# Current Economic Affairs/Chapter 8

CHAPTER VIII
COMMONSENSE IN EXAMINING OUR PRESENT ECONOMIC POSITION
I propose to address you upon the present economic situation in the United States in the light of what seems to me to be that of commonsense, looking at facts and interpreting their meaning. I am not going to expound any abstract economic principles, although I may incidentally touch upon several. We have gained during the last five years a great deal of knowledge respecting the amount of our national wealth, our national annual income, our living expenses and savings that we did not previously possess. There is much data of such nature that we still need and for which our research men are diligently seeking. With the results of their work we shall every year be able to have a better understanding of current conditions. In the meanwhile the basic data that we have already gained enable us to form clearer ideas than ever before. Incidentally they dispel a great many illusions.
If I should undertake to submit to you our present collection of facts, even in their most concise expressions, my address would be largely statistical and consequently wearisome. I am therefore going to ask you to believe that the statements that I shall make to you are founded on facts. I am an economist who is ​fundamentally an engineer. The whole tradition and training of the engineer is the ascertainment of facts and coming to conclusions from them.
Of course, everybody knows that ascertained facts are often capable of different interpretations. Economists look at things through glasses of different colors, and the difference thereof has its effects. You may have heard of me being characterized as an exponent of capitalism. Let me say immediately that it is a correct characterization in the broad economic sense. Let us have an understanding about this before we go any further. Economically capitalism means the system whereby goods for further employment in the prosecution of affairs are accumulated by the individuals who are intelligent and thrifty. The antithesis of capitalism as an economic system is socialism. Capitalism is not an advocacy of the concentration of wealth in the bands of a few or a repudiation of the desirability of a wider and wider distribution of wealth. Anybody who owns property that is used for the creation of more wealth, whether he be a magnate, who individually owns a railway, or a farmer who owns land, or a mechanic who owns his tools and uses them, is a capitalist. Here I am indeed touching upon one of the abstractions of economics, but it is necessary for a good understanding of what is going on in the world, even in our own country, at the present time. The United States evinces no tendency whatever to become socialistic, but we are nevertheless in my judgment right now conducting our affairs without an understanding of the need for the creation of more capital goods.
There has been much talk during recent months about maintaining in the United States “the tide of ​prosperity” which has seemed to be beginning to wane. There is something grotesque about this, for half the people of the country have been wondering what kind of a tide of prosperity has it been that has not flowed over them. Whatever we have had, leaving the white collar workers and the farmers in discomfort as it has done, it has not been a tide of prosperity. That there has been a great activity in business is undeniable, but industrial activity and economic prosperity are two different things. The desire to maintain the tide of industrial activity may be translated into the wish to maintain fantastic wages for building mechanics and consequently high rents for houses, to continue to starve the railways and enhance the difficulties of transportation, to court the danger of another shortage of anthracite coal next winter, to aggravate the shortage of schools; and in the meanwhile to build more millions of automobiles, to squander more labor on highway maintenance and to promote the enjoyment of the luxury of leisure and the need for amusement by many people who ought to be working. In my judgment this is a cruel, unholy, and surely disastrous program.
Our thoughts will be clarified if we consider the fundamentals of economics. A people maintains itself by work—by nothing else unless the bounty of nature gives it food for nothing and the climate is so mild that shelter and clothing are unnecessary and the people are content to live in such a primitive way. In civilized countries, however, people have to work in order to provide their food, clothing, shelter, fuel, means of transportation, etc., and they have to work somewhat harder than for hand to mouth needs in order to provide for future requirements. In the United States this ​necessary surplus, under pre-war conditions, was found by experience to be about 15 per cent.
The need for appropriating annually a proportion of the national work for capital savings is apt to be obscure. A prosperous country has normally a surplus of houses and of transportation and manufacturing facilities, wherefore it may suspend adding thereto for a time, as during warfare, without experiencing inconvenience. We may visualize the need, however, by imagining a nation that had exhausted its native supply of timber and had only what it grew. Annually, then, there would have to be done a certain amount of tree planting, which would not yield timber for, say, 30 years. If this were neglected the time would come when the country would have no timber.
There are several great modifying factors in the welfare of a people. Among the favorable are mechanicalization, whereby men multiply their work by machines, and so increase their production; and economy in use, whereby they decrease their consumption. Among the unfavorable are the impoverishment of natural resources and the tendency of workers to diminish their intensity. A people can improve its scale of living only by causing the favorable factors to exceed the unfavorable.
Irrespective of these basic, determinative conditions a people may wilfully, or ignorantly, depart from the conditions of sound living. It may say, figuratively of course: What is the use of saving? Anyhow, savings appear in the form of railways, houses, factories, which are owned by capitalists. Such accumulations are a part of the capitalistic system. Let us capture the portion of the produce of industry that used to be ​saved for such purposes, and let us improve our scale of living and be merry.
Now this is precisely what we have been, consciously or unconsciously, saying and doing in this country. It has been found that, excluding the farmers, labor used to get normally from 65 to 75 per cent of the produce of industry. In recent years it has been getting probably upward of 80 per cent. The share of capital and management has diminished proportionately. It is significant moreover, that savings also have diminished. In other words town labor has captured a larger portion of the produce of industry, has improved its scale of living temporarily (although there may be doubt even as to the improvement) and certainly has been making merry.
All of this may be attended with great industrial activity. No matter whether we are producing capital goods or consumers’ goods we are bound to require raw materials and to use labor in their transportation and fabrication. Obviously there will be dislocations. Thus, instead of putting steel into buildings that will last 30 years we may put it into automobiles that will be scrapped in five years. We shall divert much labor and material to the production of gasoline with which to run the automobiles, and much cement for the improvement of the roads for them. Nevertheless there will be no question respecting the activity in doing all those things and in many lines there will naturally be handsome industrial profits. Superficially everything will seem to be ringing as happily as the marriage bell. There will be upswings and downswings of the so-called business cycle, but after all those are of only superficial manifestation.
​In the meanwhile great economic evils are undermining the whole structure. In capturing a greater share of the produce of industry town labor does not get it only from what are technically called property and management, but it robs the farmers, and shopkeepers who theoretically are capitalists. Moreover, the stronger classes of town labor prey upon the weaker of the proletariat. This upheaval of what used to be a delicate economic organization is in itself of ominous portent. But the people who capture an increased share of the produce of industry and proceed to make merry with it commit other crimes. In order to be merry there must be more leisure, i.e., shorter hours per week. More labor must be diverted to service and to the provision of pleasures. Many men refuse to do the disagreeable jobs that have to be done and that they used to do. In short, although we can not prove this statistically, there is the strongest kind of reason to believe that the 40 per cent of our population who constitute our workers do not put in so many hours of work per annum in 1923 as they did in 1913. We may be blind to the effects of this, not seeing that it is at the expense of savings—the provision of capital goods—that are going to be needed in coming years and at the cost of impairment of old property which we are neglecting to keep up.
However, industrial management feels much evil effect right away and makes frantic efforts to improve methods so as to counteract the consequences of the determination of labor to eat all of the cake of the old size and let consideration of the future go hang. In other words management is desperate in its efforts to make a bigger cake and preserve a necessary surplus ​for itself, knowing that failure to do so spells ruin. In some industries there have been brilliant achievements, but on the whole it is doubtful whether these constructive efforts have any more than merely offset the destructive influences. There is no positive evidence that 100 billion hours of work are producing any more goods in 1923 than in 1913. There is considerable evidence to the contrary. There is however positive evidence that 42,000,000 workers do not function for so many hours per annum in 1923 as they did in 1913. As I have previously pointed out the economic effects of this may be obscured for a long time, for they may be, and probably will be, at the expense of principal so to speak, and they will not be apparent until we find that we do not possess adequate housing, means for transportation, not enough schools, etc. Indeed, we are conscious of such inadequacy even now, but there is a general failure to understand its meaning or what has brought it about.
Let us pause here to consider what indeed it is that has brought this about. I say in one phrase that it is a state of mind; and I amplify this to say an ignorant and even insane state of mind. There has been a revolt against what is called capitalism. There has been the stupid representation that although capitalism had served to elevate the scale of living of the civilized world it had outlived its usefulness and could no longer succeed in functioning properly. Herein we find the germ of state socialism and pink socialism, which are founded on the preposterous idea that experienced people do not know how to conduct affairs properly and that inexperienced can do everything better. Alas! We have had practical demonstrations of the ​fallacy of this thought, absurd on its very face, and have learned that in business management the hand of the government is the touch of death.
Then we have had the thoughts of syndicalism and communism, founded on the hypotheses that the worker is the only real producer and that by capitalism he had been robbed of his tools and of all but a pittance of his own product. Italy tried syndicalism and wisely rejected it just short of its bringing national disaster. Russia tried communism and found it a formula for the expeditious committal of suicide by the proletariat.
Communism, syndicalism and socialism have all been tried on small and large scales, with disastrous results, so why waste any more time upon them? American labor, in its superior wisdom, does not. American labor has consistently turned its face against false prophets and has been directing itself according to what I shall describe as the parasitic theory of labor. This is founded on the economic theory of the residual claimancy of labor but is a perversion of it. It supports capitalism, because capitalism can make the most production, but aims to claim the maximum that it can and let capitalism survive, which is shrewd but dangerous, for no dog can support too many fleas without running the risk of some impairment of health. The superior brains that are guiding American labor have no patience with communism, which they know spells quick suicide; or with syndicalism, which inexperienced dreamers fatuously expect to be an improvement over the old way of doing things. Oh, no! American labor wants the present management to continue to run things, but wants to mulct it to the very limit that it can without destroying it.
​Even before the war unionized labor was increasing its wages per hour and shortening its hours. The exigencies of the war constrained us to an accession to all of its demands. Since the war its policy has been simply to hold what it got. It is, however, defeating its own aims by carrying the parasitic theory too far. The theory of the residual claimancy of labor in itself implies that labor is getting all that there is for it without being parasitic and beginning to do damage. When it goes further it not only begins to do damage to the whole economic organism, but also inevitably it starts to prey upon itself.
When I am on a railway journey and the conductor comes through the train I look upon him with resentment as a symbol of what has caused my railway fare to be 1.8 times what it used to be. He, himself, has a grouch on his face, and although he is probably thinking that upon the completion of his run he will take a spin in the automobile that he did not use to have, he is resentful over the increase in his rent for which the building mechanics are responsible, and the high cost of the anthracite coal that he is putting in his celler lest next winter he may not be able to get any owing to the policy of the anthracite coal miners. The anthracite coal miners and the builders themselves are grouchy over the high cost of all the things they have to buy, toward which the railway men are contributory. Thus, even the aristocrats of labor consume each other and raise living costs against themselves.
So it goes down the line until we come to the clerks and other branches of the white collar class and to the farmers who not being able to prey upon anybody else become the general victims. We might simply be sorry ​for them and rest there if it were not that we can see that the aristocrats of labor are easing up in their work and thus diminishing the amount of the national produce; and that they are eating up what ought to be saved to provide for future national requirements.
There is a prevalent misconception, which organized labor is doing its best to promote, that we are in the midst of a contest between greedy employers and ill-treated employees. That is not the truth in any way. Most employers are willing to give their labor anything it wants, providing they can recoup themselves from the general public. The real issue is between the general public and a portion of town labor, not to exceed one third of all the workers of the country, which is seeking to enhance its scale of living at the expense of all the rest of the people and is jeopardizing the national welfare in the process. When people get the dust out of their eyes they will see that and will have no patience with mawkish sentiment and foolish misconceptions.
The total number of workers in the United States is about 42 million, of whom about 11 million are farmers and farm laborers, and about 10 million are professional men, managers, merchants, clerks and governmental employees. There are about 744 million factory workers, 134 million workers at hand trades, about 234 million engaged in transportation services and about 3 million engaged in building construction, both as mechanics and laborers. There is therefore a total of about 1414 million workers engaged in those major, mechanical occupations. The remainder of the working population comprises those who are classed as being in service, numbering about 4 million, and those who are in minor occupations, such as lumbering, ​fishing, operating telephones and telegraphs, etc. It appears therefore that at least 50 per cent of the working population of the United States is comprised in what may be described as the farming and white collar classes. It appears moreover that the transportation workers, builders, miners and factory workers who are claiming the retention of war scale of wages are relatively few in number, being distinctly less than one half.
The total membership in labor unions in the United States is variable, but at the present time is not to exceed 3,500,000. If labor unionism has been of incalculable benefit, as we are told, why do not all workers unionize themselves? And why does the membership in labor unions fall off so rapidly as it has done during several years immediately past?
Now, I am not finding much fault with anybody, not even with labor unions, although there are some serious things for which they are undoubtedly responsible. It is not, however, the labor unions that have caused wages to run high and hold high, except to limited extents. What has really done it is the law of supply and demand. Everybody in the Eastern part of this country knows that the wages for domestic servants have risen proportionately as high as for most building mechanics, but there is no union of domestic servants.
​The rise in their wages is explained by scarcity of such workers and great demand for their services.
Everybody knows moreover that it is not uncommon to find higher wages than the union scale being paid in open shops. The greatest exponent of the open shop in this country is the U. S. Steel Corporation. Its wage scale rose from 100 in 1913 to 254 in 1920, which was as great a rise as in any industry. Even in the strongly unionized field of railroading the average compensation of employees rose only to 236 in 1920. But while steel labor fell to 162 in 1922 railway labor was held at 216.
It may be that a labor union by threat of a general strike becomes able to resist wage reductions in times of business depression. If so that is a bad thing. It is probable that the complete unionization of the workers in an industry, acting in collusion with their employers, may arbitrarily enhance their wages at the expense of the public. There may be results of that nature in the anthracite coal mining industry. Also in the building trades and some branches of manufacturing. These unions are absolutely cold-blooded and selfish. I know instances where there are rival unions which knife each other remorselessly, although both have the common idea of skinning the public.
Apart from such excrescences, however, I do not believe that the labor unions have very much to do with the determination of wages. Their great mischief has been in the economic restrictions that they have ​made effective. These range from legislation relating to the conditions for work, as in the matter of railway labor, to limitations upon output, upon the number of men who may work in a trade, and the kind of work that they may do and may not do. All of these things are impediments to the natural operation of the law of supply and demand and therefore are bad. The harassed manufacturer who determines to operate henceforth an open shop, or none at all, generally does so in order to become free to conduct his business without insolent and ignorant dictation, not to pare wages, for he will be constrained to pay the market rate anyhow. This brings us to the most serious objection of all against labor unionism, viz. that it promotes slackness in work. That such has happened is certain. For example, we know that west of the Alleghanies building construction is done now at much lower cost with non-union men than with union men, both getting the same wages per hour. We know that non-union men there lay now as many bricks per hour as in pre-war times which union bricklayers refuse todo. We know therefore that inefficiency in this respect is due wholly to slackness and not to physical impairment. Henry Ford, that great manufacturer, recently declared that unionism expressed itself in the promotion of loafing.
The world is still in the throes of economic readjustment following the greatest cataclysm of history. America is enmeshed in this like all the rest of the world, though not so acutely as Europe. The readjustment is far from being completed. I doubt if it has scarcely more than begun and I expect that it will have many years to run. It may be prolonged by the erection of more economic impediments, stupidly conceived as ​panaceas although in truth their sponsors have sight of nothing but superficial symptoms. Nothing is going to avert the economic inevitable and the sooner we recognize that the better shall we be.
The true formula for the restoration of well being is simple, but it will not receive much attention, perhaps owing to its simplicity, perhaps for being found unpalatable, like many medicines. Moreover, the body public may be averse to taking any medicine while a good many doctors are assuring it that it is not sick at all, but on the contrary quite active and prosperous. I diagnose, nevertheless, that it is sick, organically sick.
America did not become rich out of the war, but probably became poorer. Any idea to the contrary is preposterous. It would follow from such an idea that warfare is economically a good thing. Since the war we have been squandering our earnings in high living and have not been saving enough. Yet in spite of the extravagances in living by some it is doubtful whether the real scale of living of all in 1923 is as good as it was in 1914. The war did not increase the concentration of wealth in this country but rather did it increase the distribution thereof. It is not true that 65 per cent of the wealth of the country is owned by 2 per cent of the people or anything like it. The war did not produce a class of unconscionable profiteers. Those who profited on the rising markets, without being able to avoid so doing if they would, lost, equally helplessly, on the decline. Only a few got out at the top and stayed out. The war produced an unbalancing of economic equilibrium, which is too complicated an affair for anything but nature to regulate. The unbalancing was in favor of the wage earning class and against the capitalistic ​class. The capitalistic class does not consist merely of the men of big business, but includes all of the little merchants and all of the farmers, among whom the farmers as the weakest are in dire distress. No country can be healthy if it be not economically in equilibrium, and it is not so when half of its people are poor and the other half are extravagant. These are some of the reasons why the United States is not so well as many of its people believe. Now, for the simple formula for recovery:
    1. Promotion of the will to work.
    2. Promotion of the will to save.
    3. Removal of all economic restrictions.
The first two prescriptions relate to state of mind, which we must first make healthy. The third prescription is the active agent. Let us scan our statute books and our existing practices and if we find anything of the nature of economic restriction let us abolish it unless there be some mighty good reason why that should not be done. You see I do not wholly revert to laissez faire. Nevertheless, I think we ought to go a long way toward it. If we do this, having already created a healthy state of mind, the law of supply and demand will do the rest.
I have no patience with sociologists, who in the desire to increase human happiness (which all of us have) see in the present unrest of peoples merely the effort of the submerged and dissatisfied to get that from which they have heretofore been deprived, or out of which they have been cheated, with a hope of attainment as never before. We are told by some who are described as idealists. that we ought to recognize this and give the masses what they want in the true spirit of progress, ​lest they rise in their might and take what they can get and lead the way to common ruin. I do not profess to be an idealist in the common sense of the term, which to me implies an absence of sense of the practical. Nevertheless I am not scornful of idealism in the broadest conception. The greatest idealists and progressives whereof I know are the engineers and the managers of business, who dream such dreams as no one else, but who do so in practical ways and work until they make them come true. There are many engineers whose minds do not rise above mere thoughts of measurements and materials, their strength and properties; but the great engineer has visions and is not so far removed from the poet as many might carelessly think. If it were not so, you would have no steam engine and none of the other things that in the space of a century and a half have raised the civilization of Europe and America so far above that of the interior of Africa, and by the very enrichment of the people, have led them to dissatisfaction, such being human nature.
So, as a professed materialist (who may nevertheless have ideals and visions) I say to the professed idealists, let us give to the dissatisfied everything in the ways of liberty and opportunity that they want. I am thinking only of America. An idealist told me recently however there is sufficient liberty and opportunity here, but that the aspiration is for more leisure and more things, in other words, that it is quite materialistic. This brings us right up against economic limitations, just as sometimes we are unfortunately constrained by the limits of our company balance sheets or family budgets. If the national income does not permit the satisfaction of idealistically materialistic aspirations what then can ​we do? Shall we eat into the principal and be merry while it lasts?
Well, we may squirm under the restrictions and try to persuade ourselves that they do not exist and while making inroads upon principal deceive ourselves in the belief that our income is really greater than it is. Within a family, limited by its budget, some of the stronger and more selfish members may greedily aggrandize their shares at the expense of the weaker and less assertive. Such instances are common enough both in corporate and family affairs. Our national affairs as a whole are in no wise different except in magnitude and greater complication.
In my recent discussion with an idealist, to which I have referred, I said in conclusion that in my judgment the aspirations of the discontented boil down to the simple desire to steal from those who have what they would like. This raw expression naturally was not relished, but we found that we could stand on a common ground in the agreement that the true aspiration of everybody is to know the facts. I think there is more trouble in this country at the present time from not knowing the facts than owing to anything else. If we know the facts we shall be apt, as a whole, to take the commonsense view of them. So, after much wandering, I thus return to the theme of my address.
* ↑ A speech to the Industrial Conference of the Y. M. C. A. at Silver Bay, Lake George, N. Y., Aug. 30, 1923.
* ↑ At the meeting of the American Federation of Labor in October, 1923, it was reported that the membership of that organization was then 2,926,468, a loss of 269,167 from the previous year and a loss of 1,152,272 from the peak in 1920. The membership in the railway brotherhoods is about 500,000. This indicates a total of about 3,500,000 in the ranks of organized labor at the present time. There are some general unions that are not affiliated with either the Federation or the brotherhoods. The decline in membership in the national unions is perhaps in part ascribable to increase in company unions, toward which there has been a certain tendency during the last year or two.
* ↑ Even that is but ephemeral. Great and prolonged depressions bring about the disruption of unions. Thus, the Knights of Labor broke up about 30 years ago. At the present time trade unionism in Great Britain, which heretofore has been far stronger than anything ever known in America, is showing strong signs of disintegration.