must be indicated in terms of that for which it is bought or for which it is sold. When there is the coincident transfer of prop- erty in utilities, the price of each utility is that of the other. If property in a utility of one kind be exchanged for property in a dozen utilities of an- other kind, the price of the dozen utilities of the one kind is the one utility of the other kind, and the price of the utility of the one kind is the dozen utilities of the other. When utilities of one kind are exchanged di- rectly for utilities of another kind, each party ob- tains at once that which he wants in return for that with which he parts. But if a person have utilities and another person wants them but does THE EXCHANGE OF UTILITIES 39 not have utilities which their owner will accept, he must render in exchange that for which he can obtain from whosoever may have them the utili- ties he does want. Thus there must be an inter- mediary of exchange. Such an intermediary at first was a thing of usefulness in itself, of such universal usefulness that it could be disposed of at any time by any person in exchange for anything he might want, and would be accepted at any time by any person in return for that with which he wanted to part. Of such things were the cattle of the Greeks, the tobacco of the early American settlers. Because of their durability, portability, and divisibility, the metals came generally to be adopted as the media of exchange. Gold and silver tended to displace the other metals for this purpose, and hence to be designated the precious metals. In order that there might be known just what meas- ure of metal passed from one to another, the met- als were transformed into coins that were pre- scribed to be of definite weight and quality. Then it came about that coins were sought by many apparently for no other purpose than to possess them. The acquisitive instinct found ex- pression in acquiring coins. But that which gave coins their general usefulness was the fact that any thing or any service could be obtained for them. Therefore it was that a coin of a given weight and fineness became the unit of exchange. 40 THE FLOW OF VALUE A certain number or quantity of utilities of each kind could be obtained in exchange for a coin, which is the same as to say that a coin could be obtained in exchange for a certain number or quantity of utilities. Thus this number or quan- tity of utilities of a respective kind had the ex- change ratio of the unit of exchange. This num- ber or quantity was exchangeable for the coin which was the concrete embodiment of the unit of exchange. The coin in turn was exchangeable for that measure of utilities of another kind which had the exchange ratio of the unit of exchange. Therefore it essentially was that the measure of utilities of one kind, which had the exchange ratio of the unit of exchange, was exchangeable for the measure of utilities of another kind, which had the exchange ratio of the unit of exchange. Were there not a unit of exchange, there would have to be a tabulation of the ratios in which utilities of each kind were exchangeable. It is obvious that any one of a variety of units may serve to indicate these exchange relations. Just as linear relation to space may be measured by such different units as the yard, the meter, the verst, so also may the relation of utilities from the standpoint of exchange be indicated by such different units as the pound sterling, the franc, the mark, the florin, the ruble, the peseta, the dollar. Naturally the unit of exchange in general use by a given people is that which will indicate THE EXCHANGE OF UTILITIES 4-1 the respective measures of utilities that most frequently enter into exchange. For example, in China when exchanges were in small quantities the "cash" was the unit; in Great Britain where a great variety of utilities enter into exchange and in larger volume the pound sterling is the unit. Or, as there may be the transfer of property in large or small measures of utilities, there may be a unit to which a less and another unit to which a greater measure of utilities may have the ratio of exchange. For example, in Great Britain there is the shilling as well as the pound sterling. In fractions or multiples of any unit of exchange may be expressed the exchange relativity of any num- ber or quantity of any utility. In the United States the unit of exchange is the dollar. It is to be emphasized that, as the unit of ex- change indicates the measure of utilities of each kind which has the exchange ratio of that unit, it indicates the measures in which utilities of all kinds are exchangeable, those of one kind for those of another kind. Thus while the term that desig- nates the unit of exchange is the designation of a coin, it is also the designation of the relativity of utilities in exchange. Thus the unit of exchange is the designation of respective measures of re- spective utilities that are exchangeable, one for another. Therefore the coin tends to disappear as an intermediary, and the unit of exchange comes 42 THE FLOW OF VALUE not in actuality to be based upon coin, but upon the utilities that are bought and sold. This ten- dency is perceptible throughout an evolution not as yet consunmiated. The first stage in this evolution was attained when in the course of time the actual transfer of coins came in large measure to be obviated as their use was supplemented by government notes and bank notes. Such an instrument is a promise to pay coin, and thus it may be used instead of coin as an intermediary of exchange. But as the desig- nation of a coin is also an indication of the unit to which utilities have an exchange ratio, a govern- ment note or a bank note, aside from its correla- tion with coin, facilitates the transfer of property in utilities in that it may pass from one to another in an indefinite series of exchanges without being redeemed in coin. Then in the longer course of time it was found that exchanges could be effected by debit entries and credit entries on the books of banks in accord- ance with the amounts specified in written instru- ments. Such instruments include checks, drafts, bills of exchange, and acceptances. They are ex- pressed in terms of the units that designate coin and that therefore also indicate the exchange ra- tios of utilities. Their essential function, aside from any correlation with coin or the metals of which coin is made, is to facilitate the transfer of THE EXCHANGE OF UTILITIES 43 property in utilities in accordance with their ex- change relativity, which less and less depends upon any relation of utilities to coin. Coin, govern- ment notes, and bank notes are designated as cur- rency because they flow as a current from any person to any other person. Bank credit, and the instruments in accordance with which it is trans- ferred, are not currency, because the flow is from a designated person to a designated person. The more readily utilities or the instruments by means of which property in them is transferred flow in the currents of exchange, the greater is their liquidity. There can not be the transfer of property, that is, there can not be buying and selling, without at least two persons being concerned, he from whom the property passes and he by whom it is received. If, at the time A transfers property in certain utilities to B, B in turn transfers property in other utilities to A, the results of effort owned by A have been exchanged for the results of effort owned by B, and the transaction is complete. If, at the time of the transfer of property in utilities from A to B, the latter made payment in coin, bank notes, or government notes, the trans- action, in a sense, would also be complete, because A could immediately exchange the currency for other utilities. Or he could retain it in his posses- 44 THE FLOW OF VALUE sion for future exchange, or, as banks developed, he might deposit it in a bank, where it would be placed to his credit. The word credit has several meanings and shades of meaning. Its underlying significance is positive not negative. When it is said of a man, "It is to his credit that he is upright and honest," or, "He is entitled to credit for having done this or that," positive qualities or positive perform- ance is implied. "He is credited with this or that," implies recognition of positive perform- ance. This leads to the significance of credit in commerce as that which has been obtained, that which may be used or disposed of. It also signi- fies return which is due for property that has been transferred. Thus, for example, if A have prop- erty in a dozen cattle, the cattle are to his credit. If he dispose of the cattle for 240 dollars in coin, government notes, or bank notes, the currency is to his credit. If he deposit the currency in a bank it is placed to his credit. He can use or dispose of that which is placed to his credit. Therefore, that which is to his credit is command over util- ities. Credits in the form of coins, government notes, bank notes, or credit entries on the books of a bank is immediately utilizable command over utilities. Their owner can expend them in any proportions for any utilities he may want. Prop- erty in other utilities must be transmuted into such credits before it is so utilizable. THE EXCHANGE OF UTILITIES 4.5 A debt is that which is due for property in util- ities that has been transferred, but in return for which there has not been an immediate transfer of property in other utilities. In general usage, when there has been such a transaction the pur- chaser is said to have obtained the property "on credit." A better expression is that he has ob- tained the property "on trust," because trust that he will make payment is reposed in him. If he has an established reputation for paying for that which he purchases, it is said that his "credit is good." A purchase on trust means that a debit has been incurred by the purchaser. For exam- ple, if, when A disposed of the dozen cattle to B, the latter did not make immediate payment, he would be in the debt of A in the amount of 240 dollars. The significance of debt is negative. It implies the receiving of that in return for which the positive must be forthcoming. A credit is required to balance a debit. Every transfer of property involves credit and debit. Every commercial transaction gives rise to debit for that which is obtained, and to credit for that which is transferred. Debits and credits are in terms of the units of exchange. Utilities received which give rise to debit may be utilized in the production of future utilities which give rise to credit. Then again, utilities which have given rise to a debit may be used and consumed before there is the production of utilities that 46 THE FLOW OF VALUE balance the credit to him from whom they were obtained. A credit means that utilities have been produced and property in them transferred. A debit means that utilities must be forthcoming and property in them transferred. A man may keep account with anything in which he has property, debiting it with that which he puts into i-t and crediting it with that which he takes out of it. Thus A may have debited the dozen cattle with all of the food and care given them, and finally credited them with the 240 dol- lars received for them. This 240 dollars definitely indicates the ratio at which the cattle were exchanged; that is, the dozen cattle were of the exchange ratio of 240 dollars. In this sense dollars indicate utilities, not something separate and distinct from utilities. As we have learned, the first intermediary of ex- cha.nge was something separate and distinct from the utilities, the transfer of property in which was effected by means of it. That is, the in- termediary of exchange was itself a concrete util- ity. When metals were used they were also con- crete utilities exchanged for concrete utilities. In the form of coins they continued to be utilities, but their usefulness as coins came to outweigh their usefulness as concrete utilities in other ways. The use of bank notes and government notes was a step toward the interchange of debits and cred- its without resort to coin. The use of debit on- THE EXCHANGE OF UTILITIES 4-7 tries and credit entries on the books of banks marks the exchange of utilities without a concrete utility as an intermediary of exchange. But bank credit, although not a concrete utility, is a utility, in that it may be exchanged for utilities and util- ities may be exchanged for it. It is a record of utilities that have been sold for which other util- ities are due in return. The unit of exchange that once was a definite measure of a concrete utility now becomes a unit of measurement of utilities in their relation of exchange, just as a yard is a unit of measurement of linear relation to space, and a pound is a unit of measurement of relation to the force of gravity. The evolution of the mechanism by means of which property in utilities is transferred makes clear that at this time the essential significance of the dollar is not of something separate and dis- tinct from the utilities that are exchanged, any more than a yard or a pound is something separate and distinct from the forms of matter measured by these units. Inasmuch as a yard or a pound may be applied in the measurement of different kinds of matter, we can speak of yards or pounds without definite specification of particular forms of matter. So also, as the dollar is the unit by which utilities of any kind are measured from the standpoint of the exchange of property in them, we can speak of dollars without definite specifi- cation of particular utilities. When, however, we 48 THE FLOW OF VALUE thus speak of yards or pounds there is implied reference to forms of matter. So also, when we thus speak of dollars there is implied reference to utilities. There can not be yards or pounds of intangible space, and in this sense there can not be dollars except as measures of definite utilities in their relation of exchange. There is, however, a radical difference between the yard and the pound as units of measurement of tangible things, and the dollar as a unit of meas- urement of definite utilities from the standpoint of exchange. As a rule, there is a constant re- lation of a given quantity of matter to the unit by which it is measured as a form of matter, but there is not a constant relation of a utility to the unit by which it is measured from the stand- point of exchange. The ratio of a utility to the unit of exchange, that is, the measure of a utility which will exchange for respective measures of other utilities, is determined by concurrence be- tween the different minds of different men. Be- cause of various promptings of the different minds of different men a given measure of utilities of a given kind may bear at one time or place a higher or lower ratio to the dollar than at another time or place, and thus respective measures of utili- ties of different kinds may bear at one time or place a higher or a lower ratio to the dollar than at another time or place. Therefore the unit of exchange is a shifting unit. THE EXCHANGE OF UTILITIES 49 The dollar is the nexus at a given time or place of the ratios borne by respective measures of respective utilities one to another, each to the others, from the standpoint of the exchange of property in them at that time and place. More- over, as it is in terms of the dollar that he who sells utilities at one time may receive payment at another, and he who sells utilities at one place may receive payment at another, the dollar is the nexus of the exchange ratios of respective utilities at different times and different places. As the dollar thus focuses the exchange ratios of utilities of all kinds, it is the nexus of prices. For example, when we say that the price of a dozen eggs is fifty cents, of a pair of gloves one dollar, of a yard of carpet one dollar and a quar- ter, of a week's work fifteen dollars, of a set of furniture twenty-five dollars, of an acre of land two hundred dollars, of a steam engine one thou- sand dollars, we mean that the ratios of these measures of these utilities to the dollar is respec- tively as one to one-half, one to one, one to one and a quarter, one to fifteen, one to twenty-five, one to two hundred, and one to one thousand. The nexus of the prices of these utilities is thus indi- cated aside and apart from actual buying and selling. Larger or smaller measures of a utility than that which has the ratio of one dollar may have the same proportionate ratio or they may have a 50 THE FLOW OF VALUE less or greater ratio. For example, it may be that with eggs at fifty cents a dozen, one half dozen could be obtained for twenty-five cents or • perhaps the dealer would ask thirty cents. It may be that of gloves at a dollar a pair, a half- dozen pairs could be obtained for six times one dollar or perhaps for five dollars. As the unit of exchange is the measure of price, it is in terms of the dollar that demand is expressed and in terms of the dollar that supply is expressed. The preceding chapters have developed that the life of civilization depends upon the exchange of things and services, upon the exchange by each person of the results of his efforts in return for the results of the efforts of others. As the things and services thus exchanged are utilized toward meeting human wants,, they are designated as utilities. Therefore, the life of civilization de- pends upon the exchange of utilities, that is, upon the buying and selling of utilities. To this ex- change, this buying and selling, is requisite a unit of exchange, in terms of which may be indicated the measure of a utility of one kind that is ex- changeable for a measure of a utility of another kind, that is, the measures in which utilities of different kinds are exchangeable. In a country where there is no hampering governmental re- striction upon buying and selling, these exchange ratios are determined through bargaining and THE EXCHANGE OF UTILITIES 61 competition. It is now necessary to trace more definitely the sequence of cause and effect in de- termining these exchange ratios ; that is, to ascer- tain how competitive price is determined, that is, the prices for sources of substance, substance, intermediate utilities, instruments of production, and final utilities, and the price, designated as wage, which is paid for human effort. As every thing or service that has price is a utility, and as the purpose of all utilities is to meet human wants or to be utilized toward meet- ing human wants, and as all utilities that are bought and all utilities that are sold are produced through the application of human effort, it fol- lows that prices arise from the relations between effort applied in producing utilities, and the wants which are met by the utilities produced. The pur- pose of the immediately succeeding chapters is to trace these relations through that reaction and in- teraction which results in prices. A HYPOTHETICAIi DEVELOPMENT OF PRICES FOR FOODSTUFFS THE EMERGENCE OF PROFIT Among whatever people there has been the de- velopment of industry and commerce, it has been interrupted and modified by changing political and social conditions. Even if adequate data were available, an exposition of the actual prog- ress from the dawn of history or even from the Crusades would require hundreds of pages. But throughout the tortuous progress each stage has been determined by that which preceded it, and has borne a determinate relation to that which succeeded it. An understanding of the produc- tion, buying, and selling of utilities and the sig- nificance and effect of that production, buying, and selling can not be attained except through a trac- ing of the successive phases. There are, however, so many factors in the industrial and commercial mechanism of to-day that it would be confusing to review the integral development. It may be better to lead gradually through the evolution of the various factors to their interelation. The essential development and essential significance 52 PRICES FOR FOODSTUFFS 63 may be unfolded through a series of hypothetical illustrations. Let us begin with a hypothetical outline of an evolution such as conceivably might have been that of the settlers on the American continent had they been devoid of communication with Europe. As it was, the families of the settlers, especially in the interior, were very nearly self-sufficient, the members of each cultivating for themselves land that could be had with little or no formality and making for themselves such things. as they used. Because of differences in the size of different families, differences in the characteristics of the soil which they cultivated, and differences in their aptitude and application, there would be differ- ences in the quantities and qualities of the re- spective things produced by different families. There would be the tendency for each to produce a surplus beyond its own needs of that which it could produce to the best advantage. Thus one family might have an advantage in raising wheat and converting it into flour; another, in raising potatoes ; another, in raising sheep. There would come to be the- exchange of flour and potatoes, of flour and mutton, of mutton and potatoes. At first the respective proportions in which such things were exchanged would probably depend upon the relative intensity of the respective de- sires ; exchanges would probably continue through- out many years before there was anything like 54 THE FLOW OF VALUE definiteness in the exchange ratios. But in the course of time the tendency would be toward ex- change in the measure which each party would accept of a utility of one of those kinds rather than produce it for himself. Thus, consciously or subconsciously, there would be recognition of the mutual saving of effort. Thus there would come to be established the ratio in which a utility of one kind would be ex- changed for a utility of another kind. Let us suppose it came to be that a sack of flour was ex- changed for two bushels of potatoes, a sack of flour for ten pounds of mutton, and two bushels of potatoes for ten pounds of mutton. Thus a sack of flour, two bushels of potatoes, and ten pounds of mutton would be the exchange ratios of these utilities, that is, would be the respective measures in which the utilities of the respective kinds would be exchanged, those of one kind for those of another. If every transaction were the coincident ex- change of a utility of one kind for a utility of an- other kind, no intermediary would be required. But if the head of a family raising flour trans- ferred a measure of flour to the head of a family raising potatoes, and were not at that time in need of potatoes, but did want mutton ; or if for five sacks of flour he might want four bushels of potatoes and thirty pounds of mutton, the process of exchange would not be so simple. PRICES FOR FOODSTUFFS 65 As one sack of flour, two bushels of potatoes, and ten pounds of mutton had the same exchange ratio, any one of these respective measures of a respective utility could be considered the unit of exchange; that is, such a particular measure of one of these utilities would be that for which could be obtained the respective measure of another of these utilities. Or there could be adopted for the unit of exchange a designation that would not need to be expressed in terms of flour, or of potatoes, or of mutton. Let us suppose that the community arrived at once at the conception of such a unit and designated it a " dollar. ' ' The exchange ratio of flour would be one sack to one dollar, of pota- toes two bushels to one dollar, of mutton ten pounds to one dollar. This implies that this community arrived at the conception of a unit of exchange that was deter- mined by the exchange ratios of utilities and not dependent for its expression upon any one con- crete utility. Moreover, let us suppose that the community from the beginning effected exchanges by debits and credits in terms of this unit of exchange without the use of a concrete unit as an intermediary. In accordance with these suppo- sitions each party receiving utilities would render to the other a certificate specifying the number of dollars to which the utilities transferred bore the ratio of exchange. If the producer of flour transferred five sacks of flour to the grower of 56 THE FLOW OF VALUE potatoes he would receive his certificate for five dollars. If the producer of flour wanted four bushels of potatoes and thirty pounds of mutton, the certificate for five dollars would not serve his inunediate purpose because it would not be so divisible that he could pay the potato-grower two dollars and the mutton-raiser three dollars. Let us, therefore, make the further supposition that the community advanced to the conception of a record of transactions on which the certificate for five dollars would be entered to the credit of the seller of flour. When he obtained four bushels of potatoes he would give his certificate in favor of the potato-grower for two dollars and it would be entered to the debit of the flour-seller's account on the record ; and when he obtained thirty pounds of mutton he would give his certificate for three dollars in favor of the mutton-raiser, which would be entered to the debit of the flour-seller's ac- count. The practice of the debtor giving a certificate at the time of each purchase and the creditor de- positing that certificate would result in all trans- actions being effected by means of certificates which would be deposited with the keeper of the record, and in the adjustment of all transactions through debit entries and credit entries on the rec- ord. Each certificate entered to the credit of a de- positor would certify that utilities had been pro- duced and transferred by him. Each certificate PRICES FOR FOODSTUFFS 57 entered to the debit of a depositor would certify- that utilities had been produced by another and re- ceived by him. Each credit entry would mean that the depositor had transferred to others the results of efforts having the exchange ratio of the dollars indicated. Each debit entry would mean that the depositor had received from others the results of efforts having the exchange ratio of the dollars indicated. The entries would be based on utilities actually produced and transferred. The dollars of entry would be symbols of transactions; the dollar of credit a symbol of utilities produced and sold, the dollar of debit a symbol of utilities pro- duced and received. The continuity of transactions would give rise to entries to the debit and to the credit of each depositor. The certificate would take the form of an order on the keeper of the record, drawn by one depositor in favor of another. It would be- come what we know as a check, and the place of record would perform a function of what we know as a bank. A check drawn by one depositor in favor of another would mean that he had received utilities having the exchange ratio of the dollars indicated, that the account of the drawer was to be debited and the account of the payee to be cred- ited in this amount. Let us trace the debit entries and credit entries that would have their origin in a series of sup- posititious transactions. As A obtained twenty 58 THE FLOW OF VALUE bushels of potatoes from B, he would give B his certificate for ten dollars which would give rise to a debit entry and to a credit entry on the record thus: A B Dr. Cr. Dr. Cr. 10 10 As C obtained from A five sacks of flour, giving his check for five dollars, that amount would be entered to the debit of C and to the credit of A, making the record stand : ABC Dr. Cr. Dr. Cr. Dr. Cr. 10 10 5 5 As B obtains from A five sacks of flour and gives his check for five dollars, the record becomes: ABC Dr. Cr. Dr. Cr. Dr. Cr. 10 10 5 5 5 5 As B obtains from C fifty pounds of mutton and gives his check for five dollars, the record be- comes : ABC Dr. Cr. Dr. Cr. Dr. Cr. 10 10 5 5 5 5 5 5 PRICES FOR FOODSTUFFS 59 As the record now stands the entries to the debit of each depositor amount to the same as the entries to his credit ; that is, each account is bal- anced. For the twenty bushels of potatoes hav- ing the exchange ratio of ten dollars which A obtained from B, he has transferred five sacks of flour having the exchange ratio of five dollars to C, and five sacks of flour having the exchange ratio of five dollars to B. In return for the twenty bushels of potatoes having the exchange ratio of ten dollars which B transferred to A, he received five sacks of flour having the exchange ratio of five dollars from A, arid fifty pounds of mutton having the exchange ratio of five dollars from C. In return for the five sacks of flour hav- ing the exchange ratio of five dollars he received from A, C transferred to B fifty pounds of mut- ton having the exchange ratio of five dollars. While it is conceivable that the accounts of rec- ord might thus exactly balance at one time or another, this probably would rarely happen. The periods during which the utilities obtained by one family were consumed would not likely be coincident with the periods during which the util- ities obtained by other families were consumed. Regardless of the periods of consumption by each of respective quantities of one utility or another, A would continuously need potatoes and mutton, B would continuously need flour and mutton, and C, flour and potatoes. As wheat was harvested 60 THE FLOW OF VALUE from season to season and converted into flour, as sheep were grown from season to season and con- verted into mutton, as potatoes were raised from season to season, there would be transfers of prop- erty in the utilities of each kind which would re- sult in a series of entries to the debit and to the credit of each account. A balance to the debit of any depositor would mean that there would be due from him utilities having the exchange ratio of the dollars indicated by that balance. He might cancel the debt with utilities then in existence, or at a future time with utilities sub- sequently produced. A balance to the credit of a depositor would mean that there would be due to him utilities having the exchange ratio of the dollars indicated by that balance. The payment to him might be with utilities then in existence, or at a future time with utilities subsequently produced. By means of debit entries and credit entries there would continue to be adjusted the continued exchange of the results of effort. Co- incident with the flow of the production of utilities and of the transfer of property in utilities would be the flow of debit and of credit entries. Profit is gain. Its germ was in the beginnings of exchange. When A, B, and C respectively ex- changed flour, mutton, and potatoes, each obtained gain, because each received that which he wanted more than that with which he had parted, because PRICES FOR FOODSTUFFS 61 each had produced in excess of his own wants that with which he parted, and because each had pro- duced that surplus with less than the effort requi- site to produce that which he received. Had there not been mutual gain there would not have been exchange. Were there not exchange there would not be a unit of exchange. Eespective measures of different utilities came to have a ratio to this unit, because their exchange in these measures re- sulted in mutual gain. Because of various conditions there may be a variation between one time and another and one place and another in the measure of a utility hav- ing the ratio of the unit of exchange. For exam- ple, a scant crop of wheat might lead A to de- mand more than one dollar for a sack of flour. This would mean that he wanted to pay less than a sack of flour for two bushels of potatoes or for ten pounds of mutton. The ratio of flour to the unit would fall; a smaller measure could be ob- tained for a dollar; its price would advance. If there was a continual diminution in the supply of flour in relation to the supply of potatoes and mutton, B would pay two bushels of potatoes and C ten pounds of mutton for diminishing measures of flour, until the measure that thus could be obtained would be so small that they would no longer derive gain. Then they would cease to exchange either potatoes or mutton for flour. Flour would no longer be an economic utility; it 62 THE FLOW OF VALUE would not command price ; it would liave no ratio to the unit of exchange. B and C would either have to produce flour themselves or provide a sub- stitute for it. A would have to do without potatoes or mutton unless he raised them him- self or produced some utility other than flour for which B and C would be willing to pay potatoes and mutton. If at the time there was a scant supply of flour there was also such a scant supply of potatoes that B would want more than a sack of flour or ten pounds of mutton for two bushels of potatoes, he probably would be able to obtain more mutton but not more flour. C would continue to buy flour and potatoes until more of mutton were demanded in return than he would pay. That is, he would con- tinue to buy flour and potatoes until there was no gain in doing so. Then A and B would have to raise mutton for themselves or do without it. On the other hand, if at a given time the supply of flour became so abundant that B would not pay as much as two bushels of potatoes for a sack of flour nor C as much as ten pounds of mutton for a sack of flour, the ratio of flour to the unit would rise, a greater measure could be obtained for a dollar, its price would fall. If the supply of flour continued to become more and more abundant in relation to the supply of potatoes and mutton, B and C would pay less and less for it, until A would not obtain sufficient from them to meet his PRICES FOR FOODSTUFFS 63 wants. He might produce less of flour and re- sume the raising of potatoes and mutton. Thus we arrive at these deductions. If a util- ity can not be had except at a price so high that gain can not be derived from its purchase, it will not be bought and its production for sale will cease. Obversely, if the price obtainable for a utility be so low that gain can not be derived from its sale, its production for sale will cease. This chapter no more than outlines the factors that, under the conditions presupposed, would en- ter into the determination of prices for final util- ities in the form of foodstuffs, the emergence of profit from their production and sale, and the effect of profit in determining what foodstuffs would be bought and sold. The prices for utilities in this chapter are illus- trative and not historical. Although they seem low in comparison with prices of subsequent pe- riods as expressed in dollars, they are not without a degree of verisimilitude when compared with prices of an early stage of development, such as that of the Colonial period of this country. It is part of the supposition that A, B, and C were self-sufficient in meeting wants other than those for flour, mutton, and potatoes, that is, that these were the only utilities for which exchange ratios had developed. VI A HYPOTHETICAL DEVELOPMENT OF PRICES FOE THE PEODUCTS OF AETISANS, FOE SUBSTANCE AND OF WAGES As a community emerges from self-sufficiency obviously the utilities between which there is first established an exchange ratio are those that first become the subject of exchange. That is, the first economic utilities gave rise to the first buying and selling; and it was the first economic utilities that were first bought and sold. The first economic utilities may have been foodstuffs, or they may have been the products of an artisan. But he who specialized in the production of certain essential utilities would have to be provided by others with the essential utilities he did not produce. There- fore specialization in the growing of foodstuffs which would lead to the differentiation of the farmer would also tend toward the differentiation of the artisan, and specialization in the handicrafts would tend toward the differentiation of the pro- ducer of foodstuffs. Under our hypothesis the first exchanges were of certain of the foodstuffs. Such differences in conditions of production as led them to become the 64 PRICES FOR PRODUCTS OF ARTISANS 65 subject of exchange would affect the production of other utilities and cause them likewise to enter into exchange. For example, of the various per- sons engaged in making shoes it is inconceivable but that one would display greater aptitude than others. He would be called upon to make shoes not only for his own family, but the other fam- ilies would be glad to exchange of the things which they could produce at an advantage for the shoes which he could produce at an advantage. Thus shoes would become an economic utility. If this shoemaker, D, had been called upon to make the shoes for the families of A, B, and C, when they were otherwise self-sufficient, he would have gone from house to house, working into shoes the leather obtained from the hides of sheep killed by each of them. He would have received food and shelter from each family while at work for it. When he came to work in his own shop he would also have to receive food in return for the results of his effort in making shoes. There would have to be established the ratios in which shoes would be exchanged for food. Now let us suppose that to his annual nourishment were requisite five sacks of flour, ten bushels of potatoes, and fifty pounds of mutton. This would be the very least for which D could afford to desist from producing his own flour, potatoes, and mutton. If he were to make shoes for the families ' of A, B, and C, D would have to receive from them flour, potatoes, and mut- 66 THE FLOW OF VALUE ton in these quantities. That is, he must receive annually from A flour of the exchange ratio of five dollars, from B potatoes of the exchange ratio of five dollars, and from C mutton of the exchange ratio of five dollars. As in an exchange each ob- tains as much as he can and parts with as little as he can, the tendency would be for A, B, and C respectively to pay D the least he would accept for making their annual supply of shoes. Let us suppose that each of them required two pairs of shoes a year. This would mean that A would have to pay two and one-half sacks of flour for a pair of shoes or continue to make them for him- self ; and D would have to make a pair of shoes for two and one-half sacks of flour or raise the flour himself. Likewise B would have to pay five bushels of potatoes for a pair of shoes, and C twenty-five pounds of mutton. D would be obliged to make two pairs of shoes a year for the requisite annual supply of five sacks of flour, two pairs of shoes a year for the requisite ten bushels of po- tatoes, and two pairs of shoes a year for the requi- site fifty pounds of mutton. As the exchange ra- tio of flour was one sack to the dollar, of potatoes two bushels to the dollar, and of mutton ten pounds to the dollar, the exchange ratio of a pair of shoes would become two and one-half dollars. It would take two and one-half dollars to buy a pair of shoes. When D came to work in his own shop he might PRICES FOR PRODUCTS OF ARTISANS 67 have provided the leather from hides of sheep raised by himself, or more likely A, B, and C would continue for a time to furnish him the hides which he made into shoes for them. When, however, C came to produce mutton for families A and B, he would have a surplus of hides. Naturally C would be prompted to sell his surplus of hides to D, and D would find it advantageous to obtain hides from C. Thus hides would become an economic utility. Under this supposition they would be the first in- termediate utility; that is, the first substance for transformation into further utilities to become an economic utility. An exchange ratio would be es- tablished for hides; that is, a measure of hides would come to have a ratio to the dollar. While C probably would be willing to supply D with the hides to be transformed into shoes for C, he would not be willing to supply without return the hides used in making shoes for A and B. So long as the shoes made by D for A, B, and C brought him no more than his subsistence, he would not have anything wherewith to pay for hides. He could not buy hides from C unless he could obtain customers for additional shoes, from whom he would receive that which would enable him to pay for the hides. That is, D could not buy other than flour, mutton, and potatoes until he produced utilities in excess of those necessary to provide him with the flour, mutton, and pota- 68 THE FLOW OF VALUE toes requisite to his subsistence. If for each pair of shoes in addition to the six pairs made for A, B, and C, D received two and one-half dollars, he would have to his credit that which he did not need to expend for flour, potatoes, and mutton. If he sold one additional pair of shoes, he would have two and one-half dollars to his credit which could be expended for more of flour, potatoes, or mut- ton, or which could be expended for hides. That is, he could expend the two and one-half dollars for personal gratification, or he could invest it toward further production. This is the second stage of profit. The first stage was in obtain- ing through exchange that produced with less ef- fort than would have been required of the recipi- ent. The second stage is marked by a surplus of that received for putting forth individual effort over that which is consumed by the individual. If to the production of hides were necessary the application of exclusive effort, they could not be produced by C unless he received the flour, pota- toes, and mutton requisite for his subsistence, but whatever he received for hides produced at the same time as mutton would be in addition to what he received for the mutton. Hides would be a by- product of mutton. C would endeavor to obtain the most he could for the hides and D would en- deavor to pay the least he could for them. If to the making of each pair of shoes were necessary four pounds of hides, there would be required for PRICES FOR PRODUCTS OF ARTISANS 69 the original six pairs of shoes made for A, B, and C twenty-four pounds of hides which they would furnish to D. If, working in his own shop, D made seven pairs of shoes, he would receive seventeen and one-half dollars. He would have to pay fif- teen dollars for flour, mutton, and potatoes, and thus he would have two and one-half dollars re- maining, which would be the most he could pay for the twenty-eight pounds of hides required in making the seven pairs of shoes. Therefore, if C drove the utmost possible bargain with him, D would be obliged to pay about nine cents a pound for hides. He could not pay more than this. The price might be as much less as C could be pr.evailed upon to accept. If D oould obtain customers for all of the shoes he oould make in the course of a year, that which he would receive would be limited by the number of shoes he could make. If he could make a pair of shoes a week, he could, in fifteen weeks, make sufficient to supply one pair to each person of families of five members of A, B, and C, and for them he would receive thirty-seven and one-half dollars. For these he would require sixty pounds of hides. C would have to sell his surplus of hides, or utilize them himself, or throw them away. He probably could not utilize them himself, and would be willing to take what he could get rather than throw them away. D would have to buy hides or desist from making shoes. As the ut- 70 THE FLOW OF VALUE mfost that D could afford to pay for hides after ho had reached the point where he oould afford to buy them at all, was nine cents a pound, he might refuse to pay more and C to accept less. For the sixty pounds of hides D would pay a fraction less than five and one-half dollars. This added to his expenditure of fifteen dollars for flour, potatoes, and mutton would make twenty and one-half dol- lars. If he made no more shoes in the course of a year he would have remaining seventeen dollars, which would suffice to provide flour, mutton, and potatoes for a wife and leave more than enough to purchase the hides required for the shoes of himself and his wife. If Ji were able to make a pair of shoes a week, or in round numbers fifty pairs a year, he would, if he could obtain custom- ers for all of them, receive at the price of two and one-half dollars, one hundred and twenty-five dol- lars. Of this it would require seventy-five dollars a year to provide flour, potatoes, and mutton for a family of five persons. He could pay eighteen dollars for the requisite hides, and have thirty- two dollars remaining. This would be profit, con- sisting in the surplus received by an individual for utilities produced by his individual effort over that expended by him for the subsistence of his family and for payment to those from whom he obtained the substance utilized in production. In a state of complete self-sufficiency, the fam- ilies of A, B, and C wove into cloth the wool shorn PRICES FOR PRODUCTS OF ARTISANS 71 from sheep they raised, and made the cloth into clothing for the respective members. As C came to produce the mutton consumed by families A and B, he would not only have a surplus of hides, but his flocks probably would so increase that he would also have a surplus of wool. It is incon- ceivable but that some one engaged in weaving wool into cloth and making cloth into clothing would develop greater aptitude than others. He would be called upon not only to make the clothes for his own family, but for the members of other families who would be glad to exchange with him the things they could produce at an advantage for the clothes he could produce at an advantage. Thus clothing would become an economic utility. This tailor E would have to obtain from C the wool which he would weave into cloth and make into clothing for the families of A, B, C, D, and E. Wool would become an economic utility. If to the nourishment of E were requisite the same quantities of flour, potatoes, and mutton as for D, and A, B, and C, and each required one suit of clothes a year, the exchange ratio of a suit of clothes, that is its price, would be five dollars. The price for wool would be determined in the same manner as the price for hides. The fact that he no longer raised potatoes or mutton or made his own shoes or clothing, would enable A to plant more wheat, and to make more flour. Similarly, through the specialization of ef- 72 THE FLOW OF VALUE fort B could raise more potatoes, C more of mut- ton, hides, and wool; D could make shoes, and E clothes to the limit of their respective capacity. To the extent that A could produce and sell flour in excess of that needed for the purchase of the potatoes, mutton, and shoes consumed by him- self, he could provide potatoes, mutton, and shoes for a family. To the extent that B could produce and sell a surplus of potatoes and C could pro- duce and sell a surplus of mutton, hides, and wool, they could respectively provide the other utilities for members of their family. To the extent that D could make shoes and E clothes in excess of those required to provide the flour, mutton, and potatoes necessary for their subsistence, they would have dollars to their credit which could be expended for hides and wool. A surplus above that expended for these purposes could be devoted to the purchase of flour, mutton, and potatoes for the support of a family. There would be an in- creasing number of persons as families increased in size and new families came into existence. Thus there would be an increasing number of per- sons who could consume the increasing supplies of flour, potatoes, mutton, shoes, and clothing. When the demand for utilities of a given kind came to be in excess of those an individual could produce himself, he could enlist the efforts of an employee. The effort put forth by A, B, C, D, and E in their respective vocations was an eco- PRICES FOR PRODUCTS OF ARTISANS 73 nomic utility in the sense that it entered into the production of the utilities they sold. But it was effort put forth by the person who was responsible for the sale of that which he produced. The ef- forts of an employee are applied to substance for the provision of which he is not responsible, and in the production of utilities for the sale of which he is not responsible. Thus human effort becomes an economic utility in somewhat the same sense that substance is an economic utility. Therefore price has to be determined for human effort, that price designated as wage. Through long periods the utilities required for the subsistence of an individual would not mate- rially change. If five sacks of flour, ten bushels of potatoes, fifty pounds of mutton, two pairs of shoes, and one suit of clothes continued to be the smallest measures of these utilities that would suffice an individual for one year, the lowest wage an employer could pay would be at the rate of twenty-five dollars a year. That is, the employee could obtain twenty-five dollars a year for mak- ing shoes with which he could buy flour, mutton, and potatoes. He would at this stage of develop- ment have to be self-sufficient in the production that met other wants. It is, however, to be re- flected that as under our supposition, any one could gain subsistence by the individual applica- tion of his effort, an employer would probably have to pay a higher wage than this. If for an 74 THE FLOW OF VALUE increased volume of utilities produced by the combined efforts of himself and his employee, the employer could obtain the same prices as before, the dollars to his credit would tend continually to be in excess of those required in payment for subsistence, substance, and wages. Thus his profit would consist of the credits received for utilities produced by the combined efforts of him- self and his employee over his expenditures for subsistence, for substance utilized in production, and for wages paid for effort enlisted in produc- tion. In nearly all men is the desire for gain. In or- der that the dollars to his credit may increase in accelerating ratio, a producer will endeavor to produce at a decreasing expense. Shoemaker D, through the intelligent coordination of the efforts of himself and his employee, would find that the expense of producing each pair was less than if they worked separately. That is, a greater num- ber of shoes could be produced in relation to the effort expended in production, a greater number of shoes could be produced in relation to the flour, mutton, and potatoes required to maintain the vitality from which emanated the effort applied in production. If the demand so increased that he could utilize the effort of additional employees, he might the further specialize their application. He might have one prepare soles, another uppers, and another put them together. By such effective PRICES FOR PRODUCTS OF ARTISANS 75 specializatio-n and coordination he could produce a still greater volume of shoes in relation to the effort expended. If he continued to obtain the same prices, his credits would the further increase. When T> bought hides from C, he would convert them into leather himself and later might have certain of his employees convert them into leather. In time he would discover that a man specializing in the conversion of hides into leather could effect such economy in its production that by availing of his efforts he could make a still larger number of shoes with the efforts of the same number of men. Thus evolves the tanner. Or . he may evolve through the enterprise of one who perceives that by specializing in the conversion of hides into leather he can produce leather so advantageously that he can sell it to the shoemaker for less than the shoemaker can produce it. The specialized tanner may come to produce leather suflBcient for the requirements of a number of shoemakers. He will become better acquainted with the sources whence hides can be obtained than the separate shoemakers and will be able to purchase them in larger quantity. As the demand for leather in- creases, he can increase his production by employ- ing wage-earners, and reduce his cost of produc- ing leather by specializing and coordinating their effort. In our supposititious case of the purchase of 76 THE FLOW OF VALUE hides by D from 0, the conditions determined that the price could not be in excess of nine cents a pound. It may be that D's cost of converting hides into leather by means of the efforts of his own employees was three cents a pound. He might be willing to pay the tanner twelve cents a pound for leather in order that his employees might concentrate their efforts upon making shoes, but he would not pay more than this. He would endeavor to pay less and through bargaining would doubtless share in the benefit of the tan- ner's lower cost of production. As there came to be several tanners purchasing hides from several farmers and selling leather to several shoemakers, there would be competition between the farmers to sell their hides, competition between the tan- ners to purchase their hides, competition between the tanners to sell their leather, and competition between the shoemakers to purchase their leather. The quantity of leather that could be made at a given time would depend upon the hides available at that time. The demand for leather would be determined by the demand for shoes, the demand for hides would be determined by the demand for leather. The prices for hides, for leather, and for shoes would be determined by this interela- tion between supply and demand. Through such division and subdivision of the functions of production is the further advanced that specialization by means of which a given PRICES FOR PRODUCTS OF ARTISANS 77 quantity of utilities can be produced by a smaller number of persons, thus at less expense, and, other things equal, with increasing credit to the pro- ducer. Therefore the tendency will be toward such division and subdivision of effort in the pro- duction of utilities of all kinds. Such division and subdivision gives rise to an increasing diversity of accounts in our suppositi- tious record. For example, with the evolution of the shoemaker, there would come to be entries to his credit as he sold shoes, entries to his debit as he bought flour, potatoes, and mutton of A, B, and C, clothes of E, and corresponding entries to their credit. As he came to buy hides of C there would be entry of credit to C for hides sold, and to the debit of D for hides purchased. As the tanner evolved there would be entries to the credit of C for hides sold, to the debit of the tanner for hides purchased, to the credit of the tanner for leather sold, and to the debit of D for hides purchased. There would be entries to the credit of A, B, and G as the tanner purchased flour, potatoes, or mutton from them, but there would not be entries to their debit for the purchase of leather. The entries to the debit of D as he bought leather from the tan- ner would be offset by entries to the debit of A, B, and C as they purchased shoes. An increase in the population necessitates an increase in the volumes of the essential utilities. 78 THE FLOW OF VALUE If the increased volumes were respectively pro- duced by the same proportions of the population, and the increase in production were in proportion to the increase in the population, their prices would not materially change. That is, for exam- ple, so long as there continued to be essential to the annual support of an individual five sacks of flour, ten bushels of potatoes, fifty pounds of mut- ton, two pairs of shoes, and one suit of clothes, these utilities, in these proportions, would have to be produced for each person whose existence was maintained. The effort the least efficient per- son put forth would have to pay for these utilities, and these utilities would have to be forthcoming in return for that effort. Thus the effort which resulted in the production of these utilities in the volumes that passed to the least efficient would be offset by the efforts of the least efficient. The price of the total of their efforts would be the price of the total of these utilities which they have re- ceived in return for their efforts. The more effi- cient would receive credits enabling them to buy these utilities in greater measure, but so long as these were the only final utilities, debits and cred- its would be derived solely in connection with the processes of their production and sale. For example, when the population so increased that shoemaker D was obliged to enlist the efforts of an employee, D would obtain additional credits from the sale of shoes. The efforts of the em- PRICES FOR PRODUCTS OF ARTISANS 79 ployee would be an economic utility, but the em- ployee could not expend the credits received as wage except for such utilities as were then pro- duced. When hides became an economic utility and were used only in the making of shoes, the shoemaker would be the only purchaser. The seller of hides could expend the credits obtained therefrom only for such other utilities as were then produced. As D obtained customers for all the shoes he and his employee could make, he would have credits more than sufficient to provide utilities such as were then produced in quantities sufficient for his family, and pay wages to his employee. When his credits increased to an amount in excess of that required to pay wages and for substance; that is, when the dollars ob- tained for the results of efforts put forth in pro- duction for which he was responsible exceeded the dollars expended in that production, he would re- ceive profit in the commercial sense. This consists in a surplus of the credits received for utilities over the debits incurred in their production, and thus does not take into account the personal ex- penditures of the recipient. It may or may not be sufficient to meet these personal expenditures even if they are for no more than subsistence. Or it may be sufficient to allow him to increase his per- sonal expenditures and to invest a portion in further production. As A, B, and C similarly produced larger vol- 80 THE FLOW OF VALUE umes of flour, potatoes, mutton, hides, and wool in relation to the efifort expended, credits would accrue to them in excess of their debits so long as these utilities were produced in the same pro- portions in relation to the demand of an increas- ing population. Thus there would come to be credits to A, B, and C as well as to D and E that would not only enable them to pay their expenses of production but to buy more of the final utilities then produced thari they could use. As utilities of the kinds then bought and sold came to be pro- duced by the efforts of a decreasing proportion of the population, there would be an increasing pro- portion whose efforts would not be needed in pro- duction so long as it was of only these utilities. A, B, C, D and E could retain their surplus cred- its until they desired to expend them for the pur- chase of utilities of these kinds, but if they con- tinued in similarly efficient production their cred- its would continue to increase. Therefore the only use that could be made of them would be to provide other persons with such utilities. Un- less this provision were through charity, they would desire from those supplied the results of their efforts in return. But they would not desire the results of the efforts of these other persons unless in the form of utilities of other kinds than those with which they were supplied. Thus A, B, C, D and E could employ men in the production of utilities of kinds not theretofore produced for PRICES FOR PRODUCTS OF ARTISANS 81 sale. There would come to be carpenters, smiths, and other artisans. The ratio to the dollar, that is, the prices of the utilities produced by them, would tend to be determined in the same manner as the prices of shoes and clothing; and the prices of substance used by them in the same manner as the prices of hides and wool. The purchase of utilities produced by others would be equivalent to employing others in their production. Instead of wages being paid directly there would be the transferring of credits to those responsible for their production. The perception of opportunities would lead many who believed they could obtain profit to specialize in other kinds of production. Thus there would be produced additional utilities not only by the smith and the carpenter but by other specialized workers. Thus there would be an increase in the demand for the utilities theretofore produced because of the de- mand from those whose efforts were enlisted in production of the additional utilities. The attainment of profit in the production of the underlying essential utilities would tend to lead others than A, B, C, D, and E to engage in their production. For example, an employee, per- ceiving that shoemaker D was obtaining profit, might demand a higher wage. D might be will- ing to advance his wage rather than lose his serv- ices. With increasing credits, the employee would 82 THE FLOW OF VALUE be enabled to purchase more than the underlying utilities essential to his existence. He might un- dertake to support a family. It might be that this employee would not be sat- isfied with the highest wages he could obtain from D and would engage in making shoes for custom- ers himself. If the increasing demand could not be met by D and his employees, it might suffice to provide customers for the new enterpriser. If the increasing supply of shoes were not in dis- proportionate relation to the increase in the popu- lation, and to the increase in the supply of other utilities, D and his competitor might be able to obtain the same prices as theretofore for all of the shoes they could make. The increase in de- mand might be due not only to an increasing popu- lation but in part to the fact that many families, because of their increasing credits, would wear more shoes. In the same way there would come to be similar organizations composed of employer and employees engaged in the production of util- ities of increasing variety. The essential utilities would have to be produced for all of the popula- tion, and their prices could not be less than would provide subsistence for the least efficient employed in production. Other utilities could not be pur- chased by the least efficient. Their volume would be limited by the demand of those whose credits were more than sufficient for subsistence. The price of such another utility would have to be at PRICES FOR PRODUCTS OF ARTISANS 83 least suflBcient to enable its production to be con- tinued. It might be as much more as purchasers were willing to pay. The tendency would be for that number of persons to be engaged in its pro- duction to whom purchasers were willing to pay the prices that would enable the least efficient of that number to continue in the production. At lower prices, other things equal, the least efficient would be driven out of that production : the least efficient remaining wOuld be more efficient than those driven out. At higher prices, other things equal, a greater number would be drawn into the production until the volume were in excess of that which would bring prices that would support the least efficient of this number. The least efficient receive no more than they con- sume and consume all they receive. Their gain is in making the living which they could not other- wise obtain. The more efficient, those whose ef- forts contribute in greater measure to the produc- tion of utilities, receive credits that entitle them to more than is essential to their existence. Thus they may have a surplus of credits over their ex- penditure for what they consume. This chapter has outlined the evolution of the artisan, the worker for wage, and the producer of substance for transformation. "Wage is paid by the employer to an employee for putting forth his effort under the direction of the employer, who is responsible for its application and the results. VII A HYPOTHETICAL DEVELOPMENT OF PRICES FOE SOUECES OF SUBSTANCE AND INSTEUMENTS OF PRODUCTION Sources of Substance As meat, hides, and wool came to have price, the animals growing meat, hides, and wool would be bought and sold because of the prices that could be obtained for their yield. Thus such animals would become economic utilities ; they would have a ratio to the dollar. The price of an animal obviously would have to be less than that of its yield, at least as much less as the cost of obtaining it from the animal. The price of hides and wool would likewise have to be less than that of the intermediate utilities, such as leather and cloth, into which they were transformed, and the prices of these intermediate utilities less than those of the final utilities into which they were ultimately transformed. For example, if the price he could obtain for leather enabled the tanner to pay nine cents a pound for hides and the yield of an animal were twenty pounds of hides, its price, if there were no other consideration, would have to be less than one dollar and eighty cents. If that animal also 84 PRICES FOR SOURCES OF SUBSTANCE 85 yielded fifty pounds of meat for 'whicli could be obtained ten cents a pound, its price would have to be less than six dollars and eighty cents in order that the purchaser might prepare the meat and the hides, and derive gain from their sale. The farmers who raised such animals might con- vert them into meat and hides themselves, or might sell them to butchers. Or one farmer might buy them from another because of the prices ob- tainable for their yield of substance, or for the purpose of breeding animals which would yield such substance. Or an animal yielding substance with a degree of continuity, such as a sheep yield- ing wool, a cow yielding milk, a fowl yielding eggs, might be bought and sold because of the belief that the prices obtainable for its continuing yield would exceed the debits incurred for its purchase and for the subsistence requisite to the production of its yield. The number of farmers who would raise such animals would be limited by the least efficient, by him whose animals yielded only sufficient to en- able him to continue in their production. The more efficient farmers, those whose animals were of greater yield in proportion to the effort ex- pended upon them, would, other things equal, ob- tain profit. Such efficiency might be due to the intelligence and industry applied in breeding and nurturing the live stock or, in part, to the fertility of the soil from which were obtained the crops 86 THE FLOW OF VALUE with which it was fed. And so also with the rais- ing of grain. The efficient farmers, those pro- ducing the largest crops in relation to the effort expended, would obtain the highest profit. This might be due to their intelligence and industry in cultivating, sowing, and reaping, but the fertility of the soil and accessibility to the markets for its products would be a factor in their obtaining profit. Therefore, it would be that as land was utiliz- able in producing more than necessary for the subsistence of its cultivators, there might be those willing to buy such land because of the profit obtainable through its utilization. Thus such land would become an economic utility; a measure of such land would command price. There also might be those willing to pay part of the return derived from the cultivation of such land in order that they might have the right to use or dispose of the remainder of that return. Thus there would evolve the rent of land. Land would be bought or would be rented because it was a source of substance from which profit could be obtained. Moreover, sources of substance of potential prof- itable utilization might be bought and sold. Sel- dom, if ever, however, would they command rent, because rent for land utilized in production is ordi- narily paid from, the return received through that utilization. The price of land utilized as source of substance PRICES FOR SOURCES OF SUBSTANCE 87 depends upon the price which can be obtained for the substance it yields, and the price of that sub- stance depends in turn upon the prices which can be obtained for the utilities into which it is transformed. Thus not only does farming land come to bear a ratio to the dollar, but reaches of timber and beds of minerals also to have price. They may be sold separately from the soil, or the rights to the utilization of timber or of underlying minerals may be disposed of by lease providing for payment as timber is cut or minerals extracted. A given area of land may be utilized simulta- neously in the production of foodstuffs, clothing stuffs, woods, and minerals. Other things equal, a source of substance which will produce the great- est yield in relation to the effort applied is that which will command the highest price or the high- est rent. Instruments of Production As the force applied by a machine accomplishes much that previously was effected by the direct application of human effort, the machine, to use a common phrase, displaces labor. It would be more accurate to say that it enhances the produc- tivity of labor. By the use of a machine a man can produce larger volumes of utilities of many kinds than with his unaided effort, and he gives form to many utilities that could not be produced by his unaided effort. The machine evolved from 88 THE FLOW OF VALUE the hand-tool. An animal that pulls or carries at the will of man is a tool, in a sense, but the term properly designates an instrument that has been given form by human effort. By scratch- ing the earth with a stick and placing seed in the exposed soil, primitive man increased the growth of grain. With a stone edge or a metal blade at- tached to the stick, he could scratch more earth in which he could plant more seed and thus the further increase the volume of grain. When he progressed to the fashioning and use of the hand plow and the animal-driven plow, there was a yet greater increase in the volume of production in relation to the human effort applied. Production such as that of A, B, C, D, and E would have been impossible without tools, but tools then fash- ioned were of the kinds that facilitated the work of the hand such as had been used for centuries. Structures, machines, and appliances do not en- ter into the flow of utilities in the same manner as substance and the utilities into which it is trans- formed. Whether property in a machine be in one person or another, its use is throughout a shorter or longer period. It is an economic util- ity in that it may be bought and sold, but its func- tion is that of an instrument of production. The construction of engines, of machines, and the structures in which they were used meant the de- velopment of property of a kind that had not theretofore entered into man's cognizance. Prop- PRICES FOR SOURCES OF SUBSTANCE 89 erty in tools, even in the hand-loom and the spin- ning-wheel, was regarded much the same as prop- erty in tables and chairs. There was little if any realization that the credits obtained from the sale of utilities produced by means of them were in any part due to return upon the cost of the tools. Even those who used horses and wagons in con- veyance for others made little if any distinction between the expenditure for these instruments directly utilized in production and expenditure for food and clothing. In the processes of constructing instruments of production is requisite the application of effort for which must be paid wages at least as high as could be obtained for its application in other ways. Likewise to those who applied their efforts in pro- ducing woods or metals would have to be paid as much for producing these substances for trans- formation into machines as for transformation into other utilities. It would be from the credits obtained from the sale of utilities produced by hand that would be received the debits requisite for the construction of the first machines. In the last stage of the construction of a present-day ma- chine are applied the efforts of those who put together the parts of which it is constituted. Each of these parts is composed of substance that has undergone various stages of transformation. Therefore efforts have been applied by many dif- ferent persons in every phase of the construction. 90 THE FLOW OF VALUE In large part tliese efforts have been applied in di- recting the application of force through other ma- chines, that in turn have been formed by the efforts of others applied in large measure through still other machines. To the operation of a machine there are required the results of the efforts of others than those who have been engaged in its construction and of others than those immediately engaged in its oper- ation. Whether the power be steam, gas, or elec- tricity, there is necessary the combustion of fuel to generate that power. Therefore, to its opera- tion contribute the efforts of those who have dug coal and transported it, of those who have con- structed the mines and their equipment, of those who have drilled and prepared the oil used as lubricant. Those responsible for the transformation of substance into final utilities will continue to utilize a machine in the processes of that transforma- tion if the debits incurred for the cost of the ma- chine and its operation are less in relation to the credits received from the sale of the products than would be the relation of debits to credits if the products were produced without the aid of ma- chines. That which a man can afford to pay for a machine is, therefore, determined by the relation of its cost and the cost of its operation to its pro- ductiveness during the period of its usefulness. Unemployment due to the introduction of ma- PRICES FOR SOURCES OF SUBSTANCE 91 chines is temporary. In their construction and operation is quickly enlisted specialized effort in an extending scale. The displacement of labor is the liberation of effort for application in the pro- duction of utilities in the increasing volume and variety that the extending use of machines makes possible. Those who have been trained in spe- cialized occupations that are rendered obsolete by the introduction of a machine are, however, often- times subjected to inconvenience or even privation until their effort is readjusted to other applica- tion. There is the possibility of obtaining profit from the utilization of an instrument of production be- cause it facilitates that increase in the volume of production in relation to the effort applied which is characteristic of coordination. Machines, by enormously increasing the volume of production, enable all persons to obtain utilities in greater variety. The instruments of production utilized in providing transportation contribute to this end by conveying substance and intermediate utilities in larger volume than otherwise would be possible to places where they are transformed, and by con- veying final utilities in larger volume than other- wise would be possible to the places where they are offered for sale. Warehouses, wholesale stores, and retail stores contribute to this end by retaining utilities at the place where they are wanted until the time when they are wanted. 92 THE FLOW OF VALUE Were it not for such assembling of utilities and retaining them until sold, production would have to be restricted to the volumes of utilities for which there were immediate purchasers. Production by means of machines has resulted in utilities in volume in excess of that for which there is immediate sale, and thus manufacturers and merchants are obliged to keep portions of them in stock. Thus property is retained not only in instruments of production but often for a time in the utilities produced. Not only is property retained in sources of substance but oftentimes in substance itself that awaits market. VIII A CONTINUATION OF THE HYPOTHETICAL DEVELOP- MENT OP PRICES AND PROFIT If all persons were of equal efiBciency and the same utilities were required to maintain the exist- ence of each person, each would contribute to pro- duction in the same measure and would receive of the utilities produced in the same proportions. But, even though the effort of all persons were equally effective, there would be required to the production of certain utilities the application of the effort of a greater number of persons than to the production of others, and different utilities would be required in different proportions. Therefore, it would be necessary to apportion the effort applied so that it would result in the pro- duction of utilities in the required proportions, and it would be necessary to apportion the utilities produced to meet the wants of each individual. Although in the nature of things it is more than improbable that such a community ever existed or could exist, let us, for the purpose of tracing the relation between the activities that give rise to the dollar and the dollar itself, suppose that a com- munity consists of one hundred and twenty per- 93 94 THE FLOW OF VALUE sons engaged in production and tliat the essential utilities are five in number. Let it be supposed that an evolution, such as has been described in the preceding chapters, has resulted in the equilib- rium between the wants of the community for these utilities and the numbers of persons engaged in their respective production indicated by the following : TABLE I Requ/ired Numher Vtili- Required for 120 engaged in Production Total ties per Person Persons Production per Person Produced No. 1 8 units 960 units 24 persons 40 units 960 units No. 2 32 units 3,840 units 32 persons 120 units 3,840 units No. 3 12 units 1,440 units 36 persons 40 units 144 units No. 4 6 units 720 units 18 persons 40 units 72 units No. 5 2 units 240 units 10 persons 24 units 240 units 60 units 7,200 units 120 persons 7,200 units The results of the efforts of each person must bring him 60 units of the 5 utilities in these proportions: Utility No. 1, 8 units Utility No. 2, 32 units Utility No. 3, 12 units Utility No. 4, 6 units Utility No. 5, 2 units The proportions in which the aggregate effort is put forth in the respective production of particular utilities is as follows : Utility No. 1, 12 Utility No. 2, 16 Utility No. 3, 18 Utility No. 4, 9 Utility No. 5, 5 As the efforts of the respective persons under our supposition are of equal effectiveness and, therefore, each receives the same utilities in the same proportions, the price of the efforts of each person, or, as measured by their results, the price of the utilities he produces, must be the sixty utili- PRICES AND PROFIT 95 ties of tlie five kinds in the requisite proportions. Therefore 40 units of Utility No. 1, or 120 units of Utilily No. 2, or 40 units of Utility No. 3, or. 40 units of Utility No. 4, or 24 units of Utility No. 5 are respectively equivalent to 60 units as follows : 8 units of No. 1 32 units of No. 2 12 units of No. 3 6 units of No. 4 2 units of No. 5 The utilities required by each person are com- posed of sixty units in the varied proportions. The effort put forth by each person in the production of utilities of each respective kind is equivalent to that portion of the aggregate effort put forth in the production of the sixty units of the five utilities. "Unit" signifies "one." When "one" is a unit common to utilities bought and utilities sold, when it is the unit, by which they are bought and sold, it is a unit of price. If, in this supposititious case, this unit of price be termed the dollar, each person will receive sixty dollars for the utilities he has produced and will expend sixty dollars for the utilities he requires. Therefore, Each person producing 40 units of Utility No. 1 will receive $60, or $1.50 per unit. Eaxili person producing 120 units of Utility No. 2 will receive $60, or $ .50 per unit. Each person producing 40 units of Utility No. 3 will receive $60, or $1.50 per unit. Each person producing 40 units of Utility No. 4 will receive $60, or $1.50 per unit. Each person producing 24 units of Utility No. 5 will receive $60, or $2.50 per unit. Each person will obtain the essential utilities in the requisite proportions by the following ex- penditure : 96 THE FLOW OF VALUE 8 units of Utility No. 1 at $1.50 $12.00 32 units of Utility No. 2 at .50 16.00 12 units of Utility No. 3 at 1.50 18.00 6 units of Utility No. 4 at 1.50 9.00 2 units of Utility No. 5 at 2.50 5.00 $60.00 Although this supposition disregards the ele- ment of time, it is not to be forgotten that, while production, buying, and selling continue from day to day, a longer period is required in the produc- tion of utilities of one kind than in those of an- other, and that utilities of one kind last longer than those of another. Inasmuch as those who have the capacity and the inclination for directing and coordinating the efforts of others seek the opportunity for utilizing the efforts of others, let us suppose that of the supposititious community oUe of those engaged in the production of Utility No. 1 undertook to re- lieve his twenty-three colleagues from the neces- sity of selling their products, under agreement to pay them wages equal to the return they had separately obtained. Let us suppose that then, through the direction and coordination of their efforts, he were enabled to produce 1200 units of Utility No. 1 instead of the 960 units theretofore produced. He would endeavor to continue to ob- tain $1.50 a unit. That is, from the sale of each unit of Utility No. 1 he would endeavor to obtain the same command over other utilities as was pre- PRICES AND PROFIT 97 viously obtained from the sale of each unit of Utility No. 1. If he could do so, he would receive from the sale of the 1200 units an aggregate of $1800, or $360 more than previously received by the individual producers for the 960 units. The payment to each of his twenty-three employees of the wage of $60 each would enable them to buy the same measures of the five utilities as before. There would remain $360 to his credit. But what would he do with it? In the first place, how could he obtain the price of $1.50 for the 1200 units? If the efforts of the remaining ninety-six persons continued to be put forth as before, there would be for sale neither more nor less of Utilities No. 2, No. 3, No. 4, and No. 5. There would be no sale for the additional 240 units of Utility No. 1. In order to sell the 1200 units of Utility No. 1, the employer would have to reduce the aggregate price to that previously received for the 960 units. Instead of receiving $1800 for the 1200 units, he would receive $1440, or $1.20 per unit instead of $1.50. Each of the members of the community would be enabled to buy ten units instead of eight as before. The employer would have received no more than the satisfaction of providing his fellowmen with ten units instead of eight, of hav- ing made a blade and a quarter grow where but one grew before. Now let us suppose that an able and enterpris- ing member of each of the other groups effected a 98 THE FLOW OF VALUE similar combination of resources and coordination of effort, which resulted in a similarly increased production of Utilities No. 2, No. 3, No. 4, and No. 5. Then 24 persons would produce 1200 units of Utility No. 1 ; 32 persons, 4800 units of Utility No. 2 ; 36 persons, 1800 units of Utility No. 3 ; 18 persons, 900 units of Utility No. 4; and 10 per- sons, 300 units of Utility No. 5. If these results could have been attained through separate and uncoordinated effort, the results of the efforts of each person would have enabled him to buy 10 units of Utility No. 1 instead of 8, 40 units of Utility No. 2 instead of 32, 15 units of Utility No. 3 instead of 12, 71/2 units of Utility No. 4 instead of 6, 2% units of Utility No. 5 instead of 2. In this event the price of Utility No. 1 would be $1.20 per unit instead of $1.50 ; of Utility No. 2, $.40 in- stead of $.50; of Utility No. 3, $1.20 instead of $1.50; of Utility No. 4, $1.20 instead of $1.50; of Utility No. 5, $2.00 instead of $2.50. The increased production, however, was ef- fected by the mental effort applied by the em- ployers in coordinating the efforts of the em- ployees. The employer responsible for the pro- duction of utilities also became responsible for the prices received for them, and the total derived from their sale passed to his credit. He would endeavor to obtain the same prices as before. That is, he would endeavor that no greater meas- ure of the utilities, for the production of which he PRICES AND PROFIT 99 was responsible, would have the ratio of the dollar than before. And he would endeavor to obtain with the dollar received the greatest measure he could of other utilities. In order that he might continue in production, each employer would have to enlist the requisite effort. The relation of effort put forth to wants met had established $60 as the price of the utilities required for each individual. As each individual could have obtained the required utilities for $60 if he had continued to work for himself, he would not work for wage unless he could obtain at least as much. Therefore, in order that production might continue, each employer would have to pay at least $60 as wages to each employee. Then the flow of debits and credits and of utili- ties would be as follows : At the end of a period of production each employer, from the credits de- rived from the sale of utilities produced, would pay $60 as wage to each employee. Thus there would be a credit to each employee of $60. He would pay to the producer of Utility No. 1 $12.00 for 8 units of that utility. Each employee would be debited, and employer No. 1 credited, with $12.00. Each employee would be debited with $16 for 32 units of Utility No. 2, and employer No. 2 credited with $16. Each employee would be deb- ited with $18 as the result of his purchase of 12 units of Utility No. 3, and employer No. 3 would be credited with $18. Likewise there would be 100 THE FLOW OF VALUE debit to each employee for $9, the price of 6 units of Utility No. 4, and credit to employer No. 4 for $9. And there would be debit to each employee for $5, the price of 2 units of Utility No. 5, and credit to employer No. 5 in that amount. The proportions in which each had expended his cred- its would indicate the utilities he wanted and in what proportions. The aggregate of credits ac- cruing to each employer would enable him to enlist the effort requisite to their further production. He would not buy of these utilities with his credits except for his individual use and consumption. He would buy the effort of employees, and trans- fer to them, as wages, credits that would enable them to buy the utilities. At the end of a period of production each em- ployer would have utilities exceeding by one quar- ter those which had been sold to the various per- sons engaged in production. The 120 persons, because of the coordination of their efforts, would have produced utilities sufficient for the support of 150 persons. The surplus utilities would be the property of the five employers. They could not sell them unless there were persons to buy them. Persons could not buy them unless they could pro- duce utilities in return. Each employer could em- ploy six persons at the wage of sixty dollars a year to render service that did not consist in the production of utilities for sale to others than him- PRICES AND PROFIT 101 self; that is, in the production of utilities which afforded him immediate, personal gratification. Thus he could, for example, employ six servants to minister to his ease and comfort after the fash- ion of the old-time, oriental potentates. In any event, there would be utilities for the support of an additional thirty persons, which could be paid by the five employers separately or jointly. That is, there would be $900 that could be so expended. There might come to the community a doctor, a teacher, and a barber, who would seek to obtain as much as they could from the five employers. The doctor might be able to obtain $120, the teacher $120, and the barber $60. There would remain utilities of the ratio of $600 in the posses- sion of employers. If each employer and the doc- tor and the teacher employed one servant at the wage of $60, there would remain utilities of the ratio of $180 in the possession of the employers. Need would develop for other functionaries. The debit and credit entries would have become so numerous as perhaps to justify the employment of one person to give his exclusive time to their adjustment. This would mean wage to him of at least $60. In the absence of any other arrangement each member of the community, when he wanted utili- ties of one kind or another, would have to go to the place of production and buy them from the 102 THE FLOW OF VALUE employer. As purchasers would probably buy re- spective utilities at different times and in different measures, the time of each producer would largely be occupied in making sales to his customers. There would be a saving of time both to buyers and to sellers if there were a storehouse to which utilities of all kinds were forwarded after pro- duction, and to which any purchaser could resort when he wanted utilities of any kind. The sev- eral employers, rather than have their effort dis- tracted in making sales at retail, could afford to join in employing a man or two to serve as inter- mediaries between them and their customers. If they thus employed two men, the least they could pay in wages would be $60 to each. Or a man, perceiving the opportunity, might offer to pay the producers a somewhat lower price for their wares and take the responsibility for their sale, thus be- coming an enterpriser himself. He could not charge at retail more than the established prices, but the employers could afford, because of the sav- ing of their time and effort, to make that reduc- tion in the price at wholesale which would enable the intermediary to sell the utilities at retail. Thus would evolve the merchant. This differen- tiation in the occupations naturally presupposes an increase in the population of the community, or else the shifting of the efforts of certain of its members. This, of course, would have an effect upon the volume of production and upon prices. PRICES AND PROFIT lOS Now let it be supposed that the employees en- gaged in the production of the different kinds of utilities were of different degrees of efficiency. If to an employee whose efforts contributed to the production of utilities in less degree than that of the others his employer were to pay the same wage as to them, that employee would be enabled to buy utilities in the same proportions as the more efficient. An organization with employees, some of whom were less efficient than others, would not, however, produce the same volume of utilities as it would if the efforts of each employee were equal to those of the most efficient. Therefore, it could not produce utilities sufficient to meet the wants of as many persons. At the same prices the employer would not receive the same total of dollars for the utilities produced. If he were to pay the less efficient employees the same wages as the others, fewer dollars would remain to his credit after the payment of wages. The only way he could secure the same profit would be by pay- ing the less efficient employees lower wages, or by reducing the wages of a number of, or of all of, his employees. But rather than accept a reduction, the efficient employees would resume the putting forth of their effort separately and individually. If the less efficient employee did likewise, he could not produce utilities in the same volume as the more efficient. If he were without the resources for individual production, and the employer re- 104 THE FLOW OF VALUE fused to pay him wages disproportionate to the results of his effort, he would, other things equal, be obliged to work for lower wages than the more eflBcient. If with an increase in the population of the com- munity there were an increasing disparity in the eflSciency of different persons desiring employ- ment, the different employers would seek to obtain the requisite employees by the payment of the low- est wages each would agree to accept. The low- est wage any employee would accept would be that adequate for the purchase of the utilities neces- sary for his subsistence. The relation between effort put forth and wants met in our imaginary community determined the subsistence wage as $60. But in actual communities and with actual persons the wage necessary for subsistence is vari- able. The highest wage an employer could pay the least efficient employee, without reducing the wages of others or impairing his profit, would be the dollars obtainable, for the utilities produced, exceeding the number obtainable in case he did not enlist the efforts of that employee. Likewise the highest wage he could afford to pay any em- ployee, even the most efficient, would be the number of dollars obtainable for the utilities produced exceeding the dollars obtainable in case he did not enlist the efforts of that em- ployee. If, however, he paid to every employee the high- PRICES AND PROFIT 105 est wage thus determined, all of the dollars re- ceived would be paid as wages. By reason of the coordination of their efforts, however, the em- ployer produces a larger volume than could have been produced by the various employees working separately. No one of the employees, not even the most efficient, working separately could have produced utilities for which he would obtain dol- lars equal to those his employer would obtain through the direction and coordination of his ef- forts. The employer 's test of the highest wage he could afford to pay would not be, therefore, alone the dollars he would secure by reason of the ef- forts of a particular employee, but the number of dollars he would have to pay to enlist effort equiv- alent to that put forth by him. Therefore, other things equal, he would pay no more to one em- ployee than necessary to secure the efforts of another of equal efficiency. And so also a man, of whatever degree of effec- tiveness, will not work for wage, if for the utilities he could produce working separately and individ- ually he could obtain more dollars than he could obtain as wage. A man will not work for a given wage if he can prevail upon his employer to pay a higher wage, or if he can obtain a higher wage from another employer. A man will not work for wage if, through the coordination of the efforts of others, he can obtain more as profit than he could obtain as wage. 106 THE FLOW OF VALUE In strict commercial significance, profit is the amount by which dollars received through the con- duct of a business exceed the dollars expended in the conduct of that business. That which the em- ployer pays for utilities for his individual use and consumption comes out of the profit which he de- rives from applying his effort in coordinating the eiforts of others. Therefore, in the following table, which shows the changed relations between effort put forth and wants met due to the efforts of the employers, the surplus of the amounts re- ceived by them from the sale of utilities over the amoimts paid as wage are indicated as profit. TABLE II Price Received Paid Profit Vtil- Produced by per by Em- as of Em- ity Employer and Unit ployer uaqes ployer No. 1 23 employees— 1,200 units $1.50 $1,800 $1,380 $420 No. 2 31 employees — 4,800 units .50 2,400 1,860 540 No. 3 35 employees — 1,800 units 1.50 2,700 2,100 600 No. 4 17 employees^ 900 units 1.50 1,350 1,020 330 No. 5 9 employees — 300 units 2.50 750 540 210 The status indicated by this table, even if it were ever attained, could not continue. It would be changed by forces that are always at work, the same forces that developed the specialized work- man from the germ of specialization in the saving of effort in the first exchanges, and then developed the employer. Population changes. Different persons develop different inclinations and apti- tudes, differing degrees of effectiveness, and wants in differing proportions. PRICES AND PROFIT lOT Other things equal, it is by means of an increas- ing production in relation to the effort expended that profit is augmented. Therefore producers, animated by the desire for gain, strive to bring about a diminution in the ratio of the effort ap- plied to the volume produced. The effect of such a diminution has been indicated by the transition from the status depicted in Table I to that de- picted in Table II. A further development would be in the differentiation between those who sup- plied substance and those who transformed it. Let us suppose, by way of example, that to the production of 1200 units of Utility No. 1 were necessary 1800 units of substance ; that is, one and one-half units of substance to one unit of the final utility. Let it be supposed that to the production of these 1800 units of substance the efforts of eight persons were necessary, and that the efforts of twelve persons were required to transform this substance into 1200 units of final Utility No. 1. Thus the efforts of twenty persons would be re- quired instead of the efforts of twenty-four to pro- duce the 1200 units of Utility No. 1. If there were sale for no more than these 1200 units, four per- sons would be deprived of employment in their production. If the previous price of $1.50 per unit could be obtained, these 1200 units would bring $1800 to the enterpriser. If he paid wage of $60 each to the eight producers of substance and to the twelve remaining employes, his outlay 108 THE FLOW OF VALUE for wage would be $1200. He would have $600 as profit instead of $420. Or more likely, if he did not assume responsibility for paying wages for the production of substance but paid producers for supplying it, he would endeavor to pay the least he could. He would receive for the final utilities $1800, of which to his immediate employees he would pay as wage $720, leaving $1080 wherefrom to pay for substance and obtain profit. If the producers of substance put forth their ef- forts individually and separately, he would bar- gain with them. The utilities necessary to the existence of each cost $60. If each producer of substance produced 250 units, the lowest price the employer could pay would be $.24 a unit. But this would allow no more than a living to the pro- ducer of substance. If it were timber or coal, he would continue to exhaust forest and mine with- out more return than he could obtain by working for wage. If the substance were foodstuffs from the soil, or fiber from plant, or meat, hide, or wool from animal, he would have to plant and till and harvest, or breed and kill. But there would be producers of substance of differing degrees of ef- ficiency. The least that any one could produce in order to obtain a living would be 250 units. Another, by reason of superior industry or better wood or coal or more fertile soil, might produce 400 units of substance, and another 600 units. If employer No. 1 could obtain the requisite 1800 PRICES AND PROFIT 109 units of substance at $.24 a unit, he would pay no more. At this price the producer of 400 units would obtain $96, the producer of 600 units, $144. Then it would be that if the other 6 producers of substance produced 250 units apiece, the 8 pro- ducers would produce 2500 units instead of 1800 as before. If employer No. 1 desired no more than 1800 units, he would pay the lowest price for which he could obtain that quantity. In competition with the producers of 250 units each, the producers of 400 units and 600 units would have the advantage. They might offer to sell to the employer at the lower prices, which would induce him to purchase substance from them in preference to the other producers. The least possible reduction, other things equal, would serve this purpose. If they were to sell at $.23l^ a unit, they would dispose of their 1000 units for $235. The enterpriser would still have to pay $.24 a unit for the remaining 800 units desired. These he could obtain from three of the producers if they could manage to increase their supply by as much as fifty units, and the three other separate producers would be unable td gain a livelihood in the production of substance of that kind. The producer of the 400 units would receive $94, and the producer of the 600 units, $141. The one would have $34 as surplus over his subsistence ; the other, $81. If their effective productivity was due 110 THE FLOW OF VALUE not so much to industry and capacity as to the excellence of soil or timber or coal, there might be those who would pay for the right to utilize farm, forest, or mine. As the population increased and the specializa- tion of effort extended, the tendency would be, other things equal, for the employers to obtain larger profit. This would be because, as utilities were produced with diminishing effort, there would be fewer persons to be supported in the production of any given utility. Therefore, those of the capacity and inclination would not only en- gage in the production of new utilities but in pro- duction in lines in which they perceived an em- ployer was obtaining profit. Such a one might so engage in production with the intent of obtaining profit because of the increasing demand due to an increasing population, or with the intent to share the profit of an established employer, or both. Let it be supposed that an employee, or another, perceiving that employer No. 1 was obtaining profit, became employer No. la in the production of Utility No. 1. He would purchase substance from its producers. The producers not having customers would be the producers of 250 units each which employer No. 1 did not buy. Employer No. la would have to pay them at least $.24 a unit. He could not obtain more than 750 units, unless he could outbid employer No. 1 for a portion of the PRICES AND PROFIT 111 output of the other producers of substance. He might offer the producers of 400 units and 600 units $.24: employer No. 1 might offer $.241/2, and then employer No. la, $.25. The highest price either could continue to pay would be that which did not extinguish his profit. The fact that the producers of the larger quantities of substance ob- tained profit would stimulate the less efficient to increase their production, or would induce others to enter upon this production. Then there would come to be competition between the producers of substance for its sale, and between the employers for its purchase. As the supply was high in rela- tion to demand, greater measures could be ob- tained for the dollar ; that is, its price would dimin- ish. As the demand was high in relation to the supply, smaller measures could be obtained for the dollar — that is, its price would advance. The lowest price that could be paid would be that which would enlist the number of persons whose efforts were required in the production. This number would be limited by those whose efforts were just sufficient to produce the supply for which, at the prices obtainable, they could gain subsistence. Those producing larger quantities would at this price, other things equal, obtain profit. It might be that an employer would engage in the produc- tion of this substance. The separate producers might be willing to rent to him or sell to him the sources from which they derived substance at a 112 THE FLOW OF VALUE rental equivalent to the profit they had attained from the production themselves. By the payment of wages and the coordination of effort, the em- ployer might so increase the volume of production that he could, at the price obtainable, pay the rental, pay wages, and yet derive profit. As there are always differences in the capacity of different persons, there would be, even in a low stage of development, differences in the credits accruing to different persons. So long as the least efficient were in such number that they would be compelled to work for subsistence, the lowest wage would continue to be the price of the underlying essential utilities in their crudest and simplest forms. As there was the production of utilities in greater volume in relation to the effort ex- pended, these underlying essential utilities would tend to be produced by the number limited to those whose efforts were required to supply them in volume for which there was demand; that is, in the volume in return for which the least efficient would receive at least the utilities necessary to their subsistence. In each of the various kinds of production would be engaged the less effective and the more effec- tive. The credits accruing to the least effective would enable them to purchase only the underlying essential utilities, but the credits accruing to the more effective would enable them to purchase other utilities. Thus there would come to be utili- PRICES AND PROFIT 113 ties of other kinds with ratio to the dollar. But such a utility could be purchased only by those with credits in excess of subsistence. Of their excess credits, some may make expenditure for such a particular utility and others may not. As credits pass to their producers in excess of their debits, they will be enabled to purchase other utili- ties. As credits remain in the possession of vari- ous persons, they will be enabled to purchase other utilities. IX THE EFFECT OF THE INTRODUCTION AND USE OF MACHINES UPON PEICES AND PROFIT Let us continue the hypothetical development by tracing from the status indicated in Table II the modification in the flow of credits and debits that would be caused by the introduction of ma- chines. Let us suppose that employer No. 3 in- vented a machine by means of which ten employees could produce 3600 units of utility No. 3, and that to the construction of this machine were requisite the efforts of ten employees. With his profit of $600 he could pay for the construction of the machine. When it was placed in opera- tion, he would need only ten employees to produce double the volume of utilities his organ- ization had previously produced. He would dis- pense with the services of twenty-five employees and endeavor to find a market for the 3600 utility- units that could be produced by running his ma- chine to its full capacity. Twelve units of Utility No. 3 had sufficed for each person. But perhaps each person would use more if they were within his means. If each of the remaining ninety wage- 114 USE OF MACHINES 115 earners wanted twenty-four units instead of twelve, there would be an immediate market for 2160 units, but no wage-earner could afford to pay more for the twenty-four units than the eighteen dollars he had previously paid for twelve, unless there were a change in the prices of the other utili- ties. If he paid eighteen dollars for twenty-four units instead of twelve, the price would be seventy- five cents per unit. This would yield the producer $1720. In their production he would have to pay as wage $600. Therefore, the expenditure for ef- fort enlisted in the direct operation of the machine and its repair would be $660. If he had to pay for substance, coal, and lubricants at the rate of twenty cents per unit, the expenditure for these items would be $440. Of the $1720 derived from the sale of the 2160 units, he would obtain as profit $620, which would be only $20 more than the profit obtained before the introduction of the machine. But by operating the machine to its full capacity, he could produce with the same number of em- ployees 3600 units at an additional expense for substance and other materials of $280. Whatever he could obtain for these additional 1440 units in excess of the expense of twenty cents per unit would add to his profit. If he were to sell them at fifty cents a unit, his credits would be increased by $720 and his profit by $432, making a total profit of $1052. Therefore, if the employer could sell these addi- 116 THE FLOW OF VALUE tional units at fifty cents, he would obtain the addi- tional profit of $432. If, however, the purchasers of the 2160 units were to find out that he had done so and complain because of discrimination, the reply might be that if he had reduced the price of all the 3600 units to fifty cents, he would obtain $1800 which would leave as profit only $420, or less than the profit he had obtained before the machine was introduced. In this case, he would prefer to continue to produce only the 2160 units which, if sold at seventy-five cents, one-half the price pre- vailing before the introduction of the machine, would yield greater profit than the production of 3600 utilities if they were sold for fifty cents. The introduction of the machine deprived twenty-five wage-earners of employment. Let us suppose that one of these was successful in in- venting a machine of similar capacity so that, with an expenditure of $1380, he also could produce 3600 units of Utility No. 3. If both employers ran their machines at full capacity they could produce 7200 units of Utility No. 3. Their respective costs of production would be 38% cents per unit. Bar- gaining conceivably might drive the price as low as forty cents, which would leave each enterpriser but sixty dollars as profit, no more than the wage paid each employee. There could not be sold 7200 units of the utility unless there were a vast in- crease in the demand. This would mean not only an increase in the population, but probably a de- USE OF MACHINES 117 mand increasing in still greater ratio. So long as the lowest wage were sixty dollars, if the demand of each person for the utilities and the prices of them remained the same, each person would have eighteen dollars which he could expend for Utility No. 3. At forty cents each, he could buy forty-five units. If these were in excess of any possible wants of each person, if, for example, the demand of every person for himself and his family aver- aged thirty units, there would be an overproduc- tion of fifteen units per person. Now let us suppose that machines are invented and placed in operation in the production of the other utilities. The volume of each is greatly in- creased, both in relation to the number of persons engaged in its production and to the population. The fact that the volume is increased in relation to the number of persons engaged in its production means that its price can be reduced. That is, as a smaller number of persons have to be supported in the production of each utility, fewer of other utilities are needed to support those engaged in the production of each utility. The fact that the production of a utility has increased in volume in relation to the population not only means that its price can be reduced but that its price must be reduced if the increased volume is to be sold. The increased volume will not be sold unless the utility is wanted by members of the population who have not been accustomed to buy it, and unless their 118 THE FLOW OF VALUE command over utilities is so increased that they can buy it. An individual, responsible for the application of his effort and for the sale of the utilities he pro- duces, can, other things equal, produce the largest volume of which he is capable by working continu- ously to the limit of his capacity. An employer responsible for the application of the efforts of himself and his employees can produce the largest volume of which their efforts are capable if these efforts are continuously applied to the limit of their capacity. Continuous application to the limit of capacity implies intervals of rest and rec- reation which will enable continuous maximum exertion. It differs from the extraordinary ex- ertion which, although it may result in extraor- dinary effect, is followed by harmful reaction and, therefore, can only be spasmodic. An employer having property in machines, pay- ing for substance, and paying wages can produce the largest volume of utilities through the con- tinuous working of his organization to the limit of its capacity. His employees will work to better advantage by having continuous employment, and so also will those engaged in the production of the substance which he buys. Moreover, it is nearly always the case that the effectiveness of the appli- cation of cosmic force by means of machinery in- creases in greater ratio than the number of those USE OF MACHINES 119 whose efforts are applied in its application. That is, for example, machines can usually be operated to their full capacity with less than twice the num- ber of employees that would be requisite to their operation to half capacity. Therefore, other things equal, an employer will endeavor that his organization work as nearly to its full capacity as may be possible. If he is prudent he will allow his employees intervals adequate for rest and rec- reation, and not overwork his machines. Other things equal, he will keep his organization thus at work if he can obtain profit greater than would accrue from the production of a smaller volume — a volume that would result from working to the limit of capacity part of the time or working to less than capacity all of the time. Inasmuch as an instrument of production may be utilized from the time it is installed until it is worn out, destroyed, or discarded, it may be a factor in the production of utilities throughout that period. When such an instrument has been constructed it is paid for by him to whom property in it passes. He may continue to have property in it during the period of its usefulness, or he may transfer his property in it at one or another time during that period. The purchaser of such an instrument is obliged to make payment for all of the force that has been applied in its production. Payment for the effort 120 THE FLOW OF VALUE applied at each stage of production, and for the resultant product, has been at the prices deter- mined by the various interrelations and inter- workings of supply and demand. If the producer of such an instrument were to sell it at a price equivalent to the debits incurred in its production, he would, other things equal, be enabled to produce another such instrument, but he would obtain no profit from doing so. Therefore, he would not continue in that production if he could obtain profit by applying his effort and resources in other ways. The producer of an instrument of production would, however, endeavor to obtain for it the high- est price he could. If there were two or more pro- ducers of instruments of a given kind, a purchaser would pay no more for one of them than the low- est price at which he could obtain it from any pro- ducer. Competition conceivably might force its price to the lowest which the least efi&cient pro- ducer would accept rather than not produce the instrument, or rather than not sell it if it were pro- duced and in stock. If an instrument could be ob- tained from only one producer, or if the producers were protected in its construction and sale by pat- ents, its cost of production might be a compara- tively unimportant factor in the price that could be obtained. The highest price a purchaser would pay would depend upon the addition to his profit he believed USE OF MACHINES 121 would be obtainable by means of its utilization. If the instrument were a new invention that dem- onstrably would so enhance the application of human effort that there would be a large increase in the volume of utilities produced in relation to the number of persons engaged, he would have to estimate the prices obtainable for the increased volume and the proportions of the total credits secured at these prices that would accrue as profit. If the instrument were of a kind the efficiency of which had been established through experience, the purchaser's calculation might not be so much concerned with the effect upon his immediate profit as with the effect upon his continuing profit. The cost of the machine would have to be appor- tioned through the costs of production of the total volume of utilities, in the production of which it was a factor, from the time of its installation until the termination of its usefulness. If it were an instrument utilized in the production of a utility for which there were general and continuing de- mand, its period of usefulness might terminate only when it was worn out. This period would be longer or shorter in accordance with the intensity of its operation and the feasibility with which it could be repaired and renewed ; the cost of repairs and renewals would also have to be apportioned throughout the period of its utilization. The pe- riod of usefulness might be terminated by the in- vention, construction, and utilization of another 122 THE FLOW OF VALUE machine by means of which the same or a greater volume of utilities could be produced with the ap- plication of still less of human effort. If the pro- ducer of utilities by means of the machine was to secure the latter machine and substitute it for the old, further complications would arise in adjust- ing his costs. If an instrument were available only in the production of a utility of passing de- mand, such as a puzzle or the implements for a game of transitory vogue or an article of apparel of fleeting fashion, there might have to be the con- fidence in the attainment of high profit per unit of utility produced to justify its purchase. The price of an instrument of production at one or another time during its period of usefulness would be determined by similar considerations. Other things equal, a purchaser would not pay as much for a machine that through use had suffered deterioration as for a new one ; though perhaps he would be willing to pay more for a machine that had demonstrated its efficiency than for one new and untried. In any event, the seller would en- deavor to obtain as much as he could, and the buyer to pay as little. What he could pay would be determined by his calculation of the effect upon his profit that would result from his buying or not buying the machine. If at any time the volume of utilities produced by means of the instruments of a given kind so exceeded the demand for those utilities that the USE OF MACHINES 123 aggregate of credits obtained from their sale did not meet the cost of production, there would have been not only an overproduction but an over- utilization of such instruments. Those of the least eflicient producers, other things equal, would be forced into idleness, which would have to con- tinue until the demand for the utilities had so in- creased that they again could be operated with profit. Such instruments of production as tools, ma- chines, and appliances usually can be installed and operated at one place or another place with equal effectiveness in so far as their immediate opera- tion is concerned, or can be transferred from one place to another. The cost of installation will vary, other things equal, with the cost of trans- portation from the place of production to the place of installation. Instruments of production such as the struc- tures in which and in connection with which ma- chines are operated, can in many cases be erected at one place or another place, but cannot readily be moved. Were there no consideration of loca- tion, the factors that determine the price of a structure would be the same as those that deter- mine the price of a machine or an appliance. The place where substance is transformed may, how- ever, have an important and even a controlling influence upon profit. Certain processes of trans- formation may the more advantageously be con- 124 THE FLOW OF VALUE ducted near the sources of substance. If diverse substances are utilized, they may the more advan- tageously be conducted near the source of one substance, or near the source of another, or per- haps at a place more or less approximating an equal distance from both. Or it may be that greater profit will accrue if transformation be effected at a place nearer the market for the utili- ties produced, even though it be more remote from the sources of substance. The choice will be de- termined by the effect upon profit of the various elements that would enter into the cost of produc- tion at one place or another, and the cost of mar- keting from one place or another. The structure in which a machine is operated, or in connection with which any of the processes of production are effected, must be erected upon land. Structures, the machines and appliances utilized in connection with them, and the land upon which the structures are erected are designated a "plant." This, perhaps, is because they are at- tached to the ground as is a plant, and also, per- haps, because they bear somewhat of the relation to the utilities they produce as does a plant to the fruit it yields. A factor in the cost of a plant is the cost of the land. Land may be a source of substance of per- ennial yield, as a farm, a ranch, a plantation, a truck garden ; or it may be a source of substance USE OF MACHINES 126 not replaced when taken from it, as a mine or a forest; or it may form part of an instrument of production, that is, of a plant, as when it is the site of a manufacturing establishment, or of a ware- house, or of a retail store, or the right of way of a railroad company; or it may be a final essential utility, as when it is the site of a building that affords shelter; or it may be a final utility minis- tering to the comfort and gratification of the owner, as lawn or woodland surrounding a resi- dence. Or it may serve two or more of these pur- poses, as when part of the land adjoining a resi- dence is used as farm, truck garden, or orchard, or when adjacent to a dwelling is a shop in which the occupant engages in economic production. The price of land is determined by interrelations between supply and demand, as is the price of all other utilities. But as land is immovable, supply and demand for land in a particular area may be very nearly or quite independent of the supply and demand for land otherwise situated. In the sale of land, as of any other utility, the owner will endeavor to obtain as much for it as he can, the buyer to pay as little as he can. Its price will be the highest that any one will pay for it for any purpose to which he may wish to devote it. The price of land utilized as a farm or a ranch, and available for no other purpose, will depend upon the profit that the buyer believes he can obtain by means of its utilization as a farm or a ranch. 126 THE FLOW OF VALUE Land which has been utilized as a farm, but which a buyer believes can be utilized as sites for dwell- ings, may be sold at a price upon which the buyer thinks he can obtain profit by cutting it up into lots. Land so situated as to be available for a manufacturing site, a warehouse, or a store will command the price upon which a buyer believes he can obtain profit by means of its utilization for such a purpose. Land utilized for residence, if it is so situated that it can be utilized for commer- cial purposes, may bring a higher price than if it were available only for residence. A man who desires to buy it for continued use as a residence will have to pay as much as could be obtained from him who believes he can secure profit from its utilization as part of an instrument of produc- tion. It seems absurd to talk of the cost of production of land. But from time immemorial the struc- tures erected upon land — roads, fences, drainage, and everything so attached to it as to be impos- sible or impracticable of removal or of separate utilization — ^have been held to be part of the land. Thus land and what are designated as improve- ments are classified as real estate. There has been the cost of the improvements and there have been the taxes. Therefore, it is not entirely anomalous to speak of the cost of production of real estate. The owner of real estate will en- deavor not to sell it for less than its total cost to USE OF MACHINES 127 him, whether or not it has been "improved." In any event he will endeavor not to sell it for less than can be obtained for adjoining and equally available land. As a population increases, land once so remote as not to be available for any purpose may yield profit if cultivated as a ranch or a farm. As centers of population develop contiguously, it may become available for residence. As it comes within the limits of town or city, it may be avail- able for sites for manufacturing or mercantile establishments. The increases in the prices that can be obtained, as its situation causes it to be more and more available for that utilization by means of which greater and greater degrees of profit can be secured, have been designated "un- earned increment," because the increased avail- ability has been due to no effort of the owner. During these progressive increases in the price, however, property in the land has usually been transferred many times. It may have been bought from time to time by those who believed in its availability increasing in the future; that is, because of its potential availability. Their belief often is justified and often is not. Moreover, it is not always that increased availability has not been due to effort of the owner. For example, remote and uncultivated land granted by govern- ment to the projectors of a railroad acquires availability because the railroad affords facility 128 THE FLOW OF VALUE for transportation that would not otherwise have come to it. It is because of the facility for obtaining sub- stance, or employees, or marketing products that land becomes available for manufacturing sites. It is the contiguity of office buildings to other office buildings between whose occupants, and between whose occupants and their patrons, there must be frequent intercourse, the convenience of banks, hotels, theaters, and retail establishments for the service of the greatest number of patrons, that cause the high prices of land whereon such build- ings are erected. There would not be such high prices were not profit obtained by those who so utilized the land, and these would not obtain profit were there not an intensity of demand for the utilities produced by means of that utilization. Therefore the so-called unearned increment ap- plies not only to those who^ have property in the land, but to every one who obtains utilities pro- duced by means of its utilization. The so-called unearned increment arises from interrelation be- tween supply and demand which enables high profit to be obtained from its utilization. There may be changes in these interrelations. Because of mutations in the markets for products, the prices obtainable for manufacturing or mercantile sites may decrease. Streets once frequented by purchasers of means may become deserted by them. Thus land for which increasing prices have USE OF MACHINES 129 been obtained may so lose its availability that the owner, if he sell it, will be obliged to accept a lower price than has been paid. Unearned increment may be transmuted into unearned decrement. Profit accrues from the sale of a utility at a higher price than has been paid for it. That which is sold may be a given measure of a given utility at a particular time, as an acre of land or other source of substance, or an instrument of produc- tion, such as a warehouse or a manufacturing plant; or a final utility, such as a residence, a pearl, or a painting. The expression of profit in such cases as these would be that obtained from the sale of one concrete utility. Of this nature would be the profit or loss accruing to one from the sale of a utility in which he had property but in the production of which he had no part except that of producing it at the time and place of sale. For example, its owner may sell a precious stone, a work of art, an object of great rarity at a profit because of its appeal to collectors. Also one engaged in the production and sale of staple utilities of widespread demand secures profit or sustains loss as he receives more or less than he 'has expended. His total of debits may consist of various expenditures in different amounts for divers purposes, and his total of credits of the receipts from many sales at different prices. 130 THE FLOW OF VALUE Profit may continuously be obtained by one re- sponsible for any stage of production, from the gathering of substance to that application of effort which, by bringing a final utility from the shelf of a retail store to the counter, produces it where it may be examined by a purchaser. There may be periods in which his profit is less or greater than during other periods. There may be intervals during which he sustains loss that must be coun- terbalanced by profit obtained during other pe- riods, or else he will be forced out of production. Therefore, the expression of profit secured or loss sustained must be for certain periods. In order that the profit or loss of one period may be com- pared with that of another, it is necessary, as a rule, that the expression be for periods of equal duration, for a week, or a month, or more custom- arily for the year. If, however, the processes of production and sale be conducted within a period of definite even though varying limits, such as that of a particular season, the expression of profit and loss may be for that period. In vastly the greater proportion, the flow of debits and credits is derived from the buying and selling of all that contributes to the production of final utilities of general demand. Inasmuch as all the processes of production are directed toward the production of these final utilities, and as it is from the sale of these final utilities that are 6b- USE OF MACHINES 131 tained the credits which enable the continuance of all of the processes of their production, it follows that, in greater proportion, the flow of debits and credits depends upon the buying and" selling of these final utilities. From the credits received by the sellers of final utilities there is a succession of debits and credits that pass to the ultimate pro- ducers of substance. At each stage of the con- version of debits into credits and credits into debits, profit may or may not be obtained by cer- tain of those responsible for a given phase of pro- duction, but as production must continue and to its continuance there must be profit, it follows that profit must be attained by a proportion of the producers. It is those who thus obtain profit who are enabled to apply force in future production. Therefore, profit must be obtained by those whose efforts are requisite for further production. When we say that one person obtains greater profit than another, we mean that from the produc- tion and sale of utilities he may obtain greater command over utilities than another. As the measures in which all utilities are bought and sold are expressed in terms of the dollar, profit is ex- pressed in terms of the dollar. He who obtains greater profit than another obtains a greater sur- plus of credits over debits expressed in dollars. If there be two persons who put forth their effort in the production of utilities of the same kind, and the same prices per unit can be obtained for the 132 THE FLOW OF VALUE largest total they can produce, that one who most efficiently applies his effort will produce the greater volume and, therefore, obtain the larger profit. If, as the supply increases, the price has to be reduced in order to effect the sale of the volume produced by both of them, the more effec- tive will continue to obtain a greater total of credit for the larger volume he produces, and thus if the price gradually diminishes will obtain profit at a price that will not yield profit to the other. The more effective producer, by reason of greater ca- pacity, may have exerted a greater number of force-units and thus produced a greater volume of utilities, or by greater skill he may have applied a smaller number of force-units in the production of a greater volume of utilities. It is likewise with organizations, engaged in production, composed of employer and employees. The more efficient the individuals constituting an organization and the more effectively their ef- forts are coordinated and directed, the greater the volume of utilities that can be produced in rela- tion to the number of persons engaged in their production. Therefore, the greater will be its profit if the same prices are obtained as by a less effective organization, or, if prices are reduced, the longer can it continue to obtain profit than the less effective organization. It is so also with an organization utilizing struc- USE OF MACHINES 133 tures, machines, and appliances, all that consti- tutes a plant. Its effectiveness will depend not only upon the efficiency of the individuals of the organization and the efficiency with which their efforts are directed and coordinated, but also upon that adaptability of structures, machines, and ap- pliances which permits the most effective applica- tion of force through their utilization. The more efficient plant will be that by means of which the greatest volume of utilities can be produced in re- lation to the number of persons engaged in its operation. Its efficiency will also be affected by its productive capacity in relation to the number of persons whose efforts have been applied in pro- ducing it. The efficiency of a plant will, there- fore, depend not only upon the intelligence with which it is operated, but also upon the intelligence with which it has been designed and constructed. The intelligence of him responsible for the trans- formation of substance by means of the plant will be manifested by the judgment with which he has selected and purchased each instrument that en- ters into it. The best judgment will lead to the purchase of the instrument that will contribute to profit in the greatest proportion in relation to the price paid for it. And so also every one respon- sible for the construction, from the gathering of the substance throughout its transformation into the completed instrument, will have shown his 134 THE FLOW OF VALUE ability not only in the efficiency of the immediate phases of the production but also in the selection and purchase of that which he transforms. As the production of utilities increases in vol- ume, the tendency is for their prices to be reduced. Therefore it is that the continuing tendency is to compel that efficiency in production by means of which profit can be obtained at prices that tend to decrease to the lowest at which the most effective producer can obtain profit; and thus to compel production to be effected by the efforts of the smallest number of persons in relation to the vol- ume produced. But always and inevitably credits are derived from the sale of utilities in the form of human effort, or of utilities that have been produced by the application of human effort. Credits can not be expended except for human effort, or for the results of human effort. As the population in- creases and expands, there is the production of an ever greater variety of utilities. As the produc- tion and sale of utilities of every kind is in volume that increases in relation to the efforts expended, credits tend so to accumulate in the possession of the more effective that they can purchase all of the final utilities they desire for personal use and consumption and have credits remaining. Then those who believe they can utilize credits in the attainment of profit will offer to pay for the right to their utilization. Thus evolves interest USE OF MACHINES 135 in the sense in which it has come to be a factor in industry and commerce. Interest emerges after profit has emerged. It is that paid by one for the right to utilize the credits accumulated by another. The intent is that it be paid from the further credits obtained by means of the utilization. ■ This and the four preceding chapters have shown that as population increases there is an in- creased specialization of effort which tends to be directed and coordinated, whether in immediate application or through machines, toward the pro- duction of utilities increasing in volume and vari- erty in relation to the number of persons engaged in their production. Prices for utilities of any kind tend to be the lowest which will enable the least efficient, whose effort is required in any kind of production, to continue therein. This applies to the employer whose reward is in the form of profit, and to the employee whose reward is in the form of wage. Profit tends in increasing degree to accrue to the employer who is more efficient and more effective in production, and higher wage to the more efficient and more effective employee. THE ACTUAL DEVELOPMENT OF INDUSTRY AND COMMERCE IN THE UNITED STATES The industrial and commercial development of the United States actually did proceed approxi- mately in accordance with the hypothetical devel- opment outlined in the preceding chapters. Throughout the century and a half succeeding the establishment of the first white settlements, there were few radical perturbations in the relations between the supply of and the demand for such staple utilities as were then bought and sold. Principal economic changes were in the relations between the areas of land that were cultivated, and the population that cultivated them. When the supply of soil, forests, and mines was great in relation to the human effort available for their utilization, the prices of these sources of substance were low. As the population increased the prices for these resources increased, especially as their situation made them available for utilization to the advantage of developing centers of population. For many generations there were few who were very rich, and few who were very poor, judged by the standard of the times. Any one could make 136 DEVELOPMENT IN UNITED STATES 137 a living except the physically, mentally, or morally defective. About the beginning of the nineteenth century there was that application of steam which brought the steamboat, the railroad, the mill, and the fac- tory. There was increasing immigration of many who settled upon the land, and also of many who did not, who in large proportion were capable of no more than physical effort, and who sought employ- ment. Thus it was that while through the utiliza- tion of structures, machines, and appliances the proportion of human effort required in the pro- duction of many utilities decreased there was often a disproportionate increase in the number of those whose support depended upon the production. As, however, it was the policy of the federal and state governments to encourage the utilization of the vast uncultivated areas by according property in land gratis or at nominal prices, the nation, for many decades, assimilated without much disturb- ance the activities of nearly all who came to its shores. The disposal of lands, mines, and forests proceeded until, toward the close of the nineteenth century, property had been acquired in very nearly all of these resources by individuals, or by industrial and commercial organizations. There was rapid progress in the invention and utilization of machines. Even though there quickly arose new opportunities for employment, this progress tended for a time to displace many 138 THE PLOW OF VALUE who had been trained in the handicrafts, and thus often caused temporary privation. This was co- incident with relatively high wages in the new occupations because of the relatively small supply of those with the requisite experience and capac- ity. Thus the relation of utilities to the dollar came no longer to be determined through an ap- proximately even and regular development. In general, however, during the earlier decades when effort applied to the soil produced agricultural products that met the wants of a greater number of persons than did the manufactured articles resulting from the application of corresponding effort in the crude processes of transformation, the prices of foodstuffs were low in relation to the prices for manufactured articles. As with the ex- tending use of machines manufactured products increased in relation to the effort applied in their production, their prices decreased in relation to the prices for foodstuffs. As the fertile Missis- sippi Valley was devoted to grain and grazing, and as manufacturing developed in the East, the prices of all staple utilities tended to diminish in relation to the effort applied in their production. During the last quarter of the nineteenth cen- tury, the open-hearth furnace and improved ma- chinery led to a great displacement of human effort in making steel ; as its cost of production radically decreased and its use radically extended, vast profit attended its manufacture. Coincident with DEVELOPMENT IN UNITED STATES 139 the extending application of electricity was the electrolytic reduction of copper ore which fur- thered that extension. The planting of rubber trees in the Far East vastly increased the supply of rubber, and invention rapidly extended its uses. There was a phenomenal advance in the use of machinery in the processes of agriculture. The organization of the oil industry led to the more extended and varied use of the viscous fluid. The use of aluminum extended. The making of paper from wood pulp and the discovery of proc- esses whereby pictures could cheaply be repro- duced multiplied the serviceableness of the print- ing press. There was impetus to the formation of great corporations, which promoted specialization and coordination in the processes of production. The extension of the railroads and the cheapening of railroad transportation extended and diversified the channels of traffic. Substance was brought from remote sources to places of manufacture, and products were conveyed from places of manufac- ture to remote places of demand. Very nearly all utilities came to be provided by specialized effort in which the activities of all men were more and more closely interwoven. No longer was there a semblance of self-sufficiency except in out-of-the- way places. The development of industry and commerce was through a series of convulsions. The dollar that once measured the prices of the 140 THE FLOW OF VALUE exceptional things that were bought and sold, be- came a factor in nearly every phase of nearly every relation between man and man. During the upheaval the forces of supply and demand came to apply over wider and wider areas, throughout which, because of local relations be- tween supply and demand, there were wide varia- tions in prices. Thus there were opportunities as never before for traders who, by buying in one market and selling in another, tended to adjust the relation between supply and demand over extend- ing areas. There was the flow of effort from agri- cultural to manufacturing pursuits. Therefore during the first decade of the twentieth century the diminishing supply of foodstuffs, especially of the meats, in relation to the population brought an advance in their prices in relation to the prices for manufactured products. The rapidity of the changes in the courses of industry and commerce led to r£.Jical changes in the relation of utilities to the dollar, to great fluc- tuations in prices and in profit. There was an onrush of production, of buying and selling, that, even though retarded now and then by periods of depression, resulted in a continually accelerated augmentation of debits and credits. The produc- tion and consumption of millions of persons in- volved buying and selling that caused credits and debits and credit balances on the books of banks to be expressed in billions of dollars. Increase DEVELOPMENT IN UNITED STATES 141 in the number and magnitude of business organ- izations expanded the flow of dollars to wage- earners. The more effective application of force caused profit to accumulate, making possible the investment of large aggregates of credit in return for interest. The increase in the volume and va- riety of final utilities and the diminution of effort in relation to production permitted the recipient of even the smallest wage to exercise a range of choice in his expenditure. At the retail stores there came to be less of bargaining in the sense of higgling over the price of a particular thing and more of that bargaining which finds expression in the purchase of a certain final utility at the price fixed by the merchant, instead of another utility from the same or perhaps from another merchant. But still it was that from the credits received for final utilities all of those applying effort in their production obtained the credits that enabled pro- duction to continue. As industry and commerce developed within the United States its trade with other nations ex- tended. At the beginning foodstuffs and other substances of the new country were exchanged for manufactured products of Europe. Then with the rise of manufacturing in the United States, its manufactured products entered into the exchanges with other countries. As a little de- veloped country enters into international com- merce it is naturally its substances that constitute 143 THE FLOW OF VALUE the greater portion of its exchanges with other countries. With its further development there enters into such exchanges the intermediate util- ities and final utilities which can be advantage- ously transformed from its native substances by its native population. The processes of this transformation may be directed in whole or in part by those of skill and experience who have come from countries of higher development, and be effected by instruments of production obtained from such countries. The increase in exchanges leads to the extension and improvement of means for transportation, and these facilitate the further increase and extension of international commerce. Thus the forces of supply and demand operate over ever widening areas until there is the flow not only of matter-utilities from one country to another, but also of human beings pursuant to the working of these forces. XI THE BELATIVITY OF HUMAN EFFORT AND THE BELATIVITY OP HUMAN WANTS When industry and commerce have attained a high degree of specialization, there is the clear diiferentiation of the factors that enter into pro- duction and consumption — of human effort, of cosmic force availed of and applied by human effort, of instruments of production, of sources of substance, of substance, of intermediate utilities, and of final utilities. Among one and another people, phases of the development of these factors may not have been in the sequence adopted for our hypothesis which approximates the actual devel- opment in the United States. But no matter what may have been the sequence, when these factors have been fully differentiated, their continuing interrelation is in accordance with the principles that have been disclosed by our analysis. Always the wants of the present must be sup- plied with existing final utilities that are the result of effort applied in the past, and always there must be the application of effort in the present to- ward the provision of the utilities that will meet the wants of the future. Wage-earners have 143 144) THE FLOW OF VALUE wants that can not be met unless they put forth effort, and thus they are impelled to work for wage. Those responsible for the production of substance, its transformation and sale, have wants that can not be met unless they enlist effort in the utilization of sources of substance, and of instru- ments of production. Therefore, they are im- pelled to that utilization which compels the enlist- ment of effort and the payment of wages. Throughout the seeming confusion that attends the industrial and commercial processes it often is difficult to perceive the underlying current, just as it is difficult to trace the working of the forces that resolved the primal nebulous mass into plane- tary systems, to trace through eddy and foam the current of the whirlpool, to trace through pervad- ing electric radiation the electric current. But as we penetrate the penumbra we perceive that eco- nomic phenomena may be grouped in three classes of relations that are interrelated each with the others. There is the Relativity of Human Effort and the correlated Eelativity of Human Wants, the Relativity of Prices, and the Relativity of Profit. In this chapter will be summarized that which the preceding analysis has revealed in re- gard to the Relativity of Human Effort and the correlated Relativity of Human Wants. Because there is in all production and consump- tion the meeting of human wants by human beings, THE RELATIVITY OF HUMAN EFFORT 145 the fundamental factors may be reclassified in two groups : First — The number of persons engaged in the production of utilities, and the force applied by them. Second — The aggregate of utilities produced, and the proportions in which they become the property of different persons. Human beings apply force to sources of sub- stance and to substance. The results of that ap- plication meet the wants of human beings. The utilities to the production of which each person contributes must meet the wants of others in order that he may obtain from them the utili- ties that meet his wants. The effort of one per- son may result in the production of utilities of a given kind sufficient to meet the wants of a greater number of persons than the utilities of the same kind, or of another kind, produced by another per- son. There will be differences not only in the vol- umes of respective utilities produced by respective persons, but also in the wants of different persons for these respective utilities. As each person contributes in greater or less degree to the pro- duction of utilities which others want, he will re- ceive in greater or less proportion of the utilities which others produce. Correlative with the production of utilities is 146 THE FLOW OF VALUE the buying and selling of utilities; that is, the transfer of property in them. In every utility and in all utilities there is property. Property i"n. final utilities must be either in those who have them for sale, or in those who have purchased them for use. A man may have property in util- ities produced by the application of effort that has emanated from himself, or by the application of effort that has emanated from others. If he buy utilities, even though they have been produced by the efforts of others, he applies his own effort in their purchase in that his mind determines upon the purchase and takes part in the determination of the price. If he sell utilities, even though they hav^ been produced by the efforts of others, his own effort is applied in determining that they will be sold, and in taking part in the determina- tion of the price. Thus buying and selling are determined by effort of the mind. Demand un- derlies buying and supply underlies selling. It is the aggregate demand of all purchasers for a given final utility that determines the vol- ume in which it will be bought by them. The de- gree to which any person can exert demand will depend upon the demand for the efforts or the results of efforts in which he has property. The effort requisite to the production of a given vol- ume of utilities is that of those who will have to be supported in that production. Or if portions THE RELATIVITY OF HUMAN EFFORT 147 of the effort of the same persons be applied in the production of utilities of different kinds, there must be received from the sale of all of the utili- ties of the different kinds that which will support all of the persons engaged in their production and all who are dependent upon them. If all of those receiving utilities do not directly contribute to the support of those whose efforts are put forth in their production, they must contribute to the support of others who must contribute to the sup- port of those whose efforts are thus put forth. Or else they will be supported without making any contribution to the support of others. Thus there is a relation between the effort expended in pro- duction, the number of persons applying that ef- fort, the volume of utilities which results from that application, and the number of persons whose wants are met by that volume. As each person pays as little as he can for that which he receives and parts with as little as he can for what he obtains, it follows that no one will pay more to one person for given utilities than that for which he can obtain them from an- other. Those who pay wages are responsible for the production and sale of utilities. The em- ployer will pay no more wage to employees of the respective grades of efficiency than that for which he can obtain the efforts of other employees of like efficiency. Thus there is the tendency for 148 THE FLOW OF VALUE each person engaged in production to receive pay- ment in proportion to his contribution to produc- tion. It is through those responsible for the sale to the final purchaser of the final utilities that all of the forces applied in production converge in meet- ing the wants of all persons. Therefore it is through those thus responsible that are balanced the forces applied, the number of persons en- gaged in the application, and the utilities pro- duced, on the one side; the number of persons whose wants are met by these utilities, and the proportions in which these utilities flow to them, on the other side. Each person buys utilities that meet his wants. As his wants for the essential utilities continue, he is obliged continually to buy of the essential util- ities. Therefore, there must be the continual pro- duction of the essential utilities. He exercises a certain range of choice as to the essential utilities he will buy, and as to the less essential and non- essential utilities he will buy. The fact that he buys certain utilities to meet certain wants at one time affords some indication that he will buy such utilities to meet those wants at another time. Therefore, producers are led to continue in the production of utilities which they believe will meet wants; that is, for which they believe there will be demand. Those responsible for produc- tion will tend to continue in the production of THE RELATIVITY OF HUMAN EFFORT 149 utilities of the kinds for which they will receive the greater return. Thus it is that the proportion in which respective final utilities , are bought by final purchasers tends to determine the number of those who will continue to be responsible for their respective production, and the number of those who will be employed as wage-earners in their respective production. From all sources of substance are obtained the substances that are transformed into the final util- ities. Substance may be bought at each stage by those responsible for its furtherance toward the final transformation, and the product resulting from the application of their efforts may be sold to those responsible for its furtherance to another stage. As substance of one kind can be trans- formed through any of various processes into final utilities of different kinds, there is the responsi- bility at each stage for the direction that further- ance shall take. Thus it is, for example, that there are tliose who buy hides for transformation into shoes, others who buy them for transformation into trunks, and others for transformation into harness. All of a given volume of substance may be furthered in its transformation into utilities of the same kind, or in different proportions in trans- formation into utilities of different kinds. Each stage of furtherance involves the application of effort. The effort of a number of persons may be applied exclusively in the transformation from 150 THE FLOW OF VALUE one stage to another, or portions of the respective efforts of many persons may be so applied. Whether the effort of all of the persons engaged be exclusively applied at one stage or another, or whether portions of their effort be so applied, there is involved, in the production of a given volume of final utilities of whatever kind, a total of effort. The prices -obtainable for final utilities determine the proportions in which effort is ap- plied in the respective phases of the production of utilities of each kind. Those who respectively assume the responsibil- ity for the transformation at each stage are obliged to receive credits that at least offset their debits, if they are to continue in the respective phase of production. If for example, the sub- stance transformed be wool, the final utilities in the form of clothing emerging from the shop of the tailor have to be sufficient at least for that number of persons whose efforts produce credits that at least offset the debits incurred by the grower of sheep, the shearers, -cleaners, and carders of wool, the weavers of cloth, -and the makers of the cloth- ing. The aggregate of utilities produced is composed of the results of the efforts of all of the persons engaged in production. The effort applied to- ward the production of final utilities of all kinds is the aggregate of the efforts applied toward the production of final utilities of each kind. All per- THE RELATIVITY OF HUMAN EFFORT 151 sons are using and consuming final utilities at the same time that all persons engaged in production are putting forth their efforts in ways that di- rectly or indirectly further the production of final utilities. The proportion of the aggregate effort devoted to the production of the essential under- lying utilities will determine the proportion that can be devoted to the production of other utilities. The less the proportion of effort required in the production of the essential underlying utilities, the less, other things equal, will be the proportion of effort required to obtain the credits with which they can be purchased. That is, the smaller the number of persons who produce the essential un- derlying utilities, the less will be the proportion of the effort of others, that is of the aggregate of effort, required to supply them with the things they want. And so also with other utilities. The preceding paragraphs lead to the deduction that there must be a relation between the effort expended in the production of utilities of each kind and the effort expended in the production of utilities of every other kind. This is true even through transactions so circuitous that it is diffir cult to perceive that it is really the exchange of the results of effort which underlies them. For example, when a Western ranchman, who, after applying effort for a week, buys with his wage from the nearest store a suit of clothes made, in a remote city, of wool from the hills of New Eng- 162 THE FLOW OF VALUE land and of cotton from the plantations of the South, there has been obtained in exchange for his week's work the results of the effort of thou- sands of persons. As persons of high degrees of skill and ca- pacity are comparatively few, the volume of that production to which the exclusively applied effort of such individuals is requisite will be small in relation to the entire population. But when such effort is exerted in directing and coordinating the efforts of those of lower capacity, utilities are produced in far greater volume in relation to the effort expended than would be possible without such direction. This is especially the case with great administrative ability, which is rare indeed. Then again, while great creative ability may find expression in only a few architectural monuments, a few paintings, a few statues, a few books, a few musical compositions, any one of these may con- tribute to the intellectual or emotional elevation of thousands. The great creative ability of an in- ventor may find expression in a machine that vastly enhances the production of utilities of gen- eral demand. To recapitulate: the utilities that meet human wants are produced by the application of human effort; no more of wants can be met than are supplied with the results of effort. Human ef- fort is applied in different proportions to meet human wants in different proportions. The pro- THE RELATIVITY OF HUMAN EFFORT 153 portions in which effort is applied in the produc- tion of the utilities of the different kinds, and the proportions in which these utilities pass into the possession of different persons, are determined hy the number of persons engaged in the production of utilities of a given kind whose wants are met by the number of persons respectively engaged in the production of utilities of other kinds. XII THE EEIiATIVITY OF PEICES The relation between the respective measures of force applied by different individuals in pro- duction, and the proportions in which the results of that application become the property of differ- ent individuals, finds expression in price. As the dollar is a unit which measures the rela- tion of force applied to wants met, and all wants are met by the application of force, it is through buying and selling in terms of dollars that the force applied in producing utilities of a given kind is balanced against the force applied in producing utilities of another kind. It is human beings who are responsible for the results of the application of force which are bought and sold; it is human beings who receive dollars for the results of effort for which they are responsible ; and to human be- ings are paid dollars for the results of effort for which they are responsible. That is, while dollars are paid for utilities, they are paid to human be- ings ; while dollars are received for utilities,, they are received by human beings. Let it be supposed, for example, that to the production of a volume of utilities x, consisting 154 THE RELATIVITY OF PRICES 155 of 120 units, are requisite the efforts of a dozen persons; and that to the production of a volume of utilities y, consisting of 240 units, are likewise, requisite the efforts of a dozen persons. Let it be supposed that each of the twelve persons pro- ducing the utilities x wants twenty units of utility y, and each of the twelve persons producing util- ity y wants ten units of utility x. The results of the efforts of one group of twelve persons exactly balance the results of the efforts of the other group of twelve persons. If to the production of each utility the efforts of each person have con- tributed in equal degree, the effort of each of the first group has resulted in the production of ten units of utility x, and the effort of each of the second group has resulted in the production of twenty units of utility y. The ratio to the unit of exchange would be ten units of utility x and twenty units of utility y. If this unit of ex- change be the dollar, one dollar will purchase ten units of utility x and twenty units of util- ity «/• Now let it be supposed that there are many groups, each composed of persons engaged in the production of utilities of a given kind. The util- ities produced by each group are wanted by vari- ous individuals of the other groups. The utilities produced by each of the several groups may be wanted by the individuals of other groups in different proportions. The measure of utilities 156 THE FLOW OF VALUE of any kind that will be sold for a dollar depends upon the measures of utilities of other kinds that can be bought for a dollar. If the demand is greater in relation to the supply of utilities of a given kind produced by a certain proportion of effort, than the demand in relation to the supply of utilities of another kind produced by the same proportion of effort, the dollar will purchase more of utilities of the latter kind than of the former. Therefore, while the dollar in relation to one utility is a measure of the result of force applied to matter, and the dollar in relation to another utility is a measure of the result of force applied to matter, the dollar does not indicate that equivalent measures of force have been ap- plied. It indicates that the respective results of the respective measures of force applied are equivalent from the standpoint of meeting human wants. Other things equal, the utilities produced in greatest volume in relation to the effort expended are those that would be sold at the lowest price. That is, a greater measure could be obtained for the dollar than of other utilities in the production of which a relatively greater proportion of effort is required. The reason for this is that a rela- tively smaller number of persons need to be sup- ported in their production. Therefore, other things equal, the prices of respective utilities of different kinds would tend to be determined by the THE RELATIVITY OF PRICES 157 number of persons engaged in their respective production. But, because of difference in de- mand, other things are not equal. Differences in the relation of effort applied to the demand for the results of its application may be illustrated by two examples. In the production of fabrics made of cotton is necessary the effort of a large number of persons in planting, picking, packing, ginning, transporting, compressing, card- ing, spinning, weaving, and dyeing. It is differ- ent with the various products of mineral oil. They result from the application of the efforts of a comparatively limited number. There is not the cultivation of the soil, the planting of seed, or laborious gathering by hand. In the drilling of a well and the construction of pipe lines are requi- site the efforts of many, but the gushing forth of the oil and its flow through the pipes to the tanks and to the refineries is due in greatest measure to cosmic force that is supplemented by human effort in small proportion. But oil is in wide demand. Mineral oil as a lubricant displaced ani- mal oils, enabling the operation of machines in- calculably greater in number. It also displaced animal and vegetable oils as an illuminant in countless households throughout the world. In many places it has displaced coal as fuel both in furnace of stationary and locomotive engine, and the supply has with difficulty kept pace with the demand for its use in generating power for auto- 158 THE FLOW OF VALUE mobiles. Mineral oil, moreover, is of widespread medicinal use. Therefore the application of a given measure of effort in producing certain prod- ucts of mineral oil brings in return greater com- mand over utilities in general than the applica- tion of an equivalent measure of effort in pro- ducing certain fabrics of cotton. When each seller strives to obtain the greatest number of dollars he can for utilities of a given kind, he is striving that the smallest measure of these utilities have the ratio of the dollar. When each purchaser strives to pay the smallest number of dollars he can for utilities of a given kind, he is striving that the greatest measure of these util- ities have the ratio of the dollar. Thus when a man strives to sell the smallest measure of utili- ties in relation to the dollar, he is striving to ob- tain other utilities in the greatest measure in re- turn for the utilities he sells. Likewise, when any purchaser strives to pay the fewest dollars he can, he is striving in return for utilities previously sold to obtain the greatest measure of the utili- ties he wants. The ratio of utilities of a given kind to the dollar is determined at any instant by the sale of those utilities at that instant. By bargaining between buyers and sellers, however, is established the ratios of respective utilities to the dollar that may apply over a smaller or a greater area for a shorter or a longer time. This ratio for utilities THE RELATIVITY OF PRICES 159 of a given kind can never be lower than that of the greatest measure with which a seller will t)art for a dollar, and can never be higher than that of the smallest measure for which a purchaser will pay a dollar. Bargaining between many buyers and many sellers tends to narrow the range of prices. The wider the area over which the bar- gaining prevails, the more widely information is diffused as to prices. Therefore, the tendency will be for those engaged in the sale of utilities and in the purchase of utilities to know about what will be the ratio to the dollar of the utilities with which each is concerned. That is, when a man sells utilities for a given number of dollars, he knows about what measures of other utilities he can purchase with the dollars received; and, likewise, when he buys utilities for a given number of dollars, he knows about what measures of other utilities he could have purchased. Thus it is that when he sells for a given number of dollars, the seller consciously or subconsciously has in mind the utilities he can purchase with that number of dollars ; when he buys for a given number of dol- lars, the buyer consciously or subconsciously exer- cises preference for the utilities he buys over other utilities he might have bought. With the dollars in his possession available for the purchase of final utilities a man buys them in the order of their relative importance in meeting 160 THE FLOW OF VALUE his wants. Let us suppose that the annual in- come of a family is one thousand dollars obtained as wages by its head, who has steady employment. Let us suppose that the family consists of man, wife, and children, and that its annual expenditure is about as follows : rent $180, furniture $50, food $300, clothing $200, newspapers, magazines, etc., $15, doctor $25, recreation $30, incidentals $100, insurance and saving $100. Let us suppose that these expenditures in these proportions are neither more nor less than sufiScient to maintain the mem- bers of the family in the physical and mental effi- ciency of which they are capable. The food of such a family would consist in the main in certain proportions of beef, mutton, pork, poultry, eggs, butter, lard, milk, coffee, tea, flour, cornmeal, potatoes, cabbages, onions, and other vegeta:bles, apples, oranges, bananas, and other fruits. As the supply of one or another of these articles becomes less or greater in relation to demand, its price rises or falls. For example, if the supply of beef at a certain time should so decrease as to cause an advance in price of sev- eral cents a pound, the family would be obliged to consume less of beef, or less of other foods, or else increase its expenditure for food. On the supposition that it decreased its expenditure for beef so that its total expenditure for food did not exceed $300 per annum, it would be obliged to buy more of other foods or else to reduce its THE RELATIVITY OF PRICES 161 diet. Under our supposition it could not reduce its diet without impairing the efficiency of its members. It could not increase its expenditure for food without decreasing its expenditure for other utilities, and this also would impair the efficiency of its members. If it were to decrease its consumption of beef and buy more of other foods, the demand for beef would be decreased and the demand for other foods increased. If the budget of this family be typical of that of thousands of families, the de- crease in the demand for beef would be consid- erable, and the increase in the demand for other foods would be considerable. If the supply of beef were no greater than would be purchased by families with larger incomes, the growers, pack- ers, wholesalers, and retailers of beef might obtain profit at the higher prices. If the profit were considerable, more of beef might be grown, packed, and offered for sale. Prices might again fall so low as to place it within the means of families with incomes of one thousand dollars a year. This would not happen if the owners of the land on which beef were grown believed they could ob- tain greater profit in other production. More or less of land might be deflected from the raising of beef to the raising of wheat or cotton, sheep or hogs, and the consumption of beef might continue to be restricted to those of ample means. Its pro- duction would diminish, not because of lack of de- 162 THE FLOW OF VALUE sire for it but because the demand for other food was more effective. The diminution would be in the supply of a highly beneficial utility. Now let us suppose that, of the expenditure of thirty dollars a year for recreation, this family had been wont to spend five dollars for a set of croquet such as bedecked lawn and yard of a generation ago, or for roller skates, the use of which subsequently became prevalent. A similar demand from the thousands of families would create a demand in the aggregate for sets of cro- quet and for roller skates that would give em- ployment, perhaps, to thousands of men in scores of factories; that would direct to the produc- tion of roller skates and sets of croquet por- tions of the force applied in felling trees and transforming lumber, in extracting ores and trans- forming metal. All of those engaged in the pro- duction of sets of croquet and roller skates would have to be provided with food, clothing, and shel- ter. That is, a proportion of the effort applied in the production of these essential utilities would be for the benefit of those who produced sets of croquet and roller skates. With the waning of the vogue for these implements of recreation effort devoted to their production necessarily was di- verted to other production or else there was a diminution of productive effort. If there were specialized machines that could not be utilized ex- cept in the manufacture of sets of croquet and THE RELATIVITY OF PRICES 163 roller skates, those machines became useless. These are examples of diminution in the supply of a nonessential utility because of a diminution in the demand. Diminution in demand may follow the displace- ment of a final utility by one more effective. For example, that development of the phonograph which has led to the manifold reproduction of musical renditions caused the cessation of the manufacture of the old-time music box. Diminu- tion in demand for a final utility may follow a change in fashion, even though the utility dis- placed be not less serviceable than that which supersedes it. This is conspicuously the case with women 's dress. It was exemplified when in great measure rugs displaced carpets for floor cover- ing. Machinery devised for the making of carpets passed out of utilization, and there was falling demand for the efforts of operatives trained and skilled in carpet manufacture. There may be variations not only in the supply of and demand for particular utilities but for groups of utilities. During the first decade of the twentieth century, manufacturing establish- ments engaged in the transformation of the woods and the metals into various utilities absorbed so much of the effort of the population that a con- siderably smaller proportion remained to be ap- plied in processes of producing food. The di- minishing supply of food in relation to the demand 164 THE FLOW OF VALUE led to an advance in the prices. It might be that the family with an income of one thousand dollars a year could not obtain the food for which it had paid three hundred dollars except at an expendi- ture of five hundred dollars. Under our suppo- sition, if it were to reduce the consumption of food, the efficiency of its members would be im- paired. The advance of two hundred dollars would more than absorb its savings, its inci- dental expenditures, those for recreation, for med- ical attendance, and for newspapers and maga- zines. If the head of the family were employed in a factory himself, it might be that the increase in its profit would enable his wages to be advanced in the same proportion as his cost of living. But the supply of food would not thereby be increased. If the budget of that family were typical of thou- sands of families, and the incomes of these thou- sands of families as expressed in dollars were advanced proportionately, the supply of food would not be thereby increased. The thousands of families would be bidding for the available supply, and the prices as expressed in dollars would so advance that they might not be any better off than before. If the incomes, as ex- pressed in dollars, of part of the families were advanced, these families might be enabled to make their customary purchases of food, but those with incomes remaining at one thousand dollars could •not. THE RELATIVITY OF PRICES 165 It is well here to recall that the fundamental significance of price is not the number of dollars obtained for a measure of utilities, but the meas- ure of other utilities that are obtained. In the light of this fundamental significance the dollar is a unit that facilitates buying and selling in that a measure of any utility bears a ratio to this unit. When a man sells utilities of a given kind at a given time, the measure that has the ratio of the dollar is determined by the interrelations be- tween supply and demand at that time. If he re- tains the dollars received for expenditure at a future time, he does not obtain utilities in return for the utilities he has sold until a future time. Then there may have been such a change in the interrelations between supply and demand that a greater or less measure of utilities of a given kind can be obtained for that number of dollars. If he then is obliged to pay a greater number of dol- lars for a given measure of utilities, he obtains in different measure of the results of force applied to matter. If a wage-earner were to demand and receive a greater number of dollars because of an advance in the price of these utilities, the employer, other things equal, would endeavor to obtain more of dollars for the utilities for the pro- duction of which he was responsible. Their pur- chasers, in order to offset the advance, would endeavor to obtain more of dollars for the utili- ties they produced and sold. If this process were 166 THE FLOW OF VALUE continued, more of dollars would finally have to be demanded for the utilities, the advance in the price of which started the series of advances. When the circuit was thus completed, the actual prices of utilities, that is the prices of utilities as measured by utilities, would be the same as be- fore the circuit was begun. Thus, while the same measure of utilities of one kind would bear the same ratio to the same measures of utilities of other kinds, they would bear a different ratio to the dollar. There would have been no change in actual prices ; the change would be in the relation to the unit of exchange. That is, this would be the case provided the relation of utilities produced, to the wants for those utilities, remained the same. Let this point be made clear by extending the analysis to the ultimate factors in production. As force is applied, it follows that there must be units of force applied. As wants are met, it fol- lows that there must be units of wants met. In a state of self-sufficiency, a man applied force- units when he used his hands in procuring that which he wanted, and want-units were met by that which he procured. The force-units he applied resulted in the satisfaction of his want-units that were met. In an easy environment less effort might be required in meeting wants than in a difficult environment. For example, a native of the tropics, who picked bread-fruit from a tree and wore a breech-clout, exerted less effort to meet THE RELATIVITY OF PRICES 167 his wants than the Eskimo obliged to kill seals to obtain their furs for clothing and their fat for food. If an Eskimo had to work harder at one time than another to obtain the furs and the food that served his wants for an equal period, he would be applying more force-units to meet the same number of want-units. If, for example, he thus had to work twice as hard at one time as at another time, it would be perhaps that ten force-units supplied one want-unit at one time, and five force-units supplied one want-unit at an- other time. Let it be supposed that the fur and fat constituting one want-unit sustained the vital- ity that enabled the Eskimo to put forth five force- units. If we allow ourselves to indulge in the fantasy that the Eskimo kept accounts with himself, and tried to adjust the relation of his force-units to his want-units, he might designate the five force- units applied at the preceding time as five dollars, or one dollar, or fifty cents, or ten cents. If he designated them as one dollar, and thus credited his force account with one dollar when it had provided five force-units, he would have to debit his want account with one dollar because of the one want-unit met. The relation of force-units to want-units would be as five to one. The unit of exchange that would buy five force-units would buy one want-unit, or vice versa. If, when he came to replace that want-unit, he found he was 168 THE FLOW OF VALUE obliged to put forth ten force-units, he might, at the price previously established for force-units, credit his force account with two dollars. If he also at the price previously established for want- units debited his want account with one dollar, his bookkeeping would show a balance of one dol- lar to the credit of his force account. But these ten force-units had been expended, and his want account had received in return one want-unit which would enable him to exert only five force-units. If, on the contrary, he had on the basis of what his wants had received from the ten force-units credited his force account with one dollar and debited his want account with one dollar, the want- unit would still enable him to put forth only five force-units, which, if the conditions continued, would enable the production of only one-half a want-unit. That is, when his want account was credited with force-units produced, it could at the preceding price be credited with only one-half dollar. Thus, if the Eskimo tried to reimburse himself for his increased cost of living by doubling his wages as expressed in dollars for effort put forth, he would receive no more for his two dol- lars than he had previously received for one. If he tried to reduce his expenses by insisting that his want account would pay no more for the want- unit than the previously established price of one dollar, his credit of one dollar to the want-unit THE RELATIVITY OF PRICES 169 account would purchase but half of the force- units requisite to replace the want-unit. If we indulge in the further fantasy that the situation developed in that Eskimo a logical mind, an ability to face the facts, he might discover that the only way he could maintain equilibrium be- tween his force account and his want account would be to increase the force-units applied by means of one want-unit, or to decrease the want- units received in relation to the force-units ap- plied in their production. The logic of the situation developed by this fan- tastic supposition finds close analogy in our de- veloped stage of industry and commerce. Instead of effort by one man being put forth to meet his individual wants, the efforts of all persons en- gaged in production are put forth to meet the wants of all persons supported by the utilities pro- duced. The purchasers of the final utilities pay for all of the effort that has been applied in their production. If final purchasers are obliged to pay more dollars for a given final utility, their purchase of that utility will diminish, or their purchases of other utilities will diminish. If final purchasers are obliged to pay more dollars for all utilities, their purchases will diminish unless the dollars to their credit increase. If the dollars to their credit increase but the volume of production does not proportionately rise, they can obtain no 170 THE FLOW OF VALUE more for the greater number of dollars than they formerly obtained with the smaller number of dollars. If higher wages as expressed in dollars be paid to part of the wage-earners and not to others, those wage-earners may be able to buy the same proportions of utilities as before, but other wage-earners will not be able to buy as much as they bought before. The only way in which all persons can receive utilities in greater propor- tions in return for the efforts put forth by them, is by the production of all utilities in greater pro- portion in relation to the number of persons en- gaged in their production. Then the tendency will be for the dollar of credit at a, given time to buy more of utilities than the dollar of credit at a preceding time. Thus with a fewer number of dollars can be obtained utilities that enable the application of force in the production of the same volume of utilities as before, or in the production of a greater volume of utilities than before. At any given time actual prices are determined by interrelations between force applied and wants met. They are likewise at any future time de- termined by these interrelations which may vary as follows: The volume in which a given utility is produced may in- crease in the same ratio as the population. This increase may be effected by the efforts of the same proportionate number of persons. THE RELATIVITY OF PRICES 171 This increase may be effected by the efforts of a smaller proportionate number of persons. This increase may be effected by the efforts of a larger proportionate number of persons. The volume in which a given utility is produced may in- crease in a greater ratio than the population. This increase may be effected by the efforts of the same proportionate number of persons. This increase may be effected by the efforts of a smaller proportionate number of persons. This increase may be effected by the efforts of a larger proportionate number of persons. The volume in which a given utility is produced may decrease, or it may increase in a less ratio than the population. This volume may be produced by the efforts of the same proportionate number of persons. This volume may be produced by the efforts of a smaller proportionate number of persons. This volume may be produced by the efforts of a larger proportionate number of persons. The demand for a given utility may increase in the same ratio as the population. The demand for a given utility may increase in a greater ratio than the population. The demand for a given utility may decrease in relation to the population. If the increase in the volume of a given utility be in the same ratio as that of the population and if the production be effected by the same propor- 17a THE FLOW OF VALUE tionate number of persons applied in the same relative proportions, and if the demand increase in the same ratio as that of the population, the price will not change. This would be because all of the factors that determine price would remain the same. If the increase in the production of a given util- ity and in the demand be in the same ratio as that of the population, and the production be effected by the same proportionate number of persons, but there be a variation in the effectiveness of their respective efforts, the price would be the same, the aggregate of credits received by those responsible for production would be the same, but wage and profit would vary with the respective degrees of effectiveness of the producing organiza- tions. If the volume of production of a given utility increase in the same ratio as the population, and the demand increase in greater ratio, prices would rise and the aggregate of credits to those respon- sible for production would increase. This would mean that purchasers would have to decrease their purchases of other utilities unless the production of those utilities had so inereased that because of the ensuing fall in prices purchasers could still pay higher prices for the given utility. If the volume of production of a given utility decrease in ratio to the population and the de- mand for it correspondingly decrease, prices will THE RELATIVITY OF PRICES 173 remain the same, but the total of credits accruing to those responsible for its production will rela- tively diminish. If the volume of production relatively decrease and the demand relatively increase, prices will advance. They may possibly so advance ■ that those responsible for production will receive greater credits than if the volume were greater in relation to the demand. If they do not have to pay higher wages, or more for substance, their profit will be greater. The demand for a given utility depends in part upon the relation which the proportionate in- crease or decrease in its production bears to the proportionate increase or decrease in the produc- tion of other utilities. For example, utility A may be wanted so much more than utility B that, even though the production of the former had rela- tively decreased and that of the latter relatively increased, many persons might be willing to pay the higher prices requisite to obtain utility A and thus could not afford to buy utility B even at lower prices. The preceding discussion has shown that, inas- much as all utilities are the result of human effort, price consists in the respective measure of utilities of respective kinds that can be obtained in ex- change for a given measure of human effort of a given kind, or for a measure of the results of 174 THE FLOW OF VALUE respective proportions of human effort. As price is expressed in terms of the unit of exchange, the dollar measures utilities that are bought in terms of utilities that are sold. As the relation between utilities bought and utilities sold is that of supply and demand, the dollar is the nexus of supply and demand for effort applied in respective kinds of production. As there is thus a relativity between the proportions of effort applied in the production of utilities, there is also a relativity between prices. As, pursuant to supply and demand, greater or less proportions of the aggregate of productive effort are respectively applied in the production of the respective measures of the util- ities of the different kinds that have the ratio of the dollar, the changing relations between effort applied and wants met are indicated by changes in price expressed in terms of the dollar. XIII THE EELATIVITY OF PEOFIT The germ of profit is in the specialization of effort. The first gain was in that exchange where- under each party obtained that which was pro- duced with less effort than he would have been obliged to exert in its production. That produced by each gave command over the results of effort of the other; there was mutual profit because of the mutual saving of effort. Continuity in attain- ing profit is continuity in producing that which through exchange gives command over a greater proportion of effort than that applied in its pro- duction. Thus profit develops into the production and selling of that which gives command over the results of the efforts of others, and therefore over the manner in which effort shall be put forth by others. In further development, profit is derived from selling utilities for prices that bring credits suflS.cient to give command over effort that results in the production of utilities that bring greater totals of credits, and thus, other things equal, com- mand over the efforts of a greater number of per- sons. In a still later development continuity of profit implies the selling of utilities, in the produc- 175 176 THE FLOW OF VALUE tion of which human effort has been applied in connection with external force, for prices that bring credits sufficient to give command over effort that, applied in connection with external force, results in the production of utilities that bring greater totals of credits. This may or may not involve enlisting the effort of a greater num- ber of persons, but profit tends to give command over the efforts of a greater number of persons than that of those from whose efforts it was de- rived. Profit is the surplus obtained from the sale of utilities over that which has been expended in their production. Therefore, it is the surplus re- ceived from the sale of utilities over what is neces- sary to replace that consumed in their produc- tion. Therefore, profit is that received from the sale of utilities which may be utilized in the pro- duction of utilities of the same kind in larger vol- ume, or in the production of utilities of another kind, or in the purchase of utilities of whatever kind. As profit is that portion of the credits derived from the sale of utilities which remains after pay- ment of the debits incurred in their production, all of profit is derived from the production and sale of utilities, and, therefore, from the sale of the results of effort that has been applied in the past. As profit more than suffices to replace that consumed we again perceive that it gives com- THE RELATIVITY OF PROFIT 177 mand, other things equal, over a measure of effort to be applied in future production greater than the measure applied in the past from which it was derived. At any given time an aggregate of effort is applied in the production of the aggregate of util- . ities that meet an aggregate of wants. As there is the relativity of effort applied in production, and relativity between the wants met, as inter- relations between effort applied and wants met determine prices between which there is relativity, it follows that there must be a relativity of profit. That is, the profit obtained from the production and sale of utilities of a given kind bears a rela- tion to the profit obtained from the production and sale of utilities of other kinds. Therefore, there is a relation between the profit derived from the production and sale of utilities of all kinds. Those responsible for production will, other things equal, pay wages determined by the sup- ply of and the demand for workers of the requi- site grades of efficiency. They 'will pay for sub- stance, for instruments of production, and all requisite to their operation the prices determined by interrelations between supply and demand. These interrelations may determine prices for ef- fort or for substance that are higher or lower at one place than another, higher or lower at one time than another. A producer by availing of these variations may purchase to greater or less 178 THE FLOW OF VALUE advantage than another, and thus his profit may be larger or smaller. But inasmuch as bargaining and competition tend toward equal prices for equal measures of the same utilities, profit, in the long run, depends upon production at decreased cost in relation to the volume produced. This, other things equal, means that the efforts of fewer per- sons are enlisted in relation to the volume pro- duced. The total of profit obtained from the produc- tion of utilities of a given kind would be that of all producers of utilities of that kind. Obviously, the total of that production could not be increased unless profit could be obtained more than suffi- cient to replace all the utilities that were con- sumed. But, when the application of the effort for which a certain producer is responsible re- sults in the production of utilities which bring credits exceeding the debits incurred, that pro- ducer may continue to obtain profit from that vol- ume of production. He may be content to reap this measure of profit from this volume, leaving it to others to take the risks involved in increas- ing the volume. Profit is credits, and credits command over util- ities. When one producer obtains greater profit than another, he has secured greater command over utilities than another. As profit is expressed in dollars, a greater surplus of dollars acquired by one business organization as profit gives THE RELATIVITY OF PROFIT 179 greater command over utilities than the smaller surplus acquired by another organization. Profit bears a relation to the expenditure which has been made in order to obtain it. That ex- penditure may be for human effort alone, as when a contract carpenter employs other carpenters. It may be for substance alone, as when a trader buys wheat for future sale. It may be for sources of substance, as when a dealer buys a farm for future sale. It may be for instruments of pro- duction bought by an intermediary for future sale. Or that expenditure may have been, as in the case of a large business organization, for sources of substance, substance, instruments of produc- tion, and effort, all of which are continuously util- ized in the production of utilities for sale. Thus profit may be secured upon the investment in a utility that is sold in its entirety, or it may accrue upon investment in various utilities continuously utilized in the production of utilities for sale. In either event profit is return upon investment. It, therefore, is calculated in relation to the total of the investment, and naturally is expressed in the percentage that the return bears to the invest- ment. Therefore, it is not suflScient to compare the total of profit obtained by one person or by one business organization with the total obtained by another. The significant comparison is of the re- lation of the profit to the investment. Upon a 180 THE FLOW OF VALUE given investment, one business organization can not obtain greater profit than another unless it obtains a greater surplus of credits over debits. This it may do by producing at less expense per unit the same volume of utilities for which the same prices are received. On the supposition that equal prices have been paid for all that has been used in the production, profit will be ob- tained in greater measure by one organization than another if it be more efficient in the applica- tion of force. As it is the difference between the price received per unit of utility produced and the cost of pro- duction per unit that constitutes the profit per unit, it follows that the total of profit is the total of the profit from the total units of production. Therefore, profit is not to be measured solely as return upon the investment, but also is to be meas- ured in its relation to the volume of the produc- tion. If a plant be utilized to its full capacity, the profit per unit of production, other things equal, may be greater than if it is not so utilized. At times of extraordinary demand, if it be operated continuously day and night, its profit may be ex- traordinary. This will mean that it enlists more of effort and buys more of substance. As a pro- ducer does not enlist more of effort or buy more of substance unless he expects to obtain increased profit therefrom, it follows that he obtains profit THE RELATIVITY OF PROFIT 181 not only upon the investment in the plant, but also upon the investment in wages and in substance. As individuals accumulate a surplus of credits over the debits expended for final utilities, they will have credit available for investment. They may utilize the surplus themselves in production from which they believe they will derive greater profit than from another line of production, or they may dispose of the right to the utilization of these credits to others who will seek to utilize them in that production from which they believe they can obtain the greater profit. Thus as cred- its accumulate, there will be investment in a given line of production until the profit obtained is no greater than that in another line of production, and thus there is the tendency toward the equal- ization of profit. This tendency operates, how- ever, only under similar conditions of risk. There are those willing to take great hazards in the hope of high profit, and others who will not make in- vestment unless the prospect of profit is more than probable, and thus may be content with a small percentage of return. Those who have the inclination and believe they have the capacity to obtain profit seek to assume the responsibility for the production and sale of utilities. If they have not a sufficient total of credits to enable the conduct of operations as ex- 182 THE FLOW OF VALUE tensive as they desire, and believe they can ob- tain profit through the utilization of the credits of others, they are willing not only to assume the responsibility but to pay for the right to that utilization. He who has property in credits may be willing to entrust their utilization to another without se- curity in the belief that the probability of secur- ing profit is greater than that of incurring loss. He thus retains property in his credits but dis- poses of the right to their utilization. Or he may desire security that the amount of his credits in- vested be returned, and that he receive payment for the right to utilize them. In the latter case he exacts in return for the right to their utiliza- tion a definite promise of payment for that right, and of the return of the credits. He usually ex- acts in addition to the promise a pledge entitling him to take over property of the pledger in default of the return of the principal or in default of pay- ment for its use. He who makes investment in a business organization without assurance of re- turn shares in its proprietorship and therefore in its profit, which may be disbursed as dividends or may be retained by the organization as surplus. If he makes investment that is secured by the pledge of property, he does not share in the pro- prietorship. The payment which he receives for the right to the utilization of his credits is desig- nated as interest, that which is paid for their use. THE RELATIVITY OF PROFIT 183 Investment in proprietorship not only accords the right to participate in profit, if profit be obtained, but it also imposes' a share in the liability of the organization to its creditors. On the other hand, he who invests on security is himself a creditor of the organization. A total composed of the credits of various per- sons in various proportions may be invested in a business organization in return for participation in its proprietorship, or upon pledge securing its repayment and that of interest. The utilization of the combined credits of many persons under co- ordinated direction is most conspicuously exem- plified in the modern corporation. Investment in the proprietorship is evidenced by shares of stock, investment on pledged security by bonds. Those who hold stock are entitled to participate in what- ever profit may be obtained. Those who hold bonds are entitled to receive interest during the specified period, and the return of the principal at maturity. The issues of bonds of many large corporations are, however, refunded at maturity. That is, they are paid by a new issue, which may bear the same rate of interest, or may bear a dif- ferent rate of interest. Or they may be converted into stock, or paid in part. Interest on bonds may not be considered as paid from profit, but as payment far credits utilized in production. To the extent that the replacement of that utilized in production depends upon the credits for the 184 THE FLOW OF VALUE use ot which interest is paid, interest is an ex- pense of the business and not part of the profit of the business. It will, however, always be profit to the investor upon his investment. As a corporation utilizes human effort and cosmic force on a large scale in the transformation of substance, it can, if the application of force to matter is most efficiently directed, produce utilities in larger volume in relation to the effort applied than can a smaller business organization. Thus it can obtain greater profit whether meas- ured in the aggregate, or by percentage of return upon the investment, or in relation to the volume of production, at the same prices that are obtained by a smaller organization. Or it may obtain profit at diminishing prices which do not yield profit to a smaller organization. The large scale of the operations of a great cor- poration tends to provide opportunity for each person in its service to exercise his particular aptitude to the best advantage. The niost effec- tive coordination of the efforts of a greater num- ber of persons put forth in the respective ways in which they respectively have the greatest aptitude leads to the most efficient results. This and the use of structures, machines, and appliances that are respectively best adapted to their respective purposes leads to the production of the greatest volume of utilities in relation to the number of persons engaged in their production. Therefore, THE RELATIVITY OF PROFIT 185 it is possible for utilities in greater proportions to flow to all persons engaged in production. When a corporation issues shares of stock or bonds in small denominations, it is possible for those who have accumulated only a small surplus of credit to invest it toward the attainment of profit or of interest. Therefore, it becomes pos- sible for an increasing number of persons to ac- cumulate credits which they may invest in the property or the bonds of a corporation. Inasmuch as it is possible for the corporation to obtain larger profit in proportion to the num- ber of persons engaged in production than if their efforts were exerted in smaller business organiza- tions in which there would be less efficient coordi- nation, the tendency is for the corporation to ob- tain larger profit in relation to the number of persons it employs. Therefore, as the tendency is for substance, sources of substance, and instru- ments of production to pass into the ownership of those who can obtain the greatest profit from their utilization, the tendency is for sources of sub- stance and instruments of production in increas- ing proportion to become the property of the cor- porations. Therefore, the tendency is for these resources and instruments to become the property of the increasing number of those who effectively exert their efforts, who do not spend for final utilities all they receive. And what is of still greater importance, they obtain a proprietary in- 186 THE FLOW OF VALUE terest in the organized and effective application of force in production. This entitles them to par- ticipate in profit obtained if this application of force is effective, or compels them to participate in loss sustained if this application of force is in- effective. As the stocks and bonds of corpora- tions of established reputation can readily be bought and sold, there is the continuing tendency toward investment in the issues of those corpora- tions which continuously secure profit. As a corporation earns a greater or less per- centage of return as profit, the price of its shares of stock tends to be that upon which the rate of return is the same as upon the price which would have to be paid for the shares of stock in another corporation conducted under similar conditions of stability. Likewise the price of an established business tends to be that upon which the rate of profit will be the same as obtainable upon the price that would have to be paid for another busi- ness conducted under similar conditions of sta- bility. Thus this adjustment of the price for pro- prietary participation in or proprietorship of a business to the rate of profit is a manifestation of the tendency toward an equalization of profit. "While the tendency is for the corporation to ob- tain a larger aggregate of profit, it does not al- ways secure a larger percentage of return upon the investment than was obtained upon its invest- ment by the smaller organization of the ante- THE RELATIVITY OF PROFIT 187 cedent period. Competition developed the cor- poration which competed with the smaller business organizations, and competition has developed cor- porations that compete with corporations. Com- petition tends to reduce the rate of profit : it tends to the equalization of profit under equal risks. XIV THE INTERRELATIONS OF EFFORT, PRICES, AND PROFIT When it is said that the price of a given utility is higher than that of another, it may not be meant that, for the results of the application of a cer- tain measure of effort, more of other utilities can be obtained than for certain other results of the application of an equivalent measure of effort. No more may be meant than that it will require a greater number of dollars to buy a unit of a utility of one kind than a unit of a utility of an- other kind, regardless of the respective propor- tions of effort applied in their respective produc- tion. For example, if a suit of clothes is sold for fifteen dollars and a ton of coal for five dollars, it may be said that the price of the suit of clothes is higher than the price of the ton of coal. It may or may not have been that three times as much effort had been applied in producing that suit of clothes at a given time and place as had been applied in producing that ton of coal at that time and place. But certain it is that, other things equal, he who buys a suit of clothes at fif- 188 EFFORT, PRICES, AND PROFIT 189 teen dollars renders compensation for all of the effort applied in its production, and profit to those responsible for the various stages of that produc- tion. It must be so also for all of the suits of clothes sold at fifteen dollars, emanating from a particular establishment. Likewise sufficient to- tals of credits must be received for all suits of clothes sold at fifteen dollars to afford compensa- tion for all of the effort applied in their produc- tion and, other things equal, to yield profit to those responsible for the various stages of their production. It must be so also with a ton of coal sold at five dollars, and for all tons of coal sold at five dollars. It may be that a business organization produc- ing clothes to be sold at fifteen dollars a suit also produces suits of clothes of other grades for sale at different prices, ranging perhaps from twelve dollars to twenty-five dollars a suit. It may be that operators producing coal for sale at five dol- lars a ton also produce coal of different grades for sale at prices ranging perhaps from three dollars to six dollars a ton. Therefore, the total of the credits received from the sale of all of the clothes at varying prices must be sufficient to reimburse those responsible for the various stages of their production, and, other things equal, to allow them profit. And likewise it must be with the credits derived from the sale of coal of the various grades. A sufficient number of persons must buy all of 190 THE FLOW OF VALUE the clothes at the various prices yielding such a total of credits, and a sufficient number of per- sons must buy all of the coal at the various prices sufficient to yield such a total of credits. A modern organization conducting business on a large scale seeks to transform all of the sub- stance it produces into utilities of one kind or another in order that there may be no waste, and that it may thus receive the greatest total of cred- its. Thus an organization may produce utilities serving the same purpose that are sold at different prices, and utilities that serve other purposes which respectively are sold at varying prices. For ex- ample, the modern packing-house produces choice cuts of beef, which the retail dealer sells at higher prices than inferior cuts which, in turn, are sold at higher prices than soup bones. It produces soap in delicately scented cakes packed in dainty boxes which are sold at higher prices than soap perhaps of the same quality in bulky cakes that are packed by the gross without wrapping. It produces a great range of other utilities that are sold at a varying range of prices. The audience in a theater is composed of different groups who have paid different admissions for seats in the or- chestra, in the balcony, in the gallery; varying rates are charged by a railroad company for the transportation of freight of different kinds. The intent is always to receive credits more than suffi- cient to compensate for the effort applied in pro- EFFORT, PRICES, AND PROFIT 191 duction. This end is attained in the ease of many- final utilities by their diffusion in such volume that large totals of credits are obtained from relatively small payments by great numbers of purchasers. Of such are the gas or electricity that provide light and heat for thousands of homes, from whose occupants are received the credits that in their totals are sufficient for the maintenance and operation of a plant that cost millions of dollars. Admissions of five cents and ten cents to moving pictures provide return that enables the expenditure of many thousands of dollars in the provision of one picture that is presented before many hundreds of audi- ences. In the production of clothes have been applied the efforts of a multitude of persons of various grades of effectiveness, and likewise in the pro- duction of coal have been applied the efforts of a multitude of persons of various grades of ef- fectiveness. Coal miners can not readily become tailors, nor can tailors readily apply their efforts in coal mining. But antecedent to the work of the tailors has been that of many on farms and in mills, a number of whom could qualify as coal miners ; and there are many in the coal mines who can do certain kinds of work on the farm and in the mill. There is a wide range of occupations, not requiring a high degree of specialization, in which there may be this exchangeability of effort. 192 THE FLOW OF VALUE Such wage-earners may follow one employment or another as they can obtain higher wage. In occu- pations requiring a higher degree of specialized skill and training, shifting from one vocation to another is usually impracticable, unless there be the descent to an occupation that does not require such skill and training. This may happen when the supply of workmen in a given line of produc- tion exceeds for a considerable period the demand for the results of their efforts. But as higher wages are obtained in one vocation requiring spe- cialized skill and training than in another, a greater proportion of the coming generation will endeavor to fit themselves for that vocation. As the supply increases, the wage will tend to fall, and thus there is the tendency toward the equal- ization of wages for workers of similar degrees of skill and intelligence, not only in one vocation but in all vocations. Thus it is that even though the prices for one utility may be higher than those of another as expressed in dollars, there is the tend- ency toward the equalization of the wages paid for effort of similar effectiveness. If the profit secured by those responsible for a given kind of production be higher in relation to the investment than in another, or greater per unit of product, the tendency will be for accumulated credits to flow into that production. Farms can be devoted to the raising of crops of one kind or of EFFORT, PRICES, AND PROFIT 193 another kind ; many instruments of production can be utilized in the production of utilities of one kind or another. The kind of crops that are so raised and of utilities that are so produced will tend to be determined bj'^ the degree of profit. It may be that highly specialized plants with struc- tures, machines, and appliances designed for a particular kind of production can not be shifted to other production. As such production yields high profit, the tendency will be for accumulated credits to be devoted to the construction of plants for similar purposes. If the profit is lower than can be obtained in other production, the tendency will be for accumulated credits to be devoted to other production. Thus there is the tendency to- ward the equalization of profit. There is a continual shifting in the relation between the numbers of persons employed in dif- ferent lines of production, in prices, and in profit. The tendency is ever toward equilibrium, just as the tendency of the flow of water is ever toward the level of the sea. But as the flow of the water toward that level is ever retarded, so also are the currents of industry and commerce deflected in their course toward industrial and commercial equilibrium. Equilibrium between the different kinds of production is slowly attained. A busi- ness organization may secure high profit at one time and low profit at another. It may endeavor to conceal high profit in order that competition 194 THE FLOW OF VALUE may not be awakened. The wide diffusion of in- formation as to the receipts, expenditures, and profit of a modern corporation that makes com- plete periodical reports is a guide to investors who buy the stocks or bonds of one corporation or of another as profit is high or low, as there is prospect of ensuing prosperity or ensuing depres- sion in one line of production rather than in an- other. The tendency toward equilibrium is more manifest in the production of the great staple util- ities in which is utilized substance that exists or that may be produced in great abundance. For example, profit in the production and sale of bitu- minous coal which underlies vast areas of the United States is less than in that of anthracite coal, the deposits of which are limited. Higher profit is obtained from the utilization of instru- ments of production closely guarded by patents than through those that may be purchased and utilized by any one with the credits sufficient to pay for them. If a business organization, or organizations acting in concert, are able to obtain such prices as they may fix for the utilities they produce, they may so limit their volume as to obtain higher profit per unit of production than if they met the wants of a greater number of persons at a lower price. ^ A change in the int,errelations between supply and demand may so advance the prices of certain utilities that their producers will reap high profit. EFFORT, PRICES, AND PROFIT 195 As profit is obtained from the sale of utilities pro- duced by the application of effort in the past, the tendency, in such a case, is for the high profit to be obtained before there is an advance in wages or in the prices for substance. As knowledge of the increasing profit comes to wage-earners, they are prompted to demand higher wages. If one employer advances wages for employees of a given grade of effectiveness, the tendency will be for other employers to be obliged to make sim- ilar advances. When there is increasing supply in relation to the demand, or diminishing demand in relation to the supply, prices tend to fall and profit to diminish. There is diminution of profit before employers seek to reduce wages, and reduc- tion is nearly always bitterly opposed by the em- ployees. If employers producing a given utility can not obtain profit at the wages they are obliged to pay, they will be driven out of the production of that utility. Before being driven out of pro- duction they will, if they can not reduce wages, endeavor so to advance the prices of the utilities they produce that they will obtain profit, or they will endeavor the further to increase the volume of production in relation to the number of persons employed so that they will secure profit even at lower prices. If they advance the price of utili- ties, other things equal, either their sale will di- minish, or the sale of other utilities will diminish. This will be the sequence of cause and effect if 196 THE FLOW OF VALUE the employees whose wages are advanced are no moire efficient in production than before the ad- vance ; that is, if no more than the same volume of utilities be produced in relation to the number of persons engaged in their production. If, however, coincidentally with the advance of wages there is such an increase in production that the same meas- ures of utilities can be obtained for the dollar, the purchasing power of a measure of human effort has increased in greater proportion than the prices of utilities have advanced. If the dollars received by employers are exactly equal to the dollars paid as wages — that is, all wages, including those paid for the production of substance — they can continue in production so long as their machines, structures, and appliances do not wear out. If the dollars received by em- ployers enable them no more than to pay wages and renew the machines, structures, and appli- ances, they can continue in the production of the same volume of utilities, but they will receive no profit wherewith to pay the wages requisite to en- list additional effort, provide additional substance, and additional machines, structures, and appli- ances wherewith to produce an increasing volume of utilities to meet the increasing wants of an increasing population. That is, they will not be able to provide the organization and instruments of production by means of which employment can be given to the increasing population and by EFFORT, PRICES, AND PROFIT 197 means of which continually increasing wants can be met. Those who continue to produce utilities with the application of a decreasing proportion of effort will, other things equal, continue to obtain profit. So long as there is the demand for these utilities at prices that enable the less efficient to continue in their production, the more efficient will obtain greater profit. So long as the total of credit ob- tained from the production and sale of a given utility is larger in proportion to the effort applied in its production than the total obtained from the production and sale of another utility, will the profit be greater. It may be that this relatively greater profit will enable the purchase of sources of substance, substance, or instruments of pro- duction, from the utilization of which profit is de- rived in smaller measure. Thus those who reap extraordinary profit from an extraordinary but temporary demand may make investment in an organization that secures smaller but continuing profit. Efficiency means an increased volume of pro- duction of a utility of given kind and quality in relation to the effort expended. The more effi- cient the production, the less is the number who have to be supported by the credits derived there- from. Therefore, whether the production of a given utility continue to fall in relation to demand or whether it continue to increase in relation to 198 THE FLOW OF VALUE demand, the more efficient will be enabled to con- tinue in production longer than the less efficient. It is to be emphasized that credits which con- stitute profit are of no avail unless 1. They are expended to enlist effort in the pro- duction of an increased volume of utilities of the same kind from which they were derived. It would be without avail to produce this increased volume unless there were the increased demand which would enable them to be sold at prices that would bring credits exceeding the debits ex- pended. 2. They are expended to enlist effort in the pro- duction of utilities of another kind such as were already produced. If so, the volume of the pro- duction of these other utilities would be increased. They would not find sale at the price that would yield profit unless the volume of other producers were inadequate to meet the demand at prices which would yield profit, or unless they could be produced at less expense than that of other pro- ducers and, therefore, sold at lower prices which would yield profit, and at the same time tend to drive other and less efficient producers out of their production. 3. They are expended to enlist effort in the pro- duction of utilities of other kinds such as would substitute utilities previously produced. If they were more desirable than the utilities they substi- EFFORT, PRICES, AND PROFIT 199 tuted, it is not impossible that higher prices could be obtained for them. If they were neither more noi- less desirable, they would tend to substitute the other utilities to the extent that the prices were less. 4. They are expended to enlist effort in impart- ing that education and training to the coming gen- eration which tends to fit it for future usefulness. This includes the endowment of educational insti- tutions and contribution to their support. 5. They are expended to enlist effort in research that may directly serve to eliminate disease, that may serve to make more efficient the production of utilities, or that may extend the range of knowl- edge. This includes the endowment and support of organizations so engaged. 6. They are expended to enlist effort in the pro- motion of intellectual, esthetic, and moral eleva- tion. This includes the endowment and support of institutes of art, of music, and of museums. 7. They are expended to enlist effort in the ministration of that charity which tends to build up the unfortunate, or to support the worthy in- digent. This includes the endowment and support of hospitals and asylums and contributions to ef- fective charitable organizations. 8. They are expended to enlist effort in minis- tering to the ease and comfort of the possessor, or for the results of effort desired for personal grati- fication. 200 THE FLOW OF VALUE If there were no profit, civilization would lose all that civilization means. There could not, for ex- ample, be provision for those who practise the professions and the arts unless there was a sur- plus of the essential utilities of :^ood, clothing, and shelter over those consumed by the persons whose efforts are enlisted in their production. Large measures of profit, to be sure, are expended for personal gratification. This may be beneficial, or it may be deleterious. Deleterious expenditure tends to diminish as the diffusion of good judg- ment and good taste places it under the ban. As the coordination of the efforts of employer and employees, especially when applied in connec- tion with cosmic force, leads to the provision of things the community wants in greater volume and variety than would otherwise be provided, the quest for profit serves not only the selfish ends of those who seek gain but it serves an altruistic end for the benefit of the entire population. The com- munity enlists the efforts of employers in produc- tion through the hope of profit which they may or may not obtain. Employers enlist the efforts of employees by the payment of wages which, as a rule, the employees are certain to obtain. As all men seek to obtain the most they can for that with which they part, it follows that men will not dispose to employers of the right to utilize their efforts unless they can obtain more by so EFFORT, PRICES, AND PROFIT 201 doing than by producing and selling utilities them- selves. Therefore, the desire for profit on the part of those who employ workers for wage leads to an altruistic end in that wage-earners obtain more in return for their efforts than they otherwise could. Thus not only do employers employ wage-earners with the intent of utilizing their efforts toward the acquirement of profit, but wage-earners employ their employers as instrumentalities toward a bet- ter living than they could make for themselves. As the human race has multiplied more rapidly than intelligence has diffused, by far the larger proportion of men now living are those whose ca- pacity for production is limited to that applica- tion of effort in which is not required a high de- gree of intelligence. The number of such men who will be given employment at a given time will depend upon the measure of effort that employers deem requisite in their production of future utili- ties. Employers pay for the force they need. If they require human effort only occasionally, they will employ men sporadically, or temporarily, by the hour or the day. In order that they may do this, there must be a supply of men willing to ac- cept such employment. In nearly every commu- nity are those who make a living by doing odd jobs, or by regularly dividing their efforts among a number of employers. The first and foremost utility is food. No mat- ter how great and varied the volume of utilities in W2 THE FLOW OF VALUE which a man may have property, ho must have food. If there could be a situation so extreme that he would be obliged to part with all of his possessions in exchange for the food necessary to maintain his existence, it would be a choice be- tween that exchange and death. If a man have property in no utilities that can be exchanged for food or used in the production of food, he is obliged to jmt forth his efforts in behalf of an employer in exchange for food. Such men will not find employment, as a rule, unless the results of their effort are more desired by an employer than the wage which enables food to be obtained. Clothing is essential to civilised existence, but it does not have to be renewed from day to day as does food. Shelter likewise is essential to civil- ized existence, but mere existence can be main- tained without it. There are usually a number of wanderers — the tramps of this country — who do odd jobs when they must to obtain food, now and then work perhaps for several days at a time when necessary to replenish their clothing, but who sleep in the open or in such temporary shelter as they can appropriate. They drift between mine, farm, and lumber camp, sometimes working on railroad gradings and in the excavations for buildings. They find temporary employment at one place or another, largely because there are phases of pro- duction that necessarily depend upon the seasons. For example, there is a greater demand for men EFFORT, PRICES, AND PROFIT on the farms, in the mines, and in the building trades at one time of the year than at another. There are certain kinds of production that are seasonal because the demand varies from season to season. But the great body of wage-earners live in fixed habitations for considerable periods, working steadily, usually at specialized tasks, when they have steady employment. They must have the essential utilities coincidentally, and they must have them continuously. They can not devote all of their wages to the procurement of any one es- sential, to the exclusion of the others. Therefore, their wages must be paid continuously, and they must be sufficient to enable them to obtain at least the utilities essential to maintain them in condi- tion to put forth the effort of which they are ca- pable. This is of advantage to the employer as well as to the employee. It is to the advantage of both that there be the utmost attainable continuity of employment. And it is of advantage to the whole community; for the greater the proportion of the employed, the greater is the volume of utilities produced, and the less is the proportion of those who must be supported without re- turn. Those who put forth effort may be grouped in tiers as of a pyramid. At the bottom are those who put forth crude, physical effort. The next and a shorter tier is composed of those who put 204 THE FLOW OF VALUE forth skilled effort. Above that is a still shorter tier of those who put forth highly skilled effort. Above that is the still shorter tier of those who guide and direct the application of the efforts of others. At the top is the shortest tier, of those who design and conceive, direct and manage. If those putting forth crude, physical effort, who, for example, receive as wage two dollars a day, were advanced to three dollars without there being any change in the volume of production, and the dollars obtained by the individuals of the other groups remained unchanged, obviously the crude, physical workers could obtain, for a time, a greater proportion of utilities. Likewise, if those putting forth skilled effort who had received three dollars a day were suddenly advanced to four dol- lars or five dollars, they would be enabled for a time to obtain a greater proportion of utilities. If crude, physical laborers were advanced from two dollars to three dollars and skilled workers continued to receive three dollars a day', not so many skilled workers would find employment be- cause of the necessity of employers to pay in- creased wages to the unskilled workers. Thus the number of workers competing for employment at three dollars a day would be increased. But em- ployers would employ no more of them than re- quired in their production, and, therefore, a smaller proportion of unskilled workers would find employment. Moreover, inasmuch as employ- EFFORT, PRICES, AND PROFIT 205 ers would be obliged to pay three dollars to the unskilled laborers to whom they had only paid two before, they would be obliged to expend more dollars in production. The result would be that there would be less profit available for future pro- duction, or else the utilities produced would have to be sold for higher prices. Therefore, other things equal, the groups whose wages remained unchanged could obtain not only a smaller pro- portion of final utilities at a given time, but a still smaller proportion in the future. It is obvious that this result would be augmented, if coinci- dentally with the increase in wages there were a decrease in the productivity of each worker. Here it is to be emphasized that, as a rule, it is the large supply of crude, physical laborers in relation to the demand for such effort as they can put forth that causes their wages to be of the low- est. It sometimes is that a change in the inter- relations between supply and demand causes their wages to be at a higher rate than of those of more developed intelligence. For example, at times of harvest the demand for farm laborers is often so great that they command wages higher than are obtained by many school teachers, and many kinds of clerks. The system of education generally fos- tered throughout many decades in the United States has tended to give both sexes the knowledge that may be utilized in teaching school, without qualifying them for putting forth their efforts in 206 THE FLOW OF VALUE other ways. Moreover, many so equipped engage in teaching while preparing for other pursuits. Thus the supply of school teachers has ever tended to be large in relation to the demand, and their wages to be low. For similar reasons, the supply of those competent to do routine clerical work has tended to be large in relation to the demand, and their wages to be low. The education which aids toward the attainment of the higher wage is not that which does no more than to cultivate a taste for literature and the refinements of living, but that which fits for the kinds of productivity for which there is the greater demand. When we say that in return for effort put forth at his behest an employer must render to an em- ployee at least the utilities necessary to the main- tenance of his existence during the period of his employment, we express what literally happens in the case of certain corporations such as those en- gaged in mining and lumbering, whose operations usually are conducted at places remote from com- munities engaged in other pursuits. The com- pany owns the house for which the miners pay rent ; it owns the stores from which the miners ob- tain food, clothing, and many other supplies. The company employs the physician who ministers to the employees and their families, and frequently arranges for theatrical performances and other forms of recreation. The wages of the ■employees EFFORT, PRICES, AND PROFIT 207 are computed in dollars. Their rent and their purchases at the company stores and their avail of other utilities provided by the company are computed in dollars. At the end of the pay pe- riod, usually a fortnight or a month, the wages of the employee measured by dollars are balanced against his purchases measured by dollars. There has been demand on the part of the company for the services of the employee, and there has been demand on the part of the employee for the utili- ties received as wages. The employer has ex- pended of his credits for final utilities which he pays the employees as wages. Generally, how- ever, the processes of production and exchange are so specialized that an employer is continuously in possession only of the utilities used in his busi- ness. The wages paid to his employees are com- puted in dollars and are paid to them in dollars. In exchange for dollars, they receive the utilities they desire at the stores of retail dealers, and they pay to the landlord the rent for their habitation in dollars. The employer transfers to his employees as wages the credits with which they buy final utilities. Profit may be obtainable not only by an em- ployer who enlists the efforts of employees, but by an individual who puts forth his individual efforts in the production of utilities for which he receives more than sufficient to enable the replace- 208 THE FLOW OF VALUE ment of that used and consumed. He uses and consumes food, clothing, and shelter. Their re- placement, in that it maintains his vitality, is in a sense the replacement of the force he has applied. If he has utilized substance, it also must be re- placed. That is, he must replace the force and he must replace the matter. If he is able to do more than this, he has obtained that which in es- sence is profit, which may continue to increase until his individual effort is no longer adequate. As his profit increases, he may become an em- ployer himself, or he may dispose to others of the right to utilize his accumulation and continue in the production limited by the application of his individual effort. So also with one who works for wage. If the wage is more than sufficient to buy the final utili- ties for the use and consumption of himself and those dependent upon him, he may engage in indi- vidual production or may become an employer. Thus, whether a man work for himself or work for an employer, it may be possible for him to accumulate credits which can be utilized in increas- ing production. Therefore, credits accumulated through saving are akin to profit. As profit is obtained by the production of things that people want and for which they are willing to pay more than sufficient to make the replace- ment, it is the wants of the population which deter- mine the kinds of production that will be engaged EFFORT, PRICES, AND PROFIT 209 in by those seeking profit. Therefore, in the last analysis it is the wants of the population which determine the manner in which human effort shall be put forth, which determine the respective pro- portions of the population whose efforts are en- listed in respective kinds of production. Those who assume the responsibility of production are intermediaries who s6ek to interpret the wants of the population and to obtain profit by directing human effort in the channels through which these wants are met. Those who are successful in thus interpreting the wants of the population and in meeting those wants continue to be responsible for production. They continue to give employ- ment to those who have not the capacity for such interpretation and achievement. Because of changes in the interrelations between supply and demand, the prices of certain utilities may rise and the prices of other utilities may fall. Wages may vary, prices may fluctuate, and profit may rise and fall, but effort must be put forth continually that wants continually may be met. Therefore, it is that the great body of the population continually find employment to a greater or less degree, and their wants are continually met in greater or less degree. Effective producers continually find mar- ket for their products at a profit; efficient em- ployees continually find employment. An indus- trial cataclysm may, however, cause a profound modification in these relations. 210 THE FLOW OF VALUE Any social or political entity, a town, a city, a nation, continues under the same designation, al- though the individuals change and the relations between the individuals within that community change. The community may grow or decline, it may have a low rate of mortality at one time and suffer the blight of disease at another. There is rotation in elective and appointive office. Wage- earners may become employers, and employers may become wage-earners. Families may pros- per, or may disintegrate. Members of a commu- nity may depart from it, and those of other com- munities may come into it. Friendships may strengthen and may dissolve. The name by which that community continues to be known may desig- nate a 'totally different group of individuals from one generation to another, and the characteristic traits of that community may utterly change in the course of time. It is so also with the human being. From birth to death a name attaches to each person, but there is unceasing change in the constituent parts of blood, bone, and sinew, in the matter of the nerves and the brain. By the action and reaction of the vital forces, nourishment flows in proportions to the different organs. Abundance of nutrition tends to fullness of form, impairment to wasting away, but so long as there is life the body is that of the person who bears the name that is a con- tinuing designation. When it is said that the EFFORT, PRICES, AND PROFIT 211 body is that of the person, there is the implica- tion that the body is not all that constitutes a person. But the mind and the soul can not have manifestation unless there is the nurture of the body. All of production, of buying and selling, all of that which constitutes the economic functions of the social organism are akin to the absorption by the body, the transformation of food into the nour- ishing material that flows to its different parts and enters into their structure. As there is the inter- working of the activity of the various organs in the activity of the individual organism, so also is there the interworking of the economic functions in the activity of the social organization. The transformation of the elements that enter into nu- trition and their flow to the various organs is determined by the vital processes that are beyond human knowledge. The gathering and extracting of substance from earth and air and sea, its trans- formation into utilities that meet human wants, and the apportionment of these utilities among humankind are in obedience to a force as myste- rious as that which dominates the vital processes, but its manifestation is in activity directed by the mind of man. That which in the realm of his conscious activity takes the place of the impalpa- ble force that balances and compensates the flow of nourishment to the organs of the body, is the dollar. The dollar is an expression of relations 212 THE FLOW OF VALUE that may change from day to day in ways similar to that in which the body changes from day to day. But the changes in the social organization when in a state of health can no more be abrupt and turbulent from day to day, than can the changes in the body in a state of health be violent from day to day. The radical changes in the body during a life- time, and the radical changes in the social organ- ization throughout long periods, are more analo- gous to those that have taken place in living beings as life has evolved. The lowest type of animate existence is simple in form and simple in function, and so also is the early economic structure and function. The highest forms of living beings are exceedingly complex in structure, with functions marvelously intricate, varied, and interwoven, and so also is the developed economic organization. XV THE FLOW OF DEBITS AKD CBEDITS With the passing instant the present merges into the past: with the coming instant the future presses on the present. The dollar received has been obtained by the sale of utilities produced in the past : the dollar expended is for utilities to be used in the future. Final utilities are the result of effort applied in the past. At the time of pur- chase they are bought to serve the purpose of the individual, it may be in the succeeding instant or it may be in time to come. When there is transfer of property in sources of substance, substance, instruraents of production, or intermediate utili- ties, they are bought for utilization in that future which comes with the passing hours or in the fu- ture more remote. Thus credit is derived from the past, and debit is incurred for the future. As for every sale there must be a credit, and for every purchase there must be a debit; and as there can not be a sale without a purchase or a purchase without a sale, the chain of credits and debits, the flow of debits and credits, is continuous. When a final utility in the form of food is pur- chased by the consumer, there is credit to the 213 214 THE FLOW OF VALUE seller and debit to the buyer, but there is no sale of that food to give rise to offsetting credit to its buyer. Food has served its purpose when con- sumed by the individual. It is likewise with cloth- ing as it is worn. If shelter be obtained by pay- ment of rent, it is likewise with shelter. Debits so incurred for the final utilities of food, clothing, and shelter contribute to the maintenance of the vital- ity of the individual, from which emanates effort that may be applied in that production which gives rise to credits in the future. It is likewise with other ministration to the wants of the body, or ministration to the emotions, or to the intellect, that is consumed as it is rendered. For example, fee to physician, admission to concert or play, give rise to debits to the account of those who pay them. Such services may be of benefit in pro- moting physical activity, or in giving moral or intellectual stimulus, that conduces to the attain- ment of credits in the future, or they may not. The debits that have been incurred in the purchase of such final utilities become credits to purveyors of food and clothing, to physician, musician, and actor. The purveyors of food must replace the stocks they have sold. Physician, musician, and actor must maintain the vitality that enables them to continue in their ministration. At the time of death the productivity of the individual ceases. If it pease before death, he will be obliged to sus- tain the remainder of his life by the expenditure THE FLOW OF DEBITS AND CREDITS gl6 of accumulated savings, or from rentals, if lie have acquired property yielding rent, or from other investments that he may have made. Or else he will become dependent upon others for that sup- port for which he renders no economic return. While all of effort applied in production is ap- plied toward the production of final utilities that are used and consumed by the individual, a large proportion is exerted in the provision and utiliza- tion of utilities not immediately consumed by the individual. The less the proportion of effort im- mediately devoted to the production of the final utilities that are consumed by the individual, the greater is the proportion that may be devoted to the provision of sources of substance and instru- ments of production that tend to accumulate for utilization in the production of final utilities in greater volume to meet a greater volume of wants. Therefore, were every credit of the final purchaser transmuted into the debits for final utilities that minister to the vitality from which emanates force applied in further production, it would be that, in the endless transmutation, credits would ever give rise to debits that in turn would give rise to cred- its, augmenting both in the aggregate and in rela- tion to the population. That the tendency of all production is toward such an augmentation is manifested by interest, which is based on the prac- ticability of the debitfe into which credits are con- verted being utilized in the attainment of a greater 216 THE FLOW OF VALUE total of credits. The rate of interest in general is based on the belief that there is a certain ratio of such augmentation, and the rate of interest in particular upon the degree of probability of the particular ratio of such augmentation. Further evidence of this tendency is afforded by all invest- ment toward the attainment of dividends, of profit. If every person always received for the results of his effort a return equivalent to that received by any other person for putting forth effort of the same degree of effectiveness, the whole community would be paying to each person for a given meas- ure of the results of effort that which it would have to pay to another for an equivalent measure of the results of effort. Each person would obtain the same command over utilities as any other per- son contributing to production in the same meas- ure. Therefore it would be that, if for the results of effort for which he was responsible one person re- ceived greater command over utilities than an- other, it would be because such results of effort could not be obtained for less. The person re- ceiving the greater return would have been more effective in meeting the wants of others. Therefore it would be that he who received larger command over utilities than another would not be depriving that other either by receiving or expending his larger command ; that is, his greater THE FLOW OF DEBITS AND CREDITS 217 credit. If he buy final utilities in the full measure that meets his wants and pay no lower price for them than others pay, he is depriving no one of employment, no one of that in which he has prop- erty. On the contrary, he is incurring his share of the debits that enable the continuing production of these utilities. Therefore, if those whosa credits exceed their wants for final utilities place the surplus in the way of that utilization which conduces to an in- creaising production of utilities of general useful- ness, they are not only not depriving others, but are affording means for the employment of others. Thus those who invest their credits in return for interest or in the hope of dividends are rendering a benefit to their fellowmen. Likewise those who obtain the utilization of credits in return for which they pledge interest or the right to participate in profit, are conferring a benefit by the production of utilities. That benefit receives recognition if from the sale of utilities thus produced there is obtained profit. If from the utilities produced the credits received are not equal to the debits in- curred, th-ere has been overproduction, credits are annihilated. Moreover, when a man expends surplus credit thus obtained for a final utility that affords per- sonal gratification, he is not depriving others. If, for example, he purchases for one thousand dol- lars a rare painting by an artist, who perhaps long 218 THE FLOW OF VALUE ago passed from the living, and makes immediate payment with a check on a bank, utilities produced and sold in the past have provided the credit against which he draws. He takes the painting into his house, where it continues to afford grati- fication so long as he retains it. What relation in the flow of debits and credits does the purchase and sale of that painting have to human effort put forth in the production of utilities ? The buyer was entitled to spend his credits as he might desire. Inasmuch as he expended them for the painting, it is fair to assume that he did not deprive himself of food, clothing, or shelter and, therefore, did not diminish the demand for these essential utili- ties, or deprive men of employment in their pro- duction. If the picture were purchased from one in need, who expended the one thousand dollars for essential utilities, the results of past effort may have helped to tide an unfortunate over a period of adversity, or they may have served to prolong the existence of one who had outlived his usefulness, and thus have provided a market for essential utilities. If the one thousand dollars were paid to an art dealer, it contributed to the return from his busi- ness which supported himself and his family, and enabled him to purchase other pictures; that is, to replace the utility which was sold. The results of past effort contributed to the dpmand for the work of painters, to the maintenance of the art- THE FLOW OF DEBITS AND CREDITS 219 rooms where their pictures would come to the eye of prospective purchasers. Pictures would not be purchased except by those whose demand for essential utilities had been supplied. If the one thousand dollars were received by one who no longer desired the painting, and were in- vested by him in shares of stock in a corporation, would not the effect upon the flow of debits and credits be the same as though the purchaser had made that investment himself? In either event, credit derived from the production and sale of utilities in the past would have been transmuted into the debits incurred in the purchase of the shares of stock. In either event, the seller of the shares, of stock would have received the one thou- sand dollars. The effect upon the further produc- tion of utilities would depend upon the disposition made by him of that credit. If the seller of the picture, or of the shares of stock, invested the one thousand dollars in extending business opera- tions, or in a new business organization, the results of past efforts exchanged for the picture would contribute to the production of future utilities for which there might or might not be a compensatory demand. In the actual progress of the human race the tendency has been toward the transmutation of credits into debits that result in the augmentation of credits. This tendency has been conspicuous 2W THE FLOW OF VALUE throughout the era between the introduction of steam and the beginning of the World War. That progress has been interrupted and retarded by the weaknesses of human nature — by what we designate as folly, ignorance, stupidity, greed, and vice. It has been interrupted and retarded by famine, disease, conflagration, and seismic dis- turbance. It has been interrupted and retarded by war. These causes have impaired the working of the principles disclosed by the analysis of the preceding chapters. There has been despoliation by theft, and there has been despoliation through subtler processes within the law. Bargaining has not always re- sulted in mutual benefit to buyer and seller. The more astute, the crafty, and the unscrupulous have ever sought to obtain undue advantage, and often have succeeded. Therefore, it is not true that the lowest price for which a utility could be obtained has always been the lowest price paid for it ; and it has not always been that equal wages have been paid for effort of equal effectiveness. The lack of perception that the greatest benefit to all persons is secured by the production of the largest volume of utilities in relation to the number of persons engaged has seriously impeded material progress. There has been organized and widespread effort to limit the productivity of wage-earners, to pre- vent the more efficient from contributing to pro- duction in greater degree than the less efficient. THE FLOW OF DEBITS AND CREDITS 221 It has not been true that final utilities have always contributed to the maintenance of that vitality which finds expression in the most effective pro- duction of which the individual is capable. On the contrary, the demand for many kinds of stimu- lants and other deleterious utilities has resulted in the impairment of the efforts of their purchas- ers. Debits incurred in their purchase have been converted into credits to their producers, but these debits have weakened the ability of the purchasers to obtain further credits. The current of debits and credits toward a con- tinual augmentation of credits in relation to the population has been seriously impaired by over- production and underproduction. If the produc- tion of a given utility so increases that prices can not be obtained which bring the total of credits that enables producers to continue in its produc- tion, there has been overproduction of that utility. Obversely, if the supply of a given utility be less than the volume for which credits could be ob- tained sufficient to enlist the effort required in the production of that volume, there has been underproduction of that utility. When there has been underproduction, there has been unemploy- ment or else a deficient application of effort in the production of certain utilities, and an excessive application in the production of others. Thus the underproduction of certain utilities is often, if not always, coincident and correlative with the over- f specie held against /.f.fPAWTMe^" 400 THE FLOW OF VALUE deposits is only a fraction of these deposits. It would be impossible for all checks to be redeemed in gold in case gold is demanded for them. This is demonstrated in case of a panic when the banks in order to conserve their supply of gold refuse to pay out gold ; that is, by their refusal to pay gold at the time when it is in greatest demand. There- fore, the basis of what is called money is property in utilities, or in that which gives command over utilities. Therefore, the ultimate basis of money is value. The development of the mechanism of exchange, in so far as it can be traced throughout thfe histo- rical period, has been through stages that doubt- less could not have been other than they were, or in different sequence. It would be interesting to know what mechanism would be adopted if the civilized world were suddenly thrown into a state of coma, from which it emerged with the fullest recollection of all that pertained to production, buying, and selling, but absolutely without recol- lection of coins, currency, or banking. It is incon- ceivable that with the intelligence prevailing in all matters except this, there could be the reversion to barter, or to the use of such things as cattle, shells, or tobacco as intermediaries. It is even improb- able that there would be reliance exclusively upon the metals as money. An inkling of what might happen is afforded by two examples of what ac- MONEY 401 tually has happened when the mechanism of ex- change has been deranged. During the panic of 1893, when currency was unobtainable from the banks, certain mining com- panies, lumber companies, and even merchants in out-of-the-way places, issued scrip — pieces of paper on which were respectively printed prom- ises to pay a dollar, or a multiple of a dollar, or a fraction of a dollar. This scrip was accepted for utilities and paid for utilities in the communities of issue without thought that it ever would be re- deemed in gold. It became currency because of the belief that utilities could be obtained for it, and because of reliance upon the integrity of the source of issue. After the revolution in Russia had so disorganized the financial structure that there was no belief that gold or silver could be obtained for notes issued by the government, "grain notes" and "goods notes" were issued in many places, and accepted by peasants, artisans, and shopkeepers in preference to government notes. Thus even in that desolated and benighted country arose the perception that money is ac- tually based on utilities, and not upon the metals, however precious. XXI DEVELOPED FUNCTIONS OF A MODERN BANK As an important function of the old-time money- lender was the supplying of money in return for the receiving of interest, so also an important function of a modern bank is to arrange for the utilization of credits by those who believe they can utilize them to advantage, and can give assurance of repayment. Thus a commercial bank may loan not only the credits in which it has property, but a proportion of the credits of its depositors, in re- turn for interest. An investment bank acts as an intermediary between those who have credits they desire to place in the way of that utilization which may bring interest or profit, and those who desire to obtain the right to their utilization. In return for its service, the investment bank charges a com- mission to one party, or to the other, or to both. These services of banks are still designated as "supplying money" or "providing money," and the securing of the right to the utilization of credits is colloquially designated as "getting money." The right to the utilization of credits that are the property of another may be desired : 1. By one who has property in sources of sub- 402 FUNCTIONS OF A MODERN BANK 403 stance such as farm, forest, or naine, which he believes he can utilize toward the attainment of profit, but who has not the credits that would en- able him to obtain the equipment and pay the wages requisite to that utilization. He may sell a proprietary interest in such physical assets, or he may borrow the credits, pledging the assets for the return of the principal and the payment of the interest. 2. By an organization established in business, having property in substance, or in its sources, and instruments of production, which desires to in- crease these assets, and its volume of production, but has not the requisite capital. By one who believes there is the opportunity for the attainment of profit through the produc- tion of certain utilities, but has not the credits that would enable him to provide the substance, instru- ments of production, or pay the wages essential to inaugurating the enterprise. Of such may be one who desires to extend the use of a new invention, or perhaps one who believes he can find profitable market for an increased volume of utilities of a kind that are already produced. He may form an organization, issuing capital stock, the shares of which he sells ; or issuing bonds, which he sells ; or both. If he retain little or none of the stocks and the bonds, and takes no part in the administration of the organization, he is merely a promoter. If he has secured as capital the credits essential to 404 THE FLOW OF VALUE the inauguration of production and continues in the direction of that production, he is an enter- priser, and becomes an employer employing both labor and capital. 3. By a business organization which has sold utilities for deferred payment but can not wait until payment is made by the purchasers because it needs at once to utilize the credits ; or by a busi- ness organization which has bought utilities for which it can not make immediate payment, or does not desire to make payment until they are sold, but for which payment the seller is not willing to wait. 4. By one who desires to buy at the current prices stocks or bonds for which he believes a higher price can be obtained in the future, but who has not the credits or does not desire to expend the credits requisite to immediate and complete payment. The supplying of credits to be used as capital is not a function of a modern commercial bank. The supplying of credit for immediate utilization to customers of the third of these classes and of the fourth of these classes are two of its important functions. Many a business organization, believing it can obtain profit through the purchase of utilities for which it does not make immediate payment, or from the sale of utilities for which it does not receive immediate payment, resorts, to a bank. FUNCTIONS OF A MODERN BANK 406 Thus it is enabled to engage in transactions greater in volume and value than would be possi- ble if it utilized no more than its own working capital. Credits of bank entry, like coin, govern- ment notes, or bank notes, are liquid. That is, they are value which readily flows in any transmu- tation that their possessor may desire to effect. Thus they are distinguished from "fixed capital" or "fixed assets," such as sources of substance and instruments of production, for which there is not always immediate sale, and which may have to be sold in their entirety if at all. It is working capital that pays for substance, wages, and other running expenses, that furthers the flow of utili- ties in the channels of commerce. The utilization of bank credits facilitates that flow. Let us arrive at the significance of this function of a modern commercial bank through some consideration of its effect. Awaiting payment for utilities that have been sold is different from awaiting that return upon debits incurred in production which can not be obtained until the resulting utilities have been sold. Payment for utilities subsequent to the time of their sale may be designated as deferred payment. The payment of bills to a retail dealer for cur- rent supplies, or of rent to a landlord at the cus- tomary intervals of a week or a month, is not to be considered deferred payment because there has 406 THE FLOW OF VALUE been that concurrent production and consumption of utilities which is balanced at these intervals. That is, such payment at intervals no more than registers the transfer of credits received in re- turn for effort put forth or utilities sold during the period in which the indebtedness is incurred. The longer the period during which an account thus runs, the longer does the payee have to await the credits due to him. Therefore, the longer does he have to wait until he may utilize those credits in the replacement and in the attainment of further profit. Payment to retail dealers and landlords for final utilities, deferred beyond the time at which settlement is due, may have to bo met from production subsequent to the period in which the utilities were received. This especially will be the ease with those in adversity who have not been able to earn credits to offset their debits. Such deferment may be by the procrastinating, or by the unscrupulous who do not intend to pay at all, or by the thriftless or imprudent who are not able to make their intentions good. In the pro- portion to which the extension of the period of settlement results in "bad debts" there will be diminished the credits from which dealers can pay for, or replenish, their stock. If the proportion of bad debts be large, the retail dealer may be forced out of business. He may be led to charge higher prices than he otherwise would, in order to make up from those who pay the deficit of those FUNCTIONS OF A MODERN BANK 407 who do not pay. There are many dealers who charge less when payment is immediate than when it is deferred. There are those without the means to make im- mediate payment for final utilities, such as a dwelling, a piano, an automobile, who promise de- ferred payment in instalments, thus undertaking to put forth effort or sell utilities in the future that will bring return sufficient to enable them to make the payments. This practice with many ex- tends to the purchase of furniture and clothing. It obviously involves the element of risk to both buyer and seller that is absent in case of imme- diate payment. The seller may not be willing to incur even a temporary deprivation of the credits due to him unless the debtor make payment to him in addition to the price. Thus the price of utili- ties bought on the instalment plan is higher than that of utilities for which immediate payment is made, because in the higher price is included an allowance for interest. Obviously, interest thus paid is of a different nature from interest paid for the utilization of credits in further production. As it adds to the price the purchaser would other- wise pay for the final utility, it diminishes the amount of his credits available for the purchase of other utilities. In vastly the greater volume deferred payments are availed of by those engaged in the processes of production, of buying and selling, in order to 408 THE FLOW OF VALUE facilitate or augment their operations. Sucli re- sort to deferred payments is akin to borrowing. When a man responsible for production resorts to deferred payments or borrows, he undertakes to utilize that for which he has not paid in the production of utilities that will enable him to make the payment plus the interest. The possibility of this attainment lies in the inevitability of a con- tinuing demand for utilities, but exactly the vol- ume of particular utilities for which there will be demand can not be foretold, nor the conditions that will affect the prices. To the degree that judgment and capacity outweigh the adventurous in the man who resorts to deferred payments or borrowing, the greater is the probability of his obtaining profit; and, conversely, the higher the element of the adventurous, the greater is the probability of his incurring loss. He who lends, or he who accepts promise of deferred payment, must place a certain reliance upon the judgment and capacity of the debtor, and, therefore, must exercise discretion as to the possession Of these qualities by a man before he becomes his creditor. Even though tangible security is ordinarily re- quired, he must exercise this discretion. As a rule, if the amounts are considerable, de- ferred payments or loans will not be accorded ex- cept upon the pledge of property by the debtor, which will pass into the possession of the creditor in case the indebtedness is not paid. Therefore, FUNCTIONS OF A MODERN BANK 409 it is customary for him who undertakes in consid- erable amount to make deferred payments or to repay a loan, to execute a written promise, which not only obligates him to pay the indebtedness with interest, but accords the creditor the right to take of that in which the debtor has property in case the debt is not paid. A written promise may accord to the creditor the right to take of any of the debtor's property; of such is the ordinary promissory note. It may accord the creditor the right to take certain specified property; in such case a promissory note is accompanied by a mort- gage specifying the property pledged. As a rule, a promissory note promises deferred payment for liquid utilities, or the return of cred- its the utilization of which is acquired for a lim- ited period. As a rule, a mortgage secures de- ferred payments for fixed utilities, or repayment of credits, the utilization of which is required for a long period. Payment secured by mortgage is often in instalments; frequently the interest is paid at intervals and the principal at maturity. A promissory note may be given, for example, by a farmer who does not want to pay for agri- cultural implements until he has sold his crop ; by a manufacturer who does not want to pay for sub- stance until he has transformed it and sold the re- sultant utilities ; by a merchant who does not want to pay for utilities taken into his stock until he has sold them. A third party, however, with credits 410 THE FLOW OF VALUE beyond his desire for utilization may place credit at the disposal of the payee in exchange for the note, which he will hold until its maturity, making a charge for the right accorded the payee to draw against the credit in the meantime. The third party to whom resort is made for such discounting of a promissory note, as a rule, is a commercial bank. It places the amount of the note, less the discount — the designation of interest paid in ad- vance instead of at maturity — to the credit of the payee, against which he is entitled to draw the same as though he had received immediate pay- ment for the utilities and deposited that payment to his credit. If he had received immediate pay- ment, the credit obtained from the sale of the re- sults of past effort would have been paid for the results of past effort. What the bank does is to place at his immediate disposal a credit obtained by others from the sale of the results of past effort which he repays by the credits obtained from the sale of the results of effort in the future. This function of a bank in essence is the same as was the advancing of coin by a money lender in the period before the adjustment of transactions by bank entries had developed. In large propor- tion the credit entries on the books of commercial banks to-day arise from deposits of immediate payment. As the amount of a discounted note is placed to the credit of the payee, credit entries also arise in large proportion, often in greater FUNCTIONS OF A MODERN BANK 411 proportion, from the discount of deferred pay- ments. If the various interrelations between supply and demand make it impossible for the drawer of a promissory note to obtain prices for the utilities he undertakes to sell sufficient to provide the credit that will enable him to pay the note and the interest, he will, if he can not renew the note, finally be obliged to sell other property wherewith to make up the deficit. If the demand for such utilities increase more rapidly than the supply that would otherwise be provided, those who, by promise of deferred payment, are enabled to take part in increasing the supply, may meet a demand that otherwise would not be met. But, if this pro- duction, under the promise of future payment, leads to such an augmentation in the supply as to cause a fall in prices, loss may be incurred by part of the producers, or even by all of the pro- ducers, of such utilities. That is, this conduct of business on what is commonly known as credit will have resulted in overproduction. The sale of other utilities, in order to meet a promised de- ferred payment, means that the results of past efforts disposed of for this purpose will not have been utilized by their seller in subsequent compen- satory production, but will have been utilized to make good the deficit of unremunerated produc- tion. Thus the drawer of the note sustains loss. If he can not pay it or has not property which 412 THE FLOW OF VALUE can be sold for enough to pay it, the payee will have to assume the loss. If the payee, in case the note has been discounted, can not pay the note, or has not property for which sufficient to make payment can be obtained, the loss will fall upon the bank. Upon whomsoever the loss falls, it means that effort has not brought remunerative return, and that other results of past effort have been utilized to make good the deficit caused by effort wasted in unremunerated production. It is the impulse to secure gain that leads a business organization engaged in production to lease, to borrow, to promise deferred payments. Such incurring of indebtedness may lead to an increase in the volume of production and the va- riety of production with benefit to all. Or it may so stimulate the volume of production of certain utilities with a resultant fall in prices that it will force the least efficient out of production. Other things equal, these will be those whose costs of production were highest. The payment of rent or of interest will undoubtedly add to a producer's cost, but those who have incurred this obligation may be so much more efficient that their costs of production will be less than those of other pro- ducers who do not pay interest or rent. At times of severe competition, when prices have become unremunerative, those who do not have to pay interest may prefer to discontinue production rather than operate at a loss. But FUNCTIONS OF A MODERN BANK 413 those who are under obligation to pay interest may feel impelled to continue their operations even at a loss, in order to obtain the credits that will enable them to pay interest, and thus permit them to continue in control of the resources which they utilize in production. This is peculiarly the case with large corporations, whose promises to make deferred payments are in the form of bonds se- cured by mortgage, which runs for a long period. If at any time there were that inability to pay the interest which would result in foreclosure, the corporation might lose the right to utilize the property pledged. Therefore, it is impelled to continue its operations notwithstanding loss, in the hope that it will be made good by future profit. When a business organization, which has un- dertaken to repay a loan or make deferred pay- ments for sources of substance and instruments of production, has suffered such diminution of re- sources that it can not meet or extend its obliga- tions, debits incurred by it have not been trans- muted into corresponding credits, but the sources of substance and instruments of production do not pass out of existence. If they have been ac- quired under promise of rent which is not paid, or under promise of deferred payments which are not made, they revert to the owner. If they have been purchased with borrowed credits which are not repaid, they may be foreclosed, sold, and the proceeds paid to the creditor. They may or 414* THE FLOW OF VALUE may not pass into the possession of those with the capacity to utilize them for remunerative return. If a bank were to place an entry to the credit of a depositor not based upon utilities sold by him or bought by him, the resources of the bank would be liable for all checks drawn against that entry in case the depositor were unable to obtain equiv- alent credit wherewith to repay that advance to him. Such an advance to a depositor is discoun- tenanced, but it is sometimes effected by the dis- count of what is termed an "accommodation note." The bank thus lends its credit to the de- positor. A bank may be prompted to discount an accommodation note in the hope to help to tide a depositor in its debt over a period of adversity and thus to avoid the loss of that which he had previously placed himself under obligation to re- pay. In this it may be successful, or in a col- loquial phrase it may be "throwing good money after bad." Banks, in common with other business organ- izations, desire to secure profit. Their profit in a great measure is derived from the credits that pass to them as interest or discount paid by those to whom they lend credit. Therefore, when a bank has credits at its disposal in excess of those required to meet probable demand upon it for a period, it is prone to seek the opportunity to place those credits in the way of utilization in FUNCTIONS OF A MODERN BANK 415 return for interest. In so doing it may render service toward increasing the production of util- ities for which there is compensatory or profitable demand, or it may serve to stimulate overproduc- tion. The greater the volume of deposits which a bank so may utilize, the greater, other tilings equal, will be its profit. Therefore, a bank in or- der to enlarge the volume of its deposits may offer to pay interest to its depositors. This gives a greater stimulus to the endeavor to keep the de- posits loaned at a higher rate of interest in order that it may pay the agreed interest to the de- positors and have the difference as profit. "When banks have large accumulations of cred- its in the form of deposits, the greater proportion of which will likely not be drawn by depositors in the near future, they are the more inclined to make loans to those who desire to buy stocks and bonds than when there are not such accumu- lations of deposits. The buyer gives his promis- sory note to the bank for that part of the payment he does not make from credits in which he has property, and deposits the securities bought as collateral. That is, he pledges them for the pay- ment of the note, and he may at the discretion of the bank deposit additional collateral. The prices obtainable for the securities so purchased may so advance that he may sell them for credits that en- able him to pay the loan with interest and yield profit. If the prices of the securities fall, the 416 THE FLOW OF VALUE bank may sell them when the decline has reached the price that will bring no more credits than requisite to pay the loan. There are times when the credits advanced by banks on such promis- sory notes are in greater amounts than those ad- vanced on promissory notes given by manufac- turers and merchants to facilitate and augment the production and sale of utilities for which they are responsible. A bank is a factor not only in facilitating, by the discounting of promissory notes and similar instruments, the continuity of buying and selling through periods of time, but it is a factor in fa- cilitating the continuity of buying and selling be- tween one place and another. The adjustment of payments by the balancing of cliecks against checks drawn at various places over wide areas by means of branch banks, correspondent banks, and clearing houses, contributes to this end. This adjustment in the United States is of payments expressed in terms of the dollar. There are many banks, especially in the large cities and at the seaports, which facilitate the payment of bills of exchange, acceptances, and similar instruments that are drawn in one country but payable in an- other, and that may not be expressed in terms of the unit of exchange prevailing in the country in which they are payable. Thus utilities that are sold at prices expressed FUNCTIONS OF A MODERN BANK 417 in pounds sterling, francs, marks, pesetas, florins, or rubles may be accepted by banks of the United States and made the basis of credits in dollars; and, vice versa, instruments drawn in the United States in terms of dollars may be made the basis of entry in the banks of another country in terms of the unit of exchange there prevailing. This means that utilities of a given kind may have a ratio to the unit of exchange that prevails in one country, and also a ratio to the unit of exchange that prevails in another country. Indeed, utili- ties of the same kind may have different ratios to the same unit of exchange at one place and at another place in the same country. To gain an understanding of how this may be, it is desirable again to resort to outline in the abstract. The measure of force required to effect the pro- duction of a given volume of utilities of a given kind at one place may be different from the meas- ure required in its production at another place. Obviously, the measure of force required to pro- duce a given volume of utilities applied near the source of substance would be less, other things equal, than that required in their production at a place remote from the source of substance, for in the latter case the force applied in production would include the force applied in transportation. Likewise, the force applied at mill or factory, in the transformation of substance into a final util- ity, has to be supplemented by the force applied 418 THE FLOW OF VALUE in its transportation to the community where it is offered for sale, and that applied in placing it in the retail store. In our hypothetical development of the indus- try and commerce of the United States, the emer- gence out of self-sufiQciency was indicated as of one community at one place. Therefore, the meas- ures of utilities that were bought and sold for the dollar were determined by the interrelations between effort applied and wants met at that place. If we had supposed that emergence to have been of another community in an area better adapted to the production of cornmeal, rice, and pork than of -flour, potatoes, and mutton, the dollar would have arisen from the production and sale of these commodities, and not from the production and sale of flour, potatoes, and mutton. In the course of time, as the further specialization of effort in this community led to the accumulation of credits in the possession of many of its members, a num- ber of them might want flour, mutton, and pota- toes as well as cornmeal, rice, and pork. Con- versely, in the course of time, members of the com- munity producing flour, mutton, and potatoes might also want cornmeal, rice, and pork. Obvi- ously, the prices of the utilities produced by either community would be lower at the place of production than at a distant market. Because of the differences in the productivity of effort, wages FUNCTIONS OF A MODERN BANK 419 might be higher or lower at one place than at the other. Prices would, as always, be determined by vari- ous interrelations between effort put forth and wants met. To those in the one community whose effort brought them only subsistence wages, flour, potatoes, and mutton would be essential utilities ; to such in the other would be cornmeal, rice, and pork. Foodstuffs of any kind could be obtained in greater measure in relation to effort put forth at markets contiguous to farms, gardens, orchards, and groves than at those farther away. It would be so also with utilities of the various kinds that are designated as manufactured articles, as the extension of specialization and the utilization of machinery led to their production. Thus there would be the opportunity for trad- ers aware of the lower prices for which utilities oould be bought at one place, and the higher prices which could be obtained for them at an- other, to secure profit by buying in one place and selling in the other. Extreme examples of such contrasts of prices are of those paid for pearls to the divers that bring them up from the Indian Ocean, and those obtainable in a metropolis of the western world; or likewise of the prices paid for elephant tusks in the interior of Mozambique and those obtainable for ivory. The profit of a trader, of course, is all the greater if he can ob- 420 THE FLOW OF VALUE tain in each community that which he sells for higher prices in the other. An extreme example of this is afforded by the old-time trading to the Indians of the Northwest of glass beads and whis- key for furs that were sold at great profit in the shops of fashionable thoroughfares. This buying at one place for lower prices than are obtainable at another finds manifestation in the buying and selling of utilities of virtually every kind. There may be variations in the prices obtainable for stocks and bonds in the exchanges of New York and those of London, of which traders take advantage by giving orders to buy or to sell that are transmitted by cable. As the facilities for transportation are ex- tended and knowledge of prices in various markets is diffused, the difference in price between one place and another tends to become less, and the fluctuations to be less violent. The reason for this is that the forces of supply and demand operate over a wider area. In a vast area, such as that of the United States, throughout which one language is spoken, the habits and desires of the population tend to a greater similarity, and the equation of prices proceeds with greater rapidity than among other populations where intelligence is less widely diffused and there is a smaller degree of effectiveness in production, buying, and selling. Thus it is that, in the United States, the adjust- ment of transactions is effected by means of FUNCTIONS OF A MODERN BANK 421 checks, drafts, and entries on the books of banks from one end of the country to the other with but little demand for gold in payment. In coun- tries that have not attained this development, coin, government notes, and bank notes are still the media of exchange in vastly the greater number of transactions. The acceptance of checks, drafts, bills of ex- change, and acceptances depends in part upon the facility with which they can be converted into liquid credits that can be drawn against, and in greater part upon the belief that these instruments are certificates that utilities have been sold in return for which other utilities are due. Drafts, bills of exchange, and acceptances are used in in- creasing degree in payment for utilities bought in one country and sold in another. Brokers buy and sell such instruments drawn in one country, and facilitate their being offset against similar instruments drawn in another. When a balance is due from one country to another it may be in- dicated, especially in the case of the more highly civilized nations, by credits on the books of banks. Through a bank that has branches or correspond- ents in various countries, payments in large amounts may be thus effected between the buy- ers and sellers of these different countries. In decreasing degree is there the necessity for the shipment of gold from one country to another. As there is widening belief in the "soundness" 422 THE FLOW OF VALUE of drafts, bills of exchange, and acceptances, the necessity for the use of gold will the further di- minish. It has even been suggested that, if all of the gold in the world that presumably serves as a basis for "money," were impounded on an ocean island that was not within the jurisdiction of any particular nation but was guarded through a concert of the nations, payments between the various countries might be effected by transfers of debits and credits, just as adjustment between the banks of a large city is effected by transfers of debits and credits on the books of the clearing house, without transfer of the stored currency from its vaults. The fact that such a suggestion has been made is indication of the- growing, though in the minds of many a subconscious, recognition that it is property in utilities and not gold that is the basis of money. Until there is universal belief in the integrity of instruments of exchange, there will, however, be a greater or less need for gold, especially in the settlement of international balances. In any event, there will be a continuing need for such media as serve the purpose of coin, government notes, and bank notes in adjusting small and retail transactions. The exposition contained in this and the pre- ceding chapter makes clear the significance of the market quotations on the financial page of a daily newspaper. The wholesale prices given for the FUNCTIONS OF A MODERN BANK 423 great staple utilities — ^wheat, barley, oats, coffee, cotton, copper — indicate the concurrence of buy- ers and sellers as to the prices at which these substances may be purchased for transformation into final utilities from which profit can be ob- tained. In journals devoted to the interests of respective lines of production are given the market quotations for substances of the various kinds utilized in the respective lines of production. The quotations of prices at which the stocks and bonds of various business or governmental organ- izations have been bought and sold indicate the concurrence of buyers, and sellers as to the prices which buyers believe will advance, or upon which they believe they will obtain interest or dividends. The quotations of prices for "money" indicate the concurrence of buyers and sellers as to the rates of interest for the utilization of credits, in return for which those who pledge the payment of interest believe they can obtain profit. The quotations of rates of exchange on money of vari- ous foreign nations indicate the premium that will have to be paid, or the discount which may be availed of, in adjusting payments on international transactions. The diffusion of all such quotations tends to the equating of supply and demand over widening areas. XXII THE TREND OF THE MONETAEY AND BANKING SYSTEM If the unit of exchange were considered solely to be the respective measures of utilities of differ- ent kinds that are exchangeable — that is, the meas- ure of a utility of one kind that is exchangeable for a measure of a utility of another kind, as de- termined by the interrelations between the supply of and the demand for utilities — prices for man- hours, for want-units, for sources of substance, for substance, for intermediate utilities, and for instruments of production would be determined solely by such interrelations. Prices for respec- tive utilities would rise, or prices for respective utilities would fall, as there were variations in such interrelations. The flow of effort into the production of utilities of a given kind, or out of the production of utilities of a given kind, would be consequent upon a rise in prices or a fall in prices so determined. As has been indicated in preceding chapters, the course of industry and commerce is toward such determination of prices. Its progress to that end has been retarded and is still retarded by the fact that the unit of exchange has been considered 424 MONETARY AND BANKING SYSTEM 425 to be a given quantity of a given metal, usually in the form of a coin. It is still almost universally held that a given quantity of metal, usually in the form of a coin, is the unit of exchange, no matter what may be the relation of the supply of coins to the interrelations between the supply of and the demand for utilities. When coins were the sole intermediary of ex- change, the measures of utilities that then had the ratio of the unit of exchange were determined not only by variations in the interrelations be- tween the supply of and the demand for these utilities, but also by the relation of the supply of coins to the volume of utilities that entered into exchange. When the supply of coins was large in relation to the transactions it was desired to effect, prices expressed in dollars — if for example, the dollar were the unit by which the coin was designated — tended to become higher because more dollars were obtained for a given measure of a utility, and more dollars were paid for a given measure of a utility. Conversely, when the supply of coins — for example, designated as dol- lars — was small in relation to the transactions it was desired to effect, prices expressed in dollars would tend to become lower, because fewer of the coins designated as dollars were obtainable for a given measure of a utility, and fewer of the coins designated as dollars were paid for a given meas- ure of a utility. Thus arose the theory that vari- 426 THE FLOW OF VALUE ations in prices are due to variations in the supply of money in relation to the volume of transactions it is desired to effect. Although this is a theory of prices it is usually designated as the quantity theory of money. A vast influx of metals, as new deposits were discovered and mined, would lead to a vast in- crease in the coinage, with a resulting rise in prices as expressed in terms of coin. Then in the course of time as the volume of transactions in- creased in greater proportion than the increase in the coinage, prices as expressed in terms of the coin would fall. Such an increase or decrease in prices would not effect all utilities simultane- ously, but would be more or less gradually diffused in its application to utilities of the various kinds. Those who watched the rise and fall in the sup- ply of money might secure gain because of the mutations in its supply. Those not informed as to its rise and fall might be caught unawares by rising or declining prices. Those who were under contracts obligating them to make certain pay- ments in terms of the unit of exchange through- out a period of time would be obliged, because of a decrease in the supply of coin, to sell more of utilities in order to make these payments. Or if there were an increase in the supply of coin they would be enabled to make the payments through selling a smaller volume of utilities. Conversely, those under contracts entitling them to receive MONETARY AND BANKING SYSTEM 427 certain payments, expressed in terms of the unit of exchange, throughout a period of time, would suffer loss, in case there was an increase in the supply of coin, by having to pay more of the coins they received for the utilities they bought. Or they would gain, in case there was a decrease in the supply of coin, by being enabled to buy greater measures of utilities with the payments they re- ceived. It was so also during the period when govern- ment notes and bank notes supplemented the use of coins, and currency composed of coins, govern- ment notes, and bank notes was the sole interme- diary of exchange. Neither governments nor banks adjusted their issues of circulating notes to the volume of transactions it was desired to effect. Governments in adversity were prone to issue notes for which they sought to obtain cir- culation to the end that they might meet obliga- tions in amounts greater than could be paid from taxation. Banks were prone to endeavor to se- cure a fleeting advantage by the issue of circu- lating notes in amounts greater than could be absorbed without a rise in prices. The effect of such expansion or contraction in the volume of currency was the same as that caused during the preceding period by similarly undue expansion or contraction in the volume of coin. Such ex- pansion or contraction might have an effect upon prices that would continue through long periods. 428 THE FLOW OP VALUE The greater the proportion of buying and sell- ing that is effected by means of checks, drafts, bills of exchange, credit entries and debit en- tries on the books of banks, the nearer is the ap- proach to the conditions under which the value of the dollar is determined by the interrelations between the supply of and the demand for utili- ties. Thus the less is the degree in which the quantity of money theory of prices applies. Such an instrument is not issued — that is, is not legitimately issued — except in payment for utilities bought. When presented at the bank on which it is drawn and entered to the debit of the drawer, his credit is diminished by the amount of the check, and the check is cancelled. That is, such an instrument can be drawn only against credits obtained from the sale of utilities, and its circulation ceases when the transaction is con- summated. If payments were so effected in all transactions there could not be a circulating me- dium exceeding in volume the transactions ef- fected, nor of face value exceeding the actual value of the transactions. Banks could not discount promissory notes except from credits obtained from the sale of utilities. Every check, draft, bill of exchange, or acceptance would be supported by utilities, or by credits derived from the sale of utilities. Every credit entry on the books of a bank would be a symbol of utilities sold, in return for which other utilities could be obtained. MONETARY AND BANKING SYSTEM 429 Then the so-called quantity theory of money, the theory that prices depend upon the supply of money in relation to the volume of transactions, in the sense that money is something separate and apart from utilities bought and utilities sold, would have no foundation. Because, however, of the perpetuation of the belief that specie — that is, coin or bullion — under- lies every exchange, it is held that such an inter- mediary of exchange as a check, draft, bill of exchange, or acceptance must be redeemable in specie if specie is demanded for it. Therefore dollars, as expressed even in entries to credit and to debit on the books of banks, are not always determined absolutely by interrelations between the supply of and the demand for utilities that are bought and sold. Because of the perpetuation of the belief that specie underlies every exchange, it is decreed by law that the deposits of a bank — that is, all entries to the credit of its depositors — must not exceed a certain ratio to the reserve of specie which the bank must hold in order that it may have in its possession a sufficient proportion of specie to enable it to make, in specie, payments for which specie is demanded. Therefore if the deposits of the banks have reached the limit of the ratio they must bear to the specie reserve, and they are unable to increase that reserve, there can not be the entry of additional credits to de- positors. Thus the discount of promissory notes 430 THE FLOW OF VALUE will have to cease. This will be the case, whether or not there is demand for such additional dis- counts to facilitate transactions in accordance with the supply of and the demand for utilities. In such a case it is said that "money is tight." The banks increase their rate of interest. This tends to cause a rise in prides, and thus to restrict the volume of transactions. On the other hand, if the deposits in the banks are of an amount consider- ably below the limit determined by the ratio of deposits to reserve, "money is easy." As a con- sequence the rate of interest falls, and thus there is stimulus to production, buying, and selling be- cause of the greater readiness with which prom- issory notes can be discounted and credits ob- tained. Such retardation and such stimulus may or may not be wholesome; it may lead to under- production or to overproduction. Such expansion or contraction of bank credit is analogous to the expansion or contraction in the supply of coins during the period when coins were the sole in- termediary of exchange, and to the expansion or contraction in the volume of bank notes and gov- ernment notes during the period when currency was the sole intermediary of exchange. That the requirement of a ratio of reserve to bank deposits is artificial is indicated by the fact that there is no rule by which the requisite ratio can be determined, and that there is wide differ- ence of opinion as to what that ratio ought to be. MONETARY AND BANKING SYSTEM 431 It was in large measure to avoid undue and spasmodic contraction and expansion in the means by which payment is effected, and thus to ensure that the volume of bank deposits might expand and contract more nearly in accordance with ex- pansion and contraction in the demand for such credits as were determined by the supply of and the demand for utilities, that the Federal Ee- serve Banking System was inaugurated. It pro- vides that banks which are members of the sys- tem may have notes they have discounted, which meet certain requirements as to the time of ma- turity and other stipulations, rediscounted by a federal reserve bank. There is still the prescrip- tion of a ratio of deposits to specie reserve, but as the specie reserve is concentrated with the federal reserve banks there is an increase in the ratio of the permissible total of deposits. It was the intent that the credits on the books of the federal reserve banks have their actual basis in utilities in the actual processes of commerce. It was also the intent that the government have an agency that would enable it to finance its needs when under the severe stress of an extraordinary emergency. Such an emergency arose during the War of 1914. The government incurred indebted- ness which it was obliged to liquidate through bor- rowing upon certificates issued by the United States Treasury in advance of its receipt of reve- nue from taxes and from the sale of bonds. 433 THE FLOW OF VALUE Credits received by the government from such loan anticipation and tax anticipation certificates were deposited in the banks. The banks more- over were permitted to rediscount with the Fed- eral Reserve Bank notes which were secured by the "war paper" of the government, that is by obligations of the government based on credits to be obtained from taxes, and not upon utilities that had been actually bought and sold in the course of commerce. Therefore there was a vast in- crease in the deposits of the banks, and the vol- ume of deposits so increased enabled them to be liberal toward their commercial customers. Thus these deposits were diffused throughout com- merce. Taxes and subscriptions to government bonds are paid from credits derived from the sale of utilities by the citizens. The loan anticipation and tax anticipation certificates were virtually a forced loan by the government. It is the con- sensus of opinion that this increase in the vol- ume of credits, not due to the sale of utilities, has had an effect upon prices in general anal- ogous to that due to a sudden and large in- crease in the supply of coins during the period when coins were the sole intermediary of ex- change, and to a sudden and large increase in the issue of government notes or of bank notes during the period when currency was the sole intermediary of exchange. Therefore the in- MONETARY AND BANKING SYSTEM 433 crease in prices during the war and subsequent to the war has been due not only to variations in the interrelations between the supply of and the de- mand for utilities such as has been indicated on pages 224-230, but also to an increase in the vol- ume of bank credits not derived from actual transactions. Changes in the value of the dollar due to a deficient or redundant supply of coins, or of cur- rency, or of bank credits are not unlike what would happen if the points scored during a game were, at different phases of its progress, differently enumerated. If, for example, certain players of the prevailing bridge whist, who kept a continu- ous score, were now and then to change clubs from 6 to 7, diamonds from 7 to 9, hearts from 8 to 10, spades from 9 to 12, and to make analogous changes in the count of the honors, and varying changes were made from one evening to another, the continuous score would be vitiated. If vari- ations were made in the counts by the same play- ers during the same evening, confusion would be worse confounded. Attention would be diverted from the efficient playing of the game to the grab- bing for points, just as the pursuit of what is gen- erally considered to be money tends to divert ef- fort from efficient application in production to the grabbing for dollars. Experience of the past indicates that the mone- tary system toward which we are tending will pro- 434 THE FLOW OF VALUE vide for a volume of currency that will be suflScient for the demand, that will be neither substantially less nor substantially greater than the volume re- quired for service in the small and retail trans- actions which are virtually all in which it is now used. The present minor coins of copper, nickel, and silver have little relation to the value of gold. They are "token money" and circulate largely because of the universality of their acceptance. When, for example, there are more dimes than are needed, the surplus remains in the mints and in the banks until it is absorbed ; when there is a de- ficiency, an additional supply is coined. Practice has demonstrated that the adjustment of bank notes to the actual needs of actual business could be attained if a bank were to send a redundant supply of such notes received by it to the banks of issue where they could be cancelled. This was the practice of the Suffolk banking system in New England, and it is now the practice of the banks of Canada. This is the practice with the five- pound notes of the Bank of England. Such a note is drawn from a bank by one who desires to pay currency for a purchase. It may pass from one to another in a succession of transactions, but when one who receives it deposits it in a bank, it is returned to the Bank of England where it is cancelled. The evolution of banks and banking indicates that we are tending toward a conamercial banking MONETARY AND BANKING SYSTEM 435 system under which instruments of exchange such as checks, drafts, bills of exchange, and accept- ances will be issued only in payment for actual transactions, and will be cancelled when presented to the bank upon which they are drawn. Under such a system banks would not discount promis- sory notes other than those given in payment for utilities in the actual processes of buying and sell- ing, which of course would include stocks and bonds. Thus expansion or contraction in the volume of bank credits would depend upon ex- pansion or contraction in the volume of business. The causes for a rise in the price of any utility could the more readily be detected, and a rise beyond that warranted by an increased demand in relation to the supply would the more readily be checked. Similarly, the reasons for a fall in price could the more readily be detected, and thus judgment be formed as to whether it was due to a decreasing demand or to overproduction. Our present commercial banking system has made great progress toward such perfection. The end can not be fully attained until there is a clear understanding of the actual significance of production, buying, and selling, and a profound change in the psychological attitude toward the metals as the basis of the unit of exchange. An inestimable benefit that would flow from the attainment of such an ideal would be in the per- ception and diffusion among the whole people of THE FLOW OF VALUE belief in the fact that material welfare does not depend upon the acquisition of money in the sense of endeavoring to obtain as much money as possi- ble and to work as little as possible, but that mate- rial welfare depends upon the greatest volume of production in relation to the effort applied with due regard to the relativity of production. XXIII SOUND MINDS IN SOUND BODIES If we accept the dictum of the philosopher that the great desideratum of human kind is the at- tainment of sound minds in sound bodies, it fol- lows that there ought not to be the propagation and promotion of the existence of the greatest number of persons, but that human effort ought to be devoted toward the propagation and the pro- motion of the existence of the greatest number with sound minds in sound bodies. As the ulti- mate purpose of all production of utilities, of all buying and selling of utilities, is to minister to human wants, it is in order to discuss that minis- tration to human wants which conduces to sound minds in sound bodies, and that which does not so conduce. It is in order to discuss to what extent the production, buying, and selling of util- ities should be left to individual initiative, and to what extent it should be placed under concerted regulation to promote this end. If it is found de- sirable that there be a degree of concerted regula- tion, it is in order to discuss whether it should be exerted by the government, or by those engaged in production, buying, and selling, or in respective 437 438 THE FLOW OF VALUE proportions through governmental agencies and through those engaged in business. In either event, the will of certain portions of the popula- tion will b'e inaposed upon the will of certain other portions of the population. This may be sub- mitted to by the people as guidance on the part of those competent to guide, or as imposition of the nature of tyranny. A beneficial utility promotes the attainment of the sound mind in the sound body. A deleterious utility impairs the mind and the body. A utility that is beneficial at one time may be deleterious at another, as, for example, food that is palatable for dinner may derange digestion if taken at breakfast. Or utilities that are beneficial when used in moderation may be deleterious in excess. Even poison and opiates are not always deleteri- ous. Their buying and selling is regulated, not prohibited. It is generally admitted that alcohol as a beverage is virtually always deleterious, but its use in the arts is extended and manifold. Cus- tom, example, the diffusion of intelligence, all have part in determining the kinds of final utili- ,ties that are produced, and the proportions in which they are consumed. When there is an over- whelming preponderance of opinion in favor of the prohibition or regulation of the use of utili- ties of a given kind, it tends to find expression in legal enactment, the effect of which is deter- mined through time. SOUND MINDS IN SOUND BODIES 439 There are many who believe that the govern- ment ought to extend its activities into the pro- duction and selling of many utilities. This, of course, would involve the buying by the govern- ment of the substances, the payment of the wages, and the provision of the instruments requisite to that production and sale. It would either have to exclude other business organizations from such production and selling, or compete with them, or decree the prices at which such utilities should be sold. If the government were not successful in keeping its costs of production within the aggre- gate of credits obtained from sales, it would have to make up the deficit by taxation. The experi- ence of the past has been that whenever a govern- ment has engaged in the production of utilities, it has seldom, if ever, sought the production of the greatest volume in relation to the number of persons engaged, but that a political party in power has virtually always yielded to the pres- sure to give employment to the greatest possible number of its adherents. This alone would seem sufficient to demonstrate the principle that a po- litical entity, having the power of taxation, ought not to engage in the production of utilities for sale. This includes the converse, that an organ- ization engaged in the production of utilities for sale ought not to have the power of taxation. When a business organization continuously in- curs loss, it is forced out of business ; the annihi- 440 THE FLOW OF VALUE lation of credits is concluded by foreclosure. When a government continuously incurs loss, there is no foreclosure. The loss is a continual bur- den upon the whole population. When a business organization is suspected of extravagance, mis- management, or malpractice of any kind, it can be brought to account by process of law or other- wise, its affairs and its procedure subjected to searching scrutiny. When a government is under such suspicion, investigation is only slowly inau- gurated. It is often difficult, if not impossible, to make the investigation thorough, because a po- litical party in power can not be investigated ex- cept by its own consent, and, in order to hide its delinquencies, is prone to resort to subterfuge that baffles penetration. Moreover, no citizen of the United States can institute litigation against the Federal Government except through the Court of Claims, and its decisions are not effective with- out the approval of the Congress. There are those who believe that the govern- ment ought to regulate the price of many utili- ties, even though they be produced and sold by business organizations. The prescription by the government of the price of any given utility would have an effect upon the volume in which that utility would be produced and sold, therefore a certain effect upon the production and sale of other utilities, and thus a certain effect upon the prices of other utilities. If the government, from SOUND MINDS IN SOUND BODIES 441 time to time, were to fix a price that would tend to adjust the supply of a given utility to the demand for that utility, it would be doing no more than is accomplished through buying and selling by busi- ness organizations. If it were to fix a price lower than that which would encourage production, the supply would be limited to the volume produced by those who could obtain profit at that price, with the result that many who might be willing to pay a higher price would be deprived. If the government were to fix a price higher than that which would be determined by buying and selling in accordance with supply and demand, it would be compelling consumers to pay more than they otherwise would. The government would be de- termining the proportion of an individual's credit which he must expend for utilities at a given time if he purchased them in the same volume as be- fore. Because of the higher price he might pur- chase them in smaller volume, but he would not purchase them in greater volume than he might himself determine, unless the government com- pelled him to do so. If the government were to attempt to fix a price that would limit the profit of producers, it would drive out of production those who could not ob- tain profit at the prescribed price. Or the price might be such that efficient producers might ob- tain a higher profit than otherwise. . If the gov- ernment were to take by taxation the profit in 442 THE FLOW OF VALUE excess of that prescribed, there would be no en- couragenient to increased efficiency. There would be produced no more than that volume of utilities which producers could sell at the prescribed profit, because there would be no inducement for an in- crease of that volume. If the government were to attempt to determine both the price and the profit, it also would have to determine the costs of production. Therefore, it would have to prescribe the rates of wages and the prices for substance, and this would involve pre- scription of the wages paid for the production of substance. If the government undertook to limit the profit obtained in the production and sale of any given utility, it could not, without extreme exercise of authority, compel the continuance in its production of those who could obtain higher profit in other production. If it were to prescribe the wages to be paid in any given line of pro- duction, it could not, without an extreme exercise of authority, compel wage-earners, who could ob- tain higher wages in other production, to work for those wages. If it decreed higher wages than could be obtained in other production, wage-earn- ers would flow into that production. Thus the proportion of effort devoted to other production might be impaired, with the result that the prices of other utilities would advance. Moreover, if the government were to undertake to prescribe wages, it would either have to adopt arbitrary SOUND MINDS IN SOUND BODIES 44.3 standards of wages regardless of the efficiency of the wage-earners, or else it would have to make discrimination between wage-workers of differ- ent degrees of efficiency, and this it could not do without immediate oversight of the productive processes. At this time, when human effort is interwoven in the production of all utilities, it would inevi- tably follow that, if the government were to at- tempt to prescribe price and profit in any one line of production, the tendency would be toward its prescribing price and profit in all lines of produc- tion. This would result in determining the pro- portions in which effort would be applied in the various channels of production, and this would be impossible without determination of the propor- tions in which utilities of the various kinds would be used and consumed. The government would be attempting to do that which otherwise is ef- fected by interrelations between supply and de- mand; by the interworking of human effort in producing those things which the producers be- lieve will meet the wants of the people, and the purchase by the people of the things which meet their wants. In case of war the situation is entirely different. It is then not so much a matter of promoting the augmentation of debits and credits, which means material prosperity, as it is a matter of preserv- ing the conditions under which there may be that 444 THE FLOW OF VALUE augmentation. To this preservation is necessary a temporary disturbance in the relations between debits and credits. In case of war there is at once a disturbance in the relations between supply and demand. A large proportion of the population engaged in produc- tive effort is placed under arms, and a large pro- portion of the population remaining is obliged to put forth its efforts in the production of arms and munitions of war, and of supplies for the soldiers. There is left a smaller proportion of the popula- tion for the production of final utilities of ordinary use and consumption. As the supply of these utili- ties falls in relation to the demand, prices rise. In time of peace, rising prices for utilities of wide- spread demand tend toward an increase in their production, and a fall in their prices; but in the emergency of war increase in the production of such utilities can be effected only by extraordi- nary measures, or it may be that it can not be ef- fected. As prices rise, it is only those with larger credits who can purchase final utilities in the same volume as before. If there is a continuing and general rise in prices, it will be only those with adequate credits who can purchase even the util- ities essential to existence. Thus it may be that a considerable portion of the population, not only of those whose efforts are needed in the immediate provision of utilities, but of those whose existence contributes to the general welfare, will be sub- SOUND MINDS IN SOUND BODIES U5 jected to privation. The government certainly is justified in undertaking that regulation which will conduce to the physical and mental eflSciency of every one whose physical and mental eflSciency would be maintained in times of peace. It may attempt to do this by that prescription of prices which will enable those with moderate, or even small, resources to maintain their existence. In any event, there will be a fall in the supply in relation to the wants that must be met. The gov- ernment may adopt stringent measures toward that increase in production which will augment the supply, or it may impose such limitations upon purchases that the available production will suflSce to provide subsistence for the greatest number, or it may resort to both expedients. The situation is not without analogy to that of passengers in a train unexpectedly snowbound in a mountain fastness, perhaps beyond hope of relief for several days, and for whom the only food available were that in an isolated railroad eating-house. If the proprietor were to ad- vance his prices for sandwiches and coffee in ac- cordance with the abnormal demand, the passen- gers with plenty of money in their pockets might buy the entire stock, and the less fortunate be deprived of food. There would then be no possi- bility of rising demand stimulating production. There would be the problem of maintaining the existence of human beings, until they could be 446 THE FLOW OF VALUE brought under the conditions under which there would be the normal working of supply and de- mand. There is the reflection that the proprietor of the eating-house, whose business had suffered interference, might be justified in advancing his prices to the limit within which there might be an equitable apportionment of the available sup- ply of food. In case of war, however, the rising demand is not accompanied with the cessation of production. Production continues by a reduced number of persons, but its volume must meet the essential wants of the population not under arms, and of the population under arms. It is a question if the good of the nation would not the better be served if the government were completely to annul the working of supply and demand, in its commercial sense. If to the preser- vation of the nation the government drafts men to be sent to combat, why should it not place all of the able-bodied who remain, under draft in the provision of the utilities that must be produced? Then could be avoided the extraordinary profit reaped by those responsible for the production of arms and munitions, and there could be avoided the payment of the extraordinary wages to their employees with the result that other employees, whose efforts are no less effective in promoting the welfare of the nation, are placed at a disad- vantage. Then perhaps there could be a diminu- tion in that drain of taxation from which this high SOUND MINDS IN SOUND BODIES 44.7 profit and these high wages are paid. This would mean a diminution in the issues of bonds whereby are obtained the credits from which this high profit and these high wages are paid. Then perhaps after the war there more readily could be the re- sumption of production, of buying and selling at prices bearing a due relation to the credits that accrued prior to the war, instead of a continua- tion of the inflated prices due to the bidding against each other of those whose wants must in any event be met. In time of peace when production, buying, and selling are adjusted by supply and demand, the fundamental principle of bargaining, that in an exchange a man will obtain the most he can for that with which he parts, and will yield as little as he can for that which he obtains, leads in the long run to each person securing that which he wants at the lowest obtainable price — that is, to the buying and selling of the greatest measures of utilities for the dollar — ^which will encourage the production of that supply for which there is a compensatory demand. It may be demonstrated that the adjustment thus effected leads in the long run to the greatest benefit to all, to the greatest development of sound minds in sound bodies. It would seem to go without saying that as a rule the greater the supply of utilities of the kinds that meet his wants which an individual can obtain 448 THE FLOW OF VALUE in return for the credit that has accrued to him, the better will he be enabled to maintain himself and those dependent upon him in a condition of mental and physical efficiency. Therefore, the greater the volume of utilities that contribute to mental and physical efficiency that are produced in relation to the population, the greater will be the proportion for each person. This means that each utility must be produced in the volume for which there is demand with the efforts of the few- est persons continuously capable of that produc- tion. This means that the prices of utilities in relation to the effort applied in their production will be low; that is, that for a given measure of human effort can be obtained the greatest meas- ures of utilities. It is to the advantage of the entire population that utilities be obtainable at the lowest prices that will encourage their adequate production. This means that wages must be the lowest that can be paid in relation to the volume of produc- tion. If higher wages be paid, there is a smaller volume of production in relation to the wage, and there is the expenditure of credits that could be otherwise utilized. But if higher wages be paid for more effective effort, there is greater efficiency of production in relation to the effort applied. As substance, intermediate utilities, instruments of production, and final utilities are the results of the application of effort, it follows that the SOUND MINDS IN SOUND BODIES 44.9 prices of all of these utilities must be the lowest that will elicit their adequate production. If higher prices be paid for any utility than requisite to this end, there is expenditure that could have been utilized in other production. The working of supply and demand does not mean that there should be no restriction upon production, upon buying and selling. The very expression implies that there must be the restric- tion of production to the volume which meets de- mand. Unrestticted production, buying, and sell- ing leads at times to overproduction. Production in excess of that for which compen- satory prices can be obtained means that all en- gaged in that production will not receive the utili- ties that will enable them so to continue. A cer- tain number, perhaps, can find employment in other production, but if overproduction is wide- spread, •affecting many kinds of utilities, there may ensue widespread unemployment. This con- dition has frequently resulted from the produc- tion of utilities of a given kind by many different producers in ignorance of the total volume that would be forthcoming from all of them, and who have not made an approximately accurate esti- mate of what the market would absorb at compen- satory prices. In the exceptional case of utilities that are produced only upon definite orders, there can not be such overproduction. But when there is widespread overproduction of utilities causing 450 THE FLOW OF VALUE widespread unemployment, there is falling demand for all kinds of utilities. Hence there is a dimin- ishing utilization of the instruments used in pro- duction, and consequent lack of employment. In the case of nonperishable utilities, the overproduc- tion may be absorbed in the course of time, but in the meantime there is idleness of instruments, and unemployment of wage-earners. In the case of perishable utilities, such as many of the foodstuffs, there is notable waste, and the effort devoted to the excess of production has been wasted. Those responsible for the processes of produc- tion have sought to prevent overproduction through coordination for the purpose of limiting production to the requirements of the market, and of directing utilities that have been produced to the markets where they can be sold at compensa- tory prices. For example, a committee of whole- sale dealers in butter meets each day in the city of New York. To it are presented statements of the quantity of butter in stock in the city. It esti- mates the further quantity that will be required for consumption during the immediately succeed- ing days, and determines the price which it be- lieves will cause that supply to be forthcoming, fixing a somewhat higher price if the supply on hand is scant than if it is abundant. This price is telegraphed to the producers of butter through- out the region whence comes the supply for the vast community of which Manhattan is the heart. SOUND MINDS IN SOUND BODIES 451 By thus adjusting the shipment of butter to New- York, this committee parallels in methods and re- sults what the governors of the Bank of England do in adjusting the flow of gold into and out of England by fixing the rates of discount. In many parts of the country, vegetable and fruit growers who had been consigning their products to differ- ent markets more or less at a venture, with the result that there was often a glut in one market and a paucity in another, have formed associations by means of which the supply in respective mar- kets is more closely adjusted to the demand. Conspicuous among the attempts to prevent overproduction have been the measures taken by manufacturers. First there were agreements to maintain prices, then trusts, then the amalgama- tion of different organizations into one corpora- tion, then agreements between corporations, then the holding company, and finally the merger and amalgamation of separate corporations into one great corporation. This tendency awakened pop- ular antagonism, because of the fear that there would be the stifling of competition, and inordi- nately high prices. This fear in many cases for a time was realized. Obviously, when a large corporation raises the prices of its products, many who would purchase at lower prices are deprived of them. But when there is extraordinary profit, competition is certain to be engendered soon or late. Obviously, the development of the great- 452 THE FLOW OF VALUE est number of sound minds in sound bodies means that there should be the least possible deprivation because of that unemployment which leaves a wage-worker without means wherewith to pur- chase the utilities he needs, and also the least pos- sible degree of deprivation because of prices higher than are requisite to allow profit to the least efficient producer for whose product there is demand. When a business organization, or an association •of business organizations, so controls the produc- tion of utilities of a given kind for which there is continuing demand which must be met, that it is enabled to fix prices without fear of competi- tion, it has a monopoly. Thus it may^so fix the price as to obtain extraordinary profit. The ques- tion arises whether it is better for the government to attempt to remedy this condition by prescrib- ing prices, or by compelling the monopolistic prices to be brought into the light which will dis- close injustice, if injustice has been done. Quite as conspicuous as the combination of those responsible for the production of utilities are the combinations of those who put forth effort for wage, known as trade unions. By concerted ac- tion, trade unions have at times secured higher wages for their members than otherwise would have been possible, wages oftentimes higher than those for which other employees of the same de^ gree of efficiency could have been secured. SOUND MINDS IN SOUND BODIES 459 The evolutioB toward larger and more complex organizations has woven the individiial into a web that causes the unrestrained application of the previously accepted principle of ©ompetitioa to be injurious. In the earlier stages of industry and commerce, an individual could buy or could sell at any given price, or he could" refuse to buy or to sell. He could wort for any given wage, or he could refuse to work for wage. His decision redounded to his benefit or to his injury, and per- haps to the benefit or to the injury of those de- pendent upon him, but as a rule had little effect: upon others. But at this time wheu the price of a given utility has an effect in determining the prices of other utilities, when the price limits the* wage that can be paid to those engaged: in proi- duction ; when the wage paid in the production of a given utility has an effect in determining the; wages paid in the production of other utilities; when wage and price have an effect in determin- ing profit; and when the profit obtained from the production of a given utility has an effect, upon the profit obtained; from other production and upon the volume of future production, the price of any utility of general need may have a far- reaching effect upon the promotion, of sound minds in sound bodies. In less degree are prices and wages dietermined by isolated bargaining between buyer and seller; and' employer and employee. They axe now in- 454 THE FLOW OF VALUE fluenced by many factors. Again the question rises as to whether the determination can be bet- ter effected by those engaged in buying and sell- ing, or whether there shall be resort to other agencies, or whether the government shall under- take the determination. Unrestrained competition means that each party to a bargain endeavors to obtain all that he can. Seldom is the effect upon others considered; sel- dom is consideration given to the effect upon the continuity of production, of buying and selling, upon employment and unemployment, upon the general welfare. In a higher state of enlighten- ment, the effect upon others must be considered. If those responsible for the processes of produc- tion, of buying and selling, and if those who work for wage always acted in the light of the widest in- formation and in a spirit of the highest enlighten- ment, it is clear that industrial conflicts would diminish. The evolution of industry and commerce is un- mistakably toward the production, buying, and selling of the utilities of general use and consump- tion by great corporations, and to an increasing concord of action between the corporations en- gaged in the same line of industry. An adminis- trative and executive board constituted of men of proved integrity, of large experience, and broad grasp can obtain the widest information from time to time as to the probable demand for the prod- SOUND MINDS IN SOUND BODIES 466 ucts with which it is concerned, and, therefore, can make the provisions that will most closely approximate that demand. As there is an ever closer interweaving of all the processes of in- dustry and commerce, it would follow that an administrative board, composed of representa- tives of the boards administering each great divi- sion of industry and commerce, could maintain that relativity between the production of sub- stances of the different kinds, their transforma- tion, and the proportions in which final utilities would be produced, the provision of instruments of production, of means for transportation, and that utilization of the credits which came to the various organizations, that would result in a mini- mum of overproduction or of underproduction. Even though the farmer has less control over the cosmic force that is a principal factor in his production, than have those who transport and transform substance over the cosmic force they apply, and though he, therefore, is less able to forecast the volume of production that will follow a given expenditure, the volume of the crops of the respective kinds could be far more closely ad- justed to demand if there were greater coordina- tion in their planting and conservation. It has been stated by high agricultural authority that the will of man has more effect upon the volume of agricultural production than the weather. He can sow in prepared soil selected seed from which 456 THE FLOW OF VALUE will spring the stronger plants that in consider- able degree resist inclement changes in the weather, and he can protect them from weeds and parasites. He can breed animals from selected strains and protect them from vicissitudes. If in agriculture were sought the attainment of the greatest production in relation to- the number of persons whose efforts are applied, those engaged in the production would not be so near the margin of deprivation when the yield fell short of expec- tations. Thus would the needs of the whole peo- ple be better served. By means of developed statistical and account- ing systems adapted to the respective phases of production, of buying, and selling there could be gaged the efficiency of each person, the efficacy of every instrument, and thus there could be ob- tained the maximum of production in relation to the effort of each person with due allowance for rest, recreation, and self-development. Through explicit and comprehensive reports, the status and achievement of each organization could be placed before every person with the intelligence to under- stand them. The maintenance of a due relativity between all the processes of industry and commerce would mean a minimum of unemployment. Inasmuch as every person capable of putting forth effort in production has the capacity for making contri- bution toward meeting the wants of others, and SOUNn MINDS IN SOUNP BODIES 45^! lias tbe capacity for conswning utilities produced by th,e efforts of others, it would seem contrary to the nature of things that there should not be a place in the industrial and commercial organiza, tion for every such person. If there were ade- quate adjustment of the putting forth of effort in the meeting of wants, there would never he a con-, siderable number of the employable without em- ployment. If the production of utilities were, as a rule, to increase in relation to the number of those engaged in their production, it would seem that every capable person ought to be able to obtain the utilities requisite to the support not only of himself but o| his family. It is a common saying that capital is accumu- lated by saving. From this it can not, however, be deduced that a man should save no matter how little he receives. If a laaji e,^n earn no more than suflScient to maintain the physical and mental efficiency of himself and his family, is he justified in. impairing that physical and mental efficiency in the endeavor to accumUflate: business capital? This query does not include investment in insur- ance, which every one "vyho is without other re-, course ought to make against the privation that otherwise would be caused by illness, accident, un- employment, superannuation, and death. Such investment is of the nature of business capital, f oir it is so utilized by the insurance company., Phys- 468 THE FLOW OF VALUE ical efficiency does not suffer because of a certain degree of frugality of living, and mental efficiency may be promoted by a degree of frugality of liv- ing. It is not to be assumed that this is to be car- ried to an extreme. If all persons lived with the utmost frugality with which physical efficiency could be -maintained, would not the peoples of civilization be without many of the utilities which minister to the fullness of life? To the highest development are there not requisite the refine- ments of dwelling, utilities that minister to the mind and the soul as well as the body? The less a man expends for individual use and consumption of that which he receives, the more he will have for investment toward the attainment of further cred- its. If he elect to live in miserly squalor, credits may roll up to his account, but the chances are that the quality of his individual effort will be im- paired, and certainly his life will be narrow. All that is, is in eternal motion. Motion is ac- tivity: activity is the manifestation of force. As there can not be the manifestation of force with- out effect, there is the continual flow of cause and effect. The working of eternal force is manifested in the forms of existence. As animate existence has evolved, there has evolved consciousness. Out of consciousness has evolved intelligence. The highest type of all the forms of existence known to man, is man himself. His body is SOUND MINDS IN SOUND BODIES 459 adapted to serve more varied purposes than that of any other living creature. His intelligence en- ables him to make all that is in his environment serve farther reaching purpose than does that of any other living creature. There is activity within the human body, awake or asleep, in sickness or in health, from birth un- til death. The human mind is consciously active during the waking hours. The conscious activity of the mind directs the voluntary activity of the body. The mind decrees the purpose the body shall serve, and how it shall serve it. Therefore, the mind must know the purpose to be served, and how it must be served. If more is used than is necessary to serve a purpose, there has been waste, in that the super- fluous could have been applied to serve another purpose. If less is used than is required, there has been waste, because the purpose has not been fully served. The first principle of architecture is that a building shall be of the utmost adapta- bility for the purpose it is designed to serve. Without this, there can be neither beauty nor ele- gance. With this, the construction may be given all of the grace and symmetry the service of the purpose will permit. The structure may be given the decoration that promotes beauty, but there may be no construction for decoration alone be^ cause that would not aid in serving the purpose. It would be superfluous, and superfluity is ugliness. 460 THE FLOW OF VALUE Ought not this principle to govern all of the; activity of man? Ought not food be consumed ia the measure that best serves the efficiency of body and brain? Ought not clothing be that which best protects the body and allows the fullest play of the bodily organs? Then there may be given to the service, of food all that furthers the beauty of the service, and to the fashioning of clothing all thoit, furthers elegance. Ought not this principle to govern, all that is within the habitation? Ought not this principle to have application throughout the processes of industry and com- merce> all of production, buying and selling ? The application of the superfluous enlists effort that might have been applied in the production of that which serves. If all of the effort exerted in pro- duction were applied in due relativity, there would be neither superfluity nor insufficiency in the ap- plication of force in the production of utilities of any kind. If there were no demand for other than beneficial utilities, there would be no appli- cation of force in the production of deleterious utilities. If all of the force available in produc- tion were applied by the sound mind in the sound body,, there would be an abundance of all things that would serve the needs of every person, ample for the support and training of the generation that is qoming, for the care andi comfort of the genera- tion that is passing. Then the relation of the activities of each per- SOUND MINDS IN SOUND BODIES 4-61 son to the activities of all other persons ttoia the standpoint of the production, the buying and sell- ing of utilities, would still be indicated by dollars. The abundance for every one of all that dollars mean would cause no diminution in the impor- tance of the activities that give rise to debits and credits expressed in dollars. A greater impor- tance would attach to the activities that promote the beauty and fullness of living. The captain of industry, the great merchant, the great banker, would be esteemed not alone because of the vol- ume of the debits and credits for which they were responsible, but also because of the contribution to the benefit of their fellowmen which gave rise to that volume of debits and credits. Approval or censure would be meted unto them because of the manner of their expenditure, and the manner of their lives. They would be esteemed for their achievement as the scientist, the philosopher, the teacher — he who adds to the sum of human knowl- edge and the diffusion of intelligence — is es- teemed. To the utmost development of the mind and cul- tivation of all that makes life worth living is neces- sary no great accumulation of final utilities of personal gratification. They may burden rather than serve. It is a lasting reassurance and com- fort to reflect that greater sources of satisfaction lie in the wholesome exercise of the physical and mental faculties, in the domestic affections, the 462 THE FLOW OF VALUE goodwill of friends, and the esteem of the com- munity. These could be attained by every person, did every person strive to bring about the con- ditions conducive to their attainment. THE END INDEX Acceptances, 416 f . Accounting systems, 456. See also Bookkeeping. Accounts, necessity of, in fami- lies, 265. Actors, 214. Allies: relation of, to produc- tion in United States, 224; 227. Appliances, 124. Artisan: 22; evolution of, 37; development of prices of, products, 64^83. Asia, 8. Atom, 268. Automobiles, 225. Availability, value of, in real estate, 127 f. B 423; present tendency of, 434 f. Bargaining : evolution of, 35 ff. ; mediseval, 37 f . ; ten- dency of, 158 f.; benefits of, 220 f . Bills of exchange, functions of, 48 f. Bodies, dependence of sound minds upon sound, 437-462. Bonds: investment in, 183 ff.; government, explained, 228 ; variation in value of, 420. Bookkeeping: evolution of, 253 ff. Bullion, 387. Business : primitive, 35 ; medi- aeval, 37 f. See also Trade, Commerce, Transactions. Business capital, defined, 259 f. See Capital. Bank credit: 43, 47; defined, 44. See Money, Credit. Bank loans, 407 ff. Bank notes : functions of, 42 f . ; transmutation of property into, 44; 235; as money, 387 f. See also Notes. Bank system, trend of modern, 424-435. Bank of England, methods of adjusting flow of gold, 450 f. Banks : evolution of, 387 f ; in- terrelation of, 389 ff. ; effect of, upon transactions, 390 f . ; functions of modern, 402- Caisse, mediseval, 387. Capacity: 244; bodily and men- tal, standard of greatness, 459 f. Capital: discussion of, 252- 265 ; defined, 259 ; human ef- fort as, 260 ff. ; investment of, 260 f.; sources of, 260 ff.; necessity for augmentation of, 260 f. ; application of cos- mic force to, 263 f . ; distinc- tion between, and labor, 314- 318; business, 457. Carpets, 163. 463 464 INDEX Cause: sequence of, and eflFect, 15. Cellulose, 24. Census bureau, 25. Charity, 81. Checks: 42 f.; uses of, 38s. u. See Drafts. Chest: mediaeval, first bank, •.m. Chicago, 9. China, unit of exchange in, 41. Chlorophyll, 24. Civilization: effect of, upon human wants, 4 ff. ; influence of, upon artistic develop- ment, 17 ; dependence of, upon profit, 200 ff. Clearing house, development of, 391. Clothes: transformation of raw material into, 6; 87; produc- tion of, 191; 202. Coin: 29 ff.; 235; unit, 378. See also Currency, Money, Unit of Exchange. Collectors, £(rt: effect of, on profit, 129. Colonial period, exchange dur- ing, 53 ff. Commerce: development of, in United States, 136-141; growth of international, 141 f. ; significance of dollar in development of, 375 f . ; evo- lution of, 452 f.; possible ad- ministration of, 454. See also Barter, Trade, Ex- change. Compensation: law of, defined, 18 ff. Competition: evolution of, 30 f.; tendency of, 187; ef- fect of, upon business devel- opment, 187. See also Bar- gaining. Congress: in relation to Court of Claims, 440. See United States, Government, Federal Government. Coordination: of human effort, 84-113; profit due to, of human effort, 93-113; of em- ployer and employee, 200 ff. Correlation of human effort and human wants, 143-153. Corporations: 1«3 ff*, 451, 452; development of, dependent upon competition, 187; duty of, to employees, 206 f . ; sources of capital of, 261 ff. Cosmic force: relatioti of, to matter, 6ff. ; application of, 16 f.; by machinery, 114- 135; relation of, to indus- trial development, 142 f . ; in •oil production, 157 f; meas- urement of, 270; control of, 455 ff. Cotton : 225 ; transformation of, into clothing, 6. Court of Claims: jurisdiction of, in proceedings by a citi- zen against United States, 440. Craftsman, evolution of, 37. Credit: defined, 44 f., 45; effect of value fluctuation upon, 1 69 f . ; government, how ob- tained, 228 ff. See also Coin, Money, Bank Notes, Bank Credit. Credits: flow of, 130 ff., 213- 231; accumulation of, 181; availability of, 198 ff.; 235; accumulated, due to produc- tion, 323 f.; in return for man-hours, 338-345 ; reten- tion of, 364-3685 468. Crops: 193; "futures" on, 24«f. Currency: defined, 43; full meaning of, 388 ff. See also INDEX 465 Bank notes, Gold, Bullion, Silver. D Debits: flow of, 130 ff.; 213- 231. Debt, defined, 45. Deficit, causes of, 411 f. Definitions, explanation of, 22- 33. Demand : defined, 35 ; increase of, 36 ff. ; efi'ect of increase of population on, 82; effect of, on profit, 130 ff. ; flow of, 142 ; efi'ect of World War on, 224 ff. ; interrelation between supply and, as regards money, 392 ff. ; relation of to wages, 443. See Want. Depression, effect of business, upon profit, 374 f . Desires : primitive, 34 f . Dividends, 182. Dollar: nexus of exchange ra- tios, 49; variation of pur- chasing power of, 365-376. See also Unit of Exchange, Money, Coin. Draft : function of, 42 f . Dwellings : material entering into, 6 f.; 235. E Education, effect of upon labor, 205 f. "Effectiveness," distinction be- tween, and efficiency, 298 f. Effort: 34; interrelations of, prices, and profit, 188-212. See Human Effort. Efficiency: effect of, upon credit, 81 f.; in relation to profit, 85 f . ; necessity of, to profit, 132 ff. ; wage-stand- ard, 147 f.; defined, 197; distinction between, and "ef- fectiveness," 298 f . ; 442 ; ef- fect of saving upon, 457 f. Electricity, 16. Electrons, 268. Employment, 79, 96-113, 132, 135, 210, 453. See Labor. Employee: as economic utility, 79 f. ; regulation of wage of, 96-113; dependence of profit upon, 135. See also Artisan, Labor, Wage-earners. Employer: relation of, to prod- ucts of artisans, 64 ff. ; in re- lation to prices and profit, 96-113; relation of to eco- nomic development, 114 ff.; direction of coordination by, 132 ff. ; duty of, to em- ployees, 206 f.; as wage- earners, 210; as effecting prices, 453 f . Environment: effect of upon judgment, 3ff. ; man's reac- tion upon, 13 f.; influence of, upon human effort, 166 f; 225, 230. Equipment, 225, 230. Europe, 8. Exchange: defined, 18; of util- ities, 33 ff . ; evolution of, 35 ff . ; attitude of humanity toward, 36 ff. ; mediseval, 37 ff. ; relativity, 40 f . ; money as medium of, 41 ff.; barter as first form of, 5.?; ratio, 47 ff., 53 ff. ; evolution of the artisan in relation to, 64-83; results of increase in, 141 f.; by individuals, 286- 299; true significance of, ratio, 345-352; relation be- tween money and, 278 ff.; unit of, 34-51, 379 ff.; ac- 466 INDEX tual development of, meohan- Ism, 389 £F. Existence, dependence of, upon human effort, 11 ff. See Hu- man Effort. Fabrics, processes in produc- tion of, 157. Factories, 137, 235. See Arti- san, Labor, Employee. Family: condition of, under modern civilization, 4 f . ; evo- lution of, 34 f.; 37; in the American colonies, 53 f . ; ef- fect of, upon evolution of artisan, 72 ff . ; relation be- tween, and production, 82 f . ; effect of, demands upon rela- tivity of prices, 159 ff.; ne- cessity of keeping, accounts, 265; 457 f. Farms: 4; as examples of transformation of matter and transmutation of force, 24 ff. ; confusion of census bureau as to what constitute, 25; 124, 125, 202; value of, in United States, 247; 281. Farmer, comparative control of, over cosmic force, 455 f . See Farms. Federal Government. See Gov- ernment, United States. Fees, 338. Flow of debits and credits, 130 ff., 213-231. Fluctuation in money and de- mand price, 160 ff. See De- mand, Wants, Value, Money, Prices. Food: tribal attitude toward, 34 f. ; a primal necessity, 36, 37; first of utilities, 202 f.; prices of, governed by de- mand and supply, 449 ff. Foodstuffs: hypothetical devel- opment of, prices, 52-63; first factor in evolution of exchange, 64; 87; effect of manufacturers on production of, 163 ff. Force: in relation to human effort, 6 f. ; application of, to substance, 10 f.; value of, 11-17; as property, 20 ff.; property in, defined, 22 ff. ; kinds of, 26 ff. ; manifesta- tions of, 458 ff. See also Cosmic Force. Force-unit, exemplified, 166 ff. Force-utility-unit : defined, 272 ff. ; relation of, to want-util- ity-unit, 273 ff.; 277. Forests, 125, 235. Furnaces: relation of, to in- dustrial development, 138. G Gold: use of, in exchange, 379; Bank of England method of adjustment of, flow, 450 f. Government: in relation to regulation of production, 437 ff. See United States. Government notes, 235. Government regulation of utili- ties, 439. Governmental grants, 243. Great Britain, unit of exchange in, 41. Grain, 225. Homes: a primal need, 4; ma- terial for, 6; value of, 235. Horses, 226. Houses, 235. See Dwellings, Homes. INDEX 467 Human effort: and human wants, 3-17 ; application of, 5 f . ; cosmic force in relation to, 6 f . ; part played by, in combining substances, 6 ff . ; dependence of existence .upon, 11 ff.; application of, to property rights, 19 f . ; rela- tion of, to exchange, 34 ff. ; evolution of, as an economic utility, 72-83; relation of, to prices, 51 ff.; expenditure of, in making modern machines, 89 f . ; 94 ; development of coordination of, 96 ff., 132; relation of, to profits, 131; relativity of, and human wants, 14.3-1.53 ; interrela- tions of, prices, and profit, 188-212 ; expression of rela- tion between, and wants, 267 ; direction of, in relation to propagation, 437. Immigration: effect of, upon commercial and industrial life in United States, 137. Individuals: in commerce, 286- 299. Industry: development of, in United States, 136-142; fun- damental factors of, 144 ff. ; effect of competition upon, 187; value of dollar in devel- opment of, 375 f . ; evolution of modern, 452 f. Instruments of production, 235. See Factories, Machines, Warehouses, Tools. Insurance: mitigating effect of, 223 ; as an investment, 457 f . Intelligence: in relation to hu- man effort, 5 f . ; primitive. 36 f . ; remedial effect of, 222. See also Mind. Interest: as a factor in com- merce, 134 f . ; basic principle of, 2151; 223; living upon, 335-338 ; evolution of, 386 ff. Invention ; relation between, and industrial development, 137 ff. Journeyman. See Wage-i ers. ■earn- Judgment: effect of environ- ment upon, 3 ff. ; application of, to profit, 133 f. Kilowatt-hour, 29. Labor: evolution of skilled, 64-83 ; development of, wages, 77 ff.; wages of skilled, 93-113; unskilled, 204 f . ; effect of World War upon, 225 f . ; distinction be- tween capital and, 314-318. Land: as a source of substance, 84 ff. ; ratio of, to dollar, 87 ; flow of value from, 124 f.; determination of, value, 126 .f . ; causes of increase in value of, 127 ff.; effect of, upon economic change, 136; 235; utilization of, to meet wants, 245 f . See also Real Estate. Law: development of, of prop- erty, 18. Life: dependence of civilized, upon exchange, 34 ff. Life insurance, as an invest- ment, 223, 457 f. 468 INDEX Loan s 386 ff. London, 420 em : evolution of, M Machinery: effect of, upon em- ployment, 90, 91. Machines: 124; effect of, upon prices and profit, 114-135; in relation to industrial de- velopment in United States, 138 f.; 163, 235. See Instru- ments of Production. Man from Mars: viewpoint of, 3; fitness of, to judge of earthly affairs, 4f. ; conclu- sions of, 11 f. Man: physical development of, compared with mental, 15 f.; relation of primitive, to ex- change, 34 f.; activities of, in universe, 458 f. Man-day: as unit of industrial life, 275 i.i as unit of exist- ence, 277-f. Man-hours: 272, 275, 276 f., 290 ff; application of, 302; in relation to want-units, 303— 311; man-hours for, 338-345. Manufacturers : protective measures of, 450 ff. Manufactures : evolution of, 37 f . ; effect of recreation upon, 162 f. Matter: forms of, classified, 26 ff. ^Mechanics, 22. Merchant: evolution of the, 37. Merger, defined, 451. Metals: relation of, to ex- change, 385 ff. ; as exchange medium, 435. Mills, 4, 137, 235. See also Industry. Mind: value of, 15-17; primi- tive, 36 f . ; sound, dependent upon sound body, 437-462. Mines, 125, 202. "Mixed trains," 25. Molecules, 268. Money: medium of exchange, 41 ff.; transmutation of property into, 44 f . ; ratio of substance to, 84 f . ; ratio of land to, unit, 86 f . ; expres- sion of value in, 131 f.; result of sale of man-hours, 304 ff. ; command of, over utilities, 368; discussion of, 377-401; uses of, in development of trade, 377 ff. ; relation be- tween, and exchange, 378 ff.; causes of desire for, 379; as a measure of value, 379 ff.; unit of coin, 379 f . ; ratio of, to utilities, 380 ff. ; necessity for, in conduct of business, 286 f.; pay for use of, 386; lenders, 387 ; bank notes as, 387 f. ; government notes as, 388 ; checks as, 389 f . ; scar- city of, 394 f. ; prices of, 423 ; trend of, system, 424—435. See Unit of Exchange. Money-lenders, 387. Monopoly, 452. Mules, 226. Munitions, production of, 224. Music boxes, 163. Musicians, 214. N National welfare: relation of volume of production to, 436. New England, 9. New Orleans, 9. New York: 9, 420; measures of, dealers to curb over-pro- duction, 450. Notes: 42 f., 435. See also INDEX 469 Promissory Notes, Bank Notes, Government Notes. O Oils: 157; cosmic force in re- lation to production of, 1§7 f. "On trust," deBned, 45. Organizations: relation of pro- ducing, to profit, 132 ff., 178 f.; 190; intricate func- tions of business, 211 f.; 240; sources of capital of, 264. Overproduction : meaning of, 222; ignorance at root of, 223 f. Packing-houses, 190. Paintings, as utilities, 129. Payment : significance of, 359 ff. ; deferred, 359-364, 405 ff.; adjustment of, 416 ff. Peace: adjustment of value of utilities in times of, 447 ff. Pearls, as utilities, 127. Pharaoh, 242. Physicians, 214. "Plant": defined, 124; impor- tance of efliciency to profit from, 133 ff.; specialized, 193. Plantations, 124. Population: increase of, re- sponsible for evolution of artisan, 64 ff. ; effect of, upon demand, 33 ff.; 82; relation of, to flow of value, 52 ff. ; specialization dependent up- on increase in, 84-92; influ- ence of increased, upon prices and profit, 93-113; effect of credit loss upon, 440 f . Prices: defined, 38; relation of, to human effort, 51 ff. ; fac- tors that determine, 52; ef- fect of supply and demand upon, 76; relation of wages to, 81 f.; development of, for sources of substance, 84-87; dependence of, of land upon substance, 86 f . ; development of, 93-113; effect upon, of machines, 114-135; depend- ence of profit upon, 131 ff.; dependent upon employee, 135; relativity of, 155-174; determination of, by interre- lation, 170 ff.; interrelation of effort, and profit, 188-212; effect of World War upon, 224 ff. ; rising and falling, 311-314; profit and, 331 ff.; fluctuation of, 388 f . ; effect of Government ownership upon, 441 ff.; determination of, 452 ff. See also Value. Producer: evolution of, 64-83; in relation to profit, 100- 113: adjustment of profit and loss by, 130, Production : development of, 37 ff. ; dependence of, upon profit, 62 f. ; divisions of functions of, 64-83; evolu- tion of, 65 ff. ; instruments of, 87-92, 118 ff.; phases of, 129 ff. ; flow of processes of, 166 f.; assumption of respon- sibility for, 181 f.; elements that control duration of, 196 f.; cessation of, 214; ef- fect of war upon, 223 f. ; ef- fect of war upon instruments of, 230 f . ; ultimate units of, and consumption, 266-284 ; primary function of, 270; by individuals, 286-299; by or- ganizations, 299-302 ; syn- thesis of, 352-359; full sig- 470 INDEX nificance of, 394 f. ; relation of, to material welfare, 436; of utilities ultimate purpose of, 437; relation of Govern- ment to, 438; menace of un- restricted, 449; measures to prevent excessive, 450 f. ; 460. See also Manufactures, Overproduction. Profit: defined, 60 f.; in rela- tion to vpages, 74 ff. ; effect of, upon specialization, 81 f.; relation of instruments of production to, 91 f.; factors contributing to, 100-113; ef- fect of machines upon, 114- 135; expression of, 129 f.; accrument of, 129 f.; rela- tive, defined, 131 ; relativity of, 175-187; interrelation of effort, prices, and, 188-212; causes of, equalization, 192 f.; limit of, 193 ff.; ef- fect of, restriction, 241 ; se- curing of, 318-324; living upon, 335-338 ; effect of busi- ness depression upon, 374 f.; relation volume of, to na- tional welfare, 436; effect of Government ownership upon, 441 f . ; effect of war upon, 444 ff. "Profit and loss" account, 259. Progress: result of triumph of mind, 16 ff.; dependence of, upon debits and credits, 231. Prohibition: tendency of, of utilities, 438. Promissory notes: 409; dis- counting of, in payment for utilities, 435. See Notes. Property: in matter and, in force, 18 ; essence of, ex- plained, 18 f. ; evolution of the institution of, 35 ff. ; transmutation of, into cred- its, 44 f. ; relation of, to unit of exchange, 45 ff. ; retention of, 92. Prosperity: World War in re- lation to national, 225. Purchase : designation of, 43 ff. See Transfer. Purchaser: evolution of the, 37 f. Purchasing power. See Value. R Railroad: effect of, upon indus- trial and commercial devel- opment, 137 f.; rates, 190; 235, 260. Ranches, 124, 125. Real estate: determination of, value, 124 ff, ; fluctuation of, value, 127-129. See Land, Property, Structures. Recreation : effect of, vogues upon manufactures, 162 f. Refineries, 157. Rents: 215, 323; as source of income, 334 f. Repairs, 285. Retailers: relation of, to profit, 130. Royal charters, 243. Rugs, 163. Sagacity, 244. San Francisco, 10. Satisfaction of wants, 166. See Demand, Wants. Savings: 215; effect of, upon efficiency, 457. "Scarcity of money," explained, 394 f. Self-preservation : dependence of, upon exchange, 34 ff . ; re- lation of, to economies, 34 ff. INDEX 471 Self-sufficiency: state of, de- fined, 35; reign of, 37; in American colonies, 53; 64; force-unit in the age of, 166. Servants: efforts of, 10. Shelter, 202. See Dwellings, Homes, Houses. Silver: use of, in exchange, 379. Soul: relation of human effort to, 17. Sources of substance, 84-87. Specialization, 81. Staples: profit on, 129. See Utilities. Steam: effect of, application on industrial development, 137 ff.; introduction of, 220. Steel, 261. Stocks: 185 ff.; value of, de- pendent upon rate of divi- dends, 240 f . ; variation in value of, 420. Stores, 235. Strife. See War. Structures, 124. Substance: as product of force, 6ff. ; part played by human effort in combining, 6 ff. ; ap- plication of force to, 10 f . ; replacement of, 12 f.; sources of, 84-87; value of source of, 334. Supply: early phases of, 35 ff.; effect of, upon demand, 76; operation of, 140-142; rela- tion of, to demand, 443. Surplus, 182. Taxation: effect of Government ownership upon, of utilities, 439; effect of war upon, of utilities, 446. Taxes, as governmental credits, 227 f. Texas, 9. Theaters, 190. Tools: 16; development of, 87 f. ; supply and demand in relation to, 122 ff. See also Instruments of Production. Trade: evolution of interna- tional, 141 f. See also Ex- change, Commerce. Tradesman : evolution of, 37 f . Tramps, 202. Transfer : relation of coin to, 42 f. ; explanation of factors of, 43 ff. ; essentials of, 44 f . ; 281. See also Exchange, Purchase. Tribe: economic evolution of, 35 f.; 37. Truck gardens, 124. Trusts, 451. U Ultimate units of production, 266-284. "Unearned increment," defined, 127. Unit of exchange: 34-51; de- signation of, 41 ; significance of, 47 f . ; shifting ratio of, 48 ff.; 435. See Coin, Dollar. Unit of price, defined, 95. Unit of time, 271. Unit of utility, 156 ff. Unit of value: ratio of utili- ties to, 158 f. United States: 8; unit of ex- change in, 41; development of industry in, 136-141; ef- fect of immigration upon industrial life in, 137; edu- cational system in, 205; debit and credit system in, during World War, 224 f.; 472 INDEX effect of World War upon production in, 227; utiliza- tion of, Government credits during World War, 227; value of farms in, 247; 282; characteristics of desires in, 420 f . ; regulation of price of utilities by, 440 f . ; effect of, ownership upon profit, 386. Utilities : 8 ff. ; and utility, 23- 33 ; classification of, 28 ff. ; "final," defined, 30; "inter- mediate," defined, 31; disin- tegration of, 32; relation of price to, 38 ff. ; evolution of, as intermediary in exchange, 41 ff.; ratio of, to unit of exchange, 47 f. ; machines as economic, 87 ; production of final, 130 f.; ratio of, pro- duction to human effort, 152 f . ; ratio of, to dollar,, 158 f.; relative importance of, 159 ff.; effect of World War upon, 225 ff. ; as capi- tal, 261 f.; discount of notes in relation to, 435; purpose of production of, 337 ff. ; regulation of production of, 437 ff. ; adjustment of values of, during peace, 447 ff. ; menace of unrestricted pro- duction of, 449 f . ; measures to prevent overproduction of, 451; accumulation of, in re- lation to life values, 461 f. Utility : defined, 27 f . ; econo- mic, 28. Utilization, defined, 241. Value: designation of, 11 ff.; of force, 13 ff., 22 ; of mind, 15-17; law of, 18 ff.; rela- tion of, to utilities, 34-51; development of, 35 ff. ; rela- tion of price to, 38 ff. ; effect of progress upon, 40 ff., 64 ff.; standard of, 401, 41; ratio of, 64 ff. ; relation be- tween, and efficiency, 93 ff.; influence of employer upon, 96 ff., 114 ff.; effect of pro- duction upon, 96-113; effect of machines upon, 114—135; effect of supply and demand upon, 122 ff.; flow of, from land, 124 f . ; deterioration of land, 125; increase in land, 127 f.; fluctuation, 159 ff.; effect of, fluctuation upon credit, 169 f.; commercial significance of, 232-249 ; de- fined, 234; general signifi- cance of, discussed, 234-251; the attribute of utilities, 236 ff. ; accumulation of, 244; relation of, to human exist- ence, 249-251; adjustment of, dependent upon bookkeep- ing, 263-265 ; expression of, in force-utility-units, 274 ff. ; of utility utilized in produc- tion, 329-334; money as a, measure of, 378 ff. See also Price. W Wage: degrees of, 276. Wage-earners : evolution of, 64-83; 114 ff.; 203; as em- ployers, 210; effect of World War upon, 220. See also Artisan, Labor, Employee. Wages: origin of, system, 64 ff. ; influence of profit upon, 74 ff., 95 ff.; develop- ment of, system, 77 ff. ; ef- fect upon, of specialization, 81 f., 103 ff.; efficiency and. INDEX 473 107 ff.; machinery in relation to, 114 ff.; investment of, 307 f.; effect of Government ownership upon, 442 f.; rela- tion of supply and demand to, 443 f . ; relation of, to volume of production, 447 ff. "Want," significance of, 35. Want-units : exemplified, 166 ; relation of, to man-hour, 303-311. Want-utility-units : explained, 272 ff..; relation of, to force- utility units, 273 ff. Wants: dependence of, upon human effort, 4 ff. ; relation of, to prices, 51 ff.; ratio of human effort to, 152 f. See Human Effort. War: 15; causes of primitive, 35 ; relation of, to prosperity , 443 ff. Warehouses: purpose of, 91; as instruments of production, 129. Wares : mediaeval, 37 f . See Utilities. Water-power, 235. Wheat: stages of transforma- tion of, into flour, 8 f . Wholesale stores, 91. Wisconsin, 9. Wool, 225. World War: 220; effect of, upon prices and production, 224 ff.; United States and the, 226 ff. ; utilization of government credits in the, 227.