II

Sociological Categories of Economic Action

PREFATORY NOTE

WHAT follows is not intended in any sense to be ‘economic theory.’ Rather, it consists only in an attempt to define certain concepts which are frequently used and to analyze certain of the simplest sociological relationships in the economic sphere. As in the first chapter, the procedure here has been determined entirely by considerations of convenience. It has proved possible entirely to avoid the controversial concept of ‘value.’¹The usage here, in the relevant sections on the division of labour, has deviated from the terminology of Karl Bücher only so far as seemed necessary for the purposes of the present undertaking. For the present all questions of dynamic process will be left out of account.

THE CONCEPT OF ECONOMIC ACTION

Action will be said to be ‘economically oriented’ so far as, according to its subjective meaning, it is concerned with the satisfaction of a desire for ‘utilities’ (Nutzleistungen). ‘Economic action’ (Wirtschaften) is a peaceful use of the actor’s control over resources, which is primarily economically oriented. Economically rational action is action which is rationally oriented, by deliberate planning, to economic ends. An ‘economic system’ (Wirtschaft) is an autocephalous system of economic action. An ‘economic organization’ (Wirtschaftsbetrieb) is a continuously organized system of economic action.

1. It was pointed out above, sec. I, (b), para. 2, pp. 112-13, that economic action as such need not be social action.

2. The definition of economic action must be as general as possible and must bring out the fact that all ‘economic’ processes and objects are characterized as such entirely by the meaning they have for human action in such roles as ends, means, obstacles, and by-products. It is not, however, permissible to express this by saying, as is sometimes done, that economic action is a ‘psychic’ phenomenon. The production of goods, prices, or even the ‘subjective valuation’ of goods, if they are empirical processes, are far from being merely psychic phenomena. But underlying this misleading phrase is a correct insight. It is a fact that these phenomena have a peculiar type of subjective meaning. This alone defines the unity of the corresponding processes, and this alone makes them accessible to subjective interpretation.

It is further necessary to formulate the concept of economic action in such a way as to include the modern market economy; so it is not possible to take consumers’ wants, and their ‘satisfaction,’ as a point of departure. The concept must take account, on the one hand, of the fact that utilities are actually sought after—including among them orientation to pecuniary acquisition for its own sake. But, on the other hand, it must also include the fact, which is true even of the most primitive self-sufficient economy, that attempts, however primitive and traditionally limited, are made to assure the satisfaction of such desires by some kind of activity.

3.²As distinguished from economic action as such, the term ‘economically oriented action’ will be applied to two types: (a) every action which, though primarily oriented to other ends, takes account, in the pursuit of them, of economic considerations; that is, of the consciously recognized necessity for economic prudence. Or (b) that which, though primarily oriented to economic ends, makes use of physical force as a means. It thus includes all primarily non-economic action and all non-peaceful action which is influenced by economic considerations. Economic action involves a conscious, primary orientation to economic considerations. It must be conscious, for what matters is not the objective necessity of making economic provision, but the belief that it is necessary.³

4. Every type of action, including the use of violence, may be economically oriented. This is true of war-like action in such cases as marauding expeditions and trade wars. Franz Oppenheimer, in particular, has rightly distinguished ‘economic means’ from ‘political means.’ It is essential to distinguish the latter from economic action. The use of force is unquestionably very strongly opposed to the spirit of economic acquisition in the usual sense. Hence the term ‘economic action’ will not be applied to the direct appropriation of goods by force and the direct coercion of the other party by threats of force. It goes without saying that exchange is not the only economic means, though it is one of the most important. Furthermore, the formally peaceful provision for the means and the success of a projected exercise of force, as in the case of armaments and economic organization for war, is just as much economic action, as any other.

Every course of rational political action is economically oriented with respect to provision for the necessary means, and it is always possible for political action to serve the interest of economic ends. Similarly, though it is not necessarily true of every economic system, certainly the modern economic order under modern conditions could not continue if its control of resources were not upheld by the legal compulsion of the state; that is, if its formally ‘legal’ rights were not upheld by the threat of force. But the fact that an economic system is thus dependent on protection by force, does not mean that it is itself an example of the use of force.

It is entirely untenable to maintain that economic action, however defined, is only a means by contrast, for instance, with the state, as an end in itself. This becomes evident from the fact that it has been possible to define the state itself only in terms of the means which it attempts to monopolize, the use of force. If anything, the most essential aspect of economic action for practical purposes is the prudent choice between alternative ends. This choice is, however, oriented to the scarcity of the means which are available or could be procured for these various ends.

5. Not every type of action which is rational in its choice of means will be called rational economic action, or even economic action in any sense; in particular, the term ‘economy’ will be distinguished from that of ‘technology.’⁴The term ‘technology’ applied to an action refers to the totality of means employed as opposed to the meaning or end to which the action is, in the last analysis, oriented. Rational technique is a choice of means which is consciously and systematically oriented to the experience and reflection of the actor, which consists, at the highest level of rationality, in scientific knowledge. What is concretely to be treated as a ‘technology’ is thus variable. The ultimate significance of a concrete act may, seen in the context of the total system of action, be of a ‘technical* order; that is, it may be significant only as a means in this broader context. Then concretely the meaning of the particular act lies in its technical result; and, conversely, the means which are applied in order to accomplish this are its ‘techniques.’ In this sense there are techniques of every conceivable type of action, techniques of prayer, of asceticism, of thought and research, of memorizing, of education, of exercising political or religious control, of administration, of making love, of making war, of musical performances, of sculpture and painting, of arriving at legal decisions. All these are capable of the widest variation in degree of rationality. The presence of a ‘technical question’ always means that there is some doubt over the choice of the most efficient means to an end. Among others, the standard of efficiency for a technique may be the famous principle of least action,’ the achievement of the optimum result with the least expenditure of resources, not the achievement of a result regardless of its quality, with the absolute minimum of expenditure.

There is, of course, an analogous principle governing economic action, as is true of every sort of rational action. But in this case it has a different meaning. As long as only questions of technology in the present sense are involved, the only considerations relevant are those bearing on the achievement of this particular end, the pursuit of which is accepted as desirable without question. Given this end, it is a matter of the choice of the most ‘economical’ means, account being taken of the quality, the certainty, and the permanence of the result. Means, that is, are compared only in terms of the immediate differences of expenditure involved in alternative ways of achieving the end. As long as it is purely a technical question, other wants are ignored. Thus, in a question of whether to make a technically necessary part of a machine out of iron or platinum, a decision on technical grounds alone would, so long as the requisite quantities of both metals for this particular purpose were available, consider only which of the two would in this case bring about the best result and would minimize the other comparable expenditures of resources, such as labour. But once consideration is extended to take account of the relative scarcity of iron and platinum in relation to their potential uses, as every technologist is accustomed to do even in the chemical laboratory, the action is no longer in the present sense purely technical, but also economic. From the economic point of view ‘technical* questions always involve the consideration of ‘costs.’ This is a question of crucial importance for economic purposes and in this context always takes the form of asking what would be the effect on the satisfaction of other wants if this particular means were not used for satisfaction of one given want. The ‘other wants’ may be simultaneous with the one under consideration, but of a different kind, or they may be cases of allocation to the ‘same’ want at various different times.⁵

The question of what, in comparative terms, is the cost of the use of the various possible technical means for a single technical end depends in the last analysis on their potential usefulness as means to other ends. This is particularly true of labour. A technical problem in the present sense is, for instance, that of what equipment is necessary in order to move loads of a particular kind, or in order to raise mineral products from a given depth in a mine; further, among the alternatives it is a question of knowing which is the most efficient, that is, among other things, which achieves a given degree of success with the least expenditure of effort. It is, on the other hand, an economic problem how, on the assumption of an exchange economy, this equipment can be paid for in money through the sale of goods; or, on the assumption of a planned economy, how the necessary labour and other means of production can be provided without damage to the satisfaction of other wants held to be more urgent. In both cases, it is a problem of the comparison of ends. Economic action is primarily oriented to the problem of choosing the end to which a thing shall be applied; technology, to the problem, given the end, of choosing the appropriate means. For purposes of the theoretical definition of technical rationality it is wholly indifferent whether the product of a technical process is in any sense useful. In practice this is not, however, the case since economic elements are also involved in concrete cases. In the present terminology there could well be a rational technique even of achieving ends which no one desires. It would, for instance, be possible, as a kind of technical amusement, to apply all the most modern methods to the production of atmospheric air. And no one could take the slightest exception to the purely technical rationality of the action. Economically, on the other hand, the procedure would under normal circumstances be clearly irrational because there was no demand for the product.⁶

The fact that what is called the technological development of modern times has been so largely oriented economically to profit making is one of the fundamental facts of the history of technology. But however fundamental it has been, this economic orientation has by no means stood alone in shaping the development of technology. In addition, a part has been played by the imagination and cognitation of impractical dreamers, a part by other-worldly interests and all sorts of fantasies, a part by preoccupation with artistic problems, and by various other non-economic factors. None the less, the main emphasis at all times, including the present, has lain in the economic determination of technological development. Had not rational calculation formed the basis of economic activity, had there not been certain very particular conditions in its economic background, rational technology could never have come into existence.

The fact that the aspects of economic orientation, which distinguish it from technology, were not explicitly brought out in the initial definition, is a consequence of the sociological starting point. From a sociological point of view, the weighing of alternative ends in relation to each other and to costs is a consequence of ‘continuity.’ This is true at least so far as costs mean something other than altogether giving up one end in favour of more urgent ones. An economic theory, on the other hand, would do well to emphasize this criterion from the start.

6. It is essential to include the criterion of power of control and disposal (Verfügungsgewalt)⁷in the sociological concept of economic action if for no other reason than that an exchange economy involves a complete network of contractual relationships, each of which originates in a deliberately planned process of acquisition of powers of control and disposal. This, in such an economy, is the principal source of the relation of economic action to the law. But any other type of organization of economic activities would involve some kind of distribution of powers of control and disposal, however different its underlying principles might be from those of modern private enterprise with its legal protection of autonomous and autocephalous economic units. Either the central authority, as in the case of socialism, or the subsidiary parts, as in anarchism, must be able to count on having some kind of control over the necessary services of labour and of the means of production. It is possible to obscure this fact by verbal devices, but it cannot be interpreted out of existence. For purposes of definition it is a matter of indifference in what way this control is guaranteed; whether by convention or by law, or whether, even, it does not enjoy the protection of any external sanctions at all, but its security rests only on actual expectations in terms of custom or self-interest. These possibilities must be taken into account, however essential legal compulsion may be for the modern economic order. The indispensability of powers of control for the concept of social action in its economic aspects thus does not imply that legal order is part of that concept by definition, however important it may be held to be on empirical grounds.

7. The concept of powers of control and disposal will here be taken to include the possibility of control over the actor’s own labour power, whether this is in some way enforced or merely exists in fact. That this is not to be taken for granted is shown by its absence in the case of slaves.

8. It is necessary for the purposes of a sociological theory of economic organization to introduce the concept of ‘goods’ at an early stage, as is done in sec. 2. For this analysis is concerned with a type of action in which the primary significance is attributed to the results of the activity and of the calculations of the actors, even though the role of these can only analytically be distinguished from that of other elements. It is possible that economic theory could proceed differently, though its theoretical results form the basis of a sociology of economic action, however much the latter may find it necessary to theorize on its own account.

THE CONCEPT OF UTILITY

By ‘utilities’ (Nutzleistungen) will always be meant the specific and concrete, real or imagined, advantages (Chancen) or means for present or future use as they are estimated and made an object of specific provision by one or more economically acting individuals. The action of these individuals is oriented to the estimated importance of such utilities as means for the ends of their economic action.

Utilities may be the services of non-human or inanimate objects or of human beings. Non-human objects which are the potential sources of utilities of whatever sort will be called ‘goods.’ Utilities derived from a human source, so far as this source consists in active conduct, will be called ‘services.’ Social relationships which are valued as a potential source of present or future disposal over utilities are, however, also objects of economic provision. The opportunities of economic advantage, which are made available by custom, by the constellation of interests, or by a conventional or legal order for the purposes of an economic unit, will be called ‘economic advantages.’⁸

1. Goods and services do not exhaust the category of those aspects of his relation to the situation which may be important to an individual for economic purposes and which may hence be an object of economic concern. Such things as good will or the tolerance of economic measures on the part of individuals in a position to interfere with them, and numerous other forms of behaviour, may have the same kind of economic importance and may be the object of economic provision and even, for instance, of contracts. It would, however, result in a confusion of concepts to try to bring such things under either of these two categories. This choice of concepts is thus entirely determined by consideration of convenience.

2. As Böhm-Bawerk has correctly pointed out, it would also be a source of confusion if all the objects significant to life in everyday speech were designated without distinction as ‘goods,’ and then the concept of a good were identified with any non-human source of utility. In the strict sense of a source of utility it is not a ‘horse’ or a ‘bar of iron’ which is an economic ‘good,’ but the specific ways in which they can be put to desirable and practical uses; for instance, to haul loads, to carry weights, or something of the sort. Above all, the concrete objects dealt with in economic transactions such as purchase and sale, such things as a clientèle, a mortgage, and property, are not ‘goods’ for purposes of the present terminology. For purposes of simplification, the services of such physical objects when they are made available by a traditional or legal order, or the probable availability of disposal thus guaranteed within an economic system over the utilities of goods and services, will be called ‘economic advantages’ or ‘advantages’ without qualification, unless this is likely to be misunderstood.

3 The fact that only active conduct, and not merely acquiescence, permission, or omission, are treated as ‘services’ is a matter of convenience. But it must be remembered that it follows from this that goods and services do not constitute an exhaustive classification of all economically significant utilities.

On the concept of ‘labour,’ see below, sec. 15.

MODES OF THE ECONOMIC ORIENTATION OF ACTION

Economic orientation may be a matter of tradition or of expediency. Even in cases where there is a high degree of rationalization of action, the element of traditional orientation remains considerable. For the most part, rational orientation is primarily significant for the action of the directing agencies, no matter under what form of organization. The development of rational economic action from its origins in the instinctively reactive search for food or in traditional acceptance of inherited techniques and customary social relationships has been to a large extent determined by non-economic events and actions, including those outside everyday routine⁹and also by the pressure of necessity in cases of increasing absolute or relative limitations on subsistence.

1. Naturally there cannot in principle be any scientific standard for any such concept as that of an ‘original economic state.’ It would be possible to agree arbitrarily to take the economic state on a given technological level, that characterized by the lowest development of tools and equipment, and to treat it and analyse it as the most primitive. But there is no scientific justification for concluding from observations of living primitive peoples on a low technological level that the economic organization of all peoples of the past with similar technological standing has been the same; for instance, as that of the Vedda or of certain tribes of the Amazon region. For, from an economic point of view, this level of technology is compatible with either a large-scale organization of labour or, conversely, its extreme dispersal in small groups.¹⁰It is impossible to infer which of these would be more nearly approached from the economic aspects of the natural environment alone. Various non-economic factors, for instance, military, could make a substantial difference.

2. To be sure, war and migration are not in themselves economic processes, though particularly in early times they have been largely oriented to economic considerations. At all times, however, indeed up to the present, they have often been responsible for radical changes in the economic system. In cases where, through such factors as climatic changes, inroads of sand, or deforestation, there has been an absolute decrease in the means of subsistence, human groups have adapted themselves in widely differing ways according to the structure of interest and to the ways in which non-economic factors have been involved. The typical modes have, however, been a fall in the standard of living and an absolute decrease in population. Similarly, in cases of relative impoverishment in means of subsistence, as determined by a given standard of living and of the distribution of economic advantages, there have also been wide variations. But on the whole, this type of situation has, more frequently than the other, been met by the increasing rationalization of economic activities. It is not, however, possible to discuss this in general terms. So far as the ‘statistical’ information can be relied upon, there was a tremendous increase of population in China after the beginning of the eighteenth century, but it had exactly the opposite effect from the similar phenomenon of about the same time in Europe. It is, however, possible to say at least something about the reasons for this.¹¹The chronic scarcity of the means of subsistence in the Arabian desert has only at certain times resulted in a change in the economic and political structure. And these changes have been most prominent when non-economic religious developments have played a part.

3. A high degree of traditionalism in habits of life, such as characterized the labouring classes in early modern times, has not sufficed to prevent a great increase in the rationalization of economic enterprise under capitalistic direction. The same was, for instance, true of the socialistic rationalization of the taxation system in Egypt. Nevertheless, this traditionalistic attitude had to be at least partly overcome in the Western World before the further development to the specifically modern type of rational capitalistic economy could take place.

TYPICAL MEASURES OF RATIONAL ECONOMIC ACTION

The following arc typical measures of rational economic action:

(1) The systematic distribution, as between present and future, of utilities, on the control of which the actor for whatever reason feels able to count. (These are the essential features of saving.)

(2) The systematic distribution of available utilities as between their various potential uses in the order of their estimated relative urgency, according to the principle of marginal utility. These two cases, the most definitely ‘static,’ have been most highly developed in times of peace. To-day, for the most part, they take the form of the allocation of money incomes.

(3) The systematic production of utilities through ‘manufacture’ (Herstellung) or transportation, for which all the necessary means of production are controlled by the actor himself. Where action is rational, this type of action will take place so far as, according to the actor’s estimate, the urgency of his demand for the expected result of the action exceeds the necessary expenditure, which may consist in (a) the irksomeness of the requisite labour services, and (b) the other potential uses to which the requisite goods could be put; including, that is, the utility of the potential alternative products and their uses. This is ‘production’ in the broader sense which includes transportation.

(4) The systematic acquisition, by agreement with the present possessors or producers, of assured powers of control and disposal over utilities. The powers of control may or may not be shared with others. The occasion may lie in the fact that utilities themselves are in the control of others, that their means of production are in such control, or that third persons desire to acquire them in such a way as to endanger the actor’s own supply.

The relevant associative relationships with the present possessor of a power of control or disposal may consist in (a) the establishment of a corporate group with an order to which the production and use of the utilities is to be oriented, or (b) in exchange. In the first case the purpose of the corporate group may be to ration the production, use, or consumption, in order to limit competition of producers. Then it is a regulative corporate group. Or, secondly, its purpose may be to set up a unified authority for the systematic administration of the utilities which had hitherto been subject to a dispersed control. In this case there is an administrative organization.

‘Exchange’ is a compromise of interests on the part of the parties in the course of which goods or other advantages are passed as mutual compensation reciprocally from the control of each to that of the others. The exchange may be traditional or conventional;¹²then, especially in the latter case, it is not economically rational. Or, secondly, it may be economically rational both in intention and in result. Every case of a rationally oriented exchange is the resolution of a previously open or latent conflict of interests by means of a compromise. The opposition of interests which is resolved in the compromise involves the actor potentially in two different conflicts. On the one hand, there is the conflict over the price to be agreed upon with the partner in exchange; the typical method is bargaining. On the other hand, there may also be competition against actual or potential rivals, either in the present or in the future, who are competitors for the same market. Here, the typical method is competitive bidding.

1. Utilities and the goods or labour, which are their sources, are at the disposal of an economically acting individual if he is in a position to be able in fact to make use of them at his convenience without interference from other persons, regardless of whether this ability rests on the legal order, on convention, on custom or on a complex of interests. It is by no means true that only the legal assurance of powers of disposal is decisive, either for the concept or in fact. It is, however, to-day empirically an indispensable basis for control of the material means of production.

2. The fact that goods are not as yet consumable may be a result of the fact that while they are, as such, finished, they are yet not in a suitable place for consumption; hence the transportation of goods, which is naturally to be distinguished from trade, a change in the control over the goods, may here be treated as part of the process of production.

3. When there is a lack of control over desired utilities, it is in principle indifferent whether the individual is typically prevented from attempting to use force to interfere with the control of others through a legal order, through convention, through custom, his own self-interest, or his consciously-held moral standards.

4. Competition for the means of production may exist under the most various conditions. It is particularly important when supplies depend on territorial control, as in hunting, fishing, lumbering, pasturage, and clearing new land. It is also by no means uncommon for it to exist within a corporate group which is closed to outsiders. The order which seeks to restrain such competition then always consists in the rationing of supplies, usually combined with the appropriation of the advantages thus guaranteed for the benefit of a limited number of individuals or, more often, of households. All agricultural and fishing communities, the regulation of rights of clearing forests, of pasturage and wood gathering, in the common fields and waste, the manuring of Alpine meadows, and so on, have this character. Various types of hereditary property in land have been developed from this type of regulation.

5. Anything which may in any way be transferred from the control of one person to that of another and for which another is willing to give compensation, may be an object of exchange. It is not restricted to goods and services, but includes all kinds of economic advantages; for instance, good will, which exists only by custom or self-interest, and is not subject to any enforcement; in particular, however, it includes all manner of advantages, claims to which are enforceable under some kind of order. Thus, objects of exchange are not necessarily actual utilities.

For present purposes, by ‘exchange’ in the broadest sense will be meant every case of a formally voluntary agreement involving the offer of any sort of present, continuing, or future utility in exchange for utilities of any sort offered in return. Thus it includes turning over goods for money or placing their services at the disposal of the other party in exchange for a future return of the same kind of goods. It also includes any sort of permission for, or tolerance of, the use of an object in return for ‘rent’ or ‘hire,’ or the hiring of any kind of services for wages or salary. The fact that the last example involves, from a sociological point of view, the subjection of the worker to a system of authority and discipline will, for preliminary purposes, be neglected, as will the distinction between loan and purchase.¹³

6. The conditions of exchange may be traditional, partly traditional though enforced by convention, or rational. Examples of conventional exchanges are exchanges of gifts between friends, heroes, chiefs, princes; as, for instance, the exchange of armour between Diomedes and Glaucos. It is not uncommon for these to be rationally oriented and controlled to a high degree.¹⁴ Rational exchange is only possible when both parties expect to profit from it, or when one is under compulsion because of his own need or the other’s economic power. Exchange may serve either purposes of consumption or of acquisition.¹⁵ It may thus be oriented to provision for the personal use of the actor or to opportunities for profit. In the first case, its conditions are to a large extent differentiated from case to case, and it is in this sense irrational. Thus, for instance, household surpluses will be valued according to the individual marginal utilities of the particular household economy and may on occasion be sold very cheaply. Under certain circumstances the fortuitous desires of the moment determine to a very high degree the marginal utility of goods which are sought in exchange. Thus the thresholds of exchangeability, as determined by marginal utility, are extremely variable. Rational competition develops only in the case of marketable goods and, to the highest degree, when goods are used and sold in a profit system.¹⁶

7. The modes of intervention of the regulatory system mentioned above,¹⁷ are not the only possible ones, but merely those which are relevant here because they may immediately threaten sources of supply. The regulation of marketing processes will be discussed below.

TYPES OF ECONOMIC CORPORATE GROUPS

According to its relation to the economic system, an economically oriented corporate group may be: (a) a group ‘engaged in economic action’ (wirtschaftender Verband) if the primarily non-economic corporate action oriented to its order includes economic action; (b) an ‘economic organization’ (Wirtschaftsverband) if its corporate action, as governed by the order, is primarily autocephalous economic action of a given kind; (c) an organization ‘regulating economic activity’ (wirtschaftsregulierender Verband) if and in so far as the autocephalous economic activity of the members is oriented to the order governing the group because the latter imposes regulations specifying its content; that is, it is heteronomous in that respect; (d) an organization ‘enforcing a formal order’ (Ordnungsverband)¹⁸ if its order guarantees the autocephalous and autonomous activity of its members and the corresponding economic advantages by means of rules which are only formal.

Material control of economic activity cannot in practice be extended beyond the point where the continuation of a certain type of economic behaviour is still compatible with the essential requirements of the enterprise being controlled.

1. The state, except for the socialistic or communist type, and all other corporate groups like churches and voluntary associations are groups engaged in economic action if they manage their own financial affairs. This is also true of educational institutions and all other organizations which are not primarily economic.

2. In the category of economic organizations in the present sense are included not only business corporations, co-operative associations, cartels, partnerships, and so on, but all economic organizations which involve the activities of a plurality of persons all the way from the workshop relationship of artisans, to a conceivable communistic organization of the whole world.

3. Organizations regulating economic activity are the following: village communities, guilds, trade unions, employers’ associations, cartels, and all other groups, the directing authorities of which carry on an ‘economic policy’ which seeks to regulate both the ends and the procedures of economic activity. It thus includes the villages and towns of the Middle Ages, just as much as a modern state which follows such a policy.

4. An example of a group confined to the enforcement of formal order is the pure laissez-faire state, which would leave the economic activity of individual households and enterprises entirely free and confine its regulation to the formal function of settling disputes connected with the fulfilment of free contractual obligations.

5. The existence of corporate groups regulating economic activity or merely enforcing a formal order presupposes in principle a certain amount of autonomy in the field of economic activity. Thus there is in principle a sphere of free disposal over economic resources, though it may be limited in varying degrees by means of rules to which the actors are oriented. This implies, further, at least a relative amount of appropriation of economic advantages over which the actors have, then, an autonomous control. The purest type of this regulation is thus present when all human action is autonomous in content and oriented only to formal conditions of regulation and when all non-human sources of utility are completely appropriated so that individuals can have free disposal of them, especially through exchange. This is the fundamental principle of the modern property system. Any other kind of limitation on appropriation and autonomy implies the regulation of economic activity because it determines the orientation of human activities.

6. The empirical line between the regulation of economic activity and its mere subjection to a formal order is indefinite. For, naturally, the type of formal order not only may, but must, in some way exert a material influence on action; in some cases, a fundamental influence. Numerous modern legal ordinances, which claim to do no more than set up formal rules, are so drawn up that they actually exert a material influence.¹⁹ Indeed, a really strict limitation to purely formal rules is possible only in theory. Many of the recognized principles of the law, of a kind which cannot be dispensed with, imply to an appreciable degree important limitations on the content of economic activity. Especially ‘enabling provisions’ can under certain circumstances, as in corporation law, involve quite appreciable limitations on economic autonomy.

7. The limits of the material regulation of economic activity may be reached when it results in (a) the abandonment of certain kinds of economic activity, as when a tax on turnover leads to the cultivation of land only for consumption; or (b) in evasion, in such cases as smuggling, bootlegging, etc.

MEDIA OF EXCHANGE, MEANS OF PAYMENT, MONEY

An object offered in exchange will be called a ‘medium of exchange’ so far as it is typically accepted, primarily by virtue of the fact that the recipients estimate that they will, within the relevant space of time, be able to offer it in another exchange to procure other goods which satisfy their wants, regardless of whether it is exchangeable for all other goods or only for certain specific goods. The probability that the medium of exchange will be accepted at a given rate for specific other goods will be called its ‘purchasing power’²⁰ in relation to these. The use itself will be called the ‘formal value.’²¹

An object will be called a ‘means of payment’ so far as its typical acceptance in payment of specific agreed or imposed obligations is guaranteed by convention or by law. This is the ‘formal value’ of the means of payment, which may also coincide with its formal value as a means of exchange. Means of exchange or of payment will be called ‘chartal’ (Chartal)²² when they are artifacts which, by virtue of their specific form, enjoy a significant degree of conventional or legal, agreed or imposed, formal value within the membership of a group of persons or within a territorial area; and when (b) they are divisible in such a way that they represent a particular unit of value or a multiple or a fraction of it, so that it is possible to use them in arithmetical calculations.

Money is a chartal means of payment which is also a means of exchange.

One of the functions of a corporate group may be within the sphere of authority of its order, to maintain by convention of law the formal value of money or of some other means of exchange or of payment. These will be termed internal money, means of exchange or of payment. Means of exchange used in transactions with non-members will be called external means of exchange.

Means of exchange or of payment which are not chartal are ‘natural’ means. They may be differentiated (a) in technical terms according to their physical characteristics, consisting in such things as ornaments, clothing, useful objects of various sorts; or according to whether their value is a function of weight or not. They may also (b) be distinguished economically according to whether they are used primarily as means of exchange or for purposes of social prestige, the prestige of possession. They may also be distinguished according to whether they are used as means of exchange and payment in internal transactions or in external.

Money means of exchange or of payment are ‘tokens’ so far as they do not or no longer possess a value independent of their use as means of exchange and of payment. They are, on the other hand, ‘material’ means so far as their value as such is influenced by their possible use for other purposes, or may be so influenced.

Money may consist either of coins or of notes. Notes are usually adapted to a system of coinage or have a name which is historically derived from it.

(1) Coined money will be called ‘free’ money or ‘market’ money so far as the monetary metal will be coined by the mint on the initiative of any possessor of it without limit of amount. This means that in effect the amount issued is determined by the demand of parties to market transactions.

(2) It will be called ‘limited’ money or ‘administrative’ money if the issue of coinage is formally subject to the decisions of the governing authority of a corporate group and is in effect primarily oriented to their fiscal needs.

(3) It will be called ‘regulated’ money if, though its issue is limited, the kind and amount of coinage is effectively subject to rules.

The term ‘circulating medium’ will be applied to paper money which functions as ‘note’ money, if it is accepted in normal transactions as ‘provisional’ money with the expectation that it can, at any time, be converted into ‘definitive’ money; that is, coins, or a given weight of monetary metal. It is a ‘certificate’ if this acceptance is conditioned by regulations which require full coverage in coin or bullion.

Within a jurisdiction the relative values of the different natural media of exchange and of payment may be arranged in a scale laid down by law or convention.

The money which, according to the rules of a corporate group, is acceptable in unlimited amounts as a means of payment will be called ‘legal tender.’ Monetary material is the material from which money is made. The standard money is the same, but limited to the case of market money. The monetary value-scale (Geldtarifierung) is the relative valuation of different types of natural or administrative money, which is made the basis for the division and denomination of coins. The monetary ratio is the same as between types of market money differing in material.

‘International’ means of payment are those means of payment which serve to balance accounts between different monetary systems; that is, so far as payments are not postponed by funding operations.

Every new set of monetary regulations on the part of a corporate group must necessarily take account of the fact that certain means of payment have previously been used for the liquidation of debts. It must either legalize their use as means of payment, or impose new ones. In the latter case a ratio must be established between the old units, whether natural, by weight, or chartal, and the new. This is the principle of the so-called ‘historical’ definition of money as a means of payment. It is impossible here to discuss how far this affects the value of money as a means of exchange.

It should be strongly emphasized that the present discussion is not an essay in monetary theory, but only an attempt to work out the simplest possible formulations of a set of concepts which will have to be frequently employed later on. In addition, this discussion is concerned primarily with certain very elementary sociological consequences of the use of money. The formulation of monetary theory, which has been most acceptable to the author, is that of Von Mises.²³The Staatliche Theorie des Geldes of G. F. Knapp is the most imposing work in the field and in its way solves the formal problem brilliantly. It is, however, as will be seen below, incomplete for substantive monetary problems. Its able and valuable attempt to systematize terminology and concepts will be left out of account.

1. Means of exchange and means of payment very often, though by no means always, coincide empirically. They are, however, particularly likely not to in primitive conditions. The means of payment for dowries, tribute, obligatory gifts, fines, wergild, etc., are often specified in convention or by law without regard to any relation to the means of exchange actually in circulation. It is only when the economic affairs of the corporate group are administered in money terms that Mises’ contention²⁴ that even the state seeks means of payment only as a means of exchange becomes tenable. This has not been true of cases where the possession of certain means of payment has been primarily significant as a mark of sociai status.²⁵ With the introduction of regulation of money by the state, means of payment becomes the legal concept; medium of exchange, the economic concept.

2. There seems at first sight to be an indistinct line between a ‘good’ which is purchased solely with a view to its future resale and a medium of exchange. In fact, however, even under conditions which are otherwise primitive there is a strong tendency for particular objects to monopolize the function of medium of exchange so completely that there is no doubt about their status. Wheat futures are traded in terms which imply that there will be a final buyer. Therefore they cannot be treated as means of payment or medium of exchange, let alone money.

3. So long as there is no officially sanctioned money, what is used as means of exchange is determined by custom, the play of interests, and all kinds of convention. The agreements of the parties to transactions are then oriented to these. The reasons why specific things have become accepted as means of exchange cannot be gone into here. They have, however, been exceedingly various and tend to be determined by the type of exchange which has been of the greatest importance. By no means every medium of exchange, even within the social group where it has been employed, has been universally acceptable for every type of exchange. For instance, cowry shells, though used for other things, have not in some cases been acceptable in payment for wives or cattle.

4. Sometimes means of payment which were not the usual means of exchange, have played an important part in the development of money to its special status. As G. F. Knapp has pointed out, the fact that various types of debt have existed, such as tributes, dowries, payments for bride purchase, conventional gifts to kings or by kings to each other, wergild, etc., and the fact that these have often been payable in certain specific media, has created for these media, by convention or by law, a special position. Very often they have been specific types of artifact.

5. In the present terminology it is necessary to include as money the one-fifth shekel pieces, which, according to the Babylonian records, circulated bearing the stamp of merchant firms, on the assumption, that is, that they were actually used as means of exchange. On the other hand, bars of bullion, which were not coined, but only weighed, will not be treated as money, but only as means of payment and exchange. The fact, however, that they could be weighed has been enormously important because they could be made the basis of arithmetical calculations. There are naturally many transitional forms, such as the acceptance of coins by weight rather than by denomination.

6. ‘Chartal’ is a term introduced by Knapp in his Staatliche Theorie des Geldes. All types of money which have been stamped or coined, endowed with validity by law or by agreement, belong in this category, whether they were metal or not. It does not, however, seem reasonable to confine the concept to regulations by the state and not to include cases where acceptance is made compulsory by convention or by some agreement. There seems, furthermore, to be no reason why actual minting by the state or under the control of the political authorities should be a decisive criterion. For long periods this did not exist in China at all and was very much limited in the European Middle Ages. As Knapp would agree, it is only the existence of norms regulating the monetary form which is decisive. As will be noted below, value as a means of payment and formal acceptability as means of exchange in private transactions may be made compulsory by law within the jurisdiction of the political authority.

7. Natural means of exchange and of payment may sometimes be used more for internal transactions, sometimes more for external. The details need not be considered here. The question of the purchasing power of money will be taken up later.

8. This is, furthermore, not the place to take up the substantive theory of money in its relation to prices so far as this subject belongs in the field of economic sociology at all. For present purposes it will suffice to state the fact that money, in its most important forms, is used, and then to proceed to develop some of the most general sociological consequences of this fact, which is merely a formal matter when seen from an economic point of view. It must, however, be emphasized that money can never be merely a harmless unit of accounting or of calculation so long as it is money. Its valuation is always in very complex ways, dependent also on its scarcity or, in case of inflation, on its over-abundance. This has been particularly evident in recent times, but is equally true for all times.

A socialistic regime might issue certificates based on a given quantity of ‘labour’ which was recognized as useful, which were made valid for the purchase of certain types of goods. These might be saved or used in exchange, but their behaviour would follow the rules of barter exchange, not of money, though the exchange might be indirect.

9. Perhaps the most instructive case of the far-reaching economic consequences of the relations between the monetary and non-monetary uses of a monetary metal, is that of Chinese monetary history. This is because copper had high costs of production and a wide variation in output.

THE PRIMARY CONSEQUENCES OF THE USE OF MONEY. CREDIT

The primary consequences of the widespread use of money are:

(1) The so-called indirect type of exchange as a means of satisfying consumers’ wants. This makes it possible to obtain goods which are separated from those offered in exchange for them in space, in time, in respect to the persons involved, and, what is very important, in respect to the quantity on each side of the transaction. This results in a tremendous extension of the area of possible exchange relationships.

(2) Closely related to this is the valuation of services, especially reciprocal services to be acquired in exchange—that is, debts—in terms of money.

(3) So-called ‘hoarding’; that is, the storing up of money in specie or in the form of claims to payment payable at any time, as a means of insuring future control over economic advantages in exchange.

(4) The increasing transformation of all economic advantages into the ability to control sums of money.

(5) The qualitative individuation of consumption needs and, indirectly, the extension of their area on the part of those who have control of money, of claims to money payment, or of opportunities to acquire money. This means the ability to offer money as a means of obtaining goods and services of all kinds.

(6) The orientation of the production of utilities, as it has become widespread to-day, to their bearing on the marginal utility of the sums of money which the directing authorities of an economic enterprise expect to be able to control in the relevant future.

(7) With this goes the orientation of acquisitive activities to all the opportunities which are made available by the extension of the area of possible exchanges, in time, in place, and with respect to personal agents, as noted above.

(8) All of these consequences are dependent on what is, in principle, the most important fact of all, the possibility of money calculation; that is the possibility of assigning money values to all goods and services which in any way might enter into transactions of purchase and sale.

In substantive as distinguished from formal terms, monetary valuation means that goods are not valued in terms of their immediate importance as utilities at the time and place and for the person only. On the contrary, these utilities are more or less systematically compared in determining their use, whether for consumption or for production, with all the potential future opportunities of gaining a return. Under some circumstances, this involves their possible use for the purposes of an indefinite number of other persons who can be brought into the situation because they are potential buyers of the powers of control and disposal of the present owner. Where money calculations are highly developed, this will be called the ‘market situation.’²⁶

The term ‘credit’ in the most general sense will be used to designate any exchange of goods initially possessed for the promise of a future transfer of disposal over utilities, no matter what they may be. The granting of credit means in the first instance that action is oriented to the probability that this future transfer of disposal will actually take place. In this sense the primary significance of credit lies in the fact that it makes it possible for an economic unit to exchange its expectations of a surplus of future control over goods or money which are not available at the time, for the present control of other goods, which would not otherwise be available for its use. Where the action is rational both parties expect an improvement in their positions, regardless of what it consists in, over what they could ,procure by any distribution of their present resources.

1. It is by no means necessary for the advantages in question to be economic. Credit may be granted and accepted for all conceivable purposes; for instance, charitable and military.

2. Credit may be granted and accepted in the ‘natural’ form or in money, and in both cases the promises may be of concrete goods or services or of money payments. Carrying out credit transactions in terms of money, however, means that they become the subject of monetary calculations with all the attendant consequences.²⁷

3. This definition (of credit) for the most part corresponds to the usual one. It is clear that credit relationships may exist between organized groups of all sorts, especially socialistic or communistic groups. In the case of a plurality of such groups with close mutual relationships which are not economically independent, they are unavoidable. When the use of money is completely absent, there is a difficult problem of finding a rational basis of calculation. For the mere fact of the possibility of transactions involving future returns, even long-term credit, does not determine the degree of rationality with which the parties agree on the conditions. Such parties would be in somewhat the same situation as the household economic units of ancient times which exchanged their surpluses for things they had need of. But there is this difference, that in the present situation the interests of huge masses on a long-term basis would be at stake; and for the great masses of the low-income groups, the marginal utility of present consumption is particularly high. Thus there would be a probability that goods urgently needed could only be obtained on unfavorable terms.

4. Credit may be obtained and used for the purpose of satisfying present needs, which are otherwise inadequately provided for. Even in that case it will, so far as the action is economically rational, only be granted in exchange for advantages. This is not, however, historically usual for the earliest type of consumption credit, especially as granted to people in need. That has more frequently consisted in an appeal to ethical obligations.²⁸

5. What is the most common basis of credit, in money or in kind, when it is granted for profit, is very obvious. It is the fact that, because the lender is usually in a better economic situation, the marginal utility of future expectations, as compared with present ones, is higher than it is for the debtor. It should, however, be noted that what constitutes a ‘better’ situation is highly relative.

THE MARKET

By the ‘market situation’ (Marktage) for any object of exchange is meant all the opportunities of exchanging it for money which are known by the participants in the market situation to be available to them and relevant in orienting their attitudes to prices and to competition.

‘Marketability’ (Marktgängigkeit) is the degree of regularity with which an object tends to be an object of exchange on the market.

‘Market freedom’ is the degree of autonomy enjoyed by the parties to market relationships in price determination and in competition.

‘Regulation of the market,’ on the contrary, is the state of affairs where there is a substantive restriction, effectively enforced by the provisions of an order, on the marketability of certain potential objects of exchange or on the market freedom of certain participants. Regulation of the market may be determined (1) traditionally, by the actors’ becoming accustomed to traditionally accepted limitations on exchange or to traditional conditions. (2) By convention, through social disapproval of treating certain utilities as marketable or of subjecting certain objects of exchange to free competition and free price determination, in general or when undertaken by certain groups of persons. (3) By law, through legal restrictions on exchange or on the freedom of competition, in general or for particular groups of persons or for particular objects of exchange. Legal regulation may take the form of influencing the market situation of objects of exchange by price regulation or of limiting the possession, acquisition, or exchange of rights of control and disposal over certain goods to certain specific groups of persons. In the latter case it is a legally-guaranteed monopoly or a legal limitation of economic freedom. (4) By voluntary action arising from the play of interests. In this case there is substantive regulation of the market, though the market remains formally free. This type of regulation tends to develop when certain participants in the market are, by virtue of their totally or approximately exclusive control of the possession of or opportunities to acquire certain utilities—that is, of their monopolistic powers—in a position to influence the market situation in such a way as actually to abolish the market freedom of others. In particular, they may make agreements with each other and with typical exchange partners for regulating market conditions. Typical examples are market quota agreements and price cartels.

1. It is convenient, though not necessary, to confine the term ‘market situation’ to cases of exchange for money because it is only then that uniform numerical statements of relationships become possible. Opportunities for exchange in kind are best described simply as exchange opportunities. Different kinds of goods are and have been marketable in widely different and variable degrees, even where a money economy was well developed. The details cannot be gone into here. In general, articles produced in standardized form in large quantities and widely consumed have been the most marketable; unusual goods, only occasionally in demand, the least. Durable consumption goods which can be made use of over long periods and means of production with a long or indefinite life, above all, agricultural and forest land, have been marketable to a much less degree than finished goods of everyday use or means of production which are quickly used up, which can be used only once, or which give quick returns.

2. The regulation of markets, as an economically rational policy, has been historically associated with the growth of formal market freedom and the extension of marketability of goods. The original modes of market regulation have been various, partly traditional and magical, partly dictated by kinship relations, by class privileges, by military needs, by welfare policies, and not least by the interests and requirements of the governing authorities of corporate groups. But in each of these cases the dominant interests have not been primarily concerned with maximizing the opportunities of acquisition and economic provision of the participants in the market themselves; have, indeed, often been in conflict with them. (1) Sometimes the effect has been to exclude certain objects from market dealings, either permanently or for a time. This has happened in the magical case, by taboo; in that of kinship, by the hereditary appropriation of property; on the basis of social status, with fiefs. In times of famine the sale of grain has been temporarily prohibited. In other cases permission to sell has been made conditional on a prior offer to certain persons, such as kinsmen, co-members of class groups, and of guilds, or fellow-citizens of a town; or the sale has been limited by maximum prices, as is common in war time, or by minimum prices. Thus in the mterests of the dignity of magicians, lawyers, physicians, they have not been allowed to accept fees below a certain minimum. (2) Sometimes certain categories of persons, such as members of the nobility peasants, or sometimes even artisans, have been excluded from market trade in general or with respect to certain commodities. (3) Sometimes the market freedom of consumers has been restricted by regulations, as in regulations specifying consumption for different classes, rationing in case of war or of famine. (4) Another type is the restriction of the market freedom of potential competitors in the interest of the market position ot certain groups, such as the professions or the guilds. Finally, (5) certain economic privileges, such as royal monopolies, have been reserved to the political authorities or to those holding a charter from such authorities. This was typical for the early capitalistic monopolies.

Of all these, the fifth type of market regulation has been the most highly rational in terms of the interests of market participants; the first type, the least. By ‘rational’ in this sense is meant promoting the interests of the various groups whose action is oriented to the market situations as a means to the advantageous purchase and sale of goods, with consideration for the interests of other groups not thus oriented proportionally minimized. The groups which, relative to these forms of regulation have been most interested in the freedom of the market, have been those whose interests lay in the greatest possible extension of the marketability of goods, whether from the point of view of availability for consumption, or of ready opportunities for sale. Voluntary market regulation has not appeared extensively and permanently except where there have been highly developed profit-making interests. With a view to the securing of monopolistic advantages, this could take several forms: (1) the pure regulation of opportunities for purchase and sale, which is typical of the widespread phenomena of trading monopolies; (2) the monopolization of transportation facilities, as in shipping and railways; (3) the monopolization of the production of goods; and (4) that of the extension of credit and of financing. The last two types generally are accompanied by an increase in the regulation of economic activity by corporate groups other than the immediate participants in the market relationships. But unlike the primitive, irrational forms of regulation, this is apt to be deliberately oriented to the market situation. The starting point of voluntary market regulation has naturally in general been the fact that certain groups with a far-reaching degree of actual control over economic resources have been in a position to take advantage of the formal freedom of the market to establish monopolies. Voluntary associations of consumers, such as consumers’ co-operative societies, have, on the other hand, tended to originate among those who were in an economically weak position. They have hence often been able to accomplish savings for their members, but only occasionally and in particular localities have they been able to establish an effective system of market regulation.

THE FORMAL AND SUBSTANTIVE RATIONALITY OF ECONOMIC ACTION

The term ‘formal rationality of economic action’ will be used to designate the extent of quantitative calculation or accounting which is technically possible and which is actually applied. The ‘substantive rationality,’ on the other hand, is the degree in which a given group of persons, no matter how it is delimited, is or could be adequately provided with goods by means of an economically oriented course of social action. This course of action will be interpreted in terms of a given set of ultimate values no matter what they may be. There is a variety of different possibilities.

1. The terminology suggested above is thought of merely as a means of securing greater consistency in the use of the word ‘rational’ in this field. It is actually only a more precise form of the meanings which are continually recurring in the discussion of ‘socialization’ and of evaluation in money and in kind.

2. A system of economic activity will be called ‘formally’ rational according to the degree in which the provision for needs, which is essential to every rational economy, is capable of being expressed in numerical, calculable terms, and is so expressed. In the first instance, it is quite independent of the technical form these calculations take, particularly whether estimates are expressed in money or in kind. The concept is thus unambiguous, at least in the sense that expression in money terms yields the highest degree of formal calculability. Naturally, even this is true only relatively, so long as other things are equal.

3. On the other hand, the concept of substantive rationality is full of difficulties. It conveys only one element common to all the possible empirical situations; namely, that it is not sufficient to consider only the purely formal fact that calculations are being made on grounds of expediency by the methods which are, among those available, technically the most nearly adequate. In addition, it is necessary to take account of the fact that economic activity is oriented to ultimate ends (Forderungen) of some kind, whether they be ethical, political, utilitarian, hedonistic, the attainment of social distinction, of social equality, or of anything else. Substantive rationality cannot be measured in terms of formal calculation alone, but also involves a relation to the absolute values or to the content of the particular given ends to which it is oriented. In principle, there is an indefinite number of possible standards of value which are ‘rational’ in this sense. Socialistic and communistic standards which, though by no means unambiguous in themselves, always involve elements of social justice and equality, form only one group among the indefinite plurality of possible points of view. Others are action in the interest of a hierarchy of class distinctions or in furtherance of the power of a political unit, particularly by war. All these and many others are of potential ‘substantive’ significance. These points of view are, however, significant only as bases from which to judge the outcome of economic action. In addition, it is possible to criticize the attitude toward the economic activity itself or toward the means used, from ethical, ascetic or aesthetic points of view. Of all of these, the merely formal calculation in money terms may seem either of quite secondary importance or even as fundamentally evil in itself, quite apart from the consequences of the modern methods of calculation. There is no question in this discussion of attempting value judgments in this field, but only of determining and delimiting what is to be called ‘formal.’ In this context the concept ‘substantive’ is itself in a certain sense ‘formal’; that is, it is an abstract, generic concept.

THE RATIONALITY OF MONETARY ACCOUNTING. MANAGEMENT AND BUDGETING

From a purely technical point of view, money is the most ‘efficient’ means of economic accounting. That is, it is formally the most rational means of orienting economic activity. Accounting in terms of money, and not its actual use, is thus the specific means of rational, economic provision. So far as it is completely rational, money accounting has the following primary consequences:

(1) The valuation of all the means of achieving a productive purpose in terms of the present or expected market situation. This includes everything which is needed at present or it is expected may be needed in the future; everything actually in the actor’s control, which he may come to control or may acquire by exchange from the control of others; everything lost, or in danger of damage or destruction; all types of utilities of means of production or any other sort of economic advantages.

(2) The numerical statement of (a) the prospects of every projected course of economic action and (b) assessment of the results of every completed action in the form of an account comparing costs and returns in money and comparing the estimated net profit to be gained from alternative lines of action by means of these calculations.

(3) A periodical comparison of all the goods and other assets controlled by an economic unit at a given time with those controlled at the beginning of a period, both in terms of money.

(4) A previous estimate and subsequent verification of receipts and expenditures, either those in money itself, or those which can be valued in money, which the economic unit is likely to have available for its use during a period, if it maintains the money value of the means at its disposal intact.

(5) The orientation of provision for consumption to these data by the use of money available during the accounting period for the acquisition of the requisite utilities in accordance with the principle of marginal utility.

The continual use and provision by an economic unit, whether through production or exchange, of goods either for its own consumption or to procure other goods to be consumed, will be called ‘budgetary management’ (Haushalt).²⁹ Where rationality is maximized, its basis for an individual or for a group economically oriented in this way is the ‘budget’ (Haushaltsplan), which states systematically in what way the means which are expected to be used within the unit for an accounting period—needs for utilities or for means of production—can be covered by the anticipated income.

The ‘income’ of a ‘budgetary unit’ is the total of goods valued in money, which, as estimated according to the principle stated above in number 4, has been available during a previous period or, on the availability of which the unit is likely to be able to count by rational calculations for the present or for a future period. The total estimated value of the goods at the disposal of a budgetary unit, which are normally used immediately or as a source of income, will be called its ‘resources’ (Vermögen).³⁰ The possibility of complete money budgeting for the budgetary unit is dependent on the possibility that its income and resources consist either in money or in goods which are at any time subject to exchange for money; that is, which are in the highest degree marketable.

A rational type of management and budgeting of a budgetary unit is possible where calculation is carried out in kind, as will be further discussed below. It is true that in that case there is no such thing as a single sum of ‘resources’ capable of being estimated in money nor is there a single income. Calculations must be worked out in terms of ‘possession’ of concrete goods and, where acquisition is limited to peaceful means, of concrete ‘receipts’ from the direct outlay of available goods and services. These receipts will then be administered with a view to attaining the optimum provision for the satisfaction of wants. If the wants are strictly given, this involves a comparatively simple problem from the technical point of view so long as the situation does not require a very precise estimate of the comparative utility to be gained from the allocation of the available resources to each of a large number of very heterogeneous modes of use. If the situation is markedly different, even the simple selfsufficient household is faced with problems which are only to a very limited degree subject to a formally exact solution by calculation. The actual solution is usually found partly by the application of purely traditional standards, partly by making very rough estimates, which, however, may be quite adequate where both the wants concerned and the conditions of provision for them are well known and readily comparable. When possessions consist in heterogeneous goods, as must be the case in the absence of exchange, a formally exact calculable comparison of the state of possession at the beginning and the end of a period, or of the comparison of different possible ways of securing receipts, is possible only with categories of goods which are qualitatively similar. The typical result is that all the available goods are treated as forming a totality of possessions in kind and certain goods are treated as available for consumption so long as it appears that this will not in the long run diminish the available resources. But every change in the conditions of production—as, for instance, through a bad harvest—or any change in wants necessitates a new allocation since it alters the scale of relative marginal utilities. Under conditions which are simple and adequately understood, this adaptation may be carried out without much difficulty. Otherwise, it is technically more difficult than if money terms could be used. For then any change in the price situation in principle influences the satisfaction only of the wants which are marginal on the scale of relative urgency, which are thus met with the final (variable) increments of income.

As far as accounting in kind becomes more and more rational, and is thus emancipated from tradition, the estimation of marginal utilities in terms of the relative urgency of wants encounters grave complications; whereas, if it were carried out in terms of money resources and income, it would be relatively simple. In the latter case the question is merely whether to apply more labour or whether to satisfy or sacrifice, as the case may be, one or more wants, rather than others. For when the problems of budgetary management are expressed in money terms, this is the form that ‘costs’ take. But where calculations are in kind, it is necessary, in addition to having a scale of urgency of wants, to estimate (1) the various possible modes of use of the means of production, including their value in terms of previous labour applied to them; that is, it is necessary to evaluate a variant and changeable relationship between want satisfaction and expenditure of resources. This involves further (2) estimating the amount of labour which it would be necessary to expend in order to secure various forms of new receipts; and (3) the ways in which the various resources could be used in carrying out each of a series of potential productive processes. It is one of the most important tasks of economic theory to analyse the various possible ways in which these evaluations can be rationally carried out. It is, on the other hand, a task for economic history to follow out the ways in which the budgetary management of resources in kind has actually worked out in the course of various historical epochs. In general, the following may be said: (1) that the degree of formal rationality has, generally speaking, fallen short of the level which was even empirically possible, to say nothing of the theoretical maximum. As a matter of necessity, the accounting of non-monetary budgetary management units has in the great majority of cases remained strongly bound to tradition. (2) In the larger units of this type, precisely because an expansion and refinement of everyday wants has not taken place, there has been a tendency to employ surpluses for uses outside the everyday standard of living, above all, for artistic purposes. This is an important basis of the tendency of societies with an economy on a low level of the use of money to develop cultures with a strong emphasis on style and an artistic type of orientation.

1. The category of ‘resources’ includes more than physical goods. It also includes all the economic advantages over which the budgetary unit has an assured control, whether that control is due to custom, to the play of interests, to convention, or to law. The clientèle of a profit-making organization, whether it be a medical or legal practice, or a retail shop, belongs to the resources of the owner if it is for whatever reason relatively stable. In case such resources are legally appropriated, they may, according to the definition in Chapter 1, sec. 10, constitute part of its property.

2. Money accounting is found without the actual use of money or with its use limited to the settlement of balances which cannot be paid in kind in the goods being exchanged on both sides. Evidence of this is common in the Egyptian and Babylonian records. The use of money accounting as a measure of payments in kind is found in the code of Hammurabi and in the late Roman and early Medieval law, in the permission for a debtor to pay an amount due in whatever form he is able. The establishment of equivalents may in such cases have been carried out on the basis of traditional prices or of prices laid down by decree.

3. Apart from this, the above discussion contains only commonplaces, which are introduced to facilitate the formulation of a precise concept of the rational budgetary unit as distinguished from that of a rational profit-making enterprise—the latter will be discussed presently. It is important to state explicitly that both can take rational forms. The satisfaction of needs is not something more ‘primitive’ than profit-seeking; ‘resources’ is not necessarily a more primitive category than capital; income, than profit. It is, however, true that historically the budgetary unit has been prior and has been the dominant form in most periods of the past.

4. It is indifferent what unit is the bearer of a budgetary management economy. Both the budget of a state and the family budget of a worker fall under the same category.

5. Empirically the administration of budgetary units and profit-making are not mutually exclusive alternatives. The business of a consumers’ co-operative, for instance, is normally oriented to the economical provision for wants; but in the form of its activity, it tends to be a profit-making business without being oriented to profit as a substantive end. In the action of an individual, the two elements may be so intimately intertwined, and in the past have typically been so, that only the conclusion of the course of action, whether its product was sold or consumed, can serve as a basis for interpreting the meaning of the action. This has been particularly true of small peasants. Exchange may well be a part of the process of budgetary management where it is a matter of acquiring consumption goods by exchange and of disposing of surpluses. On the other hand, the budgetary economy of a prince or a landowner may, at least in part in the sense of the following discussion, be a profit-making enterprise. This has been true on a large scale in earlier times. Whole industries have developed out of the heterocephalous and heteronomous enterprises which landowners, monasteries, princes, etc., have established to exploit the products of their lands. All sorts of profit-making enterprises to-day are part of the economy of such units as local authorities or even states. In these cases it is legitimate to include in the ‘income’ of the units, if they are rationally administered, only the net profits of these enterprises. Conversely, it is possible for profit-making enterprises to establish various types of heteronomous budgetary units under their direction for such purposes as providing subsistence for slaves or wage workers—among them are ‘welfare’ organizations, housing and eating facilities. Net profits are money surpluses after the deduction of all money costs. See above, para. 2 of this section.

6. It has been possible here to give only the most elementary starting points for analysing the significance of economic calculations in kind for general social development.

THE CONCEPT AND TYPES OF PROFIT MAKING. THE ROLE OF CAPITAL

‘Profit-making’ (Erwerben)³¹ is activity which is oriented to opportunities for seeking new powers of control over goods on a single occasion, repeatedly, or continuously. ‘Profit-making activity’ is activity which is partly oriented to profit-making. Profit-making is economic if it is oriented to acquisition by peaceful methods. It may be oriented to the exploitation of market situations. ‘Means of profit’ (Erwerbsmittel) are those goods and other economic advantages which are used in the interests of economic profit-making. Exchange for profit is that which is oriented to market situations in order to increase control over goods, rather than to secure means for consumption. Credit may be extended as a means of increasing control over the necessary requisites of profit-making activity.

There is a form of monetary accounting which is peculiar to rational economic profit-making; namely, ‘capital accounting.’ Capital accounting is the valuation and verification of opportunities for profit and of the success of profit-making activity. It involves the valuation of the total assets of the enterprise, whether these consist in goods in kind or in money, at the beginning of a period of activity; and the comparison of this with a similar valuation of the assets still present or newly acquired, at the end of the process. In the case of a profit-making organization operating continuously, it is a matter of accounting periods. But in any case, a balance is drawn between the initial and final states of the enterprise. ‘Capital’ is the sum of money in terms of which the means of profit-making which are available to the enterprise are valued. ‘Profit,’ and correspondingly ‘loss,’ is the difference between the valuations as revealed by the initial balance and that drawn at the conclusion of the period. ‘Capital risk’ is the estimated probability of loss as expressed in terms of a balance. A profit-making ‘enterprise’ (Unternehmen) is a system of action capable of autonomous orientation to capital accounting. This orientation takes place by means of calculation. On the one hand, there is a calculation, prior to actual action, of the probable risks and chances of profit; on the other hand, at the conclusion of a measure, verification of the actual profit or loss resulting. ‘Profitability’ (Rentabilität) means, in the rational case, one of two things: (1) the amount of profit estimated as possible by previous calculations, the attainment of which is made an objective of the entrepreneur’s activity; or (2) that which an audit shows actually to have been earned in a given period and which is available for the consumption uses of the entrepreneur, without prejudice to his future chances of profit making. In both cases it is usually expressed in ratios—to-day, percentages—in relation to the capital of the initial balance.

Enterprises based on capital accounting may be oriented to the exploitation of opportunities of acquisition afforded by the market or they may be oriented toward other channels of acquisition, such as exploitation of the ability to use force, as in the case of tax farming or the sale of offices.

Each individual operation undertaken by a rational profit-making enterprise is oriented to estimated profitability by means of calculation. In the case of profit-making activities on the market, capital accounting requires: (1) that there exist, subject to estimate beforehand, adequately extensive and assured opportunities for sale of the goods which the enterprise produces; that is, normally a high degree of marketability. (2) That, similarly, the means of carrying on the enterprise such as instruments of production and the services of labour are available in the market at costs which can be estimated with an adequate degree of certainty. Finally, (3) that the technical and legal conditions to which the process is subjected, from the acquisition of the means of production to final sale, including transport, manufacturing operations, storage, etc., can be taken account of as calculable money costs.

The extraordinary importance of the highest possible degree of calculability as the basis for efficient capital accounting will be evidenced again and again throughout the discussion of the sociological conditions of economic activity. It is far from the case that only economic factors are important to it. On the contrary, it will be shown that the most various sorts of external and subjective barriers have existed to account for the fact that capital accounting has arisen as a basic form of economic calculation only in the Western World.

As distinguished from the calculation appropriate to a budgetary unit, the capital accounting and calculation of the market entrepreneur, are oriented not to marginal utility, but to profitability. To be sure, the probabilities of profit are in the last analysis dependent on the income of consumption units and, through this, on the marginal utility of the available income of the final consumers of consumption goods. As it is usually put, it depends on their ‘purchasing power’ for the relevant commodities. But from a technical point of view, the accounting calculations of a profit-making enterprise and of a consumption unit differ as fundamentally as do the ends of want satisfaction and of profit-making which they serve. For purposes of economic theory, it is the marginal consumer who determines the direction of production. In actual fact, given the actual distribution of power this is only true in a limited sense for the modern situation. To a large degree, even if the consumer is in a position to buy, his wants are ‘awakened’ and ‘directed’ by the entrepreneur.

In a market economy every form of rational calculation, hence, especially, of capital accounting, is oriented to expectations of prices and their changes as they are determined by the conflicts of interests in bargaining and competition and the resolution of these conflicts. In the estimation of profitability this is made particularly clear by the form of bookkeeping, the double entry type, which is the most highly developed from a technical point of view. For here, in the system of accounting, there is introduced the fiction of exchange transactions between the different parts of a single enterprise; or, between different accounts in order to develop a technique of estimating the bearing of each particular measure on the profitability of the enterprise. Thus the highest degree of rational capital accounting presupposes the existence of competition on a large scale. And this in turn involves a further very specific condition. It is not possible in any economic system for subjective wants to correspond directly to effective demand; that is, to that which enters into calculations for provision by the acquisition of goods. For whether or not a subjective want can be satisfied depends, on the one hand, on its place in the scale of relative urgency; on the other hand, on the goods which are actually or potentially estimated to be available for its satisfaction. Satisfaction does not take place if the utilities needed for it are applied to other more urgent uses, or if they either cannot be procured at all, or only by such sacrifices of labour and goods that future wants, which are still, from a present point of view, adjudged more urgent, could not be satisfied. This is true of consumption in every kind of economic system including a communistic one.

In an economy which makes use of capital accounting and which is thus characterized by the appropriation of the means of production by individual units, that is by property, profitability depends on the prices which the ‘consumers,’ according to the marginal utility of money in relation to their income, can and will pay. It is only possible to produce profitably for those consumers who, in these terms, have sufficient income. A need may fail to be satisfied, not only when an individual’s own demand for other goods takes precedence, but also when the greater purchasing power of others, in relation to any kind of demand, withdraws the relevant good from the market. Thus the fact that competition on the market is an essential condition of the existence of rational money accounting further implies that the outcome of the economic process is decisively influenced by the ability of persons who are plentifully supplied with money to outbid the others, and of those more favourably situated for production to underbid their rivals on the selling side. The latter are particularly those well supplied with goods essential to production or with money. In particular, rational money accounting presupposes the existence of effective prices and not merely of fictitious prices conventionally employed for technical accounting purposes. These, in turn, presuppose money which functions as an effective circulating medium of exchange and in demand as such, and not merely as a technical accounting unit.³² Thus the orientation of action to money prices and to profit has the following consequences: (1) that the distribution of the amount of money or of marketable goods at the disposal of the different parties in the market is decisive in determining the direction taken by the production of goods, so far as it is carried on by profit-making enterprises. For it is only demand which is made effective through purchasing power which is and can be satisfied. Further, (2) the question, what type of demand is to be satisfied by the production of goods, becomes in turn dependent on the profitability of production itself. Production is, to be sure, in formal terms a rational process of want satisfaction. But it does not respond to actual wants unless their possessors are in a position to make them effective by sufficient purchasing power on the market.

‘Capital goods,’ as distinguished from ordinary possessions or the resources of a budgetary unit, are all such goods as are administered and so long as they are administered on the basis of capital accounting. ‘Interest on capital,’ as distinct from various other possible kinds of interest on loans, is: (1) what is estimated to be the minimum normal profitability of the use of material means to profit making; (2) the rate of interest at which profit-making enterprises can obtain money or capital goods.³³

I. The concept of capital has been defined strictly with reference to the individual enterprise and in accordance with accounting practice, which was, indeed, the most convenient method for present purposes. This usage is much less in conflict with everyday speech than with the usual scientific use of the term, which, furthermore, has by no means been consistent. In order to test the usefulness of the present accounting term, which is being increasingly employed in scientific writings again, it is necessary only to ask the following simple questions: (1) What does it mean when we say that a company has an original capital of a million pounds? When (2) that capital is ‘written down’? When (3) laws dealing with financing make rules which lay down what may and may not be included in original capital? The first question means that when profit is being divided, it is only when the excess of credits over debits as stated in the balance sheet exceeds a million pounds, that it can be treated as profit and divided among the share-holders to do what they like with. In the case of a one man enterprise, it means that only this surplus may be used for his private expenditures. The second question concerns the situation where there have been heavy losses. It means that the division of profit need not be postponed until a surplus of over a million pounds has been accumulated but that the division of ‘profits’ may begin at a lower figure. In order to do this, it is necessary to ‘write down’ the capital and this is the purpose of the operation. Finally, the purpose of rules as to how capital liability can be ‘covered’ by acquisition of assets and when and how it can be written down or up is to give creditors and shareholders a guarantee that the division of profits will be carried out correctly according to the rules of the enterprise; in such a way, that is, (a) that profitability is maintained, and (b) that the security of the creditors is not impaired. The rules as to what may be entered in the balance sheet are concerned essentially with how objects may be reckoned as capital. (4) What does it mean when we say that as a result of unprofitability ‘capital turns to other channels of investment’? The statement may refer to the resources of a budgetary unit, for ‘investment’ may be a category of the administration of budgetary resources, as well as of profit-making enterprise. But it may mean that capital goods partly have ceased to be such by being sold, for instance as scrap or junk, partly are transferred to other uses as capital. (5) What is meant when we speak of the ‘power of capital’? We mean that the possessors of control over the means of production and of economic advantages which can be used as capital goods in a profit-making enterprise enjoy, by virtue of this control and of the orientation of economic action to the principles of capitalistic acquisition, a specific position of power in relation to others.

In the earliest beginnings of rational profit-making activity capital appears, though not under this name, as a sum of money used in accounting. Thus in the ‘commenda’ relationship various types of goods were entrusted to a travelling merchant to sell in a foreign market, and possibly he was also commissioned to purchase other goods wanted for sale at home. The profit or loss was then divided in a particular proportion between the travelling merchant and the entrepreneur who advanced the capital. But for this to take place it was necessary to value the goods in money; that is, to strike balances at the beginning and the conclusion of an enterprise. The ‘capital’ of the commenda relationship or the societas maris was simply this money valuation, which served only the purpose of settling accounts between the parties and no other.

What is meant when the term ‘capital market’ is used? It means that goods, especially money, are in demand in order to be used as capital goods. Furthermore, it means that there are profit-making enterprises, especially various kinds of ‘banks,’ which make profits by the provision of goods, especially money, for this purpose as a regular business. In the case of so-called ‘loan capital,’ which consists in handing over money in lieu of a promise to return the same amount at a later time with or without the addition of ‘interest,’ the term capital will only be used if lending is the object of a profit-making enterprise. Otherwise, the term ‘money loans’ will be used. Everyday speech tends to use the term capital in so far as ‘interest’ is paid because the latter is usually reckoned as a proportion of the nominal value of the loan. It is only because of this basis of calculation that we speak of the amount of a loan or a deposit as capital. It is true that this is the origin of the term. Capitale was the principal sum of a loan which is said, though it cannot be proved, to derive from the heads counted in a loan of cattle. But this is irrelevant. Even in very early times a loan of goods in kind was reckoned in money terms; and it was on this basis that interest was calculated, so that even in such cases capital goods and capital accounting are typically related, as has been true in later times. In the case of an ordinary loan, which is made simply as a phase in the administration of a budgetary unit and so far as it is employed for the needs of the budgetary unit, the term ‘loan capital’ will not be used. The same, of course, applies to the lender.

The concept of a profit-making enterprise is in accord with ordinary usage, except for the fact that the orientation to capital accounting, which is usually taken for granted, is made explicit. This is done in order to emphasize that not every case of search for profit as such constitutes an ‘enterprise,’ but only when it is capable of orientation to capital accounting, regardless of whether it is on a large or a small scale. At the same time it is indifferent whether this capital accounting is in fact rationally carried out according to rational principles. Similarly the terms ‘profit’ and ‘loss’ will be used only as applying to enterprises oriented to capital accounting. The earnings or other modes of acquisition without relation to capital, of such persons as authors, physicians, lawyers, civil servants, professors, clerks, technicians, or workers, is naturally ‘acquisition,’³⁴ but it is not ‘profit.’ Even everyday usage would not call it profit. ‘Profitability’ is a concept which is applicable to every sort of act which is oriented in terms of business accounting technique to profit and loss, such as the employment of a particular worker, the purchase of a new machine, the determination of rest periods in the working day, etc.

It is not expedient in defining the concept of interest on capital to start with interest on any type of loan. If somebody helps out a peasant by giving him seed and demands an increment on its return, or if the same is done in the case of money loaned to a household to be returned with interest, it is not expedient to call this a ‘capitalistic’ process. It is possible, where action is rational, for the lender to secure an additional amount because his creditor is in a position to expect benefits from the use of the loan greater than the amount of the interest he pays; when, that is, the situation is seen in terms of what it would be if he had had to do without the loan. Similarly, the lender, being aware of the situation, is in a position to exploit it, in that for him the marginal utility of his present control over the goods he lends is exceeded by the marginal utility at the relevant future time of the repayment with the addition of the interest. This is essentially a matter of the administration of budgetary units and their resources, not of capital accounting. Even a person who secures a loan for his urgent personal needs from a ‘usurer’ is not for purposes of the present discussion said to be paying interest on capital, nor does the lender receive such interest. It is rather a case of return for the loan. But the person who makes a business of lending calculates interest, in case he acts rationally, in terms of its relation to his business capital, and must consider that he has suffered a ‘loss’ if the returns from loans do not come up to the requisite rate of profitability. This is a case of interest on capital; the former is simply interest. Thus for the present terminological purposes, interest on capital is always that which is calculated on the basis of capital, not that which is a return for capital. It is always oriented to money valuations, and thus to the sociological fact that disposal over means to making profit, whether through the market or not, is in private hands; that is, appropriated. Without this, capital accounting, and thus calculation of interest, would be unthinkable.

In a rational profit-making enterprise, the interest, which is charged on the books to a capital sum, is the minimum of profitability. It is in terms of whether or not this minimum is reached that a judgment of the advisability of this particular mode of use of capital goods is arrived at. Advisability in this context is naturally conceived from the point of view of maximizing profit. The rate for this minimum profitability is, it is well known, only approximately that at which it is possible to secure credit on the capital market at the time. But nevertheless, the existence of the capital market is the reason why calculations are made on this basis, just as the existence of market exchange is the basis for making entries against the different accounts. It is one of the fundamental phenomena of a capitalistic economy that entrepreneurs are permanently willing to pay interest for loans. This phenomenon can only be explained by understanding how it is that the average entrepreneur may hope in the long run to earn a profit, or that entrepreneurs on the average in fact do earn it, over and above what they have to pay as interest on loans.

Economic theory approaches this problem in terms of the relative marginal utilities of goods under present and under future control. No objection is to be made to this procedure. But the sociologist wishes to know in addition how this supposed relation of marginal utilities affects human action so that actors are in a position and willing to make differences in time preference a basis of the payment of interest. For it is by no means obvious that this would happen at all times and places. In fact, it is a phenomenon specific to profit-making economies. The primary basis of it is the economic market structure which mediates between the profit-making enterprises, on the one hand, and the budgetary units on the other, which not only consume the goods offered on the market but also provide certain essential means of production, notably labour. It is only where there is such a market that profit-making enterprises are founded and administered permanently with a capitalistic orientation. Such enterprises are further dependent on an expectation of earning the minimum rate of interest on capital. In terms of economic theory, which is subject to numerous variations, it might well be said that this type of exploitation of the situation was a consequence of positions of power deriving from private property in the means of production and in the products. It is only this type of economically-acting individuals who are in a position to orient their economic activity to interest payments.

2. The budgetary administration of resources and profit-making enterprises may be outwardly so similar as to appear identical. They are in fact in the analysis only distinguishable in terms of the difference in meaningful orientation of the corresponding economic activities. In the one case, it is oriented to maintaining and improving profitability and the market position of the enterprise; in the other, to the security and increase of resources and income. It is, however, by no means necessary that this fundamental orientation should always, in a concrete case, be decisively turned in either direction; and sometimes it is impossible to decide it. In cases where the private resources of the entrepreneur are identical with his business control over its business resources and his private income is identical with the profit of the business, the two things seem to go entirely hand in hand. All manner of personal considerations may in such a case cause the entrepreneur to enter upon business policies which, in terms of the rational maximization of profit, are irrational. But very generally, private resources and those of the business are not identical. Furthermore, such factors as personal indebtedness of the proprietor, his personal demand for a higher present income, and the like, often exert what is, in terms of business considerations, a highly irrational influence on the business. Such situations often lead to measures intended to eliminate these influences altogether, as in the incorporation of family businesses.

The tendency to separate the sphere of private affairs from the business is thus not fortuitous. It is a consequence of the fact that, from the point of view of business interest, the interest in maintaining the private resources of the owner is often irrational, as is his interest in income receipts at any given time from the point of view of the profitability of the enterprise. Considerations relevant to the profitability of a business are also not identical with those governing the private interests of persons who are related to it as workers or as consumers. Conversely, the interests growing out of the private fortunes and income of persons or corporate groups having powers of control over an enterprise, do not necessarily lie in the same direction as the long-run considerations of maximizing its profitability and its market position. This is definitely, even especially, true when a profit-making enterprise is controlled by a producers’ cooperative association. The objective interests of rational management of a business enterprise and the personal interest of the individuals who control it, are by no means identical and are often opposed. This fact implies the distinction in principle of the budgetary unit and the enterprise, even where both, with respect to powers of control and objects controlled, are identical.

It is essential for purposes of a clear and convenient terminology to maintain a sharp distinction between the budgetary unit and the profit-making enterprise. The purchase of securities on the part of a private investor who wishes to consume the proceeds, is not an investment of capital but of personal resources. A money loan made by a private individual for obtaining the interest is, when regarded from the standpoint of the lender, entirely different from one made by a bank to the same borrower. On the other hand, a loan made to a consumer and one to an entrepreneur for business purposes are quite different from the point of view of the borrower. The bank is investing capital and the entrepreneur is borrowing capital; but in the first case, it may be for the borrower a matter simply of borrowing for purposes of budgetary management; in the second it may be, for the lender, a case of investment of his private resources. This distinction between private resources and capital, between the budgetary unit and the profit-making enterprise, is of far-reaching importance. In particular, without it, it is impossible to understand the economic development of the ancient world and the limitations on the development of capitalism in those times.³⁵

3. By no means all profit-making enterprises with capital accounting are doubly oriented to the market in that they both purchase means of production on the market and sell their product there. Tax farming and all sorts of financial operations have been carried on with capital accounting but without selling any products. The very important consequences of this will be discussed later. It is a case of capitalistic profit-making which is not oriented to the market.

4. For reasons of convenience, acquisitive activity and profit-making enterprise have been distinguished. Anyone is engaged in acquisitive activity so far as he seeks, among other things, in given ways to acquire goods—money or others—which he does not yet possess. Thus it includes the official and the worker, no less than the entrepreneur. But the term ‘profit-making enterprise’ will be confined to those types of acquisitive activity which are continually oriented to market advantages by virtue of the fact that goods are used as means to secure profit, either (a) through the production and sale of goods in demand, or (b) through the offer of services in demand in exchange for money, which may occur through free exchange or through the exploitation of appropriated advantages, as has been pointed out above. The person who is a mere investor is, in the present terminology, not engaged in profit-making, no matter how rationally he administers his resources.

5. It goes without saying that in terms of economic theory the direction in which goods can be profitably produced by profit-making enterprises is determined by their marginal utilities for final consumers in conjunction with the latter’s incomes. But from a sociological point of view, it should not be forgotten that, to a large extent, in a capitalistic economy (a) new wants are created and others allowed to disappear and (b) capitalistic enterprises, through their aggressive advertising policies, exercise an important influence on the demand functions of consumers. Indeed, these are essential traits of a capitalistic economy. It is true that this does not apply primarily to wants of the highest degree of necessity, but even types of food provision and housing are importantly determined by the producers in a capitalistic economy.

CALCULATIONS IN KIND

Calculations in kind can occur in the most varied form. We speak of a ‘money economy,’ meaning an economy where the use of money is typical and where action is typically oriented to market situations in terms of money prices. The term ‘natural economy,’³⁶ on the other hand, means an economy where money is not used. The different economic systems known to history can be classified according to the degree to which they approximate the one or the other.

The concept ‘natural economy’ is not, however, very definite, since it can cover systems with widely varying structures. It may mean an economy where no exchange at all takes place or one where exchange is only by barter, and thus money is not used as a medium of exchange. The first type may be an individual economic unit organized on a completely communistic basis, or with some determinate distribution of rights of participation. In both cases, there would be a complete lack of autonomy or autocephaly of the component parts. This may be called a ‘closed household economy.’ Or, secondly, it may be a combination of otherwise autonomous and autocephalous individual units, all of which, however, are obligated to make contributions in kind to a central organization which exists for the exercise of authority or as a communal institution. This is an economy based on payments in kind, such as the Greek oikos or a ‘liturgically’³⁷ organized political group. In both cases, so far as the pure type is conformed to, there is only calculation in kind.

In the second place, where exchange is involved there may be natural economies where exchange is only by barter without either the use of money or calculation in money terms. Or there may be economies where there is exchange in kind, but where calculation is occasionally or even typically carried out in money terms. This was typical of the Orient in ancient times and has been common everywhere.

For the purposes of analysing calculation in kind, it is only the cases of the first type which are of interest, where the unit is either completely self-sufficient, or the liturgies are produced in rationally organized units. This would be inevitable in attempting to employ modern technology in a completely socialized economy.

Calculation in kind is in its essence oriented to consumption, the satisfaction of wants. It is, of course, quite possible to have something analogous to profit-making on this basis. This may occur (a) in that, without resort to exchange, available objective means of production and labour are systematically applied to the production and transportation of goods on the basis of calculations, according to which the state of want satisfaction thus attained is compared with the state which would exist without these measures or if the resources were used in another way, and thus a judgment as to the most advantageous procedure arrived at. Or (b) in an exchange economy, goods may be disposed of and acquired by exchange even in systematically repeated ways, though strictly by barter. Such action would be systematically oriented to securing a supply of goods which, as compared with the state which would exist without them, is judged to be a more adequate provision for the needs of the unit. It is, in such cases, only when quantities of goods which are qualitatively similar are compared that it is possible to use numerical terms unambiguously and without a wholly subjective valuation. It is naturally possible to set up typical combinations of consumable goods, such as salaries paid in kind and benefices, consisting of income in kind, which have been particularly common in the Orient. These may even become the objects of exchange transactions in a way somewhat similar to our government securities. In certain cases involving goods of highly uniform quality, such as the grain of Egypt, it has been possible to store them and to trade on the basis of certificates of ownership, just as if they were silver bars or bank credit. Similarly, what is more important, it has been possible to express the technical efficiency of a process of production in numerical terms and thereby compare it with other types of technical process. This may be done, if the final product is the same, by comparing the relative requirements of different processes in both the quantity and the type of means of production. Or, where the means of production are the same, the different products which result from different procedures may be compared. It is often, though by no means always, possible in this way to secure numerical comparisons for the purposes of particular problems. But the more difficult problems of calculation begin when it becomes a question of comparing different kinds of means of production, their different possible modes of use, and qualitatively different final products.

Every capitalistic enterprise is, to be sure, continually concerned with calculations in kind. For instance, given a certain type of loom and a certain quality of yarn, it is a question of ascertaining, in relation to the other relevant data, such as the efficiency of machines, the humidity of the air, the rate of consumption of coal, lubricating oil, etc., what will be the product per hour per worker and thus the amount of the product which is attributable to any individual worker for each unit of time. For industries with typical waste products or by-products, this can be determined without any use of money accounting and is in fact so determined. Similarly, under given conditions, it is possible to work out, in technical terms without the use of money, the normally expected annual consumption of raw materials by the enterprise according to its technical production capacity, the depreciation period for buildings and machinery, the typical loss by spoiling or other forms of waste. But the comparison of different kinds of processes of production with the use of different kinds of raw materials and different ways of treating them, is carried out to-day by making a calculation of comparative profitability in terms of money costs. For accounting in kind, on the other hand, there are formidable problems involved here which are incapable of objective solution. Though it does not at first sight seem to be necessary, a modern enterprise tends to employ money terms in its capital calculations without regard to these difficulties. But even this is not entirely fortuitous. In the case of the distribution of items to the different accounts, for example, money accounting is used because this is the method of forecasting the conditions of future productivity of the business which combines the greatest degree of certainty with the greatest flexibility in relation to changing circumstances. Without such a means of checking the bearing on future profitability, any provision of stocks of materials or any other mode of provision in kind would be irrational and it would be very difficult to know where to stop. It is difficult to see, without money accounting, how ‘reserves’ could be built up without being specified in detail. Further, an enterprise is always faced with the question as to whether any of its parts is operating irrationally: that is, unprofitably, and if so, why. It is a question of what parts of the expenditure of resources in kind, that is, of ‘costs,’ could be saved and, above all, could be more rationally used elsewhere. This can be determined with relative ease and accuracy in terms of money accounting by means of striking a balance between proceeds and costs on the books, which must include the interest payment assigned to that account. But it is exceedingly difficult to do this entirely in terms of material goods, and indeed it can be accomplished at all only in very simple cases. This is not a matter of circumstances which could be overcome by technical improvements in the methods of calculation, but of fundamental limitations, which make really exact accounting in terms of calculations in kind impossible in principle.

It is true this might be disputed, though naturally not with arguments drawn from the Taylor system, nor from the possibility of achieving improvements in efficiency by making use of a system of premiums or points without the use of money. The essential question is that of how it is possible to discover at what point in the organization it would be profitable to employ such measures because there existed at that point certain elements of irrationality. It is in finding out these points that accounting in kind encounters difficulties which cannot be solved by a subsequent assessment in money terms. The fundamental limitations of accounting in kind as the basis of calculation in enterprises—of a type which would include the heterocephalous and heteronomous units of a planned organization of production—are to be found in the problem of imputation. This involves much more than a simple matter of the arbitrary assignment of values in bookkeeping. It is rather a matter of the type of highly complex considerations analyzed by the theory of marginal utility. A system of accounting in kind would have to set up indices of the value of the various significant resources which would play the role of the accounting prices of modern business. But it is not clear how these indices could be established and regulated; for instance, whether they would vary from one unit to another, according to special conditions, or whether they would be uniform for the whole economy, to take account of social utility, that is, the present and future conditions of consumers’ demand.

Nothing is gained by assuming that, if only the problem of a non-monetary economy were seriously enough attacked, a suitable accounting method would be discovered or invented. The problem is fundamental to any kind of complete socialization. We cannot speak of any kind of a ‘rational planned economy’ so long as at this decisive point we have no way of working out a rational plan.

The difficulties of accounting in kind become more marked when the question is considered of whether, from the point of view of efficiently satisfying the wants of a given group of persons, it is rational to locate a certain enterprise with a given productive function at one or an alternative site. The same difficulties arise if we want to determine whether a given economic unit, from the point of view of the most rational use of the labour and raw materials available to it, would do better to obtain certain products by exchange with other units or by producing them itself. It is true that the basis of the location of industries lies in the natural environment and its simplest data are capable of formulation in non-monetary terms.³⁸ Nevertheless, the concrete determination of whether, according to the relevant circumstances of its particular location, a given unit is better assigned one or a somewhat different role in the system of production, is, in terms of calculation in kind, capable of solution only in terms of very crude estimates apart from the few cases where the solution is given by some natural peculiarity, such as a unique source of a raw material. But in spite of the numerous unknowns which may be present, the problem in money terms is always capable of a determinate solution in principle.

Finally, there is the independent problem of the comparative importance of the satisfaction of different wants, provision for which is, under the given conditions, equally feasible. In the last analysis, this problem is, in at least some of its implications, involved in every particular case of the calculations of a productive unit. Under conditions of money accounting, it has a decisive influence on profitability and thereby on the direction of production of profit-making enterprises. But where calculation is only in kind, it is in principle soluble only in one of two ways: by adherence to tradition or by an arbitrary dictatorial regulation which, on whatever basis, lays down the pattern of consumption and requires obedience. Even when that is resorted to, it still remains a fact that the problem of imputation of the part contributed to the total product of an economic unit by the different factors of production and different executive decisions is not capable of the kind of solution which is at present attained by calculations of profitability in terms of money. It is precisely the process of provision for mass demand by mass production so typical of the present day which would encounter the greatest difficulties.

1. The problems of accounting in kind have been raised in a particularly penetrating form by Dr. Otto Neurath in his numerous works apropos of the tendencies to ‘socialization’ in recent years. The problem is a central one in any discussion of complete socialization; that is, that which would lead to the disappearance of effective prices. It may, however, be explicitly noted that the fact that it is incapable of rational solution serves only to point out some of the consequences, including economic ones, which would have to be faced as a result of such a socialist experiment. This does not, however, touch the question of the justification of such a programme so far as it does not rest on technical considerations, but like most such movements, on ethical postulates or other forms of absolute value. A ‘refutation’ of these is beyond the scope of any science. From a purely technical point of view, however, the possibility must be considered that the maintenance of a certain density of population within a given area is possible only on the basis of accurate calculation. In so far as this is true, a limit to the possible degree of socialization would be set by the necessity of maintaining a system of effective prices. That cannot, however, be considered here. It may be noted, though, that the distinction between ‘socialism’ and ‘social reform,’ if there is any such, should be made in these terms.

2. It is naturally entirely correct that mere money accounts, whether they refer to single enterprises, to any number of them, or to all enterprises—indeed, even the most complete statistical information about the movement of goods in money terms—tell us nothing whatever about the nature of the real provision of a given group with what it needs; namely, real articles of consumption. Furthermore, estimates of national income in money are only to be taken seriously so far as they serve fiscal ends; that is, they determine taxable income and property. But this no longer holds true in anything like the same degree for income statistics in money terms so far as the prices of goods in money are known. But even then there is no possibility of checking real welfare in terms of substantive rationality. It is further true, as has been convincingly shown for the case of extensive farming in the Roman campagna by Sismondi and Sombart, that satisfactory profitability, which, in the campagna existed for all the participants, in numerous cases has nothing to do with an optimum use of the available productive resources for the provision of consumers’ goods for population. The mode of appropriation, especially, though not solely that of land,³⁹ leads to a system of claims to rent and services of various kinds which may well obstruct the development of even a technical optimum in the exploitation of productive resources. This is, however, very far from being a peculiarity of capitalistic economies. In particular, the much-discussed limitation of production in the interest of profitability was very highly developed in the economy of the Middle Ages and the modern labour movement is acquiring a position of power which may lead to similar consequences. But there is no doubt that this phenomenon exists in the modern capitalistic economy.

The existence of statistics of changes in money prices or of money estimates has not, as some writers have tended to give the impression, hindered the development of statistics of physical quantities. This is true, however much fault we may find with the available statistics when measured by ideal standards. Probably more than nine-tenths of economic statistics are not in terms of money, but of physical quantity.

The work of a whole generation of economists has been concentrated almost entirely on a critique of the orientation of economic action to profitability so far as it has been related to the provision of the population with real income. All the work of the so-called Kathedersozialisten was, in the last analysis, quite consciously concerned with this. They have, however, employed as a standard of judgment a mode of social reform which was oriented to social welfare.⁴⁰ This, as contrasted with complete socialization, has presupposed the continuance of effective prices and these have, indeed, been considered inevitable in an economy which either at that time or any other provided for mass production. It is naturally quite possible to treat this as a half measure, but it is not in itself a nonsensical policy. It is true that the problems of a non-monetary economy, and especially of the possibility of rational action in terms of calculations in kind, have not received much attention. Indeed most of the attention they have received has been historical and not concerned with present problems. But the World War, like every war in history, has brought these problems emphatically to the fore in the form of the problems of war economy and the post-war adjustment. It is, indeed, one of the merits of Dr. Neurath to have produced an analysis of just these problems, which, however much it is open to criticism both in principle and in detail was one of the first and was very penetrating. That economic science has taken little notice of his work is not surprising because until now we have had only stimulating suggestions, which are, however, so very broad that it is difficult to use them as a basis of intensive analysis. The problem only begins at the point where the public discussion has left off.

3. It is only with the greatest caution that the results and methods of war economy can be used as a basis for criticizing the substantive rationality of forms of economic organization. In war time the whole economy is oriented to what is in principle a single clear goal, and the authorities are in a position to make use of powers which would generally not be tolerated in peace except in cases where the subjects are ‘slaves’ of an authoritarian state. Furthermore, it is a type of economy which inherently tends toward bankruptcy. The overwhelming urgency of the immediate end overshadows almost any concern for welfare in the coming era of peace. Precision of calculation exists only on the technical level Economically, however, except for materials of which a grave shortage threatens, and above all, for labour services, calculations are very rough Hence calculation has predominantly, though not exclusively, a technical character. So far as it has a genuinely economic character—that is, so far as it takes account of alternative ends and not only of means for a given end—it is restricted to what is, from the standpoint of careful monetary calculation, a relatively primitive level of calculation according to the principle of marginal utility. In type this belongs to the class of budgetary calculations and it is not meant to establish a permanent basis for the allocation of labour and the means of production. Hence, however illuminating the experience of war-time and post-war adjustments is for the analysis of the possible range of variation of economic forms, it is unwise to draw conclusions from the type of accounting in kind found under war conditions for their suitability in a permanent peacetime economy.

It may be freely conceded: (1) That it is necessary in money accounting to make arbitrary assumptions in connexion with means of production which have no market price. This is particularly common in the case of agricultural accounting; (2) that to a less extent something similar is true of the allocation of overhead costs among the different branches of a complicated enterprise; (3) that the formation of cartel agreements, no matter how rational their basis in relation to the market situation may be, immediately diminishes the stimulus to accurate calculation on the basis of capital accounting, because calculation does not take place, at all or with a high degree of accuracy, in the absence of an objective need for it. But if calculation were in kind, the situation described under (1) would be universal. Furthermore, any type of accu- 1 rate allocation of overhead costs, which, however roughly, is now somehow achieved in money terms, would become impossible; and, finally, every stimulus to exact calculation would be eliminated and would have to be created anew by artificial means, the effectiveness of which would be questionable.

It has been suggested that the clerical staff of a business concern, which is actually to a large extent concerned with calculations, should be turned into a universal statistical bureau which would have the function of replacing the monetary calculations of the present system with a statistical accounting in kind. This idea not only fails to take account of the fundamentally different motives underlying ‘statistics’ and ‘calculation,’ it also fails to distinguish their fundamentally different functions. They differ essentially as the bureaucrat differs from the entrepreneur.

4. Both calculation in kind and in money are rational techniques. They do not, however, by any means exhaust the totality of economic action. There also exist aspects of action which, though actually oriented to economic considerations, are unrelated to calculation. Economic action may be traditionally oriented or may be affectually determined. All the more primitive aspects of the search for food on the part of human beings is closely related to that of animals, dominated as the latter is by instinct. But apart from this, when economically oriented action is dominated by a religious faith, by war-like passions, or by attitudes of personal loyalty and similar modes of orientation, the level of rational calculation is likely to be very low, even though the motives are fully self-conscious. Bargaining is excluded ‘between brothers,’ whether they be brothers in the kinship sense, in a guild, or in a religious group. It is not usual to be calculating within a family, a group of comrades, or of disciples. At most, in cases of necessity, a rough sort of rationing is resorted to, which is a very modest beginning of calculation.⁴¹ Everywhere it has been money which has been the means in terms of which calculation has been developed. This explains the fact that calculation in kind has remained on an even lower technical level than the actual nature of its problems might have necessitated.⁴²

THE FORMAL AND SUBSTANTIVE RATIONALITY OF A MONEY ECONOMY

It is thus clear that the formal rationality of money calculation is dependent on certain quite specific substantive conditions. Those which are of a particular sociological importance for present purposes are the following: (1) Market competition of economic units which are at least relatively autonomous. Money prices are the product of conflicts of interest and compromises; they thus result from systems of power relationships. Money is not a mere token or sign for unspecified utilities, which could be altered at will without any fundamental effect on the character of the price system, for the latter results from the competitive process. Money is rather, primarily, an instrument in the competitive struggle, and prices are competitive in their significance. Money, even as a unit of account, is essentially significant as a means of quantitative expression of estimated opportunities and risks met in the pursuit of competitive advantages; (2) money accounting attains the highest degree of rationality as a means of orientation of economic action by calculation when it takes the form of capital accounting. This implies the substantive condition of far-reaching market freedom in the sense both of the absence of monopolistic limitations which are imposed or are economically irrational, and of those which are voluntary and economically rational through orientation to the securing of market advantages. The competition to dispose of products, which results under these circumstances, gives rise to a number of expenses, especially for a marketing organization and for advertisement in the broadest sense. In the absence of competition, these expenses would, as in a planned economy or with complete monopoly be unnecessary. Capital accounting is further dependent on the social conditions of a disciplined organization and the appropriation of the means of production. This implies the existence of a system of imperatively co-ordinated relationships;⁴³ (3) it is not wants as such, but effective⁴⁴ demand for utilities, which regulates the production of goods by profit-making enterprises oriented to capital accounting. What is to be produced is thus determined by the structure of marginal utilities in the income group which has both the inclination and the resources to purchase a given utility. This will depend on the distribution of wealth in the particular society. Where complete market freedom is given, the highest degree of formal rationality in capital accounting is absolutely indifferent to all the substantive considerations involved. But it is precisely the existence of these substantive factors underlying monetary calculations which determine a fundamental limitation on its rationality. This rationality is of a purely formal character. No matter what the standards of value by which they are measured, the requirements of formal and of substantive rationality are always in principle in conflict, no matter how numerous the individual cases in which they may coincide empirically. It is true that they may be made to coincide theoretically in all cases, but only under assumptions which are wholly unrealistic. The formal rationality of money accounting has as such no implications for the actual distribution of goods. This must always be considered separately. If the standard used is that of the provision of a certain minimum of subsistence for the maximum size of population, the experience of the last few decades would seem to show that formal and substantive rationality coincide to a relatively high degree. The reasons lie in the nature of the incentives which underlie the type of economic orientation of social action which is alone adequate to the large-scale use of money calculations. Under all circumstances, it holds true that formal rationality can explain anything about the type of real want satisfaction only when it is combined with knowledge of the distribution of income.⁴⁵

MARKET ECONOMIES AND PLANNED ECONOMIES

Want satisfaction will be said to take place through a ‘market economy’ so far as it results from action oriented to advantages in exchange on the basis of self-interest and where co-operation takes place only through the exchange process. It results, on the other hand, from a ‘planned economy’ so far as action is oriented systematically to the established order, whether agreed or imposed, which is valid within a corporate group.

Want satisfaction through a market economy normally and in proportion to the degree of rationality presupposes money calculation. Where capital accounting is used it presupposes the economic separation of the budgetary unit and the enterprise. Want satisfaction by means of a planned economy is dependent, in ways which vary in kind and degree according to its extensiveness, on calculation in kind as the ultimate basis of the substantive orientation of economic action. Formally, however, the action of the producing individual is oriented to the instructions of an administrative staff, the existence of which is indispensable. In a market economy the individual units are autocephalous and their action is autonomously oriented. In the administration of budgetary units, the basis of orientation is the marginal utility of money holdings and of anticipated money income in relation to the market situation for the purposes of particular purchases. In profit-making enterprises, capital accounting is the basis of orientation. In a planned economy, all economic action, so far as it is carried through, is oriented heteronomously in terms of the administration of the budgetary unit, to rules which enjoin certain modes of action and forbid others, and which establish a system of rewards and punishments. When, in a planned economy, the prospect of individual income is used as a means of stimulating selfinterest, the type and direction of the action thus rewarded is heteronomously determined. It is possible for the same thing to be true of a market economy, though in a formally voluntary way. This is particularly true where the unequal distribution of wealth, and particularly of capital goods, forces the low-income group to comply with the authority of others in order to obtain any return at all for the utilities they can offer on the market. It may be they are subjected to the authority of a wealthy householder or to that of the owners of capital interested in maximizing the profit from it, or of their agents. In a purely capitalistic organization of production, this is the fate of the entire working class.

The following are decisive as elements of the motivation of economic activity under the conditions of a market economy: (1) For those without substantial property; (a) the fact that they run the risk, both for themselves and their personal dependents, such as children, wives, sometimes parents, of going without any provision; (b) that, in varying degrees subjectively they value economically productive work as a mode of life. (2) For those who enjoy a privileged position by virtue of wealth or the education which is usually in turn dependent on wealth; (a) opportunities for large income from profitable undertakings; (b) ambition; (c) the valuation as a ‘calling’⁴⁶ of types of work enjoying high prestige, such as intellectual work, artistic performance, and work involving high technical competence. (3) For those involved in the fortunes of profit-making enterprises; (a) the risk to the individual’s own capital and conversely his own opportunities for profit, combined with (b) the valuation of rational acquisitive activity as a ‘calling.’ The latter may be significant as a proof of the individual’s own achievement or as a symbol and a means of autonomous control over the individuals subject to his authority, or of control over economic advantages which are culturally or materially important to an indefinite plurality of persons—in a word, power.

A planned economy oriented to want satisfaction must, in proportion as it is radically carried through, weaken the incentive to labour so far as the risk of lack of support is involved. For it would, at least so far as there is a rational system of provision for wants, be impossible to allow a worker’s dependents to suffer the full consequences of his lack of efficiency in production. Furthermore, autonomy in the direction of organized productive units would have to be greatly reduced or, in the extreme case, eliminated. Hence it would be impossible to retain capital risk and proof of merit by a formally autonomous achievement. The same would be true of autonomous power over other individuals and important features of their economic situation. Along with opportunities for special material rewards, a planned economy may have command over certain ideal motives of what is in the broadest sense an altruistic type, which can be used to stimulate a level of achievement in economic production comparable to that which autonomous orientation to opportunities for profit, by producing for the satisfaction of effective demand, has been able to achieve in a market economy. Where a planned economy is radically carried out, it must further accept the inevitable reduction in formal rationality of calculation which would result from the elimination of money and capital accounting. This is merely an example of the fact that substantive and formal rationality are inevitably largely opposed. This fundamental and, in the last analysis, unavoidable element of irrationality in economic systems is one of the important sources of all the problems of social policy, above all, the problems of socialism.⁴⁷

1. The above exposition obviously formulates only things which are generally known, in a somewhat more precise form. The market economy is by far the most important case of typical widespread social action predominantly oriented to ‘self-interest.’ The process by which this type of action results in the satisfaction of wants is the subject matter of economic theory. Knowledge of it in general terms is here presupposed. The use of the term ‘planned economy’ (Planwirtschaft) naturally does not imply acceptance of the well-known proposals of the former minister of economic affairs. The term has been chosen because, while it does not do violence to general usage, it has, since it was used officially, been widely accepted. This fact makes it preferable to the term used by Neurath, Verwaltungswirtschaft, which would otherwise be suitable.

2. So far as it is oriented to profit-making, the economic activity of corporate groups, or that regulated by corporate groups, is not included in the concept of planned economy, whether the group be a guild, a cartel, or a trust. Planned economy includes the economic activity of corporate groups only so far as it is oriented to the provision for needs. Any system of economic activity oriented to profit-making, no matter how strictly it is regulated or how stringently controlled by an administrative staff, presupposes effective prices, and thus capital accounting as a basis of action. In the limiting case of a total system of cartels, prices would be determined by negotiation between the cartel groups and by negotiated wage agreements with labour organizations. In spite of the identity of their objectives, complete socialization in the sense of a planned economy administered purely as a budgetary unit, and partial socialization of various branches of production with the retention of capital accounting, are technically examples of quite different types A preliminary step in the direction of the budgetary planned economy is to be found wherever consumption is rationed or wherever measures are taken to control the spontaneous distribution of goods. A centrally planned organization of production, whether it is undertaken by voluntary agreement, by authoritatively imposed cartels, or by agencies of the government, is primarily concerned with a rational organization of the use of means of production and labour resources and cannot, on its own terms, do without prices. It is thus by no means fortuitous that the type of socialism which attempts to ration goods tends to become intimately connected with ‘Guild Socialism,’⁴⁹ oriented as the latter is to the interests of workers in their jobs. This has happened against the will of the leaders of the latter movement who have been interested in a completely rational scheme.

3. It will not be possible to enter at this point on a detailed discussion of the formation of such economic corporate groups as cartels, corporations or guilds. Their general tendency is orientation to the regulation or monopolistic exploitation of opportunities for profit. They may arise by voluntary agreement, but are more generally imposed even where formally voluntary.⁵⁰

The conflict between two rival forms of socialism has not died down since it was started in Marx’s Misère de la Philosophie. On the one hand, there is the type, which includes especially the Marxists, which is evolutionary and oriented to the problem of production; on the other, the type which takes the problem of distribution as its starting point and advocates a rational planned economy. The latter is again to-day coming to be called ‘communism.’ The conflict within the Russian socialistic movement, especially as exemplified in the vigorous disputes between Plechanov and Lenin, was in the last analysis essentially concerned with the issue. While the internal divisions of present-day socialism are very largely concerned with competition for leadership and for ‘benefices,’ along with these issues and underlying them goes the same set of problems. In particular, the economic experience of war time has given impetus to the idea of a rationally planned economy, but at the same time, to the development of interests in appropriation.

The question of whether a planned economy, in whatever meaning or extent, should be introduced, is naturally not in this form a scientific problem. On scientific grounds it is possible only to inquire what would probably be the results of any given specific proposal, and thus what unforeseen or undesired consequences would have to be accepted if the attempt were made. Honesty requires that all parties should admit that, while some of the factors are known, many of those which would be important are only very partially understood. In the present discussion, it is not possible to enter into the details of the problem in such a way as to arrive at concretely conclusive results. The points which will be taken up can be dealt with only in a fragmentary way in connexion with forms of corporate groups, particularly the state. It was possible above only to introduce an unavoidably brief discussion of the most elementary aspects of the technical problem. The phenomenon of a regulated market economy has, for the reasons noted above, not yet been taken up.

4. The organization of economic activity on the basis of a market economy presupposes the appropriation of the non-human sources of utilities on the one hand, and market freedom on the other. The extent of market freedom is a function of the degree to which these sources of utility, particularly the means of transport and production, are appropriated. For, the higher the degree of marketability, the more will economic action be oriented to market situations. But market freedom is further a function of the degree to which appropriation is limited to non-human sources of utility. Every case of the appropriation of human beings through slavery or serfdom, or of economic advantages through control of persons, as in market monopolies, restricts the range of human action which can be so oriented. Fichte in his Geschlossener Handelsstaat was right in treating this limitation of the concept of ‘property’ to nonhuman goods, along with the extension of autonomy of control over the things included, as characteristic of the modern property system with its intimate relations to the market economy. All the parties to market relations have had an interest in the development of this form of property right because it increased the area within which they could orient their action to the opportunities of profit offered by the market situation. The development of this type of property system is hence primarily attributable to their influence.

5. For reasons of convenience, the common term ‘collective economy’ (Gemeinwirtschaft) has been avoided. It suggests a ‘collective interest’ or ‘a community of sentiment’ as the normal thing, but for purposes of definition it is not necessary to include them. The economic organization of the estate of a feudal lord or of a monarch like the Pharaohs of the New Kingdom, belongs to the same category in the present terminology as does that of a family household. Both are equally to be distinguished from a market economy.

6. For the purposes of the definition of a market economy, it is indifferent whether or to what extent economic action is ‘capitalistic,’ that is, is oriented to capital accounting. The budgetary satisfaction of wants in money terms may involve a market economy; indeed, that is the more common case. It would be a mistake to assume that the development of capitalistic enterprises occurred in direct proportion to that of the satisfaction of wants through a money economy. It would be particularly untenable to maintain that this was true of capitalistic forms of the particular type which have developed in the Western World. In fact, the contrary is true. The extension of money economy might well go hand in hand with the increasing monopolization of the larger sources of profit by the household economy of a prince. The Egypt of the Ptolemies is an outstanding example. According to the evidence of the accounts which have survived, it was a highly developed money economy, but its accounting remained budgetary accounting and did not develop into capital accounting. It is also possible that with the extension of a money economy could go a process of ‘feudalization’ (Verpfründung) of fiscal advantages resulting in a traditionalistic stabilization of the economic system. This happened in China, as will be shown later.⁵¹ Finally, the capitalistic investment of money resources could take place in relation to sources of potential profit which were not oriented to opportunities of exchange in a free commodity market and were thus not oriented to the production of goods. For reasons which will be discussed below, this has been almost universally true outside the area of the modern Western economic order.

TYPES OF ECONOMIC ‘DIVISION OF LABOUR’

Every type of social action in a group which is oriented to economic considerations and every associative relationship of economic significance involves to some degree a particular mode of division and organization of human services in the interest of production. A mere glance at the facts of economic action reveals that different persons perform different types of work and that these are combined in the service of common ends, with each other and with the non-human means of production, in the most varied ways. The complexity of these phenomena is extreme, but yet it is possible to distinguish a few types.

Human services for economic purposes may be distinguished as (a) ‘managerial,’ or (b) oriented to the instructions of a managerial agency. The latter type will be called ‘labour’ for purposes of the following discussion.

It goes without saying that managerial activity constitutes ‘labour’ in the most definite sense if labour is taken to mean the expenditure of time and effort as such. The use of the term labour in contradistinction to managerial activity has, however, come to be generally accepted for social reasons and this usage will be followed in the present discussion. For more general purposes, the terms ‘services’ or ‘work’ will be used.

Within a social group the ways in which labour or other work may be carried on typically may be classified in the following way: (1) technically, according to the way in which the services of a plurality of cooperating individuals are divided up and combined, with each other and with the non-human means of production, to carry out the technical procedures of production; (2) socially. In the first place, forms of labour may vary according to whether particular services do or do not fall within the jurisdiction of autocephalous and autonomous economic units, and according to the economic character of these units. Closely connected with this is variation according to the modes and extent to which the various services, the non-human means of production, and opportunities for economic profit, used as sources of profit or as means of acquisition, are or are not appropriated. These factors determine the mode of occupational differentiation, a social phenomenon, and the organization of the market, an economic phenomenon; (3) finally, in every case of combination of services with each other and with nonhuman means of production, it is important, in determining their division among economic units and the modes of appropriation, to know whether they are used in a context of budgetary administration or of profit-making enterprise.⁵²

1. It should be emphatically stated that the present discussion is concerned only with a brief summary of the sociological aspects of these phenomena, so far as they are relevant to its context. The economic aspect is included only in so far as it is expressed in what are formally sociological categories. In a substantive sense, the discussion would be economic only if the conditions of price determination and market relationships, which have heretofore been dealt with only on a theoretical level, were introduced into it. It would, however, be possible to treat such substantive aspects of the problem in such a general introduction to the field only in terms which would involve a very unfortunate kind of one-sidedness. Furthermore, attempts to explain these things in purely economic terms are both misleading and open to question. To take an example: The Dark Ages in the tenth to the twelfth centuries have been held to be the decisive period for the development of that type of Medieval labour which, though subject to corporate regulations, was in a sense free labour. In particular, it is held that the lords were in a situation of having to compete for the fees and income arising from the control over land, personal status, and jurisdiction; and that this situation permitted peasants, miners, and artisans to profit from the competition of the lords. It is further held that the decisive period for the development of capitalism was that of the great long-drawn-out price revolution of the sixteenth century. This led both to an absolute and a relative increase in the prices of almost all products of the land in the Western World. It is only necessary to apply well-known principles of agricultural economics to see that this both made possible and stimulated the development of enterprises which sold products on the market. This in turn led to the development of large-scale production, in part, as in England, of the capitalistic type; in part, as between the Elbe and Russia, more on the basis of patriarchal estates. Furthermore, it meant, in most cases, an absolute rise of prices, but, relatively in the normal case, a fall in the price of important industrial products. Then, so far as the necessary forms of organization and other conditions, both external and subjective, were given, there would be a stimulus to the development of market enterprises related in a competitive system. These were, to be sure, not present in Germany, but this fact is held to account for the economic decline which started there about that time. The consequence of all this is the development of capitalistic enterprises in the industrial field. Its necessary prerequisite was the development of extensive markets. An indication that this was actually happening is seen in certain changes of English commercial policy, to say nothing of other phenomena.

In order to verify theoretical reasoning about the substantive economic conditions of the development of economic structures, it would be necessary to employ theses, such as these and similar ones. This cannot, however, be attempted in the present discussion. These and numerous other equally controversial theories, even so far as they could be proved not to be wholly erroneous, cannot be incorporated into the present scheme which is intentionally limited to sociological concepts. In that the present discussion renounces any attempt to take account of this type of data, however, the following exposition in this chapter explicitly repudiates any claim to concrete ‘explanation’ and restricts itself to working out a sociological typology. The same is true of the previous discussion in that it consciously omitted to develop a theory of money and price determination. This must be strongly emphasized. For the facts of the economic situation provide the flesh and blood for a genuine explanation of the process by which even a sociologically relevant development takes place. What can be done here is only to provide a scaffolding which is adequate to enable the analysis to work with relatively clear and definite concepts.

It is obvious, not only that no attempt is here made to do justice to the empirical historical aspect of economic development, but even the typology of the genetic order of possible forms is neglected. The present aim is only to develop a systematic scheme of classification.

2. A common and correct objection to the usual terminology of economics, is that it fails to make a distinction between the ‘organization’ and the ‘enterprise.’⁵³ In the field of economically oriented action, ‘organization’ is a technical category which designates the ways in which various types of services are continuously combined with each other and with non-human means of production. Its antithesis is one of two things: either intermittent activity or that which is discontinuous from the technical point of view, as is true empirically of every household. The antidiesis of enterprise, denoting as it does a type of economic orientation, namely, profit-making, is the budgetary unit which is oriented to provision for needs. Classification of types of economic orientation in terms of profit-making enterprise and budgetary units is not, however, exhaustive. There are actions oriented to acquisition which are not covered by the concept of enterprise. All cases of seeking earnings from work, like the work of the author, the artist, the official, are neither one nor the other. The receipt and use of incomes from investment is a clear case of budgetary administration.

Despite the mixture of categories, a profit-making organization (Erwerbsbetrieb)⁵⁴ is spoken of wherever there is continuous permanent co-ordinated action on the part of an entrepreneur. Such action is in fact unthinkable without an ‘organization,’ though, in the limiting case, it may be merely the organization of his own activity, without any help from others. Here it is a matter primarily of distinguishing the budgetary unit from the enterprise and its attendant organization. The term ‘profitmaking organization,’ instead of a continuous profit-making enterprise is, it may now be noted, to be accepted, because there it is unambiguous, only for the simplest case where the unit of technical organization coincides with the unit of enterprise. But in a market economy, it is possible for a number of technically separate organizations or ‘plants’ to be combined in a single enterprise. The latter receives its unity by no means alone through the personal relationship of the various units to the same entrepreneur, but by virtue of the fact that they are all controlled in terms of some kind of consistent plan in their exploitation for purposes of profit. It is hence possible that there should be transitional forms. Where the term ‘organization’ or ‘plant’ is used by itself, it will always refer to the technically distinct unit consisting in buildings, equipment, labour forces, and technical management. The latter is possibly heterocephalous and heteronomous. This state of affairs would still exist, as even ordinary usage recognizes, in a communistic economy. The term ‘profit-making organization’ will be used from now on only in cases where the technical and the economic unit, the enterprise, coincide.⁵⁵

The relation between organization and enterprise raises particularly difficult terminological questions in the case of such categories as ‘factory’ and ‘putting-out industry.’⁵⁶ The latter is clearly a category of enterprise. From the point of view of organization, there are two types of units: The commercial organization and those which are parts of the workers’ households without any centralized workshop except in certain cases where a master craftsman organizes one on his own initiative. The organizations in the worker’s household perform certain specified functions for the commercial organization, and vice versa. The process is thus not understandable in terms of technical organization alone. It is necessary in addition to employ the categories of market, profit-making enterprise, household (of the individual worker), and exploitation of contracted services for profit.

The concept of ‘factory’ could, as has often been proposed, be defined in entirely non-economic terms as a mode of technical organization, leaving aside consideration of the status of the workers, whether free or unfree, the mode of division of labour, involving the extent of internal technical specialization, and the type of means of production, whether machines or tools. This would make it equivalent to an organized workshop. But besides this, it is necessary to include in the definition the mode of appropriation in the hands of an owner of the premises and the means of production. Otherwise, the concept becomes confused with that of an ‘ergasterion.’⁵⁷ If this distinction is made, it seems more appropriate to define both factory and ‘putting-out system’ as strictly economic categories of capitalistic enterprise. Then, in a strictly socialistic economy, there would neither be factories nor ‘putting-out’ enterprises, but only workshops, buildings, machines, tools, and various types of labour in the shop or at home.

3. The question of stages of economic development will be considered only in so far as it is absolutely necessary, and then only incidentally. The following points will suffice for the present.

It has fortunately become more common lately to distinguish types of economic system from types of economic policy. The stages which Schönberg first suggested, and, which in a somewhat altered form, have become identified with Schmoller’s name, ‘domestic economy,’ ‘village economy,’ the economy of landed estates and royal households, ‘town economy,’ ‘territorial economy,’ and ‘national economy,’⁵⁸ have been formulated according to the type of corporate group regulating economic activity. But there is no implication of any specific mode of variation even in the type of regulation to which economic activity has been subjected by the different corporate groups thus classified in terms of the extent of their jurisdiction. Thus the territorial economic policies of the German states consisted to a large extent simply in taking over the measures developed in the town economy. Furthermore, their innovations were not greatly different from the ‘mercantilistic’ policies, which were typical of those of the patrimonial states which had already achieved a relatively high level of rationality. They were thus similar to ‘national economic policies,’ to use the common term, which is, however, not very appropriate. This classification, further, clearly does not imply that the inner structure of the economic system, the modes in which work roles were assigned, differentiated and combined, the ways in which these different functions were divided between independent economic units, and the modes of appropriation of control over labour, means of production, and opportunities for profit, in any way ran parallel to the extent of jurisdiction of the corporate group, which might be responsible for economic policy. Above all, it does not imply that this structure was a simple function of the extent of corporate jurisdiction. To demonstrate the untenability of this view, it is only necessary to compare the Western World with Asia and the situation in modern Europe with that of Antiquity. At the same time, in considering economic structure, it is by no means legitimate to ignore the existence or absence of corporate groups with substantive powers of regulation of economic activity, nor to ignore the essential purposes of their regulation. The modes of profit-making activity are strongly influenced by such regulation, but it is by no means only political corporations which are important in this respect.

4. In this connexion, as well as others, the purpose of the discussion has been to determine the optimum conditions for the formal rationality of economic activity and its relation to the various types of substantive demands which may be made on the economic system.

TYPES OF THE TECHNICAL DIVISION OF LABOUR

From a technical point of view the division of labour may take the following forms: In the first place, it may vary according to modes of differentiation and combination of work services as such: (1) They may vary according to the type of functions undertaken by the same person. He may combine managerial functions with those of carrying out specifications; or his work may be specialized in terms of one or the other.

The distinction is naturally relative. It is common for an individual who normally supervises to take a hand in the work from time to time, as in the case of the peasants with larger holdings. The type cases of combination of the two functions are: The small peasant, the independent artisan, or the small boatman.

A given individual may perform functions which are technically different and contribute to different results, or he may perform only technically specialized functions. In the first case, the lack of specialization may be due to the technical level of work which does not permit further dividing up, to seasonal variation, or to the exploitation of labour services as a side line at times when they are not taken up by their primary occupation. In the second case, the function may be specialized in terms of the product in such a way that the same worker carries out all the processes necessary for this product, though they differ technically from each other. In a sense, this involves a combination of different functions and will be called the ‘specification of function.’ On the other hand, the functions may be differentiated according to the type of work, so that the product is brought to completion only by combining, simultaneously or successively, the work of a number of persons. This is the ‘specialization of function.’ The distinction is to a large extent relative, but it exists in principle and is historically important.

The case where there is little division of labour because of the low technical level is typical of primitive household economies. There, with the exception of the differentiation of sex roles, every individual performs every function as the occasion arises. Seasonal variation has been common in the alternation of agricultural work in the summer with the crafts in the winter. An example of side lines is the tendency for urban workers to take up agricultural work at certain times, such as the harvest, and also the various cases of secondary functions undertaken in otherwise free time, which is common even in modern offices.

The case of specification of function is typical of the occupational structure of the Middle Ages. Then, there was a large number of crafts, each of which specialized in the production of a particular article, but with no reference to the technical heterogeneity of the functions involved. There was thus a combination of functions. The specialization of functions, on the other hand, is crucial to the modern development of the organization of labour. There are, however, important physiological and psychological reasons why it has virtually never been pushed to the absolute extreme of isolation, even on the highest levels of specialization. There is almost always an element of specification of function involved. It is not, however, as in the Middle Ages, oriented to the final product.

(2) The differentiation and combination of different functions may further vary according to the modes in which the services of a plurality of persons are combined to achieve a co-ordinated result. There are two main possibilities: First, the ‘accumulation’ of functions; that is the employment of a number of persons all performing the same function to achieve a result. This may be organized in such a way that the functions are co-ordinated but technically independent of each other, are thus parallel; or they may be organized on a technical basis in relation to a single common purpose.

Examples of the first case are the functions performed by carpenters or plasterers, several of whom work at the same time on the same job. The second type is exemplified on a grand scale in ancient Egypt in such cases as the transportation of huge stones by thousands of workers, large numbers of them performing the same acts, such as pulling on ropes, at the same time.

The second type is the ‘combination’ of functions—that is, of functions which are qualitatively different, and thus specialized—in order to achieve a result. These functions may be technically independent and either simultaneous or successive; or they may involve technically organized co-operation in the simultaneous performance of technically complementary functions.

1. A particularly simple example of simultaneous, technically independent functions is furnished by the parallel spinning of the warp and the woof for a given cloth. In the same class are to be placed a very large number of processes which are, from a technical point of view, undertaken independently, but are all designed as part of the production of the same final product.

2. An example of the successive type of technically independent processes is furnished by the relation of spinning, weaving, fulling, dyeing, and finishing. Similar examples are to be found in every industry.

3. The combination of specialized functions is found all the way from the case of an assistant holding a piece of iron while a blacksmith forges it, a case which is repeated in every modern foundry, to the complicated situations, which, though not specific to modern factories, are an important characteristic of them. One of the most highly developed types outside the factory is the organization of a symphony orchestra or of the cast of a theatrical production.

TYPES OF THE TECHNICAL DIVISION OF LABOUR—(Continued)

The division of labour varies also, from a technical point of view, in terms of the extent and nature of combinations with the non-human means of production.

1. Forms may vary according to whether they consist purely in personal services, as in the case of wash-women, barbers, the performance of actors, or whether they produce or adapt goods by ‘working up’ or transporting raw materials. The latter may consist in construction work, as that of plasterers, decorators, and stucco workers, in production of commodities and in transport of commodities. There are many transitional forms between them.

2. They may be further distinguished according to the stage at which they stand in the process from original raw material to consumption; thus from the original products of agriculture and mining, to goods which are not only ready to consume, but available at the desired place for consumption.

3. The forms may further vary according to the ways in which they use: (a) Fixed plant and facilities.⁵⁹ These may consist in sources of power; that is, means of harnessing energy, either that of natural forces, such as the power of water, wind, or heat from fire, or that which is produced mechanically, especially steam and electrical power, or in special premises for work, or they may use (b) implements of work,⁶⁰ which include tools, apparatus, and machines. In some cases only one or another of these means of production may be used, or none. ‘Tools’ are those aids to labour, the design of which is adapted to the physiological and psychological conditions of manual labour. ‘Apparatus’ is something which is ‘tended’ by the worker. ‘Machines’ are mechanized apparatus. These rather vague distinctions have a certain significance for characterizing epochs in the development of industrial technology.

The use of mechanized sources of power and of machinery is characteristic of modern industry. From a technical point of view, the latter presupposes specialization of functions and the saving of human labour, and also a peculiar uniformity and calculability of performance, both in quality and quantity. It is thus rational only where there exists a sufficiently wide demand for particular types of products. In the case of a market economy, it presupposes adequate purchasing power for the relevant goods; and this in turn depends on a certain type of income distribution.

It is quite out of the question here to undertake to develop even the most modest outline of a theory of the evolution of the technology and economics of tools and machinery. The concept of ‘apparatus’ refers to such things as the type of loom which was operated by a foot-pedal and to numerous other similar devices. These already involve a certain relative independence on the part of the mechanical process, as distinguished from the functioning of the human or, in some cases, the animal organism. Without such apparatus—which included in particular various devices for moving materials in mines—machines, with their importance in modern technology, would never have come into existence. Leonardo’s famous inventions were types of apparatus.

SOCIAL ASPECTS OF THE DIVISION OF LABOUR

From the social point of view, types of the division of labour may be classified in the following way: In the first place, there is the question of the ways in which qualitatively different, especially complementary functions, are divided between more or less autocephalous and autonomous economic units, which may further be distinguished economically according to whether they are budgetary units or profit-making enterprises. There are two polar possibilities:

(1) A ‘unitary’ economy (Einheitswirtschaft) where the specialization of functions is wholly internal, completely heterocephalous and heteronomous and carried out on a purely technical basis. The same would be true of the co-ordination of function. A unitary economy may, from an economic point of view, be either a budgetary unit or a profit-making enterprise.

On the largest possible scale a communistic organization of a national economy would be a unitary budgetary economy. On the smallest scale an example is the primitive family unit, which included all or the great majority of productive functions—a closed household economy. The type case of a profit-making enterprise with a high degree of internal specialization and co-ordination of functions is naturally the great vertical combination⁶¹ which treats with outsiders only as an integrated unit. These two distinctions will suffice for the moment as a treatment of the development of autonomous economic units; (2) the differentiation of functions may, on the other hand, exist as between autocephalous economic units, (a) It may consist in the specialization or specification of functions between units which are heteronomous, but are autocephalous, which are thus oriented to an order established by agreement or imposed. The order, in turn, may be substantively oriented in a variety of ways. Its main concern may be to provide for the needs of a superior economic unit, which may be the budgetary unit of a lord, an oikos, or a profit-making enterprise controlled by a political body. The order may, on the other hand, be concerned with providing for the needs of the members of some organized group. From an economic point of view, this may be accomplished by the organization of subsidiary budgetary units, or of profit-making enterprises. The corporate group in question may exercise any one of a large number of functions. It may be confined to the regulation of economic activity or may, at the same time, be engaged in economic action on its own account, (b) The other main type is the specialization of autocephalous and autonomous units in a market economy, which are oriented on the one hand substantively only to their own self-interest, formally only to the order of a corporate group, such as the laissez-faire state, which enforces only formal, rather than substantive rules.⁶²

1. A typical example of the corporate group which, limiting its function to the regulation of economic activity, takes the form of a budgetary unit administered by an association of the members, is the organization of village handicrafts in India. Corporate groups, which are themselves engaged in economic activity, like the household of a great noble, are illustrated by the organizations which provide for the wants of great landlords or slaveowners by means of contributions from the individual holdings of subjects, dependents, serfs, slaves, cottars, or sometimes village craftsmen. These phenomena have been found spontaneously developed in every part of the world. Cases of production of compulsory payments in kind to a landlord or to a town corporation, have, in so far as they have not served substantive, but as has often been the case, only fiscal ends, constituted only the regulation of economic activity. This type of control has served profit-making ends in cases where the services of household industries have been exploited for the benefit of the controlling unit.

The types where there is specialization and specification of function, as between heteronomous units, are all cases of the imposition of specialized functions. They have been common in many very old small-scale industries. The Solingen metal trade was originally organized in terms of a voluntary association determining the division of labour by agreement. It was only later that it became organized in terms of imperative co-ordination—that is, became a ‘putting-out industry.’ The type where the áutocephalous economic units are subject only to regulation by a corporate group is illustrated by innumerable cases of the rules established by village communities and town corporations for the regulation of trade, so far at least as these have a substantive influence on the processes of production.

The case of specialization as between units in a market economy is best illustrated by the modern economic order.

2. A few further details may be added. The rules of those corporate groups which attempt to provide for the wants of their members on a budgetary basis, are related to the component budgetary units in a particular way—that is, they are oriented to the prospective needs of the individual members, not of the organized group, such as a village, itself. Specified services of this kind will be called demiurgic liturgies;⁶³ and this type of provision for needs, correspondingly, demiurgic. It is always a question of corporate regulation governing the division of labour and, in some cases, the ways in which specialized functions are co-ordinated.

This term will not, on the other hand, be applied to a corporate group, whether it is imperatively co-ordinated or based on voluntary co-operation, if it carries on economic activity on its own account, contributions to which arc assigned on a specialized basis. The type cases of this category are the specialized and specified contributions in kind of feudal manors, landed estates, and other types of large household units. But assigned obligations are also common in various types of corporate groups which are not primarily oriented to economic ends, such as the households of princes, political groups and the budgetary administration of local communities. These contributions are generally for the benefit of the budgetary needs of the governing authority or for corporate purposes. This way of providing for the needs of a budgetary unit by means of qualitatively specified liturgies and payments in kind on the part of peasants, craftsmen, and merchants, will, when they are owed to a personal superior, be called the ‘oikos’⁶⁴ type of organization. Where they are received by the corporate budgetary unit as such, they will be called ‘corporate liturgies in kind.’ The principle governing this mode of provision for the budgetary needs of a corporate group engaged in economic action, is ‘liturgical’ provision. This mode of organization has played an exceedingly important historical role and will have to be discussed frequently. In many political corporations, it has taken the place of modern taxation and, in economic groups, it has made possible a decentralization of the central organization by providing for its needs through agencies which were not included in the single common unit. On the contrary, each unit has managed its own affairs, but has assumed the obligation to fulfil certain functions for the central unit and to that extent has been dependent on it. Examples are peasants and serfs, subject to various kinds of labour services and payments in kind; craftsmen attached to an estate; and a large number of other types. Rodbertus was the first to apply the term ‘oikos’ to the large-scale household economies of Antiquity. He used as the principal criterion the tendency to self-sufficiency in provision for needs by using the services of members of the household unit itself or of others dependent on it. In all these cases, the non-human means of production were made available without relation to the market. It is a fact that the landed estates, and still more the royal households of antiquity, especially in the New Kingdom in Egypt, were cases where the greater part of the needs of the unit were provided by services and payments in kind, which were obligations of dependent household units. At the same time, the degree of approach to the pure type varies widely. The same phenomena are to be found at times in China and India, and to a less extent in our own Middle Ages, beginning with the capitulare de villis. It is true that exchange with the outside world has generally not been entirely lacking, but has tended to have the character of budgetary exchange. Obligations to money payment have also not been uncommon, but have generally played a subsidiary part in the main provision for needs and have tended to be traditionally fixed. It has also not been uncommon for the economic units subject to liturgical obligations to be involved in exchange relations. The decisive point, however, is that the main emphasis lay on the fact that the subsistence of the members was regarded as a return for the services of the land and equipment the members were privileged to use. There are, of course, many transitional forms. But in each case there is some kind of regulation of functions by a corporate group which is concerned with the mode of division of labour and of its co-ordination.

3. The cases where a corporate group regulating economic activity is oriented to considerations of economic profit, are well illustrated by the economic regulations of the communes of Medieval Europe and by the guilds and castes of China and India. The regulations governed the number of master craftsmen and their functions and also the technique of the craft, thus the way in which labour was oriented in the handicrafts. They belonged to this type so far as the rules were intended not primarily to secure provision for a given standard of living of the craftsmen, but, as was often though not always the case, to secure their market position by maintaining the quality of performance and by dividing up the market. Like every other type of economic regulation, that of the guilds, of course, involved limitations on market freedom and hence on fully autonomous orientation of craftsmen to the maximization of their profits. It was unquestionably intended to maintain the income standards of the existing craft shops and to that extent, in spite of its formal resemblance to profit-making enterprise, still involved a budgetary mode of orientation.

4. The cases where the corporate group carrying on economic activity has been concerned with profit making, are illustrated, apart from the cases of put ting-out industry already discussed, by the agricultural estates of north-eastern Germany. These have been carried out by semi-independent tenants bound by a common system of rules. In the north-west it has taken the form of the part-time labour by individuals with small independent holdings (Heuerlingswirtschaft). These estates, like the putting-out industries, have been profit-making enterprises of the landlord as were those of the ‘putter-out.’ The economic activities of the tenants and of the domestic workers are oriented primarily to the obligations which have been imposed upon them both in the division of functions and in their co-ordination. These obligations determine the organization of labour on the estate as they determine the mode of dependency of the domestic worker. Apart from this, they are budgetary units. Their contribution to the profit-making activity is not autonomous, but is a heteronomous function on behalf of the enterprise of the landlord or the putter-out. According to the degree in which this orientation is substantively standardized, the technical aspects of the division of labour within a single organization may approach the kind which is typical of the factory.

SOCIAL ASPECTS OF THE DIVISION OF LABOUR—(Continued)

From a social point of view, the modes of the division of labour may be further classified according to the mode in which the economic advantages, which are regarded as returns for the different functions, are appropriated. The objects of appropriation⁶⁵ may be opportunities for realizing returns on work, non-human means of production, or opportunities for profit from the exercise of managerial functions.

When the returns from labour services are appropriated, the service may be owed to a particular recipient, such as a lord, or a particular corporate group; or it may be disposed of on the market. In either case, there may be any one of four radically different possibilities: (a) Monopolistic appropriation of opportunities for return by the individual worker—the case of ‘free guild labour.’ This may be hereditary but alienable, as for the Indian village craftsman; or personal and inalienable, as for the Medieval craftsman, who in addition disposed of his services on the market. Rights of elegibility for office are personal and inalienable, but not marketable. Or finally, they may be hereditary, but inalienable, as was the case with certain of the rights attached to the Medieval handicrafts, but above all, the Indian handicrafts and various types of Medieval offices. In all these cases the appropriation may be unconditional or subject to various substantive conditions; (b) The second possibility is that the return for labour services should be appropriated by an Owner’ of the worker—the case of ‘unfree labour.’ There may be free appropriation which is both hereditary and alienable—the case of slavery proper. Or, though it is hereditary, it may not be freely alienable, but may, for instance, be bound to the non-human means of production, particularly the land. This includes serfdom and hereditary dependency.⁶⁶

The appropriation of the use of labour by a lord may be limited by substantive conditions, as in serfdom. The worker cannot leave his status of his own free will, but neither can it arbitrarily be taken from him.

The appropriation of returns of labour may be used by the owner for purposes of budgetary administration, as a source of income in kind or in money, or as a source of labour service in the unit, as in the case of domestic slaves or serfs. Or it may be used as a means of profit. In that case the dependent may be obligated to contribute goods or to work on raw materials provided by the owner. The owner will then sell the product. This is unfree domestic industry. He may, finally, be used as a labourer in an organized shop—a slave or serf workshop.

The person herein designated as the ‘owner’ is very generally involved in the work process himself in a managerial capacity or even in part as a worker, but this need not be true. It may be that his position as owner, ipso facto, makes him the managing agent. But this is by no means necessary and is very generally not the case.

The use of slaves and serfs, the latter including various types of dependents, as part of a process of budgetary administration and not as workers in a profit-making enterprise, was typical of Antiquity and of the early Middle Ages. There are, for instance, inscriptions which mentioned slaves ‘of a Persian prince who were bound out as apprentices on the understanding that they might be used for labour services in the household, but might also be allowed, in return for a payment to the owner,⁶⁷ to work independently for customers.’ Though by no means without exception, this tended to be the rule for Greek slaves; and in Rome this type of independent economic activity became a legal institution which involved providing the slave with a peculium or merx peculiaris. He was naturally obligated to make payments to his owner. In the Middle Ages, body serfdom frequently involved merely a right to claim payments. This was usual in western and southern Germany. In Russia, also, an actual limitation to the receipt of these payments (obrok) from an otherwise free serf was, though not universal, very common. Its legal status was, however, precarious.

The use of unfree labour for profit-making purposes has taken the following principal forms, particularly in the domestic industries on the estates of landlords, including various royal estates, among them probably those of the Pharaohs: (i) Unfree obligation to payments in kind—the delivery of goods in kind, the raw material for which was produced by the workers themselves as well as worked on by them. Flax is an example; (2) unfree domestic industry—work on material provided by the lord. The product could be sold at least in part for money by the lord. But in many cases, as in Antiquity, the tendency was to confine market sale to occasional instances. In early modern times, however, particularly in the border regions between the Germans and the Slavs, this was not the case, particularly, though not alone, where domestic industries have developed on the estates of landlords. The use of unfree labour in a continuous organization could take the form of unfree domestic labour or of labour in a workshop. Both forms are common. The latter was one of the various forms of the Ergasterion of Antiquity. It also was found on the estates of the Pharaohs, in temple workshops, and from the testimony of the frescoes on tombs, on the estates of private owners or lords. It also existed in the Orient, in Greece (Demosthenes’ shop in Athens) in the Roman estate workshops, in Byzantium, in the Caroligian ‘genitium,’ and in modern times, for example, in Russian factories operated with serf labour;⁶⁸ (c) the third possibility is the absence of every sort of appropriation—in this sense, formally free labour. The services of labour are treated as the subject of a contractual relationship which is formally free on both sides. The contract may, however, be substantively regulated in various ways through a conventional or legal order governing the conditions of labour.

Freely contracted labour may be used in various ways. In the first place, in a budgetary unit, as occasional labour,⁶⁹ either in the household of the employer⁷⁰ or in that of the worker himself. Or it may be permanent, again performed in the household of the employer, as in the case of domestic service, or in that of the worker, as typical of the colonate. It may, on the other hand, be used for profit, again on an occasional or a permanent basis; and in both cases either in the worker’s own home or on premises provided by the employer. The latter is true of workers on an estate or in a workshop, but especially of the factory.

Where the worker is employed in a budgetary unit, he is directly in the service of a consumer who supervises his labour. Otherwise, he is in the service of a profit-making entrepreneur. Though the form is often legally identical, economically the difference is fundamental. Coloni may be in either status; but it is more typical for them to be workers in an oikos; (d) the fourth possibility is that opportunities for return for labour services may be appropriated by an association of workers, either without any appropriation by the individual worker or with important limitations on such appropriation. This may involve absolute or relative closure against outsiders and also prohibition of the dismissal of workers from employment by management without consent of the workers, or at least some kind of limitations on power of dismissal.

Examples of the type of appropriation involving closure of the group are castes of workers, the type of miners’ association found in the Medieval mining industry, the organized groups or retainers sometimes found at courts, or the threshers on a landed estate. This type of appropriation is found throughout the social history of all parts of the world in an endless variety of forms. The second type involving limitations on powers of dismissal, which is also very widespread, plays an important part in the modern situation in the ‘closed shop’ of trade unions and especially in the ‘works councils.’

Every form of appropriation of jobs by workers in profit-making enterprises, like the converse case of appropriation of the services of workers by owners, involves limitations on the free recruitment of the labour force. This means that workers cannot be selected solely on grounds of their technical efficiency, and to this extent there is a limitation on the formal rationalization of economic activity. These circumstances further impose substantive limitations on technical rationality in so far as: (1) The exploitation of the products of labour is appropriated by an owner. This may occur through the tendency to arbitrary restriction of the production of labour by tradition, by convention, or by contract. Or it may occur by the reduction or complete disappearance of the worker’s own interest in maximizing the production. The latter occurs when, as in slavery, the worker is freely appropriated by an owner; (2) limitations on technical rationalization may also result from appropriation on the part of the worker. There may be a conflict of the self-interest of the worker, which lies in the maintenance of his traditional mode of life, with the attempts of his employer to get him to produce at the optimum technical level or to use other modes of production in place of his labour. For employers, there is always the possibility of transforming their exploitation of labour into a mere source of income. The tendency for the exploitation of the products to be appropriated by the workers thus under favourable circumstances generally leads to a more or less complete exclusion of the owner from management. But it also regularly tends to place workers in a state of dependence on people with whom they deal who enjoy a more favourable market position. These, such as putting-out entrepreneurs, then tend to assume a managerial position.

1. The tendency of appropriation of jobs by workers and that of workers by owners are formally antithetical. But in practice they have very similar results. This should not be surprising. In the first place, the two tendencies are very generally formally related. This is true when appropriation of the workers by an owner coincides with appropriation of opportunities for jobs by a closed corporate group of workers, as has happened in feudal courts. In such cases it is natural that exploitation of services should, to a large extent, be stereotyped; hence that production should be restricted and the worker have little interest in maximizing it. The result is generally a successful resistance of workers against any sort of technical innovation. But even where this does not occur, the fact that workers are appropriated by an owner means in practice that he is obliged to make use of this particular labour force. He is not in a position like that of the modern factory manager to select according to technical needs, but must utilize those he has without selection. This is particularly true of slave labour. Any attempt to exact performance from appropriated workers beyond that which has become traditionally established, encounters traditionalistic obstacles. These could only be overcome by the most ruthless methods, which are not without their danger from the point of view of the employer’s own self-interest, since they might undermine the traditionalistic bases of his authority. Hence almost universally the production of appropriated workers has shown a tendency to restriction. Even where, as was particularly true of eastern Europe in early modern times, this has been broken up by the power of the propertied classes, the development of much higher technical levels of production has still been impeded by the absence of the selective process and by the absence of any element of self-interest or independent risk on the part of the appropriated workers. When jobs have been formally appropriated by workers, the same result has come about even more rapidly.

2. Appropriation by workers was particularly common in the development of the early Middle Ages, from the tenth to the thirteenth centuries. The Carolingian ‘beunden’ and all the other beginnings of large-scale agricultural enterprise declined and disappeared. The income of feudal lords and landed proprietors became stereotyped at a very low level; and an increasing proportion of the products in kind, in agriculture and mining, and of the money proceeds from the handicrafts, went to the workers. In just this form this development was peculiar to the Western World. The principal circumstances which favoured it were as follows : (a) The fact that the propertied classes were heavily involved in political and military activity; (b) the absence of a suitable administrative staff. These two circumstances made it impossible to treat these workers in any other way than as a source of stereotyped income; (c) the fact that the freedom of movement of workers as between the potential employers competing for their services could not easily be restricted; (d) the numerous opportunities of opening up new land, new mines, and new local markets; (e) the primitive level of the; technical tradition. The more the appropriation of opportunities for profit by the workers took the place of the appropriation of workers by owners, the more the owners became merely recipients of income. Classical examples are the mining industry and the English guilds. But this, even at an early period, tended to go further to the point of repudiation of payments to a lord altogether, as exemplified in the saying, ‘A townsman is a freeman.’ Almost immediately all this led to a broadening of opportunities of making profit by market transactions, arising either from within the group of workers themselves or from without through the development of trade.