VII. p. 25.

240 THE THEORY OF BUSINESS ENTERPRISE

hood.!. For those workmen who continue to find
fairly steady employment during the depression,
however, even at reduced wages, the loss is more
apparent than real; since the cheapening of goods
offsets the decline in wages. Indeed, the cheapen-
ing of the means of living is apt to offset the fall
in wages fully, for such workmen as have steady
work. So that in the case of the workmen also,
as well as in that of the business men, the distress
which dull times brings is in some part a spiritual,
emotional matter.

To the rest of the community, those classes that
are outside of business enterprise and outside of
the industrial occupations proper, that is to say,
those (non-industrial) classes who live on a fixed
salary or similar fixed income, dull times are a
thinly disguised blessing. They suffer in their
affections from the reflected emotional detriment
of the business community, but they gain in their
ease of livelihood and in their savings by all the
difference between the price scale of brisk and of
dull times. To these classes an era of prosperity
brings substantially nothing but detriment.

1 The reduced scale of living of the working population is the chief
factor that counts as an offset against the reduction of the gross pro-
duction during dull times, as indicated above.

2 Cf. articles by G. Cassel, ‘‘Om Kriser och Daliga Tider,’ now
running in Ekonomisk Tidskrift (1904, Nos. 1 and 2), for a parallel
discussion of the topics here dealt with. Mr. Cassel’s exposition con-
nects more closely with the received notions of Capital, Production,
ete., and goes more into detail at certain points, particularly on Saving,

THE THEORY OF MODERN WELFARE 241

Depression is primarily a malady of the affec-
tions of the business men. That is the seat of the
difficulty. The stagnation of industry and the
hardships suffered by the workmen and_ other
classes are of the nature of symptoms and
secondary effects. Any proposed remedy, there-
fore, must be of such a nature as to reach this
emotional seat of the trouble and restore the bal-
ance between the nominal value of the business
capital engaged and the earnings of the business ;
that is to say, a remedy, to be efficacious, must
restore profits to a “reasonable” rate; which
means, practically, that prices must be brought to
the level on which the accepted capitalization has
been made. Such a remedy, to offset the disastrous
cheapening of products through mechanical improve-
ments, has been found in business coalitions and
working arrangements of one kind and another,
looking to the “regulation” of prices and output.
Latterly this remedy is becoming familiar to the
business community as well as to students of the
business situation, and its tangible, direct, and
unequivocal efficiency in correcting this main
infirmity of modern business is well recognized.
So much so, indeed, that its urgent advisability
has been formulated in the maxim that “ Where

Investment (Kapitalbildning), and Pecuniary Expectancy (Vantandet).
His exposition is not yet completed, but so faras may be gathered from
what has come to hand, he should reach substantially the same out-
come as that given above.

242 THE THEORY OF BUSINESS ENTERPRISE

combination is possible competition is impossible.”
What is required is a business coalition on such a
scale as to regulate the output and eliminate com-
petitive sales and competitive investment within a
field large enough to make up a self-balanced,
passably independent industrial system,—such a
coalition of business enterprises as is loosely called
a “trust.”

Such a business coalition, if it 1s comprehensive
and closely controlled, can adjust the output of
goods and services to the market with some nicety,
and can maintain the balance of the ruling prices,
or the price scale agreed upon, with such effect
that the received capitalization need not become
obsolete even in the face of very radical improve-
ments in the processes of industry. Its effect, in
the case of ideal success, is to neutralize the cheap-
ening of goods and services effected by current
industrial progress. It offsets industrial improve-
ments in so far as these improvements affect the
cost of goods more than they affect the value of
the money metals. It might seem at first sight
that by this mbhibitory effect of the trust the
entire advantage derivable from industrial improve-
ments within the scope of the trust should inure to
the gain of the business men in the combination,
but such does not appear to be the practical out-
come. The practical outcome appears more nearly
to be that material advantage inures to no one from

THE THEORY OF MODERN WELFARE 243

industrial improvements under the control of the
trust, In so far as the trust successfully carries its
point. This feature of trust management will be
taken up again in a different connection.

In addition to its prime purpose of checking the
decline of earnings on past investments, such a
business coalition is also enabled to distribute any
unavoidable effect of the progressively reduced cost
of production of the productive goods employed,
somewhat equably over the entire field of industry
comprised in the coalition, and so obviate the press-
ure of this untoward industrial progress falling with
exceptional severity at any given point. Kcono-
mies effected are at the same time made to accrue to
the collective business organization, showing them-
selves in the way of increased dividends and
increased effective (market) capitalization of the
coalition’s property, instead of being dissipated in
competitive selling, and so going to the body of
consumers or to the industrial system at large.

To return to a point temporarily set aside above.
By supposition, in what has just been said, any-
thing like a speculative inflation has been excluded
from the discussion of business depression; and
necessarily so, since the two do not come at the
same time. But at one point the two show a
feature in common. Under both of these two
widely different conditions of the business situation

944 THE THEORY OF BUSINESS ENTERPRISE

there is a discrepancy between the accepted capital-
ization and the actual earning-capacity.' But the
two differ even at this point in that, in the case of
inflation, the discrepancy is not felt until the climax,
when a widespread realization of the discrepancy
brings on an abrupt readjustment, in the crisis
which follows inflation; whereas in a period of
depression the sense of this discrepancy and the
protest against it is the most striking circumstance
of the case. The discrepancy between capitaliza-
tion and earning-capacity in a period of speculative
movement comes of an inflation of capitalization ;
whereas in time of depression the discrepancy is
due to a shrinkage of earning-capacity, — both
capitalization and earning-capacity being, of course,
counted in terms of money values. A speculative
movement offsets or checks the trend to depression
whenever it occurs; and for some appreciable time
past, such speculative movements appear to have
been the only force which has from time to time
broken the otherwise uninterrupted course of busi-
ness depression. Under the régime of a perfected

1 Tn the case of a speculative inflation,

cap = ea, 1 <cap! — ea + Aea “ ie
cost int cost int
in case of depression,
cap! = ea > cap! = ea — meas
cost x int cost Xx int

In the former case the current capitalization during inflation, be-
ing cap’, exceeds the bona fide capital value as proved by events, cap ;
while in the case of depression the nominal capital, being cap’, exceeds
the capitalization warranted by current earning-capacity, cap!’

THE THEORY OF MODERN WELFARE 245

machine industry and a perfect business organiza-
tion, with active competition throughout, it is at
least probable that depression would not be seri-
ously interrupted by any other cause.

But it has been a point of economic dogma in
modern times — not to call it a point of theory,
since it is not held on reasoned grounds — that
depression and inflation, followed by crisis, succeed
one another with a rough periodicity, interminably
and in the nature of the case. The periodicity
(with an interval of some ten to twelve years from
phase to phase) has not been established with any
cogent show of evidence, except for the period from
1816 to 1873; and even within that period the
evidence has not been convincing to all students of
these phenomena. A tentative explanation of the
periodicity, such as there may have been within
that period, as well as of its absence before and
after the period in question, may be offered on the
basis of the views here set forth. Keeping in mind
the point that the disturbance, both in the case of
inflation and in that of depression, is a discrepancy
between capitalization and earning-capacity, and
also the manner in which this discrepancy arises,
it may be said that prior to the earlier date men-
tioned the modern industrial system was not such
a comprehensive and articulate process that a dis-
turbance in one part or one member of the system
need be transmitted forthwith through the channels

246 THE THEORY OF BUSINESS ENTERPRISE

of business to all the rest. A speculative move-
ment need not spread forthwith throughout the in-
dustrial system. The great episodes of speculation
and collapse that occurred during earlier modern
times were not of the nature of speculative infla-
tion affecting the entire business community occu-
pied with industry. They are rather of the nature
of commercial speculation verging on gambling.'
So also, the crises of that earlier time, when they
were not collapses of gambling ventures, were com-
monly produced by some great disaster which
brought an absolute material loss upon the com-
munity, such as crop failures, invasions, or heavy
war expenditures. On the other hand, as regards
periods of depression prior to the early years of the
nineteenth century, they were also rare if not
unknown, except when due to failure of resources
or the burdens of government. The conditions
out of which depression could come, as a persist-
ent disturbance of business through a divergence
between the capitalization and the earning-capac-
ity of investments, were not had. The developed
machine system was absent, and without this the
cost of production of productive goods could not

1 So impressive a fact has the gambling character of early periods of
inflation and crises been that it has led economists to look for gambling
as a matter of course in later phenomena that have been classed as in-
flation and crises, even when no gambling element has been obviously
present. It has been felt that gambling must presumptively be pres-
ent whenever there is inflation or crises, because the showing of earlier
history runs that way.

THE THEORY OF MODERN WELFARE 247

be progressively lowered at a rate large enough
to set up and maintain a persistent divergence
between capitalization and earning-capacity in in-
dustrial enterprises.

At some uncertain point in the first half of the
nineteenth century the system of machine industry,
and the business system based upon it, attained
such a breadth and consistency that business disturb-
ances of appreciable magnitude in any part would
affect values throughout the system. It had then
grown so large and was so closely articulated a
structure that the relations of its members to one
another and to the system as a whole were of
greater moment for the fortunes of these members
and for the orderly process of the whole than were
the relations of the members to industrial factors
lying outside the system of the machine industry
and the business community. Hence industrial
crises in the proper sense of the word seem well at
home in this period. They spread with great force
and facility whenever they came ; and they had the
true character of business crises, in that they ran
with great severity without involving an appreciable
ageregate loss of material wealth, except in terms
of price. They commonly meant a cancelment of
values, without appreciable aggregate loss of goods.
They seem also to have been true to the staple defi-
nition of crises in that they followed upon a period
of speculative inflation in industrial investments.

248 THE THEORY OF BUSINESS ENTERPRISE

Chronic depression, however, does not seem to
belong, as a consistent feature of the course of
things, in this nineteenth-century period, prior to
the eighties or the middle of the seventies. The
usual course, it is commonly held, was rather:
inflation, crisis, transient depression, gradual ad-
vance to inflation, and so on over again.’

On the view of these phenomena here spoken
for, an attempt at explaining this circuit may be
made as follows: A crisis, under this early nine-
teenth-century situation, was an abrupt collapse of
capitalized values, in which the capitalization was
not only brought to the level of the earning-ca-
pacity which the investments would have shown
in quiet times, but appreciably below that level.
The efficiency and the reach of the machine indus-
try in the production of productive goods was not
then so great as to lower the cost of their produc-
tion rapidly enough to overtake the shrinkage in
capitalization and so prevent the latter from rising
again in response to the stimulus of a relatively
high earning-capacity. The shock-effect of the
liquidation passed off before the cheapening of the
means of production had time to catch up with
the shrinkage of capitalization due to the crisis, so
that after the shock-effect had passed there still
remained an appreciable undercapitalization as a

1Cf., e.g., Burton, Crises and Depressions, ch. VIII., for a succinct
account of depressions and crises in the United States during this period.

THE THEORY OF MODERN WELFARE 249

sequel of the period of liquidation. Therefore
there did not result a persistent unfavorable dis-
crepancy between capitalization and earning-capac-
ity, with a consequent chronic depression. On
the other hand, the earning-capacity of invest-
ments was high relatively to their reduced capitali-
zation after the crisis. Actual earning-capacity
exceeded the nominal earning-capacity of mdus-
trial plants by so appreciable a margin as to
encourage a bold competitive advance and a
sanguine financiering on the part of the various
business men, so soon as the shock of the liquida-
tion had passed and business had again fallen into
settled channels. But such a bold competitive
advance means the beginning of an extension of
credit and a speculative movement in industry,
such as has been discussed some pages back in
connection with crises. This movement has a
cumulative character, after the manner there in-
dicated, and its outcome is an inflation of capi-
talization and a large extension of credit, which
normally ends in a period of liquidation.
Within the period spoken of (1816-1873) this
liquidation is apparently always brought on by
some extraneous disturbance. But it seems that
the theory would require us to say that the extra-
neous disturbance requisite to bring such a specu-
lative movement to a head will be slighter the
farther the movement has gone; so that in the

950 ‘THE THEORY OF BUSINESS ENTERPRISE

earlier stages of a given period of inflation a
liquidation could be brought on only by some
relatively violent disturbance, whereas at a higher
phase of speculative inflation a relatively slight
disturbance would suffice.

Now, it takes some time for such a speculative
movement to bring on so large a discrepancy be-
tween capitalization and earning-capacity as may
not be adjusted by other means than a widespread
and severe liquidation.’ Hence a rough periodicity
in the recurrence of these seasons of buoyancy and
of collapse in capitalized values. Other factors,
and varying ones, have, no doubt, been present in
each of the historic crises of the nineteenth century,
and these other factors would have to be taken
due account of in any history of crises, and even in
any theory of crises, which aimed at anything like
an exhaustive treatment; but the factors here
pointed out seem to be the characteristic and con-
stant ones in the sequence of crises within this
period, at the same time that they are the factors
which are in a peculiar degree connected with that
process of business management in modern in-
dustry which is the objective point of the present
inquiry.

Since the seventies, as an approximate date and

1 The speculative movement requires time, because the inflation is

a cumulative one and is carried out unintentionally and in a sense
unconsciously,

THE THEORY OF MODERN WELFARE 251

as applying particularly to America and in a less
degree to Great Britain, the course of affairs in
business has apparently taken a permanent change
as regards crises and depression. During this
recent period, and with increasing persistency,
chronic depression has been the rule rather than
the exception in business. Seasons of easy times,
“ordinary prosperity,’ during this period are
pretty uniformly traceable to specific causes ex-
traneous to the process of industrial business
proper. In one case, the early nineties, it seems
to have been a peculiar crop situation, and in the
most notable case of a speculative inflation, the
one now (1904) apparently drawing to a close, it
was the Spanish-American War, coupled with the
expenditures for stores, munitions, and services
incident to placing the country on a war footing,
that lifted the depression and brought prosperity
to the business community. If the outside stimu-
lus from which the present prosperity takes its
impulse be continued at an adequate pitch, the
season of prosperity may be prolonged; otherwise
there seems little reason to expect any other out-
come than a more or less abrupt and searching
liquidation.

What would be an adequate pitch of the stimu-
lus making for prosperity is, of course, not easy to
say, but it is probably safe to say that in order to
keep up the season of prosperity for a considerable

952 THE THEORY OF BUSINESS ENTERPRISE

number of years the stimulus would have to be
gradually increased. That is to say in other
words, the absorption of goods and services by
extra-industrial expenditures, expenditures which
as seen from the standpoint of industry are pure
waste, would have to go on in an increasing
volume. If the wasteful expenditure slackens, the
logical outcome should be a considerable perturba-
tion of business and industry, followed by depres-
sion; if the waste on war, colonization, provincial
investment, and the like, comes to an abrupt stop,
the logical consequence, in the absence of other
counteracting factors, should be a crisis of some
severity.’

1 These extra-industrial expenditures that have brought prosperity
are here spoken of as wasteful, not thereby implying that they may
not be beneficial to the community even in respect to their effect upon
the aggregate income or the aggregate accumulation of wealth in the
community. They are called wasteful simply because these expendi-
tures directly, in their first incidence, merely withdraw and dissipate
wealth and work from the industrial process, and unproductively con-
sume the products of industry. Indirectly they have a beneficial
aggregate effect upon industry by inducing an employment of the full
productive efficiency of the industrial apparatus ; so that in a very
short time, it is at least conceivable, the aggregate net output of the
industrial process may be as large and serviceable as before the wasteful
expenditures were entered upon, even with the destruction of that
portion of the product which goes to maintain the wasteful expendi-
tures. At the same time, the effect upon business must be held to be
patently favorable. The wasteful expenditures enhance demand and
so increase the vendibility of the output, —they increase profits and
raise capitalization. They therefore act unequivocally to advance the
values of the business men’s holdings and increase their gains, as
counted in business terms. The wasteful expenditure is good for trade.
It is only in the eventual liquidation that a disadvantageous business
consequence comes in view.

THE THEORY OF MODERN WELFARE 253

It was said above that since the seventies the
ordinary course of affairs in business, when un-
disturbed by transient circumstances extraneous to
the industrial system proper, has been chronic
depression. The fact of such prevalent depression
will probably not be denied by any student of the
situation during this period, so far as regards
America and, in a degree, England.' For the
Continent of Europe this characterization would
have to be materially qualified. But the reply is
ready to hand that governmental interferences with
trade have been so ubiquitous on the Continent,
particularly in the German-speaking communities,
that their case is fairly to be thrown out of any
general theory. It may also be questioned whether
the industrial system of Germany, e¢.g., throughout
this period conforms to the requirements of the
theory in respect of the degree of development of

It will be seen that on this view of the effect of wasteful expendi-
ture the position occupied by some early economists, as Malthus,
Lauderdale, Chalmers, and others, as well as by some later ones, as
Robertson, Hobson, is substantially well taken, although the defence
of waste which these economists offer may be incomplete. Waste
seems necessary to keep trade brisk, and therefore to keep the indus-
trial processes working at their full capacity. The ulterior reason for
this state of the case being the fact that the decisive ground which
determines the margin of activity in business, and therefore in industry,
is the business men’s reluctance to accept a reduction of profits as
measured in terms of price. The opponents of the Malthusian view
failed to appreciate the decisive importance of price, as contrasted
with serviceability, among the motives on which business proceeds.

1 The objection would not come unexpected that this state of the
case is not to be taken as normal,—a point of opinion not readily to
be decided, since it rests on a difference in the point of view.

254 THE THEORY OF BUSINESS ENTERPRISE

the machine industry which such a state of affairs
supposes.’

The explanation of this persistent business
depression, in those countries where it has pre-
vailed, is, on the view here spoken for, quite
simple. By an uncertain date toward the close of
the seventies the advancing efficiency and articu-
lation of the processes of the machine industry
reached such a pitch that the cost of production of
productive goods has since then persistently out-
stripped such readjustment of capitalization as has
from time to time been made. The persistent
decline of profits, due to this relative overproduc-
tion of industrial apparatus, has not permitted a
consistent speculative expansion, of the kind which
abounds in the earlier half of the nineteenth cen-
tury, to get under way. When a speculative
movement has been set up by extraneous stimuli,
during this late period, the inherent and relatively
rapid decline of earning-capacity on the part of
older investments has brought the speculative in-
flation to book before it has reached such dimen-
sions as would bring on a violent crisis. And
when a crisis of some appreciable severity has come
and has lowered the capitalization, the persistent
efficiency and facile balance of processes in the
modern machine industry has overtaken the de-
cline in capitalization without allowing time for

1 Cf. Sombart, Kapitalismus, vol. I, ch, XVITI.-XX.

THE THEORY OF MODERN WELFARE 255

recovery and consequent boom. The cheapening
of capital goods has overtaken the lowered capi-
talization of investments before the shock-effect of
the liquidation has worn off. Hence depression is
normal to the industrial situation under the con-
summate régime of the machine, so long as com-
petition is unchecked and no deus ex machina
interposes..

The persistent defection of reasonable profits
calls for a remedy. The remedy may be sought in
one or the other of two directions: (1) in an in-
creased unproductive consumption of goods ; or (2)
in an elimination of that “ cutthroat” competition
that keeps profits below the “ reasonable’ level.
If enough of the work or of the output is turned
to wasteful expenditures, so as to admit of but a
relatively slight aggregate saving, as counted by
weight and tale, profitable prices can be main-
tained on the old basis of capitalization. If the
waste is sufficiently large, the current investment
in additional industrial equipment will not be suf-
ficient to lower prices appreciably through compe-
tition.”

Wasteful expenditure on a scale adequate to
offset the surplus productivity of modern industry
is nearly out of the question. Private initiative

1 Cf. Hobson, Problem of the Unemployed, Appendix to ch. V.

2.Cf, Hobson, Problem of the Unemployed, ch. VI. Mr. Hobson
does not use the term ‘‘waste’’ in this connection. Also Vialles,
Consommation, final chapter.

256 THE THEORY OF BUSINESS ENTERPRISE

cannot carry the waste of goods and services to
nearly the point required by the business situa-
tion. Private waste is no doubt large, but business
principles, leading to saving and shrewd invest-
ment, are too ingrained in the habits of modern
men to admit an effective retardation of the rate
of saving.! Something more to the point can be
done, and indeed is being done, by the civilized
governments in the way of effectual waste. Arm-
aments, public edifices, courtly and diplomatic
establishments, and the like, are almost altogether
wasteful, so far as bears on the present question.
They have the additional advantage that the pub-
lic securities which represent this waste serve as
attractive investment securities for private savings,
at the same time that, taken in the aggregate, the
savings so invested are purely fictitious savings
and therefore do not act to lower profits or prices.
Expenditures met by taxation are less expedient
for this purpose; although indirect taxes have the
peculiar advantage of keeping up the prices of the
goods on which they are imposed, and thereby act
directly toward the desired end. The waste of
time and effort that goes into military service, as
well as the employment of the courtly, diplomatic,
and ecclesiastical personnel, counts effectually in

1«Saving’’ at the same time takes place automatically in the
current operations of coalition and incorporation, as indicated above,
pp. 166-176,

THE THEORY OF MODERN WELFARE 257

the same direction. But however extraordinary
this public waste of substance latterly has been, it
is apparently altogether inadequate to offset the
surplus productivity of the machine industry, par-
ticularly when this productivity is seconded by the
great facility which the modern business organiza-
tion affords for the accumulation of savings in
relatively few hands. There is also the drawback
that the waste of time involved in military service
reduces the purchasing power of the classes that
are drawn into the service, and so reduces the
amount of wasteful consumption which these
classes might otherwise accomplish.’

So long as industry remains at its present level

1 Hobson (Problem of the Unemployed), whose analysis of over-
production and its relation to depression goes farther than any other,
reviews and criticises (ch. VIII.) the palliative measures that have been
advocated. He finds them, all and several, inadequate and inconse-
quent, in that they do not touch the root of the evil — oversaving or
‘‘underconsumption.’’ They do not touch this because they do not
mitigate the automatic saving and investment process that necessarily
goes with the possession of large private incomes. But in point of practi-
cal efficiency his own proposed remedies must also be scheduled under
the head of ‘palliatives.’” These proposed remedies are measures
looking to a ‘‘ Reformed Distribution of Consuming Power’? (ch, VI.),
such as taxation of ‘‘unearned’’ incomes, higher wages, shorter work-
ing day. The aim is ‘‘ to increase the proportion of the total wealth of
the community, which falling to them as wages shall be spent in raising
the general standard of working-class consumption.’’? The contemplated
move is manifestly chimerical in any community, such as the modern
industrial communities, where public policy is with growing singleness
of purpose guided by business interests with a naive view to an increase
of profits.

Cf. also Smart, Studies in Hconomics, Essay VIII., on ‘‘ Overpro-
duction’ ; also Essay IX., ‘‘ The Socializing of Consumption,” particu-
larly sec. 8, on ‘*The Limits of Consumption,’’ pp. 293-298,

258 THE THEORY OF BUSINESS ENTERPRISE

of efficiency, and especially so long as incomes con-
tinue to be distributed somewhat after the present
scheme, waste cannot be expected to overtake pro-
duction, and can therefore not check the untoward
tendency to depression. But if the balance cannot
be maintained by accelerating wasteful consump-
tion, it may be maintained by curtailing and regu-
lating the output of goods.

“ Cutthroat” competition, that is to say, free com-
petitive selling, can be done away by “ pooling the
interests” of the competitors, so soon as all or an
effective majority of the business concerns which
are rivals in the market combine and place their
business management under one directive head.
When this is done, by whatever method, selling
of goods or services at competitively varying
prices is replaced by collective selling (“ collective
bargaining’) at prices fixed on the basis of “ what
the traffic will bear.” That is to say, prices are
fixed by consideration of what scale of prices will
bring the largest aggregate net earnings, due re-
gard being had to the effect of a lower price in
increasing sales as well as to the reduction of cost
through the increase of output. The outcome, as
regards the scale of prices, may easily be a reduc-
tion of the price to consumers; but it may also,
and equally readily, be an increase of the average
price. But the prices of the output which is in
this way brought to a monopoly basis are nearly

THE THEORY OF MODERN WELFARE 259

certain to run more even than prices of the like
output while sold competitively by rival concerns.

What has been said in the last paragraph sup-
poses that the combination of business enterprises
is so comprehensive as to place the resulting coali-
tion in a position of practical monopoly. Such a
result is not always attained, however, especially
not in the earlier attempts at coalition in any par-
ticular branch of industry ; although the endeavor
is commonly repeated until at last a virtual mo-
nopoly is achieved. But even where no effective
monopoly is achieved, a coalition of this kind has a
salutary effect, at least temporarily. In almost all
cases a consolidation of this kind is able to effect
considerable economies in the cost of production,
as pointed out in an earlier chapter, and such econ-
omies bring relief through enabling the combined
industrial ventures to earn a reasonable profit at a
lower price for their product than before. They
are therefore able to goon ona scale of prices which
was not remunerative while they stood on their
old footing of severalty. But the relief which
comes of such measures, so long as competitive
selling goes on in rivalry with concerns standing
outside the coalition, is only transient. The de-
clining cost of production, and the consequent com-
petitive investment and extension in the industry,
presently catches up with the gain in economy ;
the margin of advantage in the competition is lost,

260 THE THEORY OF BUSINESS ENTERPRISE

and depression again overtakes the consolidated
enterprises on their new footing. The remedy
again is a wider coalition, making possible farther
economies, and making some approach to a position
of secure monopoly.

It is only on a footing of monopoly that this
grinding depression can be definitively set aside.
But the monopoly need not be absolute in order to
afford a somewhat enduring relief. What is neces-
sary is that the monopoly should comprehend all
but a negligible fraction of the business concerns
and the equipment engaged in the field within
which competition has kept profits below a reason-
able level. What is a negligible quantity in such
a case is not to be determined on general consider-
ations, since it depends in each case on circum-
stances affecting the particular industry. But, in
a general way, the more nearly complete the mo-
nopoly, the more effectually is it likely to serve its
purpose.!

Such business coalitions have the effect of bring-
ing profits to a reasonable level, not only by

1The obvious remark may be added, for completeness of state-
ment, that the various branches of industry lend themselves to man-
agement by monopoly in extremely varying degrees, some, e.g.,
farming, as an extreme instance, not being amenable to this method
of management under existing circumstances ; others, again, as, e.g.,
retail merchandising, can be managed by this method only to a very
restricted extent ; while at the other end of the scale, in such indus-
tries as railroading, monopoly management, more or less unqualified,
is fairly unavoidable.

THE THEORY OF MODERN WELFARE 261]

making it possible to regulate output and prices,
but also by the economies which are made prac-
ticable on this footing. Coalitions of a less com-
prehensive character, as spoken of above, also
effect economies in the cost of production. But
the larger coalitions which bring the business to
a monopoly basis have not only the advantage
which comes of the large-scale organization of the
industrial process, but they also enjoy peculiar
advantages in the matter of cost, due to their
monopoly position. These added advantages are
more particularly advantages in buying or bar-
gaining for all goods, materials, and services re-
quired, as well as in selling the output. So long
as the coalitions are not comprehensive enough
effectually to eliminate competition, they are con-
strained to both buy and sell in competition with
others. But when the coalition comes effectually
to cover its special field of operation, it is able,
not only to fix the prices which it will accept (on
the basis of what the traffic will bear), but also in
a considerable measure to fix the prices or rates
which it will pay for materials, labor, and other
services (such as transportation) on a similar basis,
—unless it should necessarily have to do with
another coalition that is in a similar position of
monopoly.

The rule which governs the fixing of rates on
this side of the business dealings of a monopolistic

962 THE THEORY OF BUSINESS ENTERPRISE

coalition is similar to that which guides its trans-
actions in the matter of sales. Prices and rates,
as, ¢.g., for materials and labor, are not depressed
to the lowest possible point, but to the lowest
practicable point,—to the point compatible with
the largest net profits. This may or may not be
a point below the rates necessary under a régime
of competitive buying. It may be added that only
in rare cases does a coalition attain so strong a
position in respect of its purchases (of materials or
services) as to lift this side of its business entirely
above the reach of competition."

Wherever this expedient of coalition has been
found practicable, the chronic depression of recent
times and the confusion and uncertainty which
goes with a depressed competitive business situa-
tion have been obviated. The great coalitions do
not suffer acutely from the ills of depression, ex-
cept in cases where their industrial processes are
to a peculiar degree in the position of intermedi-
aries within the range of the competitive indus-
tries, as is the case, ¢.g., with most railroads. But

1 Hitherto probably none of the American coalitions have succeeded
in freeing themselves from the inconveniences of competitive bidding for
labor, and very few have achieved a purely monopolistic buying, either
of materials or of any of the various kinds of services which they re-
quire. With regard to raw materials alone have some, as, e.g., the
Standard Oil Company, been able to compass an effectual monopoly.
Something approaching this position has been accomplished by a very
few other coalitions, as, e.g., the Sugar Refineries, the Cotton Seed
Oil Company, the United States Steel Corporation, and in a local way
certain coal, railway, lumber, and warehouse companies.

THE THEORY OF MODERN WELFARE 263

even in such a case the coalition which has a
monopoly is more fortunate as regards the stability
of its balance sheet than the same traffic would be
without the advantage of monopoly.

Barring providential intervention, then, the only
refuge from chronic depression, according to the
view here set forth, is thoroughgoing coalition in
those lines of business in which coalition is prac-
ticable. But since this would include the greater
part of those lines of industry which are domi-
nated by the machine process, it seems reasonable
to expect that the remedy should be efficacious.
The higher development of the machine process
makes competitive business impracticable, but it
carries a remedy for its own evils in that it makes
coalition practicable. The ulterior effects of thor-
oughgoing monopoly, as regards the efficiency of
industry, the constancy of employment, the rates
of wages, the prices of goods to consumers, and
the like, are, of course, largely matter of surmise,
and cannot be taken up in this inquiry, the present
purpose being merely to give in outline an eco-
nomic theory of current business enterprise.

A further consideration bearing on the later
phases of the business situation may be added.
' The great coalitions and the business manoeuvres
connected with them have the effect of adding to the
large fortunes of the greater business men; which

264 THE THEORY OF BUSINESS ENTERPRISE

adds to the large incomes that cannot be spent in
consumptive expenditures; which accelerates the
increase of investments; which brings competition
if there is a chance for it; which tends to bring on
depression, in the manner already indicated. The
great coalitions, therefore, seem to carry the seed
of this malady of competition, and this evil conse-
quence can accordingly be avoided only on the
basis of so comprehensive and rigorous a coalition
of business concerns as shall wholly exclude com-
petition, even in the face of any conceivable amount
of new capital seeking investment.

What has made chronic depression the normal
course of things in modern industrial business is
the higher development of the machine process, —
given, of course, the traits of human nature as it
manifests itself in business traffic. The machine
process works this effect by virtue, chiefly if not
altogether, of these two characteristics: (1) a
relatively rapid rate of increasing efficiency; and
(2) the close mterdependence of the several lines
of industrial activity in a comprehensive system,
which is growing more comprehensive and close-
knit as improvement and specialization of indus-
trial processes go on. The last-named factor counts
for more in proportion as the interdependence
grows closer and more comprehensive. Disturb-
ances are progressively transmitted with greater
facility and effect throughout the system, and each

THE THEORY OF MODERN WELFARE 265

line of industrial business comes to stand in rela-
tively intimate relations to an ever increasing range
of other lines with which it carries on a traffic of
purchase or sale. A consequence of this state of
things is that any business coalition, in order effec-
tually to serve its purpose of maintaining earnings
and capitalization, is required to be of larger scope
and closer texture. As the exigencies which en-
force the resort to coalition uninterruptedly gain
in scope and urgency, the “trust”? must take the
same course of growth to meet these exigencies;
until, with some slight further advance along the
accustomed lines, the trust which shall serve the
modern business situation must comprehend in one
close business coalition virtually the whole field of
industry within which the machine process is the
dominant industrial factor.’

To this there is a broad exception, given by the
circumstances of the industrial organization. This
organization rests on the distinction between busi-
ness management and ownership. The workmen
do not and cannot own or direct the industrial
equipment and processes, so long as ownership pre-
vails and industry is to be managed on business
principles. The labor supply, or the working pop-
ulation, can therefore not be included in the ideally

1Jt is, e.g., already apparent that the general railway system of
America must presently come under one management, and it must
fall into a coalition with the group of industries that are occupied
with the supply and elaboration of iron, coal, and lumber.

966 THE THEORY OF BUSINESS ENTERPRISE

complete business coalition suggested above, how-
ever consummate the machine system and the
business organization built upon it may become.
So that when the last step in business coalition has
been taken, there remains the competitive friction
between the combined business capital and the
combined workmen.

From the considerations recited above it appears
that the competitive management of industry be-
comes incompatible with continued prosperity so
soon as the machine process has been developed to
its fuller efficiency. Further technological advance
must act to heighten the impracticability of com-
petitive business. As it is sometimes expressed, the
tendency to consolidation is irresistible. Modern
circumstances do not permit the competitive man-
agement of property invested in industrial enter-
prise, much less its management in detail by the
individual owners. In short, the exercise of free
contract, and the other powers inhering in the
natural right of ownership, are incompatible with
the modern machine technology. Business discre-
tion necessarily centres in other hands than those
of the general body of owners. In the ideal case,
so far as the machine technology and its business
concomitants are consistently carried through, the
general body of owners are necessarily reduced to the
practical status of pensioners dependent on the dis-

THE THEORY OF MODERN WELFARE 267

cretion of the great holders of immaterial wealth ;
the general body of business men are similarly, in
the ideal outcome, disfranchised in point of busi-
ness initiative and reduced to a bureaucratic hier-
archy under the same guidance; and the rest, the
populace, is very difficult to bring into the schedule
except as raw material of industry. What may
take place to accentuate or mitigate this tendency
is a question of the drift of sentiment on the mat-
ter of property rights, business obligations, and eco-
nomic policy. So far as the economic factors at play
in the modern situation shape this drift of sentiment
they do so in large part indirectly, through the dis-
ciplinary effect of new and untried circumstances of
politics and legal relation to which their working
gives rise.