Fetter The Principles of Economics

192	THE PRINCIPLES OF ECONOMICS

support for this view, except in the rare case when the money standard is undergoing a rapid change, as in the United States from 1866 to 1873, and the statement then needs much modification and explanation. The money theories of crises are nearer to the truth than are the overproduction type, for the crisis is always connected with money and prices. But it cannot be said that the absolute amount of money in circulation in the period preceding crises gives occasion to them. In a few instances a rapid change in the amount has had an important effect, but this fact does not explain crises in general.

Lack of confidence is said to be a cause of crises. This is a truism, but the lack of confidence is not without reason and cause. Over-confidence in the period of expanding prices is succeeded by extreme depression when many false hopes are shattered.

3. Crises must be explained essentially as the forcible and sudden movement of readjustment in the mistaken capitalization of productive agents. Capitalization runs through all industry. The value of everything that lasts for more than a moment is built in part upon rents that are not actual, but expectative, whose amount, therefore, is a matter of guesswork, or “speculation.” Many unknown factors enter into the estimate of future rents. The universal tendency to rhythm in motion (material or psychic) manifests itself in an overestimate or underestimate of rent and of every other factor in value. This is emphasized by a psychological factor called the “hypnotism of the crowd.” Most men follow a leader in investment as in other things. The spirit of speculation grows till it becomes almost a frenzy, and people rush toward this or that investment throwing capitalization in some industries far out of equilibrium with that in others.

The use of credit enhances the rhythm of price. A large part of business is done practically on margins. If the value (p. 354) of a thing fully paid for falls in the hands of the owner, he alone loses; but if the value of a thing only partly paid for falls so much that the owner is forced to default in his payment, the loss may be transmitted along the line of credit to every one in the series of transactions. A credit system, highly developed, is a house of cards at a time of financial stress. There is an element of credit in all modern business. Enterprisers enter into strenuous rivalry to secure the profits of a rise, ever hoping to get out whole before the crisis comes.

The fundamental cause of crises thus is seen to be psyc hological; it is the rhythmic miscalculation of rents and of capital value, occurring to some degree throughout industry, but particularly in certain lines. But this subjective cause in men is given full opportunity for action only when certain favoring objective conditions are present. Most noteworthy of these besides the credit system is a dynamic condition of industry. The past century has opened up new fields for investment on an unexampled scale. Investment has advanced both intensively and extensive ly in a series of great waves. New machinery and processes have given undreamed of opportunities for enterprise in the older countries, and the physical frontier of investment has moved outward with the march of millions of immigrants to people the fertile wilderness. Such factors disturb the equilibrium of prices both in time and space, give a powerful impulse toward higher values in the older lands, and stimulate the hopes of all investors. When the balance between the capitalizations of various industries and between the rents of the various periods

proves to be false, the inevitable readjustment causes suffering and loss to many, but particularly in the inflated industries. But, because of the mutual relations of men in business, few even of those who have kept freest from speculation can quite escape the evils.

4. Crises must be discussed in connection with other subjects than profits. In the text-books the subject of the (p. 355) crisis is variously classified. It may well be discussed with money, credit, and banking. It has its bearings on wages, justice in distribution, the theory of interest, and

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the consumption of wealth. But the reasons for taking it up in connection with the subject of profits are strongest. In no other connection is the presence of the element of speculation and of chance profit and loss in business so forcibly seen.

The income of every class of society is to some extent affected by these more or less periodic fluctuations. They are in part the price paid for progress under the constantly shifting conditions of our dynamic industry. In part they are the proof of industrial maladjustment. The force of the shocks will no doubt be much reduced by better banking and business methods, and by a sound currency system. More important still, the development of moderation, conservatism, and a less speculative spirit among the leaders of business will do much toward softening the asperity of these scourges of industry.

PART III

DIVISION A—RELATION OF PRIVATE INCOME

TO SOCIAL WELFARE

CHAPTER 38

PRIVATE PROPERTY AND INHERITANCE

§I. IMPERSONAL AND PERSONAL SHARES OF INCOME

1.Under the title “the social aspects of value” are to be considered the influences exerted upon incomes by various social acts, ideals, and institutions. The incomes from the wages of free labor and those from the rent of wealth, as studied in the abstract theory of value, are alike in their impersonal aspect, their relation to utility. But while wage flows from a personal source—is

an income appearing to reward the personal effort of the laborer, the income of the wealth-owner is due to the uses of goods. In the abstract theory of value we do not seek to get behind this impersonal phase of rent. The income arising from goods goes to the de facto owner of the goods. We do not ask how the goods first came into his possession, whether through labor or as a gift, whether stolen or inherited. Indeed, the economic theory of competitive rent may be said not to recognize the personal fact of ownership; it is concerned with the impersonal fact of usufruct. The theory of economic rent, of time-value and capital, and of wages, as measured by efficiency, is impersonal, is a study of functional distribution. In the problem of monop- (p. 360) oly the personal factor is more prominent, but the economic study of rent cannot well stop there.

An answer, at least in broad outline, must now be given to the question why some men are permitted to hold wealth as their “own,” that is, as “property,” while other men are propertyless. Why do the owners exact payment for the use of goods, and why are they allowed by their fellows to do so? Back of these facts is a great system of social institutions that helps to determine what men will do. Market value is a social fact; price is determined by the bidding of men under the existing social and political conditions. These broader social aspects of value remain for consideration. The influence of lawmaking, of collective action, and of social institutions on value must be noted. Incidentally, this has been done in speaking of patents, political monopolies, and related questions; but mainly the subject has been viewed from the individual standpoint; now it must be looked at more fully from the social side.

2. The study of personal distribution should include a further explanation of the various elements that unite to form the individual’s income. “Distribution” in economics is the reasoned explanation of the way in which the total product of a society is divided among its members. It is a logical question and not an ethical one. The economist first asks, What is the effect of utility on value? and, next, What is the relation of these goods to the personal incomes of the members of society? It is not his peculiar part to say whether this is the best distribution in an ethical sense, yet in pursuing the question of distribution one comes to the border of certain moral questions.

The impersonal and the personal views of distribution are not, however, contradictory; they are different aspects of the same question. It cannot be said that the analysis of economic rent is a purely abstract piece of work. In fact, the impersonal view of distribution is essential to an understanding of the personal view of it. The one gives general (p. 361) principles, the other the special cases. In the practical economic issues of the day, the most urgent need is a better popular

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understanding of the abstracter theory of value. It is a guiding thread through otherwise bewildering mazes.

The actual incomes of individuals are made up of different elements. The wage-earner and the salaried man are rarely without material wealth. The enterpriser gets some income also in the form of contract interest, or as rent from machinery. Actual personal incomes are therefore a sum of various functional or impersonal incomes. The earnings of every agent may be thought of as always going either to some individual or to some group. By social convention the receiver of incomes that are not personal gifts is supposed to have produced them. This involves the great assumption that the owner of a piece of land has produced or contributed in some way to society an amount equal to the rent. This may be true in many cases, but in many cases this view cannot be accepted without close scrutiny.

3. Property and wealth are respectively the personal and the impersonal, the legal and the economic, aspects of productive agents. Law holds an important place in the discussion of actual economic questions. This fact was not overlooked by John Stuart Mill, and it has been far more clearly recognized in the last few years, especially by the German economists. Political law in the broadest sense, as embodied in the state, is, in the first place, a set of rules to guide the conduct and regulate the relations of men in society—a legal code; it is, in the next place, a governmental machine to determine disputes between men—a judicial system; and it is, finally, physical power to bring contestants into court and to secure and protect their rights—a police force. Whether acting through legislature, courts, or police, in all its dealings with wealth the law is predominantly personal. The question the law asks and answers regarding wealth is not What, but Who? Who is the owner, who should control, receive, enjoy the income? Economic wealth (p. 362) consists of scarce things, of valuable agents, and because they are scarce, men quarrel over them. Because of the impersonal economic fact that a field and a machine produce scarce goods, arises the legal question as to which ma n is entitled to enjoy them.

In the case of material things, property value and capital value must be exactly equal. Property rights cover the ownership of a material thing. Material property consists of things viewed with reference to ownership; capital consists of the same things viewed with reference to their economic services. There are other property rights besides those in material things, various immaterial rights controlling the action of the individual and thus giving a sort of ownership of the individual’s actions. Such are patents which forbid other men making a particular kind of machine; copyrights which forbid other men printing certain writings; legal contracts that limit the action of men in various ways, and thus appear to abridge their liberty.

§II. THE ORIGIN OF PRIVATE PROPERTY

1.Property is ownership, the legal control over the sources of economic income. The Latin word property means ownership, and hence that which pertains to the individual, that which is a man’s own. The control of property is greater or less. The law makes between property rights

and equity rights certain subtle distinctions which have their reason in the history, if not in the logic, of the law, but which are not essential to economic discussion. What we are interested in are the equitable claims of men to wealth rather than the technical property rights. With that thought let us consider the value of the control of wealth. If a farm worth ten thousand dollars is mortgaged for five thousand dollars, its economic wo rth is ten thousand dollars after as before the mortgage, but the equitable claim is divided into two shares of five thousand dollars each. The value of the property (p. 363) right cannot, in a reasonable view, be greater than the value of

196 THE PRINCIPLES OF ECONOMICS

the economic wealth it covers. There is much confusion in the law of taxation on this point. The law treats the farm as property and the debt upon it, whether secured by a mortgage or not as another body of property. Needless to say, this leads to absurd conclusions in reasoning, and to gross injustice.

There are different forms of ownership: first, private, as that of individuals, families, partnerships, or corporations; second, public or state, as the ownership of the state house, the highway, the Adirondack forest-reserve or the Erie Canal. These are equally effective as against the claims of outsiders, but the rights of those inside the circle of ownership differ. For example, the rights of one shareholder against another, or the rights of one member of a family as against another, are not the same as the rights against outsiders. Private property is the characteristic feature of our present industrial society, but it exists side by side with state property and with many intermediate grades between private and common property. Private property, while attacked on some sides, is usually accepted without question; but in this age of inquiry its origin should be examined, its limits and the reasons for them should be noted, and its purpose, faults, and effects should be set clearly before the judgment.

2. The older theories of the origin of private property are those of occupation, conquest, labor, natural rights, and law. The theory of occupation is that property is based upon the priority of claim of one who finds wealth without an owner and appropriates it. This, to be sure, is a statement of what happens in the settlement of new countries, but it is not an explanation of the property rights that are arising every moment, nor does it give a logical reason for the continua nce of ancient property rights.

The same can be said of the conquest theory, the theory that property is based on force. It applies to the invasion of (p. 364) the Roman provinces by the barbarian tribes who divided the country and enslaved the population. But it rarely applies to present-day happenings and at its best it cannot, to modern minds, “justify” present property rights.

The labor theory, meeting some queries where others fail, is that ownership is based on production, on the right of a man to that to which his brain and his muscle have imparted value. It is evident that this test leaves without explanation or justification a great number of things that do exist and have existed as property.

The natural-rights theory is that property is necessary for the realization of the dignity of human nature. This, if true, would be not so much an explanation as a condemna tion of private property as it has existed in most cases, as millions of men are in every land all but lacking in property, and inequality of possession is everywhere marked. This theory expresses, however, one of the worthy ideals of modern democracy. Although, in common with the various other “natural rights” theories, it must to-day be deemed too absolute and too individualistic, it contains a far-reaching truth, of which due account must be taken in our social philosophy.

The legal theory is that property exists because the law says it shall. This expresses a truth, but is no more than a truism. The law determines the limits of property, but what determines the limits of the law? What practical or social justification is there for passing and continuing such law? The legal theory does not explain anything finally. Each of these theories has its defects, but each points to some fact important and significant, at certain times and places, in the explanation of this widespread institution.

3. The institution of private property has evolved under diverse conditions; the question of its origin is not the same as that of its present justification. In early societies individual property rights were not very clearly marked. Every tribe asserted against other tribes, and tried to uphold, by (p. 365) war, its claims upon its customary huntinggrounds; but the claims of the individual

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hunter and fisher within the tribe did not often come into conflict. Private property at the outset was in personal possessions, ornaments, weapons, utensils, which were very meager in that primitive society where it was the custom “to go calling with a club instead of a card-case.” Only later came individual property in land. A few years ago it was generally believed that the organization of the old German tribes was politically an almost perfect democracy, and economically a communism wherein all had equal claims on the land. To-day this opinion is very seriously questioned. It seems probable that the so-called communism was really an oligarchy of the favored, and that the masses lived in subjection, cut off from all but a meager share in the public property.

However that may have been, strong forces within historic times have put an end to the common ownership and tillage of land as it existed among the serfs of Europe. The common tillage of land was shown by experience to be wasteful. Not only did competition tend to bring the economic agents into more efficient hands, but the movement was furthered by many acts of injustice and violence on the part of those in power. Inquiries into the origin and development of this social institution are interesting and helpful in forming an estimate of its present significance, but the problems of the past are not those of to-day. Whether or not the ancient beginning of property in Europe was in violence and evil has but a remote bearing on the question as to the present working of it. Social conditions and needs have not changed more than have the forms and limits of property itself. Each generation has its own problems to solve, and each must test existing institutions by their present results, ignoring for the most part the evils of the past.

4. Private property may now be justified mainly on the grounds of social expediency. This is a broad explanation under which can be brought the many varying conditions; (p. 366) but it has the fault of a broad explanation, that it needs to be further explained. Conceding that private property works hardship to the individual in many cases, it must be justifed on the ground that on the whole, it furthers the progress of society. Private property is looked upon by some as merely reflecting or expressing the economic inequalities of men; the man poor in ability is the man poor in property. It is looked upon by others as exaggerating, indeed at times reversing, the economic abilities of men. In general, it must be judged by this test: Does it further the welfare of society better than would any alternative plan for the control of economic wealth? The question is not whether it is faultless, for no human institution is so. Nor must it be assumed that property is a fixed and uniform mode of control; there are many kinds of property. Different parts of wealth may be treated in different ways: there may be private property in wagons, and public property in roads; private property in houses, and public property in forests; private property in automobiles, and, in some countries, public property in railway-carriages. But any rule of property, like any other workable human law, must be applicable to all individuals that meet the conditions. Hence any human institution must be judged by its average working, not by exceptional cases.

The very acceptance of the theory of social expediency implies the need of a readjustment of the institution of private property; for private property, as it is found to-day, is complicated by many historical accidents. Survivals of ancient injustice and relics of feudal institutions that rest on no vital reason remain in our new country as well as in the older ones. The limits of property in many respects are determined, not according to the logic of expediency, but by the social inertia which often governs succeeding generations. (p. 367)

§ III. LIMITATIONS OF THE RIGHT OF PRIVATE PROPERTY

198	THE PRINCIPLES OF ECONOMICS

1. Unmodified private control of property is unknown: the public makes many reservations in its own interest. Few realize the manifold ways in which property rights are limited. There is, first, a whole set of limitations to prevent nuisances. An owner in many situations is not free to build a slaughter-house or to start a gluefactory on his land. Property is governed by general public utility, and anything that threatens to become a nuisance or a danger is excluded. When, under the right of eminent domain, the state or the railroad takes the old homestead from its owner who would live and die there, the payment of money damages to him does not make this the less a limitation of his property rights. Rights of way on property exist either through contract or by prescription permitting its public use. Most important of all limitations is the right of taxation, by which society takes more or less of private incomes for purposes of which the individual owners may in no way approve.

2. The law enforces a multitude of private claims against private owners. A variety of rights called easements or servitudes may attach to private property, modifying its exclusive use. Leases for any period are a virtual limitation of the control and division of the ownership. Both the holder of the lease and the owner of the property have certain rights before the law. The lender of money secured by mortgage has a legally recognized and enforceable interest in the mortgaged wealth. Property is left in trust for the benefit of persons or of institutions or of the public, and is administered by trustees who are strictly bound to the execution of the terms of their instructions. Contracts of many sorts are entered into by owners, limiting their control in manifold ways, and the law enforces these contracts. These all form a complex of equitable claims, which together equal in value one undivided property right, which in turn equals (p. 368) the value of the wealth. These claims mutually limit each other (whether they be called equitable claims, or liens, or property rights), and wealth is not multiplied by multiplying the claims, as the lawmakers unfortunately sometimes assume to be the case.

3. The right of bequest, or of gift at death, is limited in various ways in different countries.

The term bequest implies a will, usually a written will in which the person, foreseeing death, has expressed his wishes as to the disposition of his property. It is said sometimes that bequest is a “logical” result of private property, but the law does not treat it as such. In countries where hereditary aristocracies exist, primogeniture is in some cases required by law, in others so strongly favored by public opinion that it is practically always followed. Custom limits bequests in England to members of the family, and wills giving outside the family are rare, and are almost always broken in the courts. John Stuart Mill contrasts this with the frequent practice by rich men in America of giving for public purposes. In France the right of bequest outside the family is legally limited; only the share of one child can be willed away by the father, and the rest must be equally divided among the children. Settlements and fidei commissa are limited in many countries, because of the recognized social evils resulting from the tying up of estates for generations. Throughout the history of England, Parliament has given attention to the question of mortmain, which chiefly concerned the drifting of great estates into the hands of the church or of corporations, as a result of bequests by the pious. Only recently in England, and to a less extent in this country, has been seriously discussed the policy of permitting unlimited endowments to charitable institutions, and new legislation has diverted from their original purposes some of the old endowments. These varied and often strict limitations of the right of private property are all determined by some thought, wise or foolish, of social expediency. (p. 369)

4. The law of inheritance varies greatly with time and place. Inheritance, in contrast with bequest, usually means succession to the property of one who has died intestate, that is, has made

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no will. The old idea of family unity survives in great measure in modern laws of inheritance. The nearest living relatives, no matter how distant they may be, inherit property when there is no will. When a miser dies in solitude and neglect, the world must be searched over to find a remote cousin to take the hoarded wealth. Inheritance is limited largely at present by the power of taxation. The view is growing that the claims of the society in which wealth has been acquired are stronger than those of relatives distant alike in space, in blood, and in affectionate interest. This view is reflected in many recent inheritance-tax laws which take from the shares of distant relatives a goodly portion for public purposes.

The question is raised in many minds, If private property is not an absolute right, what shall be its limits? What changes should be made in it? The essential thought in the various attacks on the institution of private property is that, because it occasions inequality in incomes, it is not socially expedient. The conviction is growing that, in some general way, incomes should correspond to, and reflect, social service. It is well to consider more closely what the terms social expediency and social service imply.

CHAPTER 39

INCOME AND SOCIAL SERVICE

§I. INCOME FROM PROPERTY

1.Property rights must meet the test of social expediency. If private property is defended on the ground of social expediency, it must show good social results. It is not a sacred thing; it is open to examination, and must be judged by its fruits. Of all the forms of income, that from

property has been most strongly attacked. The thought is that enjoyment of wealth should not be found apart from labor; and that it should bear some proportion to services performed. The enjoyment of an ample income by one who does no more than to draw checks or to sign coupons seems to many minds to be unjust; and it is often questioned whether there is any social service performed by the receivers of the rent from land. Property seems in many cases to be distributed without rule or reason. It does not correspond with beauty, strength, wit, wisdom, temperance, gentleness, or charity. Since the beginning of the Christian era, reformers have assailed and preached against the prevailing inequality of wealth. The idea that incomes, if not equal, should correspond to social service has always been present in some vague way in the minds of men.

2. The right to transmit property by inheritance or by gift may be judged with reference to its effect on the giver, on the receiver, and on society at large. It is well to take these three points of view. The right to dispose of property either during life or at death has undoubtedly in many (p. 371) ways a good effect on the character of men. It stimulates the father to provide for his children, the husband to provide for his wife. There is a joy in giving, a joy in the power to bestow one’s wealth on those one loves. The right to give stimulates industry, frugality, ingenuity, and yields productive results. Much of the existing wealth probably never would have been created if men did not have this right of gift. But there is a limit to the working of this motive, and other motives often are much more effective. Many men after gaining a competence continue to work for love of wealth and power in their own lifetime, as the miser continues to toil for love of gold. When men without families die wealthy, when men that have not the slightest interest in their nearest relatives labor and amass wealth till their dying day, it is evident that the right to bequeath property has little to do with their efforts. Love of accumulation and love of power in these cases supply the motive. A more limited liberty to dispose of property at death might still suffice, therefore, to call out the greater part of the efforts now made to accumulate property. That the effects on the receiver of the property are good is somewhat more doubtful. It is true that children raised in great comfort or luxury would be more than ordinarily unhappy if plunged into poverty or even into humble circumstances on the death of their parents. There is much social justification for permitting families to maintain an accustomed standard of comfort. Few would deny that a moderate provision by parents to provide education and opportunity for their children is commendable and desirable. But the evil effects of waiting for dead men’s shoes are proverbial. Many a boy’s greatest curse has been his father’s fortune. Men of native ability wait idly for fortune to come, and opportunities for selfhelp slip by unheeded. The world often exclaims over the failure of the Sons of noted men to achieve great things, for, despite confusing evidence, men still have faith in heredity. A too easy fortune saps (p. 372) ambition and relaxes energy; and thus rich men’s sons, if not most carefully and wisely trained, are made pitiable paupers in spirit, while the selfmade fathers think their boys have chances they themselves did not enjoy. The greater social loss is not the dissipated fo rtunes, but the ruined

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characters.

The effects of inheritance on the community are good in so far as it secures efficient management of wealth. If the son or relative has been in business with the deceased, there is a reason that he should inherit the property, and his succession to it makes the least disturbance to existing business conditions. But every profligate son is an argument against inheritance; every incompetent heir is an argument in the hands of the enemies of the existing order of society. It is to society’s interest that no able-bodied member shall stand idle. Every child should have presented to him the motive to devote his powers to the social welfare in economic or other directions. Moreover, many feel that the great fortunes now accumulating through successive generations in the hands of a few families are endangering our free society, even if these fortunes should continue to be well adminis tered. There is a widespread feeling that the heredity of great wealth is, like the heredity of political power, out of harmony with the democratic spirit—though this may easily become a misleading comparison. Still, democracy wishes to see men as individuals put to the test, not profiting forever by the deeds of their forebears. This feeling is shared by those who cannot be charged with radical prejudices. A few years ago the Illinois Bar Association passed a somewhat startling resolution favoring moderate limits to inherited fortunes. Every year sees bills of this purport introduced in the legislatures and in Congress. Andrew Carnegie says it would be a good thing if every boy had to start in poverty and make his own way. Cecil Rhodes recorded in his will his contempt for the idle, expectant heir.

3. Social expediency will limit the right of intestate (p. 373) inheritance to persons in essential economic and social relations. Public opinion is not yet crystallized in favor of this formal proposition, but tends strongly toward it. The foregoing considerations show that the right of gift in the lifetime of the giver should be the freest. The right of bequest, that is, of gift by will, should be liberal. The man who has acquired wealth may well be trusted to decide who bear to him a close social or personal relation, and to say whose lives have in a measure furnished the motives of his activity. But the right of intestate inheritance by distant relatives is one that stands on weak social foundations to-day. It appears to be an unreasonable survival from more patriarchal conditions. The true test is whether the wish to provide for these heirs has furnished the motive for the producing and preserving of the wealth. The claims of those nearest in blood and closest in personal relations are strongest. Family affection and friendship form the strongest of social ties, and it is socially expedient to cultivate them. Motives for abstinence and industry must be strengthened. But the same test shows that the zealous regard of the American law for the rights of grandnephews in Australia, or even of brothers long absent in distant quarters of this country, is irrational, and is unjust to the community where the fortune lies.

4. Many fortunes built on favoring legislation are defended as due to social service. In the Middle Ages kings often granted great estates to nobles as rewards for past merit and as a payment for expected public actions. The great landlords were the magistrates, military leaders, and supporters of social order, and thus, in the judgment both of the king and of the commonalty, the nobles earned their incomes by their social service. While this practice has disappeared under constitutional government, large grants are still made to royal families. Many Englishmen who are democratic at heart uphold such grants as the price of social stability. Re gard for royalty is so deep-rooted in the minds of the people of any long-established monarchy that there is always (p. 374) danger in change. England must pay many millions annually as the price of loyal and conservative sentiment. So long as this is true, a family of royal figureheads and idlers performs a social service.

Protective tariffs sought by wealthy manufacturers are granted, not ostensibly to help them,