# 1922 Encyclopædia Britannica/Capitalism

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CAPITALISM. The meaning of “capital,” in economics, is analyzed in the earlier article under that heading (Capital). But the working of “capitalism” or the “capitalistic system,” as such, had by 1921 become so highly controversial a question as to require here more detailed examination.
The term “capitalism” is generally applied to the system under which the instruments of production are the property of private owners, who usually employ managers and manual workers to carry out production by their means. By production we must include, if this definition is to be correct, the whole of the process by which raw materials are brought to the place of manufacture and worked up into manufactured goods, and the manufactured goods are then distributed to the places where they are wanted and sold to the final consumer through the hands of retailers. The instruments of production thus include not only the land, factories, tools and machinery, and other equipment used in actual manufacture, but the railways, ships and other means of transport, and the warehouses and shops through which the goods finally pass to the consumer.
Private Ownership. — Private ownership of the instruments of production has not been universal in man’s economic history, but it has been generally adopted by progressive communities. When “Adam delved and Eve span,” they were “capitalists” in the sense of owning a spade and spinning-wheel and using them for purposes of production; but they used these tools themselves and for the purposes of supplying their own needs. And at a very primitive stage of society, this simply individualistic system by which the capitalist used his own tools and worked for his own needs may be presumed to have been common. When, however, by the development of a wider society the division of labour and the exchange of goods between one member and another of the community began to be practised, the new feature arose by which the producer made and grew goods not only for his own use, but to be exchanged for goods grown or produced by others; and consequently he had to produce something which somebody else wanted if he wished to provide for his own needs to his own satisfaction. Thus we find in the Middle Ages artificers and craftsmen owning their own tools, that is to say, their own capital equipment, and working to produce articles such as armour, farming implements and clothes which they exchanged in return for the food produced by the farmers who would only take the goods produced by the artificers if they were of a kind which pleased their fancy. It is important to note at the outset that the capitalist, whether he
works with his capital or sets others to work with it, must invariably direct the work done so as to suit the wishes of a buyer which may or may not be expressed before the making of the article is begun. Capitalism, in the sense of a private ownership of tools and equipment, thus dates from the earliest organization of human economic activity. As soon as a savage had given time and labour to fashioning a weapon with which he could more easily kill or catch animals that he hunted for food or clothing, he had become a capitalist; he had made something which would help him to provide for his own needs and those of his dependents more easily, or by which he could more easily acquire commodities which he could exchange against those owned by other members of his tribe. But capitalism in the modern sense, and as defined above, is usually said to date from the last quarter of the 18th century, when what is called the “Industrial Revolution” began, and by the inventions of machinery and the use of steam industry was reorganized on a new basis.
Capitalist and Worker. — Owing to these developments it was no longer possible for the workman using his own tools and working in his own home to compete with workmen who were assembled in a great factory and worked with machinery which it would not have been possible for their collective resources to buy. Thus arose the distinction between the worker and the capitalist, which had in effect already made considerable progress before the introduction of machinery, but was so rapidly developed after it that modern capitalism is usually so dated. By this system the worker, by which is generally meant the manual worker, is said to have been divorced from the ownership of his tools. The scale of industrial organization became so great that it was only possible for men of great means, or for a collection of people of considerable means, to provide the necessary land, factories and equipment for its working, and also to buy the large quantities of raw material required, to pay the wages of the multitude of workers and managers, and to finance the other expenses during the process of production and up till the time of payment by the final purchaser.
Originally it was usual for the owners of these factories, whether individuals or small bodies working in partnership, to act as managers of the whole concern. The capitalist was at once owner of the factory and machinery, provided the money needed for the financing of the industrial process, and managed and organized the whole enterprise. He was responsible for buying raw materials, paying wages and selling the product to the greatest possible advantage to the other capitalists, merchants and middlemen, who passed it on until it reached the final consumer; he, singly or in partnership, took all the risk of loss involved if the product failed to suit the caprices of the buying public, and took all the profit, if any, that was earned from the enterprise. This profit thus included interest on his money invested, the payment of his salary as organizer and manager, and any extra bonus which his skill might enable him to earn as compensation for the risks run.
Joint Stock System. — As industry developed on a still greater scale it was not possible for this comparatively simple organization to be maintained. When it became a question of building railways, requiring hundreds of millions to finance them, no individual or partnership could supply the necessary funds, and so the joint stock system, which had already been developed on a small scale in mediaeval times, was extended so successfully to industry that the greater part of our industrial activity is now carried on by means of joint stock companies, the extension of which was enormously facilitated by the introduction of the principle of limited liability. Thus the position of the capitalist has become still further defined and differentiated. It is certainly probable that the managers of most of our great industrial concerns hold a certain number of shares in the business which they conduct, and to that extent may be described as capitalists, but the two functions are now quite distinct. The capitalist pure and simple lends money to industry or invests it in industry, using industry in the widest sense of the word to include transport and commerce. The actual management is carried on by officials appointed specially for this purpose under the supervision
of a committee of the shareholders who are called directors, who are paid comparatively small fees for the usually rather nominal supervision which they exercise over the more highly paid work of the managers and staff, and for guiding the financial policy of the company with regard to dividend distributions and so on. The capitalist is either a creditor or a shareholder in the company which is formed by public subscription to carry on the industry in question; all that he does is to lend to industry the money which is essential in order that the industry may acquire all the tools, machinery, buildings, raw materials and other equipment necessary for carrying on the work, and to pay the wages of the wage-earners and managers during the initial period before the company’s operations have produced something that can be sold to supply money for wages, the purchase of further raw materials, and the upkeep of the plant. The business of management is carried on by highly paid experts, and the capitalist’s sole claim to a share in the earnings of the company is based on the fact that he has provided the money which was essential for its beginning and for its further growth. He earns his reward first by placing this money at the disposal of industry instead of spending it on his own immediate enjoyment; and secondly by risking the loss of part or the whole of his money if the industry should fail.
Capital Financing. — A highly ingenious machinery has been developed for the provision of money for industry and commerce by the process of investment in the securities of public companies, and for the turning of these securities back into money by their sale in markets known as stock exchanges. Joint stock companies are formed either to carry out some new enterprise, or work some new process, or to take over an existing business which has hitherto been carried on by private partners. An appeal is therefore made to the public to subscribe to the securities into which what is called the company’s capital is divided. As so often happens in these matters of business, great confusion arises owing to the use of the same word in different senses: the capital of industry has hitherto been referred to in the course of this article as the tools, buildings, and other equipment by which industry works; but the capital of a company generally means the money that it receives from those who subscribe to the securities that it offers. If we take the case of a company formed to work a coal mine, and suppose that the original promoters consider that £2,000,000 will be necessary for them to make a proper start on the enterprise, then these two millions will be the original capital of the company, subscribed to it by investors who receive, in return for their money, securities which give them claims upon it for interest, dividends and repayment either at a fixed date or in the event of the company’s liquidation. These claims take the form of securities issued by the company. They would probably be divided into several categories; there will be a debenture stock, perhaps carrying mortgage rights and entitling the holders to a fixed rate of interest, and most probably to repayment in full or at a premium at some future date. In case of default in payment of their interest or repayment of the sums promised at the due date, the debenture-holders would be entitled to take over the property and put it in the hands of a receiver. They are thus not shareholders in the company but its creditors, and, strictly, securities issued in this form of a mortgage or debenture are not part of a company’s capital but its debt. Ordinary business parlance, however, usually includes mortgages and debentures as part of capital. The share capital is usually divided into preference and ordinary, the preference shareholder being entitled to a fixed rate of interest which has to be paid to him before the ordinary shareholders receive anything. This preference right among English companies is usually what is called cumulative, that is to say, if the preference dividend is not paid in any year all arrears have to be paid before the ordinary shareholders receive any return on their investment. In America, however, where the term “preferred” rather than “preference” is more usual, this cumulative right is not so common as it is in England; in some cases also preference shareholders are entitled to a further participation in profits after a certain rate of dividend has been paid to the ordinary shareholders. The ordinary shareholders as a rule take what is left of the profits after the claims of debenture-holders and preference shareholders have been satisfied. If the company is successful they thus earn higher rates on their investments than go to the holders of other forms of securities. If the company fails they receive little or no profit, and the claims of the mortgage and preference shareholders have to be satisfied in full before the ordinary shareholders get any of their capital back in case of liquidation. Almost infinite variations, however, are performed on the theme of capital arrangements, with income debentures, cumulative ordinary shares with a fixed rate of dividend, deferred shares, founders’ shares and so on. And some companies issue no securities except ordinary shares or stock.
By this ingenious system the amount of risk involved by industrial investments can be varied to suit the taste of the individual investor, but generally with the result that the less risk he takes the less return he is entitled to on his investment. The holder of a debt which is a first charge on a long-standing and well-managed industrial or transport concern comes as near as he can to eliminating risk altogether from an industrial investment. It consequently follows that this kind of security is originally issued and is dealt in on the markets of the world on terms which give their subscribers or purchasers a comparatively low rate of interest. The preference shareholder, who is not as well secured as the debenture-holder, but ranks before the ordinary holder, also stands midway between them in the matter of risk and the matter of return. Before the World War, for example, if a well-known English brewery company were appealing to the public for subscriptions it would probably have been able to issue its debenture stock in return for a promise of 4% to 4½%, its preference shares on the basis of 5% to 6%, while its ordinary shares, if they were to expect a ready response from the public, would have had to show a probable return of 7% or 8%.
When the prospectus has been issued and the public subscription has been carried out, the securities offered are then quoted on the Stock Exchange at prices which will vary with the opinion held concerning the present and prospective prosperity of the company, and also in accordance with the general rate ruling for the use of money, which varies like the price of everything else in accordance with supply and demand. At a time when there is a great demand for capital for the development of new and old enterprises all over the world the rates that have to be offered in order to tempt subscribers will be forced up by competition, and consequently the price of existing securities will tend to fall owing to sales by their holders, who are tempted by the more alluring rates offered by new ventures. If, on the other hand, enterprise is slack and new creations of capital are comparatively rare, then the pressure of accumulating savings for investment in existing securities will force their prices up and so lower the rate of return which an investor may expect.
By this means capitalism has devised a highly efficient machinery through the mechanism of the Stock Exchange by which anyone who has lent money to industry, as conducted by an ordinary joint stock company, is able in normal times to realize his holdings and turn them into cash by sale on the stock markets. If the company in which he has invested has been successful and is fulfilling, or more than fulfilling, the anticipations held out in its prospectus, he will be able to sell his holdings at a comfortable profit, especially if he is an ordinary shareholder. The prices of securities with a fixed rate of interest or dividend naturally fluctuate less than those of the ordinary shares, but even in their case the success or failure of the company has a very considerable influence upon the price for which they would be sold. Many popular securities have a world-wide market and can be dealt in in all the financially civilized countries; and this development of securities readily marketable at publicly quoted prices has been a great assistance to the growth of international banking.
Freedom of Enterprise. — By the development of this machinery it is possible for the association of small contributions by a large number of people with comparatively small means to carry out enterprises on a colossal scale, and to pour the stream of investment into all the countries of the earth, fertilizing its backward
places and bringing forth a vigorous crop of goods and services and making the world into one great market united by the bonds of industry and finance. In many large industrial companies nowadays, shares of £1 each or less are now issued, and in this way capitalism has been democratized to an extent which a hundred years ago would have been thought quite incredible. Enormous enterprises, the most obvious example of which are the Egyptian pyramids, have been carried out in the past by means of slave labour employed by tyrants; and the Roman roads and aqueducts are another example of what could be done by the application of state management to a highly disciplined people. But the most notable achievement of modern capitalism is that it has vastly increased the productive power of mankind by making use of the resources of thousands of individuals voluntarily subscribing their money in the hope of profit which can only be earned if the consuming public will voluntarily buy the goods and services produced. Thus capitalism is essentially based on freedom the freedom of the subscriber in risking his money, and the freedom of the consumer in giving or withholding his custom and the profit that it makes possible. It opens its pocket freely — sometimes too freely — to anyone who can persuade it that an enterprise is likely to be profitable. Under it the way is open from the bottom of the ladder to the top for those who have the diligence, determination, capacity, and luck to climb; and they can climb only by producing something that will fetch a good price in the market of their fellow-creatures’ needs and desires. The freedom of capitalism is thus limited by the consumers’ veto. It can only succeed by pleasing the ultimate buyer and coöperating with the consumer by satisfying his needs.
Prejudice against Capitalism. — Nevertheless, capitalism is perhaps now more virulently criticized than any other human institution, largely owing to the belief that it involves robbery of the wage-earning classes by those who place the means of production at their disposal and pay them wages for working upon them. The prejudice against capitalism could not be as wide as it is unless there were some foundation for it; and in the first half century in which modern capitalism was active the exploitation of the wage-earners through low wages, long hours, disgraceful working conditions and ruthless dismissal at any time when it seemed more profitable to the employers to reduce output, was carried on to an extent which is now seen to have been criminal. This seems to be the reason for the astonishing hold which the works of Karl Marx have exercised upon those of the wage-earners who are attracted by his revolutionary doctrines. It is admitted by Marx’s most fervent admirers that most of his theories were wrong, that many of his assertions were incorrect, and that most of his forecasts have been proved to be baseless. But the fact remains that he was able to describe a state of things in English industry on the authority of official documents which was entirely disgraceful; and the wage-earners, who probably seldom study his works but usually rely upon a summary of their contents, find that with regard to the exploitation of the worker he has a solid basis of facts which are known to them by the tradition they have received from their forbears who worked under the miserable conditions that he describes.
It need not be said that since the middle of the 19th century there has been a very great change in this respect, thanks to Factory Acts, the growing strength of the trade unions and a more humane and sensible spirit among the employers; and it is interesting to consider why it should be that the employers of the first half of the 19th century, most of whom were probably quite human and kindly people who thought that they were doing their best according to their lights, should have treated those who worked for them in a manner which now seems to us so inhuman. In the first place, we must remember that a very large number of them in those days were men who had risen from the ranks and had themselves had to suffer the hardships which they imposed on others, and, since they had come through them successfully, did not see any reason why anything better should be done for those who worked under them. But a further excuse has to be found for the men of noble lineage and high intellectual attainment, who also suffered barbarities to be perpetrated in the mines and factories which they owned; and this excuse is provided by the pessimistic utterances of economists such as Adam Smith, Malthus and Ricardo, who stated or implied that the pay of the wage-earners could not rise above the level required to maintain them as efficient workers; and that any attempt to improve their condition would simply lead to an increase in their number by procreation which would inevitably defeat the efforts of those who tried to improve their lot. With doctrines such as this in the air, and expounded by high authority, there is some reason to excuse wickedness or mistakes which have cost the industrial world dear by the legacy of bitterness and suspicion which they have left behind.
Capitalism and Wages. — It is also true that too many modern capitalists are still apt to resent any attempt on the part of the wage-earners to improve their lot by demanding better wages and shorter hours of work, and do not seem able to perceive how entirely short-sighted such resentment is. When the wage-earners are confronted, every time they ask for an improvement, by demonstrations on the part of capitalists that its granting would immediately ruin the industry in which they are concerned, and when nevertheless they insist upon the improvement and then find that the industry is by no means ruined but goes ahead to fresh prosperity, it is natural and inevitable that the wage-earners should be filled with a deep distrust of any statement made by their employers concerning what is and what is not possible to be granted by industry. And it is not only owing to this distrust and bitterness that this policy on the part of employers has been short-sighted. They might have recognized that for all the great staple commodities the wage-earning classes are already, and will be to an increasing degree, the most important consumers; and therefore that those who are engaged in making any product of general use will find it to their own interest that the general level of wages should be high so that there should be a good and steady demand for the product which they have to sell. It may be true from the point of view of the next balance sheet that it will pay any individual employer to pay as low wages as possible to his workmen, but he ought to recognize that what he needs is that all the workers in all other industries should be paid as well as possible and that he, by paying his own workers low, is doing what he can to depress the general level and so defeat his own objects in securing a market. This is quite apart from the wider question how far low wages involve cheap production. Up to a point, and as long as the wage-earners can be induced to give a fair day’s work in return for their wage, experience has shown — especially in America — that high wages are an important item in cheapening production. Lately, and especially since the war, experience has shown that increases of wages have been followed by absenteeism on the part of the workers, and slack work while they are at work. Up to this point it should be the ambition of enlightened employers to pay the highest wages that the industry can stand. Capitalism increases its own efficiency and those of its wage-earners up to the point at which it enables them to improve their health and efficiency by paying higher wages; but when, as sometimes happens, the wage-earner simply has no use for any increase in his money receipts, then higher wages merely mean that he works fewer days in the week. The only remedy for this deadlock seems to be the education of the worker in the habit of accumulating for himself out of any surplus that he earns. If the wage-earners could thus be induced by accumulation to become capitalists themselves, it is possible that an improvement, the extent of which it is quite impossible to measure, might be secured in the relations between labour and capital.
Charges Examined. — If then we admit, as we must, that the early days of modern capitalism were marked by serious injustice inflicted on the manual workers, and that even to-day employers are much too ready to resist demands on the part of labour for improvements in its conditions, it must at the same time be remembered that these faults in the working of capitalism do not necessarily imply any essential injustice in the system or any blots upon it which cannot be improved out of existence. If the early employers, taking advantage of the unorganized state
of their workers, paid them too low for too long working days under working conditions which were a disgrace, it is also true that these conditions are in most industries, especially the best organized and most prosperous industries, a thing of the past. Moreover, the charge against capitalism, brought against it by the most extreme of its critics, is not merely that it has been in the past or is now unjust to those who work for it in the matter of hours and wages, but that the whole system is essentially based upon robbery, that the whole product of industry is really due to the exertions of labour, and that any interest or profit taken by the capitalist is necessarily a form of robbery. It is not a question of degree — that the capitalist has taken more than he is entitled to — but that the capitalist is not entitled to take anything at all, and that anything he takes is essentially a theft.
Labour’s Capacity. — For this contention it is very difficult to find any real ground either in fact or in theory. Labour, in the sense of manual labour, by itself can effect nothing. Put down the most skilful hand-worker on a bare piece of ground and he cannot produce anything out of it until he has made himself tools and so become a capitalist; and, in the meantime, he would somehow have to feed himself on any roots that he could dig up, or any wild animals that he might be able to kill. Even if we include under labour the brain-workers and organizers, it remains true that any body of skilled workers, organized as well as possible under the most skilful management, would be equally ineffective without the assistance of the factory, tools, and other equipment which have to be supplied out of capital, that is to say out of the accumulation of past savings, before they can produce effectively. Labour by itself can effect nothing industrially or commercially; labour plus management is equally powerless. Capital by itself is, of course, in exactly the same position. Anyone who through the possession of capital owns a large supply of raw materials, and the necessary land, factory and equipment, can make nothing out of them without efficient management and efficient manual labour. These truisms are usually acknowledged by the extremist advocates of labour’s claim to what is called the whole of its product. They admit that labour must have machinery and tools to work with; but Mr. Philip Snowden, for instance, the English Labour M.P., has contended that “the existence of a rich class who do no labour is the conclusive proof of the claim that labour does not receive all that labour creates, but that a surplus over and above the wages of labour is appropriated in some way and some form by those who do no work.” But this argument begs the whole question by assuming that “labour creates” all that labour produces with the help of machinery. It seems to be based on a confusion of mind which imagines that because the machinery and equipment by themselves can produce nothing, therefore, those who work them and make them efficient are entitled to everything that is produced by their own efforts assisted by the machinery. In fact the existence of the machinery, which has been provided by the possibly idle capitalist, enables the manual workers to produce goods of an immeasurably greater volume and value than they could turn out without it. If labour is entitled to the whole of its product, as it surely is, it is also true that labour gets the whole of its product and a very great deal more, because, owing to the assistance given it by the machinery and equipment provided by capital, it is able to produce a very much greater volume of goods, and the bargain between it and capital results in its being better off than it could have been without capitalism’s assistance.
To take an obvious example, let us suppose a man in a primitive stage of society to have hit on the idea of making a spade, and so greatly increasing his own production of food. If he then makes a second spade and lends it to a friend, enabling the latter to multiply his production and charging him a portion of the increased food for the use of the spade, then we see a rough analogy of the bargain which under capitalism is struck between capital and labour. In this case the friend who borrows the spade works for the capitalist who lent it, but he also works for himself. By the use of the spade his production is multiplied manifold; and to argue that he is entitled to take the whole amount of what he produces with the assistance of the spade, and that the
man who invented and lent him the spade robs him by taking part of the increased production which it brings into being, is surely an example of astonishingly distorted logic. At the same time it has to be remembered that those who claim the whole product of industry for the manual workers can say that all the factories, means of transport, tools and machinery have actually been erected or produced by manual labour. But this manual labour, and the skill which organized it, were paid to produce these instruments by owners of wealth who were prepared to risk it on these objects. All these forms of the equipment of industry only came into being and increased the numbers and welfare of the whole community because some of those who controlled wealth when they were first invented used it to secure their manufacture and production instead of upon their own immediate enjoyment. At any time the future development of any country or community depends upon the extent to which its members are prepared to postpone immediate enjoyment to the provision of equipment for its further progress. If some of our ancestors had not made investments in industry in the past, and so equipped the world with all the machinery of industry and commerce, probably not half of us would now have been alive. Interest and profit are thus the reward paid for successful investment in the means of life in the results of which we all share.
Means of Production. — Critics of the capitalistic system are, at first sight, on firmer ground when they argue that it is wrong that anybody should possess, by the ownership of private wealth, this responsibility for the future development of the country or community; that injustice arises because private ownership makes it difficult and sometimes impossible for those who want to work to secure access to the means of production, and that a more equitable basis would be arrived at if all the means of production were owned by the state, or by some other public body, or, as is now contended by the syndicalists and guild socialists, by the industries which employ them organized into an all-embracing trade union or guild.
There can be no question that the existence of private property in the means of production does involve hardships and difficulties for those members of the community who do not happen to be born into the possession of property, or of the kind of qualities which enable them to acquire it rapidly. To such people, the ordinary unskilled workers, it must naturally seem unjust that if the kind and quantity of work that they offer to any private employer is not needed, some of them find great difficulty in earning a livelihood for themselves and their dependents. And the question that we have to consider is whether the hardships involved to a comparatively small number of the less fortunate members of the community are balanced by the advantages to the community as a whole involved by the working of the capitalistic system. Under that system anybody who by ingenuity and energy can earn more than his fellows is enabled and encouraged to do so and to devote his accumulations to the furtherance of industry by putting them out at interest, or engaging them in enterprises from which he hopes for profit. There is consequently a continued stimulus for activity and exertion, and it must always be remembered that this activity and exertion can only be successful if it produces something with which the community, as a whole, or a sufficient number of its members who are in a position to buy goods and services, are satisfied.
Thus, by this stimulus, the wants of the community have been continually considered and cared for by its most enterprising members, who are urged to do so by the hope of gaining profit. If this stimulus were taken away it is at least possible that progress would be very greatly retarded and that the interests of the community, as a whole, especially those of its poorest members, would be seriously affected. It has to be admitted that the wants of the community are not always wholly sensible and are very often marked by highly questionable taste. These drawbacks are surely to be best amended by the education of the community to a more sensible and tasteful use of the power that it has by its decision, through the manner in which it spends its money, concerning the goods and services which are turned out by industry. If the decision as to what is to be produced is to be
in the hands of a bureaucratic committee, as under state socialism, or of a guild or trade union committee, as it would apparently be under guild socialism or syndicalism, then it is perhaps possible, though highly doubtful, that the objects on which the productive enterprise of the community would be exercised might be more sensible and tasteful; but the general members of the community, having no power of choice, would not be exercising sense or good taste, but would merely be taking, whether they liked them or no, goods and services provided by the decision of an outside body.
Advances under Capitalism. — A more serious doubt arises whether under any alternative system that has yet been suggested the actual needs and necessities of the community would be successfully met. We have to admit that under capitalism there has existed and still exists a great deal of destitution and poverty which are serious blots on the success of the system. On the other hand, anybody who takes even a superficial and cursory view of the productive progress of the last century and a half under modern capitalism must admit that an enormous advance has been secured. There is no need here to enumerate all the miraculous inventions by which man’s power over nature has been increased, and his productive capacity has been enormously multiplied. The extent of these powers was only fully realized when the World War came, and, in spite of the view expressed by some economists that a modern continental war could not last more than a few months because the economic strain would be too great, it was nevertheless possible to carry the war on for more than four years, to develop the production of lethal weapons during its course on a scale which has never heretofore been dreamt of, to feed and clothe the armies in the field much better than armies in the field had been fed and clothed before, and, at the same time, at least in England, to increase the standard of comfort of the greater part of the population. These achievements were in fact only carried out by making drafts to some extent upon the capital resources of the countries engaged, as, for example, when England sold back to the United States her investments in American railway bonds in exchange for food and munitions of war, which she was importing from America. But, when full allowance has been made on this score, the fact remains that the World War demonstrated a growth of productive capacity which had not been suspected until the supreme test aroused the energies of all the chief nations of the world.
But, apart from this astonishing effort at a time of crisis, we may take the prosaic facts of the last half of the 19th century as quoted by acknowledged champions of socialism. Mr. Sidney Webb, in his Industrial Democracy, speaks of “the past fifty years’ rise in the condition of the English wage-earning class.” Mr. Snowden, in his Socialism and Syndicalism, says that according to official figures between 1850 and 1900 the wages of the working classes in England had risen by 78%, and at the same time there had been a fall in the prices of wholesale commodities of 11%. This is surely a wonderful achievement which has to be granted as practical evidence of the efficiency of the capitalistic system, and of the extent to which its benefits were being shared with those who did its manual labour.
Mr. Snowden objected that the prices of wholesale commodities are not the best possible test of the buying power of the wage-earners, and that certain articles which they use had in fact risen. This may be so, but nevertheless the very great advance in actual money wages, accompanied by a quite appreciable reduction in the prices of many articles of general consumption, is a stubborn fact. This, indeed, Mr. Snowden to some extent admits, but he goes on to argue that this progress had stopped at the beginning of the 20th century, and that the tendency had then become permanent by which the share of the wage-earners in the product of industry was actually going backwards. This was certainly true in the first few years of the century, since the rise in wages, which still continued, did not quite keep pace with the rise in general prices. But Mr. Snowden’s contention that this tendency was permanent was merely an assumption which might easily have been proved false even if the war had not happened. As we all remember, the World War came at a time when
the manual workers of England were preparing a great attempt to improve their position, and there is every reason to assume that this attempt would have been successful. In any case, the war came and the general position of labour was certainly improved during its course. Since the war, the struggle between wages and prices to keep up with one another has been somewhat difficult, but it may at least be contended that this has been due not to an essential fault in capitalism, but because the wage-earners thought fit to restrict output in a mistaken belief that they would thereby resist any attempt to force them back to the pre-war standard, which they were rightly determined to avoid.
We have also to remember that under the sway of capitalism this very considerable improvement in the wage-earners' lot has been carried out in spite of an enormous increase in population. If it be admitted that the general standard of life before the World War was not all that it should be, it must also be admitted that the gift of life and all that life involves had been showered upon millions of people in all the economically civilized countries of the world, who could not have come into being if it had not been for the great increase of wealth under capitalism.
Weakness of the Alternatives. — One of the strongest arguments in favour of the present capitalistic system is the weakness shown by any system with which its critics would propose to replace it. State socialism has long been before the public as an alternative to the private ownership of capital. If it could be worked its economic advantages would be considerable, because it would mean that the state would own all the means of production and so would be the sole purchaser and the sole organizer and the sole distributor. The state would, therefore, decide what the needs of the community were, and how much work had to be done to provide them, and would set the members of the community to work to provide these things. All the waste involved by competition and advertisement would be saved, and all the mistakes in production would be avoided, which now arise because those who organize production have to try to foresee and forestall the needs of the public. The state would say what work each one of us was to do and what goods each one of us was to consume. If it were really possible that under this system we should work as well as we work now, there can be no doubt that the business of supplying the community’s needs, as interpreted by the state, would be free from many of the joltings and jarrings which now often put the industrial machinery to some extent out of gear. But, in the first place, there is the enormously important question whether such a system could work at all — whether in fact the ordinary human being, as he is to-day, would be prepared to work at the bidding of the state, on conditions laid down by the state, with anything like the enthusiasm and readiness with which people work nowadays with the prospect of securing profit and advantage to themselves. Even if it be true that the great majority of commonplace people, who do not at present work with much enthusiasm or energy because they know that their own chance of achieving striking success is remote, would work for the state as well (or as indifferently) as they work now for private employers, there is very considerable doubt whether the more stirring spirits who think they can see their way to fortune in present circumstances if they work for it with determination, would put anything like the same vigour into work that they did for the state; it is upon the energy and readiness to take risks of this comparatively small body of stirring spirits in the community that economic progress really depends. If we stifle the incentives which now spur them to take risks and try experiments in the hope of fresh opportunities of profit, there is grave danger not only that the economic progress of the community might be checked, but that its whole economic organization might fall into decay and slothfulness, and that any attempt to improve or expand might be met with the same cold and unreceptive stare that now usually greets any new suggestion that comes up before officials of government departments. It might be possible in time to produce a set of officials who would be as ready and eager to promote the economic efficiency of the community as are the present captains of industry stirred by the incentive of profit. But past experience does not show that there
is much hope of this happening, at any rate for many years, and in the meantime any community which subjected itself to state socialism might find itself very much worse off. It is true that during the World War great feats were achieved by government departments in organizing the supply of food and of war munitions, but they were achieved because the spirit of the nation was stirred to meet the most momentous crisis in its history; and because government departments were able to rely upon the assistance and experience of a large number of men who came to work in them, who had been trained in the school of practical business based on the incentive of private profit. And even so, these official achievements during the war were only carried out at a cost which the country could not possibly have stood except for a comparatively short time; they also involved continual friction between government departments and the wage-earners whom they employed, and their general results were so unsatisfactory that it is now a commonplace, even among labour leaders who are most anxious to nationalize industry, that whatever happens “bureaucratic control” must not be allowed to take charge. “Government departments are in the worst of bad odours just now, and nothing which seemed to involve an extension of bureaucracy would have a chance at the polls” — so writes Mr. Gerald Gould, one of the latest exponents of socialist ambitions, in The Coming Revolution in Great Britain, published in 1920. How it is possible to organize nationalized industry without bureaucratic control has not yet been shown.
Nationalization. — The nearest attempt at solving this problem is made by the syndicalists and guild socialists, who do so by giving the nation remarkably little to say in the conduct of industry. Syndicalism in fact seems, as far as one can make out from the shadowy sketches that are obtainable of the desires of its champions, to ignore the state altogether. It proposes that the workers in any industry should seize the industry’s capital equipment for themselves and work it for themselves. It is difficult to see how such a scheme could possibly be worked in practice. With each industry its own master there does not seem to be any means of arriving at any common denominator for the exchange of their products, that is to say, of arriving at a price, and the question of the provision of further capital seems to have been left out altogether. Guild socialism seems to be an attempt to reconcile syndicalism and state socialism and to arrive at a working compromise by a compound of the two. Unfortunately, its schemes as at present expounded seem rather more likely to suffer from a mixture of the drawbacks of both systems. The guild socialists consider that the capital equipment of industry should be owned by the state, but that the whole organization of industry, the decision as to what is to be produced, and the control of the product, are to be in the hands of those who work in it with brain or with hand. Here again we have the difficulty as to how we are to arrive at a means of exchange between one guild and another. If the shirt-making guild thinks that its members ought to get a pair of boots in exchange for two shirts, while the boot-making industry thinks that a pair of boots ought to be exchanged for three shirts, who is to decide between them and what power is to enforce decision? In the exceedingly vague sketches of the guild systems that have been produced by their champions, some attempts have been made to answer these questions. It is suggested that there would have to be a guild parliament representing all the guilds, a state parliament representing the consumers, and apparently yet another parliament which is to settle matters when these two parliaments cannot agree. Obviously there are materials here for economic chaos. It is true that if everybody worked with a perfectly angelic spirit such a system might possibly be able to carry on the work of production, but if everybody had an angelic spirit any system, even capitalism, would also be highly successful. But the guild socialists have to admit that, if any particular guild which was strong enough chose to hold a pistol at the head of the rest of the community by refusing to work except on its own terms, serious difficulty would arise. In fact, some of its more candid advocates have stated frankly that the wage-earners might conceivably be a good deal worse off under guild socialism; but they seem to
think that a diminution in their actual control of goods and comforts would be more than compensated by the greater freedom they would enjoy, and by the feeling that they were no longer working to profit a private capitalist.
Economic Tyranny. — How much truth is there in this claim for the greater freedom to be enjoyed by the wage-earners under guild socialism? One of the principles on which its champions most strongly insist is that production and the control of the product are to be in the hands of the guildsmen themselves, and that, consequently, they will be able to insist on producing goods which they think should be produced, rather than goods which consumers would prefer to consume. One of their champions, Mr. G. D. H. Cole, even goes so far as to mention the right to “choose whether they will make well or ill” as one of the things which must be secured for the workers under guild socialism. Certainly the right to work well or ill is a very large extension of freedom of a kind, but is it likely to react in favour of freedom in the fullest sense of the word? As industry is now organized under the principle of the division of labour, every one of us produces or helps to produce one article or fraction of one article, but we consume hundreds of articles. Economic freedom, that is to say, freedom to provide ourselves with such goods as we should like to consume, thus seems to be much more real under capitalism, which gives us the right to spend our wages and salaries as we please, than it would be under state socialism or guild socialism. State socialism would tell us what work to do and what goods to consume; and guild socialism, though apparently leaving to us, when once members of a guild, the right to decide along with our fellows concerning the goods that we will produce, and also as to whether we will work well or ill, would nevertheless leave us dependent upon the decisions of the other guilds as to what kind of goods they chose to produce, and upon the inclination to work well or to meet our demands with shoddy and ill-made commodities. Since this is the kind of freedom which is held out to the wage-earners under these rival systems, there certainly seems to be good reason why they should think many times before taking a leap in the dark by adopting them.
Capitalism and Progress. Such are the doubts and difficulties that face us when we contemplate the practical working of any alternative so far suggested to capitalism. For it, on the other hand, we can at least claim that, with all its faults, it has achieved a marvellous improvement in the command of man over natural forces; and has produced an enormously greater amount of wealth, which has been distributed, though in a manner which leaves a good deal to be desired, over a greatly increased population. Along with this purely material improvement there has proceeded a great expansion in education, sanitation and social reform. Capitalism can certainly lay no direct claim to the whole of this expansion, a great deal of which has been brought about, in spite of the opposition of the propertied classes, by a few enthusiasts, educational and scientific; but capitalism can fairly claim that these enthusiasts could not have done their work if there had not been available the surplus supply of wealth which was called into being by the efforts of private enterprise working with the incentive of profit. A noted labour leader has recently said that capitalism has made England a “C.3” nation. But this description is more rhetorical than accurate. England’s achievements by land and sea, during the World War, and likewise those of her Allies and enemies, who had also developed their resources under a capitalistic system, were such as to astonish those who had anticipated that the drift of the populations into great towns, and their occupation under sedentary conditions, would make it difficult to find armies who could fight with the spirit in which armies fought in former days. In fact, armies were produced in proportion to the population on a scale previously undreamt of, and fought an almost continuous battle for four years, showing unprecedented courage under conditions that no armies had hitherto been asked to face. The spirit and physical power of the countries which have grown into material greatness under the capitalistic system certainly show no sign of demoralization. At the same time it is true, as has already been admitted, that the blot of destitution is one which has to be
erased from the record of capitalism before it can claim to have produced a system which is really worthy of what is called civilization. If capitalism is to continue it will clearly have to remedy this evil and others which have already been mentioned. The leading spirits among those who are interested in its maintenance are fully aware that these things have to be remedied. In fact the change of attitude on this point among employers in recent years almost amounts to a revolution, though there are still too many obstructive exceptions. Associations formed, for the face-to-face discussion of these points by employers and employed are already common, and, on the side of the employers, it is certainly true that (perhaps under the spur of self-interest) they are earnestly trying to repair the weaknesses in the system which they have to work. Their difficulty is to know what it is that labour really wants; what concessions can be made which will induce labour to work the capitalistic system with hearty coöperation. Improved conditions, higher wages, and greater influence on problems of management, the best of them are more than ready to grant if only they can secure in return for them active work during the time when the manual labourers are engaged on their job, and the renunciation of the policy of the restriction of output. It would appear from the utterances of those who consider themselves entitled to speak for labour, such as Mr. Sidney Webb and Mr. Cole in England, that labour has made up its mind that it is not going to work in future to put profits into the pockets of private employers; in other words, it is determined to end the capitalistic system. Whether the rank and file of manual workers have really adopted this extreme view may very well be doubted, but they are extremely likely to adopt it unless they can be granted greater security. This is certainly a demand on the part of the manual worker which will have to be met by capitalism if it is to survive. The anxieties of the ordinary manual worker, who does not know how soon he may be told that he is no longer wanted at his job, should always be present in the minds of the employers, and if the schemes now being mooted by which every industry should make itself responsible for its own unemployed can be brought into practical effect, there can be no doubt that one of the worst evils of capitalism will have been abolished.
Another reform on which the manual workers seem likely to insist is a clearer statement of the costs and profits of industry. At present the accounts published by joint stock companies usually only succeed in making darkness visible. Labour has so often been misled as to the capacity of industry to stand concessions to it, that employers will be well advised to produce a more scientific system of accounting, by which they can be able to prove to demonstration what the true costs of industry really are, how much is required for depreciation and upkeep, how much goes to labour and management and how much is taken by capital.
As to the sordid ugliness with which capitalism is usually charged, everyone who has visited an English north-country industrial town must admit that the system in its craving for cheap production has ignored many things which make life tolerable for those who work for it, and has therein shown only another example of short-sightedness for which it now has to pay. Even on this point, however, one feels a certain doubt whether any alternative scheme of state socialism or guild socialism would provide the community with the necessary leisure and surplus wealth that could be devoted to the beautification of the country which adopted it, as is too usually assumed. If everybody is to have a nice house and live in pleasant surroundings, production has to be organized so as to be not only comfortable for those who are engaged in it, but efficient in the matter of output. And, on this subject, as has already been shown, there is good reason to doubt the efficiency of alternative schemes.
Inherited Wealth. — Another of the weaknesses of the capitalistic system is the power that it gives to owners of wealth to continue to accumulate it and pass it on to their heirs and assigns, with the result that a class is created which is able to live in great luxury on the past efforts of their ancestors, relatives, or friends, without making any effort to justify their own existence. There
can be no doubt that the existence of these huge fortunes, accumulating and being passed on, are a source of great bitterness among the classes which do not possess them. Much might be done to alleviate this bitterness if all the owners of this wealth, and not only a certain number of them, were careful to make a more public-spirited use of it. It is true that they owe it to the work and exertions of others who have passed on this wealth to them, but this is only partially so. A large part of it they really owe to the existence of an ordered society providing a market and outlet for the efforts of those who accumulate the wealth and a machinery for investing it and reinvesting it, and so increasing it from generation to generation. From this point of view a large part of their great wealth they owe to the community in which they live, and the assumption that it is their own to do what they like with is a dangerous one which will cost them dear if put into practice too logically. It is possible, however, that this evil may be cured, at least to a great extent, by the development of death duties and inheritance taxes, which seems likely to be an increasingly important part of the fiscal arrangements of civilized nations in time to come. Here again, however, there is danger that if this remedy is exercised too freely the process of accumulation which is required to provide the community with capital for fresh enterprise may be dangerously checked. For the evil of huge fortunes is balanced by the fact that it is largely from them that accumulations of new capital on a great scale are effected; and it is highly dangerous to diminish them by the use of the fiscal weapon, before the duty of saving and accumulating has been effectually brought home to those classes of the community which are now accustomed to spend all that they earn or receive.
Need of Extended Capitalism by Savings. — The efforts made in England and America and elsewhere, during the war, to try to induce everybody to save for victory have had effects which astonished those who were most closely acquainted with the thriftlessness of ordinary human nature (see Savings Movement). Long before then the coöperative movement had already developed a new and very interesting form of capitalism among the wage-earning classes. Cooperation is sometimes described by its own champions as an effort directed to the overthrow of private capitalism, but it is in fact merely a variation of it. Cooperation assembles the shillings and pounds of the wage-earners and puts them into productive and distributive industry, especially the latter, with marked success. The division of the profits is effected on different lines, those of the retail shops being divided among the purchasers in accordance with the amount of their purchases. So far its successes have been won on a somewhat narrow field, but there is no reason why they should not go ahead at a greatly accelerated pace as the higher earnings of the workers give them a larger margin available for saving. If this tendency could be continued, — if good work, rapid production, and high wages could be accompanied by individually small accumulations of capital by the great mass of the wage-earners, and if they could thus be induced to become not only wage-earners but themselves also capitalists, and if, at the same time, the large capitalists could be induced to see that the use they make of their incomes and of their leisure is a matter which concerns the community as well as themselves, — then it might be possible to arrive at a state of affairs in which every worker was a capitalist and every capitalist a worker, and capitalism, shorn of many of its worst evils, might work miracles of industrial production.
Authorities. — Gustav Cassel, The Nature and Necessity of Interest (1906); Prof. Shield Nicholson, The Revival of Marxism (1920); Philip Snowden, Socialism and Syndicalism (1913); J. Ramsay Macdonald, The Socialist Movement (1911); G. D. H. Cole, Self-Government in Industry (1917); Reckitt and Bechhofer, The Meaning of National Guilds (1918, 2nd ed. 1920); Harold Cox, Economic Liberty (1920); H. Withers, The Case for Capitalism (1920); Gerald Gould, The Coming Revolution in Great Britain (1920); Hugh Dalton, The Inequality of Incomes (1920); J. G. Brooks, Labor’s Challenge to the Social Order (1920).
(H. W.)