SOCIAL ASPECTS OF THE DIVISION OF LABOUR—(Continued)

The Appropriation of the Non-Human Means of Production

The non-human means of production may be appropriated by workers as individuals or as corporate groups, by owners, or by regulating groups consisting of third parties.

When appropriated by workers, it may be by the individual worker who then becomes the ‘owner’ of the non-human means of production; or the appropriation may be carried out by a more or less completely closed group of workers so that, though the individual worker is not the owner, the corporate group is. Such a corporate group may carry out its functions as a unitary economy as on a ‘communistic’ basis, or with appropriation of shares.⁷⁰ In all these cases, appropriation may be used for the purposes of budgetary administration or for profit making.⁷¹

Appropriation by individual workers may exist in a system of completely free market relations, as between small peasants, artisans, boatmen, or taxi-drivers, each owning his own means of production. Where it is not the individual but a corporate group which is the agent of appropriation, there is a wide variety of possibilities, varying particularly with the extent to which the system is of a budgetary or a profit-making character. The household economy, which is in principle neither necessarily primitive nor in fact communistic, may be oriented wholly to provision for its own needs. Or it may, perhaps only occasionally, dispose of surpluses of certain types of raw material accumulated by virtue of a favourable location, or of products derived from some particular technical skill, as a means to better provision. This occasional sale may then develop into a regular system of profit-making exchange. In such cases it is common for ‘tribal’ crafts to develop with an interethnic specialization of function and exchange. Generally speaking, marketability depends on maintaining a monopoly, which in turn is usually secured by inherited secrets. These may develop into wandering craft groups or possibly pariah⁷² crafts. It is also possible, as in India, where these groups are united in a political structure and where there are ritual barriers between the ethnic elements, for them to develop into castes.

The case where members of the group possess appropriated shares is that of ‘producers’ co-operation.’⁷³ Household economies may, with the development of money accounting, approach this type. Otherwise, it is only occasionally found, as an organization of workmen. There is, however, one important case closely approaching this type—the mining industry of the early Middle Ages.

Since appropriation by organized groups of workers has already been discussed, appropriation by ‘owners’ or organized groups of them can mean only the expropriation of the workers from the means of production, not merely as individuals, but as a whole. An owner may in this connexion appropriate one or more of the following items: land, including water; subterranean wealth; sources of power; work premises; labour equipment, such as tools, apparatus and machinery; and raw materials. In any given case all these may be concentrated in a single ownership or they may be appropriated by different owners. The owners may employ the means of production they appropriate in a context of budgetary administration, as means to provide for their own needs, or as sources of income by loans. In the latter case, the loans may in turn be used for budgetary purposes or as means for earning a profit, in which case they may be used in a profit-making enterprise without capital accounting, as capital goods in another’s enterprise or as capital goods in the owner’s own enterprise.

The appropriating agency may be a corporate group engaged in economic activity. In this case, all the alternatives just outlined are open to it. It is, however, also possible that the means of production should be appropriated by a corporate group which only regulates economic activity. In this case, they are neither used as capital goods nor as a source of income, but are placed at the disposal of the members.

1. When land is appropriated by isolated economic units, it is usually for the period of actual cultivation until the harvest or, so far as, by virtue of clearing or irrigation, land is itself an artifact, for the period of continuous cultivation.

It is only when scarcity of land has become noticeable that it is common for rights of cultivation, pasturage and use of timber to be reserved to the members of a settlement group, and for the extent of their use to be limited: (1) When that happens, appropriation may be carried out by a corporate group. This may be of differing sizes, according to the mode of use to which the land is put—for gardens, meadows, arable land, pastures, or woodland. These have been appropriated by progressively larger groups from the individual household to the whole tribe. Typical cases are the appropriation of arable land, meadows, and pastures by a kinship group or a local community, usually a village. It has been usual for woodland to be appropriated by broader territorial groups, differing greatly in character and extent. The individual household has typically appropriated garden land and the area around the house and has had shares in arable fields and meadows. The assignment of these shares may take various forms. Where a wandering agricultural people takes over new areas, it may involve rigid equality. In a sedentary agricultural regime, there may be a rationally systematic redistribution. This usually occurs only as a consequence of fiscal claims when villagers are collectively responsible for taxes, or of claims of the members to political equality. The unit of technical organization has normally been the household group; (2) the subject of appropriation may be a landlord. This status may, as will be discussed later, be based primarily on the individual’s position of authority in a kinship group or as political chieftain with claims to exact labour services, or on fiscal or military authority, or on some form of organization for the systematic exploitation of new land or an irrigation project.

Proprietorship over land may be made a source of utilities by the employment of the unfree labour of slaves or serfs. This, in turn, may be administered as part of a budgetary unit, through deliveries in kind or labour services, or as a means of profit, as a ‘plantation.’ On the other hand, it may be exploited with free labour. Here again it may be treated in budgetary terms, drawing income from the land in the form of payments in kind or from share-cropping by tenants or of money rents from tenants. In both cases the equipment used may be provided by the tenant himself or may be loaned to him by the landlord. A landlord may also exploit his holdings as a source of profit in the form of a large-scale rational enterprise.

Where the land is used as part of a budgetary economy with unfree labour, the landlord is apt to be bound traditionally in his exploitation of it, both with respect to his labour personnel, which is not subject to selection, and to their functions. The use of unfree labour in a profit-making organization, the ‘plantation,’ has only occurred in a few cases, notably in Antiquity in Carthage and in Rome, and in modern times in the plantations of colonial areas and in the Southern States of North America. Its use in large-scale profit-making enterprises with free labour has occurred only in the modern Western World. It is the mode of development of land proprietorship, in particular the way in which it was broken up, which has been most decisive in determining the modern forms of land appropriation. To-day, only the following pure types are found: the owner of land, the capitalistic tenant, and the propertyless agricultural labourer. The latter type is exceptional, found principally in England.

Sources of wealth adapted to exploitation by mining may be appropriated in the following ways: (a) By the owner of the land, who in the past has usually been a landlord; (b) by a political overlord or authority; (c) by any person discovering deposits worthy of mining; (d) by a corporate group of workers; and (e) by a profit-making enterprise.

Landlords and political authorities may administer their holdings themselves, as they did occasionally in the early Middle Ages; or they may use them as a source of income, by leasing them to an organized group of workers or to any discoverer whatever or anyone who was a member of a given group. This was the case with the ‘free mines’ of the Middle Ages and was the origin of the institution of ‘mining freedom.’⁷⁴

In the Middle Ages, the groups of organized mine workers were typically sharing co-operatives where each member was under obligation either to the owner or to the other solidary members to work in the mine. This obligation was balanced by a right to a share in the products. There was also the type of association of owners which distributed shares of the proceeds and each of whom had to make contributions. The tendency was for the owners to be progressively expropriated in favour of the workers; but these, in turn, as their need for equipment increased, became more and more dependent on groups with command over capital goods. Thus in the end, the appropriation took the form of a capitalistic enterprise, a limited liability company.

2. Means of production which are bound to a fixed position, such as sources of power, particularly water power, ‘mills’ for various different purposes, and workshops, sometimes including the apparatus in them, have in the past, particularly in the Middle Ages, generally been appropriated in one of the following ways: (a) by princes or landlords; (b) by towns; (c) by associations of workers, such as guilds, without the development, in any of them, of a unified productive organization.

In the first two cases, they are usually exploited as a source of income, a charge being made for their use. This has often been combined with monopoly position and the compulsory use of the facilities. Each productive unit would make use of the facilities in turn, according to need or, under certain circumstances, it was made the monopoly of a closed, regulative group. Baking ovens, various kinds of grinding mills for grain or oil, fulling mills, polishing equipment, slaughter-houses, dye works, bleaching equipment, forges—which were usually, to be sure, leased—breweries, distilleries, other equipment including particularly shipyards in the possession of the Hanseatic towns, and all kinds of market booths have been appropriated in this way. Under pre-capitalistic conditions, these have all tended to be exploited by allowing workers to use them in return for a payment; thus as part of the budgetary resources of the owner, rather than as capital, whether the owner were an individual or a corporate group, including town corporations. This type of production and budgetary exploitation as a source of investment income for the owning individual or group, or possibly production by a producers’ co-operative group, has preceded their transformation into the ‘fixed capital’ of individual business units. Those using such equipment have tended to treat them in part as means of meeting their own needs, especially in the case of baking ovens, but also of equipment for brewing and distilling. In part they have used them in profit-making operations.

3. For maritime commerce the typical arrangement in past times has been the appropriation of the ship by a plurality of owners who have tended to become more and more sharply differentiated from the workers on ships. The organization of maritime enterprise has tended then to develop into a system of sharing risks with shippers in which ship owners, officers, and even the crew, were associated. This did not, however, produce any fundamentally new forms of appropriation, but affected only the forms of calculation and hence the distribution of profit and loss.

4. To-day, it is usual for all kinds of equipment and tools to be appropriated under one controlling agency, as is essential to the modern factory; but in earlier times, this has been exceptional. In particular, the economic character of the Greek and Byzantine ‘ergasterion’ and the corresponding Roman ‘ergastulum’ has been highly equivocal, a fact which historians have persistently ignored. It was a ‘workshop’ which might, on the one hand, be a part of a household unit in which slaves might carry out production for the owner’s own needs, as on a landed estate. Or it might be a place where slaves carried out some subsidiary process of production of goods for sale. But, on the other hand, the workshop might be used as a source of profit in the ownership of a private individual or of a corporate group, which latter might be a town, as was true of the workshops of the Piraeus. A property would then be leased to individuals or to organized groups of workers in return for payment. Thus when it is stated that people worked in an ergasterion, especially in a town, it is always necessary to inquire further to whom it belonged and who was the owner of the other means of production necessary for the work process. Did it employ free labour? Did they work for their own profit? Or did it employ slaves, in which case it is necessary to know who their owners were and whether they were working on their own account, though making a áπoøpá payment to their master, or directly for their master. According to the ways in which these questions are answered, the structure would be radically different from an economic point of view. In the great majority of cases, even as late as the Byzantine and Mohammedan types, the ergasterion seems to have been primarily a source of budgetary income and was hence fundamentally different from the modern factory and should not be treated as an early stage of its development. From an economic point of view, this category is, in lack of definiteness, most closely comparable to the various types of mills, found in the Middle Ages.

5. Even in cases where the workshop and the means of production are appropriated by an individual owner who hires labour, the situation is not, from an economic point of view, necessarily what would usually be called a factory to-day. It is necessary in addition to have the use of mechanical power, of machinery, and of an elaborate internal differentiation and combination of functions. The factory to-day is a category of the capitalistic economy. Hence in the present discussion, the concept will be confined to a type of organization which is at least potentially under the control of a profit-making enterprise with fixed capital. It thus takes the form of an organized workshop with internal differentiation of function, with the appropriation of all the non-human means of production and with a high degree of mechanization of the work process by the use of mechanical power and machinery. The great workshop of Jack of Newbury, which was famous among its sixteenth-century contemporaries, did not have any of these features. It is alleged to have contained hundreds of hand looms which were his property, and the entrepreneur bought the raw material for the workers, and maintained all manner of welfare arrangements for them. But each worker worked independently as if he were at home. It was possible for an internal differentiation and combination of functions to exist in an ergasterion in which a master employed unfree labourers in Egypt, Greece, Byzantium, and in the Mohammedan world. There is no doubt that such cases have existed. But the Greek texts show clearly that even in such cases it was common for the master to be content with the payment of an áπoøpá from each worker though perhaps a higher one from persons in a supervisory position. This alone is sufficient to warn us not to consider such a structure economically equivalent to a factory or even to a workshop like that of Jack of Newbury. The closest approximation to the factory in the usual sense is found in royal manufactures, like the imperial Chinese porcelain manufactures and the European manufactures of court luxuries which were modelled on it. The best case of all is the manufacture of military equipment. No one can be prevented from calling these ‘factories.’ The Russian workshops operating with serf labour seem at first sight to stand even closer to the modern factory. Here the appropriation of the workers themselves is added to that of the means of production. But for present purposes the concept ‘factory’ will, for the reasons stated, be limited to organized workshops where the non-human means of production are fully appropriated by an owner, but the workers are not; where there is internal specialization of functions, and where mechanical power and machines which must be ‘tended’ are used. All other types of organized workshops will be designated as such with the appropriate additional description.

SOCIAL ASPECTS OF THE DIVISION OF LABOUR—(Concluded)

The Appropriation of Managerial Functions

In all cases of the management of traditional budgetary units, it is typical for the appropriation of managerial functions to take place either by the titular head himself, such as the head of the family or the kinship group, or by members of an administrative staff appointed for the management of the unit, such as household servants or officials.

In the case of profit-making enterprises, it occurs in the following situations: (a) When management and ordinary labour are entirely or very nearly identical. In this case there is usually also appropriation of the non-human means of production by the worker. This type of appropriation may be unlimited, that is, hereditary and alienable on the part of the individual, with or without a guaranteed market. It may, on the other hand, be appropriated by an organized group, with appropriation of the function by the individual restricted to personal tenure⁷⁵ or subject to substantive regulation, thus limited and dependent on various conditions. Again, a market may or may not be guaranteed; (b) where management and ordinary work are differentiated, there may be a monopolistic appropriation of entrepreneurial functions in various possible forms, notably by co-operative groups, such as guilds, or monopolies granted by the political authority.

In cases where managerial functions are, from a formal point of view, wholly unappropriated, the appropriation of the means of production or of the credit necessary for securing control over them is, in practice, in a capitalistic form of organization, identical with appropriation of control of management by the owners of the means of production. Owners can, in such cases, exercise their control by personally managing the business or by appointment of the actual managers. Where there is a plurality of owners, they will co-operate in the selection.⁷⁶

Wherever there is appropriation of technically complementary means of production, it generally means, in practice, at least some degree of effective voice in the selection of management and, to a relative extent at least, the expropriation of the workers from management. The expropriation of individual workers does not necessarily imply the expropriation of workers in general. Though they are formally expropriated, it is possible for an association of workers to be in fact in a position to play an effective part in management or in the selection of managing personnel.

THE EXPROPRIATION OF WORKERS FROM THE MEANS OF PRODUCTION

The expropriation of the individual worker from ownership of the means of production is in part determined by the following purely technical factors: (a) The fact that sometimes the means of production require the services of many workers, at the same time or successively; (b) the fact that sometimes sources of power can only be rationally exploited by using them simultaneously for many similar types of work under a unified control; (c) the fact that often a technically rational organization of the work process is possible only by combining many complementary processes under continuous common supervision; (d) the fact that sometimes special technical training is needed for the management of co-ordinated processes of labour which, in turn, can only be exploited rationally on a large scale; (e) the fact that, if the means of production and raw materials are under unified control, there is the possibility of subjecting labour to a stringent discipline and thereby controlling both the speed of work and standardization and quality of products.

These factors, however, do not exclude the possibility of appropriation by an organized group of workers, a producers’ co-operative. They necessitate only the separation of the individual worker from the means of production.

The expropriation of workers in general, including clerical personnel and technically trained persons, from possession of the means of production depends on the following principal economic factors: (a) The fact that, other things being equal, it is generally possible to achieve a higher level of technical efficiency if the management has extensive control over the selection and the modes of use of workers, as compared with the situation created by the appropriation of jobs or the existence of rights to participate in management. These latter conditions produce technically, as well as economically, irrational obstacles to efficiency. In particular, considerations appropriate to small-scale budgetary administration and the immediate interests of consumers are often in conflict with the efficiency of the organization; (b) in a market economy a management which is not hampered by any established rights of the workers, and which enjoys unrestricted control over the goods and equipment which underlie its borrowings, is in a superior credit position. This is particularly true if the management consists in individuals experienced in business affairs and with a good reputation for ‘safety’ derived from their continuous conduct of business; (c) from a historical point of view, the expropriation of labour has developed since the sixteenth century in an economy characterized by a progressive development of the market system, both extensively and intensively, by the sheer technical superiority and actual indispensability of a type of autocratic management oriented to the particular market situations, and by the structure of power relationships in the society.

In addition to these general conditions, the effect of the fact that enterprise has been oriented to the exploitation of market advantages has been to favour such expropriation: (a) As compared with every type of economic attitude which, from the point of view of calculation is less rational, it has favoured the maximum of technical rationality in capital accounting. This, however, has been a function of the complete appropriation of economic resources by owners; (b) it has favoured commercial abilities in management as opposed to the technical. It has also favoured the maintenance of technical and commercial secrets; (c) it has favoured a speculative business policy which again has required expropriation; (d) apart from any considerations of technical rationality, expropriation has been favoured by the bargaining superiority which management, by virtue of its possession of property, has enjoyed, both on the labour market in relation to the worker, and in the commodity market, by virtue of its capital accounting, and its command over capital goods and credit. In these ways it is superior to any type of competitor operating on a lower level of rationality in methods of calculation or less well situated with respect to capital and credit resources. The upshot of all these considerations is that the maximum of formal rationality in capital accounting is possible only where the workers are subjected to the authority of business management. This is a further specific element of substantive irrationality⁷⁷ in the modern economic order; (e) finally, free labour and the complete appropriation of the means of production create the most favourable conditions for discipline.

THE EXPROPRIATION OF WORKERS FROM THE MEANS OF PRODUCTION—(Continued)

The expropriation of all the workers from the means of production may have the following effects in practice: (1) That management is in the hands of the administrative staff of a corporate group. This would be true very particularly of any rationally organized socialistic economy. The expropriation of all the workers would be retained and merely brought to completion by the expropriation of private owners; (2) that the managerial functions are, by virtue of their appropriation of the means of production, exercised by the owners or by persons they appoint. The appropriation of control over the persons exercising managerial authority by the interests of ownership may have the following consequences: (a) Management by one or more entrepreneurs who are at the same time owners—the immediate appropriation of managerial functions. This situation, however, does not exclude the possibility that a wide degree of control over the policies of management may rest in hands outside the organization, by virtue of their powers over credit or financing; for instance, the bankers who finance the enterprise; (b) the separation of managerial functions from appropriated ownership, especially through limitations of the functions of owners to the appointment of management and to the free appropriation of shares of the profits, these powers exercised by the owners of capital shares. From this situation to the purely personal type of appropriation there are all manner of gradual transitions. The separation of ownership and management is formally rational in the sense that, as contrasted with the case of permanent and hereditary appropriation of managerial functions, it permits the selection for managerial posts of the persons best qualified from the standpoint of profitability. But this can have various different practical consequences. By virtue of their ownership, control over managerial positions may rest in the hands of property interests outside the organization as such. They may be shareholders who are, above all, concerned with maximizing their investment returns. Or control over managerial positions may lie, by virtue of a temporary market situation, in the hands of speculative interests outside the organization, such as shareholders who are interested in profits from the sale of their shares. Or, finally, control over managerial positions may be in the hands of other business interests, such as banks or others, which by virtue of their power over markets or over credit are in a position to exercise control. These may pursue their own interests, which are often foreign to those of the organization as such.

Interests are spoken of as ‘outside the firm’ so far as they are not primarily oriented to the long-run profitability of the enterprise. This may be true of all sorts of property interests. It is particularly true, however, of interests having control of the plant and capital goods of the enterprise or of a share in it, which is not exercised as a permanent investment, but as a means of making a speculative profit. The types of outside interest which are most readily reconciled with those of the enterprise are those of pure investment; they are, that is, interests in long-run profitability.

The ways in which these outside interests play into the modes of control over managerial position constitutes another specific element of substantive irrationality in the modern economic order. This is the more true the higher the degree of rationality exercised in selection. It is possible for entirely private property interests to exercise control, or others which are oriented to ends having no connexion with the organization, or finally, those concerned only with gambling. By gaining control of shares, these can control the appointment of the managing personnel and, more important, the business policies they pursue. The influence exercised on the market situation, especially that for capital goods, and in turn on the orientation of production of goods for profit, by speculative interests outside the producing organizations themselves, is one of the sources of the phenomena known as the ‘crises’ of the modern market economy. This cannot, however, be further discussed here.

THE CONCEPT OF OCCUPATION AND TYPES OF OCCUPATIONAL STRUCTURE

The term ‘occupation’ (Beruf) will be applied to the mode of specialization, specification, and combination of the functions of an individual so far as it constitutes for him the basis of a continual opportunity for income or for profit. Occupations may be distributed in the following ways: (1) By a heteronomous assignment of functions and provision of maintenance within a corporate group regulating economic activity—the unfree differentiation of occupations—or through autonomous orientation to the state of the market for occupational services—free differentiation of occupations; (2) its distribution may rest on the specification of functions or the specialization of functions; (3) it may involve economic exploitation of the services by their bearers on either an autocephalous or a heterocephalous basis.

The structure of occupational differentiation and that of opportunities for income and profit are closely related. This will be discussed in relation to the problems of social stratification.⁷⁸

1. The unfree organization of occupations exists in cases where there is compulsory assignment of functions within the organization of a royal estate, a state, a feudal manor, or a commune on the basis of liturgies or of the oikos type of structure. The free type of distribution arises from the successful offer of occupational services on the labour market or successful application for free ‘positions.’

2. As was pointed out above in sec. 16, the specification of functions was typical of the organization of the handicrafts in the Middle Ages; specialization is characteristic of the modern form of rational organization. Occupational distribution in a market economy consists to a large extent of technically irrational specification of functions, rather than of rational specialization of functions, because it is oriented to the market situation and hence to the interests of purchasers and consumers. These interests determine what services will be offered to and selected by a given productive unit, often independently of the technical aspects of the specialization of functions. And this often necessitates modes of combinations of functions which are technically irrational.

3. Cases of autocephalous occupational specialization are the independent ‘business’ of an artisan, a physician, a lawyer, or an artist. The factory worker and the government official, on the other hand, occupy heterocephalous occupational positions.

The occupational structure of a given social group may vary in the following ways: (a) According to the degree in which well-marked and stable occupations have developed at all. The following circumstances are particularly important in this connexion; the development of consumption standards, the development of techniques of production, and the development of large-scale budgetary units in the case of unfree occupational organization, or of market systems in that of free organization; (b) according to the mode and degree of occupational specification or specialization of individual economic units. This will be decisively influenced by the market situation for the services or products of specialized units, which is in turn dependent on adequate purchasing power. It will also be influenced by the modes of distribution of control over capital goods; (c) according to the extent and kind of continuity or change in occupational status. This in turn depends above all on two factors: on the one hand, on the amount of training required for the specialized functions, and on the other hand the degree of stability or instability of opportunities for earnings from them. The latter is in turn dependent on the type and stability of distribution of income and on the state of technology.

Finally, it is always important in studying occupational structure to know the system of social stratification, including the distribution of opportunity in the different classes and the types of education which are available for the various types of occupations requiring specialized training, notably the learned professions.

It is only functions which require a certain minimum of training and for which opportunity of continuous remuneration is available which become the objects of independent and stable occupations. The choice of occupation may rest on tradition, in which case it is usually hereditary, on considerations of expediency, especially the maximization of money returns, on charismatic devotion to the task, on affectual grounds, and finally, in particular, on grounds of prestige with particular reference to class status. Originally, the more individualistic occupations seem to have been dependent primarily on charismatic, particularly magical, elements; while all the rest of the occupational structure, so far as in a differentiated form it existed at all, was traditionally fixed. The requisite qualities, so far as they were not charismatic and thus specifically personal, tended to become the object of a traditional training in closed groups, or of a hereditary tradition. Specialized occupations which were not of a strictly charismatic character first appeared on a liturgical basis in the large-scale households of princes and landed proprietors, and then oriented to a market economy in the towns. Alongside of this, however, related to magical ritual or clerical training there have developed literary forms of education which have tended to enjoy high class prestige.

From what has been said it will be seen that occupational specialization does not necessarily imply continuous employment either on a liturgical basis for an organized unit, as, for instance, in a royal household ⁸⁰ or in relation to a completely free market. Other forms are not only possible, but common: (1) Property less occupationally specialized workers may be employed on an occasional basis as needed in the service of a relatively stable group of customers in household units or of employers in profit-making enterprises. In the first case, if the worker has no property of his own, the employer provides the raw material and is hence the owner of the product. This type of work may be carried on on a purely itinerant basis or sedentarily in the service of a local group of household units.⁸¹ It is also possible for the work to be carried on in the worker’s own fixed shop, which may at the same time also be his household, but on behalf of the household unit.⁸²

In all such cases the employing household provides the raw materials but it is usual for the worker to own his own tools—the mower, his scythe; the seamstress, her sewing equipment, etc. In the first type, the relationship to the employer involves temporary membership in the latter’s household.⁸³

Occupationally specialized workers may be employed on an occasional basis by profit-making enterprises when at least the raw material, and thus also control over the product, belongs to the employer. In this case there may be migratory labour for a variety of different employers in different units, or occasional or seasonal work for an employer, the work being done in the worker’s own household. Migratory harvest labour is an example of the first type. The second type is illustrated by the common cases of homework which supplements that of the workshop; (2) the same type of thing may occur where the means of production are appropriated by the economic units in question: (i) Where there is capital accounting and partial appropriation of the means of production by owners, particularly appropriation restricted to spatially fixed equipment and premises. Examples are workshop organizations employing wage labour, and, above all, the ‘factories’⁸⁴ of the putting-out industries. The first of these forms has long existed, while the latter has recently become common; (ii) when the means of production are completely appropriated by the workers: (a) In a small-scale unit without capital accounting, producing for households, who are the ultimate consumers, or for profit-making enterprises. The latter is a case of domestic industry without expropriation of the means of production. The worker is formally a free craftsman, but is actually bound to a monopolistic group of merchants who are buyers for his product; (b) on a large scale with capital accounting and production for a fixed group of purchasers. This is usually, though not always, the result of market regulation by cartels.

Finally, it must be pointed out that every case of earning is by no means necessarily part of profit-making as an occupation; nor is it necessary that involvement in acquisitive action, however frequent, should imply a continuous specialization with a constant meaningful orientation.

Occasional acquisition is found as a result of the disposal of surpluses produced in a budgetary unit. Corresponding to these are both purchases and sales of goods by large-scale budgetary units, especially landed estates, as the occasion offers. From this starting point, it is possible to trace a continuous series of occasional acquisitive acts, such as the occasional speculation of a person living on income from investment, occasional publication of an article or a poem by a person who is not a professional author, and similar modern phenomena, to the case where such things constitute a ‘subsidiary’ occupation.⁸⁵

It should furthermore be remembered that there are ways of making a living which are continually shifting and in essence fundamentally unstable. A person may shift continually from one type of profitable activity to another; or even between normal legitimate earning and begging, stealing, or highway robbery.

The following must be treated in special terms: (a) Support from purely charitable sources; (b) maintenance in an institution on other than a charitable basis, notably a penal institution; (c) regulated acquisition by force; and (d) criminal acquisition; that is, acquisition by force or fraud in violation of the rules of an order. The cases of (b) and (d) are of relatively little interest; (a) has often been of tremendous importance for the economy of religious groups, such as mendicant orders; while (c) has been crucial for many political groups in the form of the booty gained from war. It is characteristic of both these cases that they lie outside the realm of economic activity as such. Hence this is not the place to enter into a more detailed classification. The forms will be treated elsewhere.⁸⁶ For reasons which are in part, though only in part, the same, the earnings of bureaucratic officials, including military officers, have been mentioned below (sec. 39) only in order to give them a place as a sub-type of the earnings of labour, but without going into the details. To do this, it would be necessary to discuss the structure of relations of authority and imperative co-ordination in the context of which these types of earnings are to be placed.

THE PRINCIPAL FORMS OF APPROPRIATION AND OF MARKET RELATIONSHIP

According to the theoretical schema which has been developed, starting with sec. 15, the classification of the modes of appropriation in their technical aspects and in relation to the market is exceedingly complex. But actually, only a few of the many theoretical possibilities play a really important role.

(1) With respect to agricultural land: (a) There is the migratory household economy, which changes its location whenever the land has been worked out. The land is usually appropriated by the tribe while its use is temporarily or permanently appropriated by neighbourhood groups. It is only appropriation of the use of land for a period which is enjoyed by the individual household.

The extent of the household group may vary from the individual conjugal family, through various types of extended family groups, to organized kin groups or a widely extended household community. Agriculture is migratory as a rule only in relation to arable land, much less commonly and at longer intervals for farm buildings.

(b) Sedentary agriculture. This is usually regulated by territorial or village communities with a smaller household group enjoying rights of use of arable fields, meadows, pastures, woodland, and water. Gardens and the land immediately surrounding the buildings are normally appropriated by the immediate family; arable fields, usually meadows, and pastures, by the village community; woodland, by more extensive territorial groups. Redistribution of land is usually possible according to the law, but has generally not been systematically carried through and is hence usually obsolete. Economic activities have generally been regulated by a system of rules applying to the whole village. This is a ‘primary village economy.’

It is only in exceptional cases, such as China, that the extended kinship group has constituted an economic unit. Where this is the case, it has generally taken the form of a rationalized corporate group, such as a clan association.

(c) Landed proprietorship and serfdom. The estate is controlled by a landlord, and dependent peasant farms are obligated to deliveries in kind and labour services. Land ownership and the workers are appropriated by the lord, the use of the land and rights to work by the peasants. This is a simple case of an organization of reciprocal relations between a landlord and his sources of income in kind.

(d) The monopoly of control over the land by a landlord or a fiscal unit with communal responsibility of the peasant community for meeting fiscal obligations. This leads to communal cultivation and a regular systematic redistribution of the land. The land is, as a correlate of the fiscal burden, permanently appropriated by the organized peasant community, not the individual household; the latter enjoys only rights of use and these are subject to redistribution. Economic activity is regulated by the rules imposed by the landlord or the political authority.

(e) Free landed proprietorship with exploitation of the dependent peasants as a source of budgetary income. The land is thus appropriated by a landlord; but colonies, sharecroppers,⁸⁷ or tenants paying money rent carry out the actual economic activities.

(f) The plantation. The land is freely appropriated and worked by slaves. The owner uses both as means of profit making in a capitalistic enterprise with unfree labour.

(g) A ‘landed estate.’ ⁸⁸ The land is appropriated by owners who receive rent by leasing it to large-scale farmers or who farm it themselves as a source of profit. In both cases free labour is used. Various sorts of equipment may be either owned by the tenant or provided by the lord. In both cases, again, all agricultural products may be produced on the estate or, in the limiting case, all consumption needs met through the market.

(h) The absence of landed proprietorship. This is a peasant economy with appropriation of the land by the peasant who farms it. In practice, this form of appropriation may mean that the land farmed is predominantly inherited land, or, on the other hand, that the land is freely bought and sold. The former is typical of settlements with scattered farms and large-scale peasant proprietors; the latter, where settlement is in villages and the scale is small.⁸⁹

Where tenants pay a money rent and where peasant proprietors buy and sell land, it is necessary to presuppose an adequate local market for the products of peasant agriculture.

(2) In the field of industry and transport, including mining, and of trade:

(a) Household industry carried on primarily as a means of occasional exchange of surpluses, only secondarily as a means of profit. This may involve an inter-ethnic division of labour, out of which in turn caste occupations have developed. In both cases it is usual for sources of raw materials to be appropriated by craft groups, and hence, the production of raw materials to be carried on by them. The purchase of raw materials and work for wages are secondary phenomena. In the case of inter-ethnic specialization, formal appropriation is often absent. There is, however, generally, and in the case of caste, always, appropriation of opportunities for earning from a specified function by kinship or household group.

(b) A restricted craft working for specific customers. The specification of function for an organized group of consumers. This may be a group exercising authority, such as an oikos or a landed estate, or it may be a communal group.

There is no market sale. In the first case, there is an organization of functions on a budgetary basis, or of labour in a workshop, as part of the ergasterion of the lord. In the second case, there is hereditary appropriation of the status of the workers which may, however, become alienable. Work is carried out for an appropriated group of customers who are consumers. There are the following very limited possibilities of development: (i) The workers, who are formally unfree but with specified functions, may be appropriated by a lord as a source of income, but in spite of their formal unfreedom, may remain for the most part in fact free to work for customers as they will. They may also be appropriated as unfree workers in the lord’s own household for his profit. They may, finally, be employed in an ergasterion for profit; (ii) this may also develop into a liturgical specification of functions for fiscal purposes, similar to the type of caste occupations.

In the field of mining, there are similar forms, notably the use of unfree labour, slaves or serfs, in productive units controlled by princes or landed proprietors.

In inland transportation, it is common for transportation equipment to be appropriated as a source of income. Services are then compulsorily imposed on specified small peasant holdings. Another possibility is smallscale caravan trade co-operatively regulated. The traders would then appropriate the goods themselves.

In the field of maritime transportation: (i) The ownership of ships by an oikos or a landlord or a patrician who manages it himself; (ii) co-operative construction and ownership of the ship. The captain and the crew also participate on their own account. Small travelling merchants would also participate as shippers. All the parties were associated in the bearing of risks. Actual voyages were made by strictly regulated ‘caravans.’ In all these cases ‘trade’ was still identical with inter-local trade; that is, with transport.

(c) Free industry.⁹⁰ Free production for consumers in return for a wage, either on the customer’s premises or the worker’s own. Usually the raw materials were appropriated by the customer, the tools by the worker, and premises and stationary equipment, if they were involved at all, by a lord as a source of income or by organized groups with rights of use in rotation. Another possibility is that both raw materials and tools should be appropriated by the worker who thus managed his own work, whereas premises and stationary equipment belonged to an organized group of workers, such as a guild. In all these cases, it is usual for the regulation of profit-making activity to be carried on by guilds.

In mining, deposits have usually been appropriated by political authorities or by landlords as sources of income, while the rights of exploitation have been appropriated by organized groups of workers. Mining operations have been regulated on a guild basis, oriented to the obligation toward the owner to secure his interest in royalties and to the working group who were responsible to him as a group and had an interest in the proceeds.

In the field of inland transport are found guilds of boatmen and land carriers with fixed itineraries and regulations of their opportunities for profit.

In the field of maritime shipping have existed the ownership of shares, ‘caravans’ of ships, and travelling merchants acting as agents on a commission basis.

There are the following stages in the development toward capitalism: (a) Effectual monopolization of money capital by entrepreneurs who have used it as a means to make advances to labour. Connected with this is the assumption of powers of management of the process of production by virtue of the extension of credit and of control of the product, in spite of the fact that appropriation of the means of production has continued formally in the hands of the workers, as in the handicrafts and in mining; (b) appropriation of the right of marketing products on the basis of previous monopolization of knowledge of the market and hence of market opportunities and monopolization of money capital. This was made possible by the imposition of a monopolistic system of guild regulation or by privileges granted by the political authority. Such privileges were granted in return for periodical payments or for loans; (c) the subjective disciplining of workers who stood in a dependent relationship in the putting-out system, and the supply of raw materials and apparatus by the entrepreneur. A special case is that of the rational monopolistic organization of domestic industries on the basis of privileges granted in the interests of national finances or of the employment of the population. The conditions of work were thereby regulated by imposition from above as part of the concession which made profitmaking activity possible; (d) the development of workshops without a rational specialization of labour in the process of production, by means of the appropriation by the entrepreneur of all the non-human means of production. In mining this included the appropriation by individual owners of mineral deposits, galleries, and equipment. In transportation, shipping enterprises fell into the hands of large owners. The universal result is the expropriation of the workers from the means of production; (e) the final step in the transition to capitalistic organization of production is the mechanization of the productive process and of transportation and its orientation to capital accounting. All the non-human means of production become fixed or working capital; all the workers become ‘hands.’ As a result of the transformation of enterprises into associations of security owners, even the management itself becomes expropriated and assumes the formal status of an official. Even the owner becomes effectively an agent for, or unofficial representative of, the suppliers of credit, the banks.

Of all these various types, the following instances may be noted:

1. In agriculture, type (a), migratory agriculture, is universal. But the sub-type where the effective unit has been the large-scale household community or kinship group, is found only occasionally in Europe, but has been very common in eastern Asia, particularly China. Type (b), sedentary agriculture with village communities; has been indigenous to Europe and India. Type (c), unfree landed proprietorship, has been found everywhere and is still common in some parts of the Orient. Type (d), proprietorship by a landlord or a fiscal unit, with a systematic redistribution of peasant holdings, has been, in the context of landed proprietorship, primarily found in Russia, and in a somewhat different form, involving the redistribution of land rents, in India. The predominantly fiscal form has been found in Eastern Asia, the Near East, and Egypt. Type (e), free ownership of land, drawing rent from small tenants, is typical of Ireland, but also occurs in Italy, southern France, China, and the eastern parts of the Hellenistic world in Antiquity. Type (f), the plantation with unfree labour, was characteristic of Carthage and Rome in Antiquity, of modern colonial areas, and of the Southern States of the United States. Type (g), the landed estate, in the form which involves separation of ownership and exploitation, has been typical of England; in the form of owner management, of eastern Germany, parts of Austria, Poland, and western Russia. Finally, type (h), peasant proprietorship, has been found in France, southern and western Germany, parts of Italy, Scandinavia, with certain limitations in south-western Russia, and with modifications, particularly in modern China and India.

These wide variations in the forms which the organization of agriculture has finally assumed are only partially explicable in economic terms, involving such factors as the difference between the cultivation of forest clearings and of the areas subjected to irrigation. In addition, it is necessary to take account of a variety of special historical circumstances, especially the forms taken by political and fiscal obligations and military organization.

2. In the field of industry, the following outline of the distribution of types may be given. Our knowledge of the situation in transportation and mining is not sufficiently complete to give such an outline for those fields.

(a) The first type, the tribal craft, has been found universally; (b) organization on the basis of occupational castes has become the predominant form only in India. Elsewhere it has existed only for occupations considered discreditable and sometimes ritually impure; (c) the organization of industry on the basis of the oikos is found in all royal households in early times, but has been most highly developed in Egypt. It has also existed on landed estates all over the world. Production by a co-operative group for a fixed market ⁹¹ occurs occasionally everywhere, including the Western World, but has become the predominant form only in India. The special case of the use of control over unfree persons simply as a source of income was common in Mediterranean Antiquity. The liturgical specification of functions is characteristic of Egypt, of the Hellenistic world, of the later Roman Empire, and has been found at times in China and India; (d) the free handicraft organization with guild regulation is classically illustrated in the European Middle Ages and became the predominant form only there. It has, however, been found all over the world; and guilds, in particular, have developed very widely, especially in China and the Near East. It is notable, however, that this type was entirely absent from the economic organization of classical Antiquity. In India, the caste took the place of the guild. Of the stages in the development toward capitalism, only the second was reached on a large scale outside the Western World. This difference cannot be explained entirely in purely economic terms.⁹²

CONDITIONS UNDERLYING THE CALCULABILITY OF THE PRODUCTIVITY OF LABOUR

1. In the three typical communistic forms of organization, non-economic motives play a predominant part.⁹³ But apart from these cases, there are three primary conditions affecting the maximization of calculable performance by labour in carrying out specifications: (a) The optimum of aptitude for the function; (b) the optimum of skill acquired through practice; (c) the optimum of incentive for the work.

Aptitude, regardless of whether it is the product of hereditary or environmental and educational influences, can only be determined by testing. To-day, in large-scale business firms this usually takes the form of special aptitude tests. The Taylor system involves an attempt to work out rational methods of accomplishing this.

Practice, and the resulting skill, can only be perfected by rational and continuous specialization. To-day, it is worked out on a basis which is largely empirical, guided by considerations of minimizing costs in the interest of profitability, and limited by these interests. Rational specialization with reference to physiological conditions is only in its beginnings. Here again the Taylor system is a pioneer.

Incentives to work may be oriented to any one of the ways which are open to any other mode of action.⁹⁴ But in the specific sense of carrying out the intentions of the actor himself or of persons supervising his work, it must be determined either by a strong interest in the outcome on his own part, or by direct or indirect compulsion. The latter is particularly important in relation to work which carries out the aims of others. This compulsion may consist in the immediate threat of physical force or of other undesirable consequences, or in the probability that unsatisfactory performance will have an adverse effect on earnings.

The second type, which is essential to a market economy, appeals immensely more strongly to the worker’s self-interest. It also necessitates freedom of selection according to performance, both qualitatively and quantitatively, though naturally from the point of view of its bearing on profit. In this sense it has a higher degree of formal rationality, from the point of view of technical considerations, than any kind of direct compulsion to work. It presupposes the expropriation of the workers from the means of production and their dependence on competition for paid employment. This in turn presupposes that the appropriation of the means of production by owners is protected by force. As compared with direct compulsion to work, the system of free labour involves responsibility for reproduction, in the family, and part of the responsibility for selection according to aptitude is turned over to the workers themselves. Further, both the need for capital and the risks to which it is subjected are, as compared with the use of unfree labour, lessened and made more calculable. Finally, through the payment of money wages on a large scale, the market for goods which are objects of mass consumption is broadened.

Other things being equal, positive motives for work are not, in the absence of direct compulsion, to the same extent obstructed as they are for unfree labour. It is, however, true that whenever technical specialization has reached very high levels, the extreme monotony of operations tends to limit incentives to purely material wage considerations. It is only when wages are paid in proportion to performance on a piece-rate basis that there is an incentive to increasing productivity. In the capitalistic system, the most immediate bases of willingness to work are opportunities for high piece-rate earnings and the danger of dismissal.⁹⁵

The following observations may be made of the situation of free labour separated from the means of production: (a) Other things being equal, the likelihood that people will be willing to work on affectual grounds is greater in the case of specification of functions than in that of specialization of functions. This is true because the product of the individual’s own work is more clearly evident. In the nature of the case, this is particularly true where quality of performance is important; (b) traditional incentives to work are particularly common in agriculture and in domestic industries, where in both cases the general attitude toward life is traditional. It is characteristic of diis that the level of performance is oriented either to products which are stereotyped in quantity and quality or to a traditional level of earnings, or both. Where such an attitude exists, it is difficult to manage labour on a rational basis and production cannot be increased by such incentives as piece rates. Experience shows, on the other hand, that a traditional patriarchal relationship to a lord or owner is capable of maintaining a high level of affectual incentive to work; (c) incentives based on absolute values are usually the result of religious orientations or of the high social esteem in which the particular form of work as such is held. Observation seems to show that all other sources of incentive are transitional forms between this and other types.

It goes without saying that the ‘altruistic’ concern of the worker for his own family is a typical element of duty contributing to willingness to work generally.

2. The appropriation of the means of production and personal control, however formal, over the process of work constitute among the strongest incentives to unlimited willingness to work. This is the fundamental basis of the extraordinary importance of small units in agriculture, whether in the form of small-scale proprietorship or small tenants who hope to rise to the status of owner. The classical locus of this type of organization is China. The corresponding phenomenon in the functionally specified skilled trades is most marked in India. But it is very important in all parts of Asia and also in Europe in the Middle Ages. In the latter case, the most crucial conflicts have been fought out over the issue of formal autonomy of the individual worker. The existence of the small peasant in a sense depends directly on the absence of capital accounting and on retaining the unity of household and enterprise. His is a specified and not a specialized function, and he tends both to devote more intensive labour to it and to restrict his standard of living in the interest of maintaining his formal independence. In addition, this system of agriculture makes possible the use of all manner of by-products and even ‘waste’ in the household in a way which would not be possible to a large organization. All the information we have available ⁹⁶ goes to show that capitalistic organization in agriculture is, where management is in the hands of the owner, far more sensitive to cyclical movements than small-scale peasant farming.

In industry, the corresponding small-scale type has retained its importance right up to the period of mechanization and of the most minute specialization and combination of functions. Even as late as the sixteenth century, as actually happened in England, it was possible simply to forbid the maintenance of workshops, like that of Jack of Newbury, without catastrophic results for the economic situation of the workers. This was true because the combination in a single shop of looms, appropriated by an owner and operated by workers, could not, under the market conditions of the time, without any far-reaching increase in the specialization and co-ordination of labour functions, lead to an improvement in the prospects of profit for the entrepreneur large enough to compensate with certainty for the increase in risk and for the costs of operating the shop. It is above all true that in industry an enterprise with large investments in fixed capital is not only, as in agriculture, sensitive to cyclical fluctuations, but also in the highest degree to every form of irrationality—that is, lack of calculability—in public administration and the administration of justice. This factor has everywhere been of crucial importance, except in the modern Western World. It has hence been possible, as in competition with the Russian factory and everywhere else, for decentralized domestic work to dominate the field. This was true up to the point, which was reached before the introduction of mechanical power and machine tools, where, with the broadening of market opportunities, the need for exact cost accounting and standardization of product became marked. In combination with technically rational apparatus, using water power and horses, this led to the development of forms of organization with internal specialization. Mechanical motors and machines could then be introduced. Though they did occasionally appear, it would, until this point was reached, have been possible for all the large-scale industrial establishments in the world to be eliminated without any serious prejudice to the economic situation of all those involved in them and without any serious danger to the interest of consumers. This situation has been changed only with the appearance of the factory. But willingness to work on the part of factory labour has been primarily determined by a combination of the transfer of responsibility for maintenance to the workers personally and the corresponding powerful indirect compulsion to work as symbolized in the English workhouse system. It is furthermore permanently bound to the compulsory guarantee of the property system. This is demonstrated by the marked decline in willingness to work at the present time, which has resulted from the breakdown of this compulsory power in the revolution.⁹⁷

TYPES OF COMMUNAL ORGANIZATION OF LABOUR

Communistic systems for the communal or associational organization of work are unfavourable to calculation and to the consideration of means for obtaining optimum production; they tend, rather, to be based on the direct feeling of mutual solidarity. They have thus tended historically, up to the present, to develop on the basis of common value attitudes of a primarily non-economic character. There are three main types: (1) The household communism of the family, resting on a traditional and affectual basis; (2) the military communism of comrades in an army; (3) the communism based on love and charity in a religious community.

Cases (2) and (3) rest primarily on a specific emotional or charismatic basis. They always, however, (a) stand in direct conflict with the specialized rational or traditional economic organization of their environment. The communistic group then either works itself or is supported purely by contributions from without, or both. Or (b) it may constitute a budgetary organization of privileged persons who exercise control over other budgetary units which are not members and are supported by the contributions or liturgies of the latter. Or (c) finally, it is a purely consuming unit, distinct from any profit-making enterprises, but drawing income from them, and hence in an associative relationship with them.

The first of these modes of support (a) is typical of communities based on religious belief or some other community of sentiment—such as monastic communities which renounce the world altogether or carry on communal labour, sectarian groups and Utopian socialists.

The second mode (b) is typical of military groups which rest on a wholly or partially communistic basis. Examples are the ‘men’s house’ in many primitive societies, the Spartan ‘mess,’ the Ligurian pirate groups, the entourage of the Calif Omar, the communism, in consumption and partly in requisitioning, of armies in the field in every age. A similar state of affairs is found in authoritarian religious groups— as in the Jesuit state in Paraguay and communities of mendicant monks in India and elsewhere.

The third mode (c) is typical of family households in a market economy.

Willingness to work and consumption without calculation are, within these communities, a result of the non-economic attitudes characteristic of them. In the military and religious cases, they are to an appreciable extent based on a feeling of separateness from the ordinary everyday world and even of conflict with it. Modern communistic movements are, so far as they aim for a communistic organization of the masses, dependent on devotion to absolute values for their following. In their propaganda, however, they also make use of arguments from expediency, touching the efficiency of production. But in both cases, they rest their position on specifically rational considerations which are, as contrasted with military and religious communities, concerned with the everyday profane world.⁹⁸ Their prospects of success under ordinary conditions rest on entirely different subjective conditions from those governing groups which are oriented to exceptional activities, to other-worldly values, or to other primarily non-economic considerations.

CAPITAL GOODS AND CAPITAL ACCOUNTING

Capital goods are usually first found in their earlier stages in the form of commodities which are objects of exchange between different areas or tribes. This implies that ‘trade’ or ‘commerce’ ⁹⁹ occurs which is clearly distinct from the mere production of goods by budgetary units. For trade, when carried on by the budgetary unit itself, cannot be oriented to a system of capital accounting. The products of household, clan or tribal crafts, which are sold to other groups, are commodities; and the means of production, so long as they are used to produce directly for consumption, are tools and raw materials, not capital goods. The same is true of the salable products and means of production of peasants and feudal estates, so long as production is not carried on in terms of even a primitive form of capital accounting of the type which Cato, for example, mentions.

It is obvious that the internal movement of goods within the domain of a feudal lord or of an oikos, including occasional exchange and the common forms of internal exchange of products, is the antithesis of trade based on capital accounting. Even the trade engaged in by an oikos, like that of the Pharaohs, when it is not concerned solely with provision for need, and is thus not a budgetary unit but one oriented to profit, is not for present purposes necessarily capitalistic. This would only be the case if it were oriented to capital accounting, particularly to an estimate, beforehand, in money, of the chances of profit from a transaction. This did occur in the case of professional travelling merchants, whether they were engaged in selling their own goods, in selling as agents for others, or in disposing of goods co-operatively marketed by an organized group. It is here, in the form of occasional profit-making enterprise, that the source of capital accounting and of the use of goods as capital is to be found.

Human beings, such as slaves and serfs, and all sorts of fixed premises and equipment which are used by owners and landlords as sources of consumption income, are in the nature of the case only income-producing property and not capital goods. The same is true to-day of securities which yield interest or dividends to the private investor, even though he may be ready to take advantage of any opportunity for speculative gain. Investment in this sense should be clearly distinguished from even a temporary use of resources as capital of an enterprise. Goods which a landlord or a personal overlord receives from his dependents in payment of the obligations due him by virtue of his status of authority, and then puts up for sale, are not capital goods for the present terminological purposes, but only commodities. In such cases capital accounting—and above all, estimates of cost—are lacking in principle, not merely in practice. On the other hand, where slaves are used in an enterprise as a means of profit, particularly where there is an organized slave market, and widespread purchase and sale of slaves, they do constitute capital goods. Where productive organization works with unfree labour which is not, however, freely alienable, but consists in hereditary dependents, even when they are oriented to profit-making, it will not be called a capitalistic enterprise, but only a profit-making enterprise with unfree labour. It is the fact that the lord is bound to the worker which is decisive. Whether it is a case of agricultural production or unfree domestic industry is indifferent.

In industry, production for sale by free workers with their own raw materials and tools ¹⁰⁰ is a case of small-scale capitalistic enterprise. The putting-out industry is capitalistic, but decentralized; whereas every case of an organized workshop under capitalistic control is centralized capitalistic organization. All types of wage employment of occasional workers, whether in the employer’s or in the worker’s home, are mere forms of relation of workers and employer. They are sometimes exploited in the interest of the budgetary economy, sometimes in the interest of the employer’s profit.

The decisive point is thus not so much the empirical fact of the use of capital accounting, as the question of whether, in principle, it is possible.

THE CONCEPT OF COMMERCE AND ITS PRINCIPAL FORMS

In addition to the various types of specialized and specified functions, which have already been discussed, every market economy, even normally those subject to substantive regulation, is characterized by another; namely, mediation in the process of disposing of a producer’s own control over goods or acquiring such control from others. This function can be carried out in any one of the following forms: (1) By the members of the administrative staff of an organized economic group, in return for payments in kind or in money which are fixed or vary with the services performed; (2) by an organized group created especially to provide for the selling and purchasing needs of its members; (3) by the members of a specialized occupational group working for their own profit and remunerated by fees or commissions without themselves acquiring control of the goods they handle; they act, that is, as agents, but in terms of a wide variety of legal forms; (4) by a specialized occupational group engaged in trade as a capitalistic profit-making enterprise. Such persons purchase goods with the expectation of being able to resell them at a profit, or sell for future delivery with the expectation of being able to cover their obligations in the meantime at a profitable figure. This may be done by buying and selling entirely freely in the market or subject to substantive regulation; (5) by a continuous regulated process of expropriation of goods with compensation on the part of an organized political group, and their exchange for compensation on a free market or under compulsion of the buyersc—ompulsory trade; (6) by the loan of money or provision of credit on the part of a specialized occupational group in order to make payments necessary in the course of business or for the acquisition of means of production through the granting of credit. Such loans may be granted to profit-making enterprises or to other organized groups, particularly to political bodies. Economically, the credit may be designed as a source of payment or for the acquisition of capital goods.

Cases (4) and (5), and only these, will be called ‘commerce.’ Case (4) is ‘free commerce,’ case (5) ‘compulsory monopolistic commerce.’

Type (1) is illustrated, for budgetary units, by the negotiatores and actores who have acted on behalf of princes, landlords, monasteries, etc., for profit-making enterprises, by various types of agents; type (2) is illustrated by various kinds of co-operative buying and selling agencies, including consumers’ co-operative societies; type (3) includes brokers, commission merchants, forwarding agents, insurance agents, and various other kinds of agents; type (4) is illustrated, for the case of free merchants, by modern commerce, for the regulated case by various types of heteronomously imposed or autonomously agreed divisions of the market for transactions with customers, or for the purchase and sale of different types of commodities, or the substantive regulation of the terms of exchange by the order of a political body, or some other type of cooperative group; type (5) is illustrated by the state monopoly of the grain trade.¹⁰¹

THE CONCEPT OF COMMERCE AND ITS PRINCIPAL FORMS—(Continued)

Free commerce, which alone will be dealt with for the present, is always a matter of profit-making enterprise, never of budgetary administration. It is hence under all normal conditions, if not always, a matter of earning money profits by contracts of purchase and sale. It may, however, be carried on by an organization subsidiary to a budgetary economy, or it may be an inseparable part of a total function through which goods are brought to a state of direct consumability by a unit.

The first type is illustrated by cases where members of a budgetary unit are designated to dispose of surpluses on their own account. If it is a matter simply of occasional sale by different members at different times, it is not even a subsidiary enterprise, but where the members in question devote themselves entirely and on their own financial responsibility to sale or purchase, it is an example of the fourth type, though somewhat modified. If, on the other hand, they act on behalf of the unit as a whole, it is a case of the first type.

The second form is illustrated by pedlers and other small traders who travel carrying their own goods with them, who thus primarily perform the function of transporting goods to the place of sale. They have hence been mentioned above in connexion with the function of transportation. Travelling commenda traders may be a transitional form between types (3) and (4). It is generally quite indefinite as to whether the transportation service is primary and the trading profit secondary, or vice versa. In any case all the persons included in these categories are ‘traders’ or ‘merchants.’

Commerce on the individual’s own account (type 4) is always carried on on the basis of appropriation of the means of production, even though his control is only made possible by borrowing. It is always the trader who bears the capital risk on his own account; and, correspondingly, it is he who, by virtue of his appropriation of the means of production, enjoys the opportunity for profit.

Specialization and specification of functions in the field of free commercial enterprise may take place in a variety of different ways. From an economic point of view, it is for the present most important to distinguish them according to the types of economic unit between which the merchant mediates: (i) Trade between budgetary units with a surplus and other units which consume the surplus; (ii) trade between profit-making enterprises, themselves producers or merchants, and budgetary units which consume the product. The latter units include, of course, all types of corporate groups, in particular, political bodies; (iii) trade between one profit-making enterprise and another.

The first two cases come close to what is usually called ‘retail trade’ and involve sale to consumers without reference to the source from which the goods were obtained. The third case corresponds to ‘wholesale trade.’

Commerce may be carried out on the market. In that case it may be a consumers’ market, normally with the goods actually present. It may on the other hand, be a market for profit-making enterprises, in which case the goods may actually be present, as at fairs and expositions, which are usually, though not necessarily, seasonal, or the goods may not be present, as in trade on exchanges. Usually, though not necessarily, such markets are permanent.

Trade may, on the other hand, be carried on for customers, providing for the needs of a relatively fixed group of purchasers. These may be budgetary units, as in the custom retail trade, or profit-making enterprises. The latter may in turn be producing units or retail enterprises or, finally, other wholesale enterprises. There may be various levels of middlemen in this sense, varying from the one nearest the producers to the one who sells to the retailer.

According to the geographical source of the goods disposed of, trade may be ‘interlocal’ or ‘local.’

The merchant may be in a position in fact to secure purchases on his own terms from the economic units which sell to him. He may, on the other hand, be in a position to dictate the terms of his sales to the economic units which buy from him, the case of sellers’ monopoly. The first type is closely related to the putting-out organization of industry and is generally found combined with it. The second is substantively regulated commerce, one variety under type (4).

It goes without saying that every profit-making enterprise involved in market relationships must market its own goods. This is true even if it is primarily a producing enterprise. This type of marketing is not, however, ‘mediation’ in the sense of the above definition so long as members of the administrative staff are not present whose functions are specialized for this purpose on their own financial responsibility. Only then can they be said to be performing a commercial function of their own. There are, of course, all manner of transitional forms.

The calculations underlying commercial activity will be called ‘speculative’ to the extent to which they are oriented to possibilities, the realization of which is regarded as fortuitous and is in this sense incalculable. In this sense the merchant assumes the burden of ‘uncertainty.’¹⁰² The transition from rational calculation to what is in this sense speculative calculation is entirely continuous, since no calculation which attempts to forecast future situations can be completely secured against unexpected ‘accidental’ factors. The distinction thus has reference only to a difference in the degree of rationality.

The forms of technical and economic specialization and specification of function in commerce do not differ substantially from those in other fields. The department store corresponds to the factory in that it permits the most extensive development of internal specialization of function.

THE CONCEPT OF COMMERCE AND ITS PRINCIPAL FORMS—(Concluded)

The term ‘banks’ will be used to designate those types of profitmaking commercial enterprise which make a specialized function of administering or creating money.

Money may be administered for private households by taking private deposit accounts and caring for the property of private individuals. It may also be administered for political bodies, as when a bank carries the account of a state, and for profit-making enterprises, by carrying business deposits and their current accounts.

Money may be created for the needs of budgetary units, as in extending private consumption credit to private individuals, or in extending credit to political bodies. It may be created for profit-making enterprises, for making payments to third persons, as in money changing, or providing checks or drafts for payments. It may also be used to anticipate future payments due from customers, especially in the form of the discount of bills of exchange. It may, finally, be used to give credit for the purchase of capital goods.

The bank may (1) advance this money from its own funds or promise to make it available on demand, as in the provision for over-drafts of a current account, and the loan may or may not be accompanied by a pledge or any other form of security provided by the borrower. (2) Also, the bank may, by some type of guarantee or otherwise, influence others to grant funds. For formal purposes, it is indifferent which of these forms is taken.

In practice, the business policy of banks is normally aimed to make a profit by relending funds which have been lent to them or placed at their disposal.

The funds which a bank lends may be obtained from stocks of bullion or of coin from the existing mints which it holds on credit, or by its own creation of certificates or of circulating bank notes. Or, finally, it may secure them from the deposits of private individuals who have placed their money at its disposal.

In every case in which a bank either borows or creates media of circulation, its business policy must, so far as it is rationally conducted, be concerned with making provision for liquidity through coverage; that is, through having available a sufficiently large reserve of liquid assets ready to be paid out, or to arrange the terms of its own loans in such a way as to be able to meet its normal obligations for payment as they arise.

As a general rule, though not always, the maintenance of a standard of liquidity for banks which create money, i.e. note-issuing banks, is assured by the imposition of regulations on the part of corporate groups, such as guilds of merchants or political bodies. These regulations are generally designed as far as possible at the same time to protect the monetary system of an area, once it has been established, against changes in the substantive value of money. This, in turn, tends to protect the formally rational economic calculations of budgetary units, especially those of political bodies, and of profit-making enterprises, from disturbance by irrational factors. Furthermore, the attempt is usually made to maintain the stablest possible rate of exchange of the money of that area with that of others with which it stands in important credit and trading relationships. Such policy, which attempts to control the factors of irrationality in the monetary field will, following G. F. Knapp, be called ‘lytric’ policy. In the strictly laissez-faire state, this is the most important function in the realm of economic policy which the state would undertake. In its rational form this type of policy is entirely restricted to the modern state.

The measures of the Chinese government regulating the status of copper coins and paper money, and the Roman coinage policy, will be discussed at the proper point; but they did not constitute a modern type of monetary policy. Only the bank money policy of the Chinese guilds, which formed the model for the Hamburg mark banks, has come up to modern standards of rationality.¹⁰³

The term ‘financing’¹⁰⁴ will be applied to all business transactions which are oriented to obtaining control of favourable opportunities for profit-making by business enterprise, regardless of whether they are carried on by banks or by other agencies, including individuals, as an occasional source of profit or as a subsidiary enterprise, or as part of the speculative operations of a ‘financier’: (a) Financing may take place through the transformation of rights to appropriated opportunities for profit into securities or other negotiable instruments, and by the acquisition of these securities, either directly or through such subsidiary enterprises as are described below under (c); (b) by the systematic tender or refusal of business credit; (c) when it is necessary or desired, by forcing co-operation between hitherto competing enterprises, (i) This may take the form of monopolistic regulation of enterprises at the same stage of production—the cartel; (ii) it may mean a monopolistic unification of previously competing enterprises under a single management in order to suppress the least profitable—‘mergers’; (iii) it may be a combination, which may or may not be monopolistic, of enterprises occupying successive stages in the process of production—a ‘vertical combination’; (iv) finally, it may mean the attempt to direct a number of enterprises from one source by control of their securities, through such devices as the ‘trust,’ or holding company, and, in many cases, the deliberate creation of new enterprises for increasing profits or for extending power.

Of course, financing operations are often carried out by banks and, as a general rule, unavoidably involve their participation. But the main control often lies in the hands of stock brokers, like Harriman, or of individual large-scale entrepreneurs in the productive field, like Carnegie. The formation of cartels is also often the work of large-scale entrepreneurs, like Kirdorf; while that of trusts is more likely to be the work of ‘financiers,’ like Graed, Rockefeller, Stinnes, and Rathenau. This will be further discussed below.

THE CONDITIONS OF MAXIMUM FORMAL RATIONALITY OF CAPITAL ACCOUNTING

The following are the principal conditions necessary for obtaining a maximum of formal rationality of capital accounting in productive enterprises: (1) the complete appropriation of all the non-human means of production by owners and the complete absence of all formal appropriation of opportunities for profit in the market; that is, market freedom; (2) complete autonomy in the selection of management by the owners, thus complete absence of formal appropriation of rights to managerial functions; (3) the complete absence of appropriation of jobs and of opportunities for earning by workers and, conversely, the absence of appropriation of workers by owners. This involves free labour, freedom of the labour market, and freedom in the selection of workers;’ (4) complete absence of substantive regulation of consumption, production, and prices, or of other forms of regulation which limit freedom of contract or specify conditions of exchange. This may be called substantive freedom of contract; (5) the maximum of calculability of the technical conditions of the productive process; that is, a mechanically rational technology; (6) complete calculability of the functioning of public administration and the legal order and a reliable formal guarantee of all contracts by the political authority. This is formally rational administration and law; (7) the most complete possible separation of the enterprise and its conditions of success and failure, from the household or private budgetary unit and its property interests. It is particularly important that the capital at the disposal of the enterprise should be clearly distinguished from the private wealth of the owners, and should not be subject to division or dispersion through inheritance. For large-scale enterprises, this condition tends to approach an optimum from a formal point of view in the fields of transport, manufacture, and mining, when they are organized in corporate form with freely transferrable shares and limited liability. In the field of agriculture, relatively long-term leases on a large scale constitute formally the most favourable situation; (8) a monetary system with the highest possible degree of formal rationality.

Only a few points are in need of comment, though even these have already been touched on:

(1) With respect to the freedom of labour and of jobs from appropriation, it is true that certain types of unfree labour, particularly fullfledged slavery, have guaranteed what is formally a more complete power of disposal over the worker than is the case with employment for wages. But there are various reasons why this is less favourable to rationality and efficiency than the employment of free labour: (a) The amount of capital which it was necessary to invest in human resources through the purchase and maintenance of slaves has been much greater than that required by the employment of free labour; (b) the capital risk attendant on slave ownership has not only been greater but specifically irrational in that slave labour has been exposed to all manner of noneconomic influences, particularly to political influence in a very high degree; (c) the slave market and correspondingly the prices of slaves have been particularly subject to fluctuation, which has made a balancing of profit and loss on a rational basis exceedingly difficult; (d) for similar reasons, particularly involving the political situation, there has been a difficult problem of recruitment of slave labour forces; (e) when slaves have been permitted to enjoy family relationships, this has made the use of slave labour more expensive in that the owner has had to bear the cost of maintaining the women and of rearing children. Very often, he has had no way in which he could make rational economic use of these elements as part of his labour force; (f) hence the most complete exploitation of slave labour has been possible only when they were separated from family relationships and subjected to a ruthless discipline. Where this has happened it has greatly accentuated the difficulties of the problem of recruitment; (g) it has in general been impossible to use slave labour in the operation of tools and apparatus, the efficiency of which required a high level of responsibility and of involvement of the operator’s self-interest; (h) perhaps most important of all has been the impossibility of selection, of employment only after trying out in the job, and dismissal in accordance with fluctuations of the business situation or when personal efficiency declined.

Hence the employment of slave labour has only been possible in general under the following conditions: (a) Where it has been possible to maintain slaves very cheaply; (b) where there has been an opportunity for regular recruitment through a well-supplied slave market; (c) in agricultural production on a large scale of the plantation type, or in very simple industrial processes. The most important examples of this type of relatively successful use of slaves are the Carthaginian and Roman plantations, those of colonial areas and of the Southern United States and the Russian ‘factories.’ The drying up of the slave market, which resulted from the pacification of the Empire, led to the decay of the plantations of Antiquity.¹⁰⁵ In North America, the same situation led to a continual search for cheap new land, since it was impossible to meet the costs of slaves and pay a land rent at the same time. In Russia, the slave ‘factories’ were barely able to meet the competition of the Custar type of household industry and were totally unable to compete with free factory labour. Even before the emancipation of the serfs, petitions for permission to dismiss workers were common, but they disappeared with the introduction of shops using free labour.

When workers are employed for wages, the following advantages to industrial profitability and efficiency are conspicuous: (a) Capital risk and the necessary capital investment are smaller; (b) the costs of reproduction and of bringing up children fall entirely on the worker His wife and children must seek employment on their own account; (c) largely for this reason, the risk of dismissal is an important incentive to the maximization of production; (d) it is possible to select according to ability and willingness to work.

(2) The following comment may be made on the separation of enterprise and household. In England there has developed a sharp separation of capitalistic tenant farming from the entailed system of land ownership This is by no means fortuitous, but is the outcome of a continuous development extending over centuries. It was made possible largely by the absence of protection of the status of the peasants, which in turn was the result of the insular position. The tendency to combine land ownership with the economic exploitation of the land has a number of consequences. It tends to make the land an economic capital good and thereby increases both the need for capital and the risks involved. It tends to obstruct the separation of household and budgetary interests trom those of the enterprise, as, for instance, when legacies have to be paid out of the resources of the enterprise. It reduces the liquidity of the entrepreneur’s capital and introduces a number of irrational factors into his capital accounting. Hence the separation of land ownership from the organization of agricultural production is, from a formal point of view, a step which promotes the rationality of capital accounting. It goes without saying, however, that the substantive valuation of the phenomenon is quite another matter and may be decided quite differently according to the values underlying the judgment.

THE PRINCIPAL MODES OF CAPITALISTIC ORIENTATION OF PROFIT MAKING

There are a number of qualitatively different modes in which it is possible for the orientation to profit to be determined in a capitalistic manner; that is, in proportion to its rationality in terms of capital accounting.

1. Profit-making activity may be oriented to the exploitation of market advantages in a continuous process of purchase and sale on the market where exchange is free; that is, formally not subject to compulsion and materially, at least relatively, free. Or it may be oriented to the maximization of profit in continuous productive enterprises which make use of capital accounting.

2. It may be oriented to opportunities for profit by trade and speculation in money, taking over debts of all sorts, and creating means of payment. A closely related type is the professional extension of credit, either for consumption or for profit-making purposes.

3. It may be oriented to opportunities for acquiring ‘booty’ from corporate political groups or persons connected with politics. This includes the financing of wars or revolutions and the financing of party leaders by loans and supplies.

4. It may be oriented to opportunities for continuous profit by virtue of domination by force or of a position of power guaranteed by the political authority. There are two main sub-types: colonial capitalism oper-ated through plantations with compulsory payments or compulsory labour and by monopolistic and compulsory trade. On the other hand there is the fiscal type, profit making by farming of taxes and of offices, whether in the home area or in colonies.

5. The orientation to opportunities for profit opened up by unusual transactions with political bodies.

6. The orientation to opportunities for profit of the following types: (a) To purely speculative transactions in standardized commodities or in the securities of an enterprise; (b) by carrying out the continuous financial operations of political bodies; (c) by the promotional financing of new enterprises in the form of sale of securities to investors; (d) by the speculative financing of capitalistic enterprises and of various other types of economic organization with the purpose of a profitable regulation of market situations or of attaining power.

Types (1) and (6) are to a large extent peculiar to the modern Westem World. The other types have been common all over the world for thousands of years where the possibilities of exchange, money economy, and money financing have been present. In the Western World they have not had such a dominant importance as modes of profit-making as they had in Antiquity, except in restricted areas and for relatively brief periods, particularly in times of war. Where large areas have been pacified for a long period, as in the Chinese and later Roman Empires, these have tended to decline, leaving only commerce, money changing and lending, as forms of capitalistic acquisition. The capitalistic financing of political activities has always depended on two conditions: a competition of states with one another for power and the corresponding competition for control of capital which was free as between them. All this has ended only with the establishment of large-scale, unified states.¹⁰⁶

It is only in the modern Western World that rational capitalistic enterprises with fixed capital, free labour, the rational specialization and combination of functions, and the allocation of productive functions on the basis of capitalistic enterprises, bound together in a market economy, are to be found. This involves the capitalistic type of organization of labour, which in formal times is purely voluntary, as the typical and dominant mode of providing for the wants of the masses of the population, with expropriation of the workers from the means of production and appropriation of the enterprises by security owners. It is also only here that we find public credit in the form of issues of government securities, the legal form of the business corporation, the issue of securities, and financing carried on as the business of rational enterprises, trade in commodities and securities or organized exchanges, money and capital markets, monopolistic associations as a type of economically rational organization of the production of goods by profit-making enterprises as opposed to the mere trade in them.

This difference calls for an explanation and the explanation cannot be given on economic grounds alone. Types (3) to (5) inclusive will be treated here together as ‘politically oriented capitalism.’ The whole of the later discussion will be devoted particularly, though not alone, to the problem of explaining the difference.¹⁰⁷ In general terms, it is possible only to make the following statement:—

1. It is clear from the very beginning that the types of political events and processes which open up the kind of opportunities for profit which are exploited by political capitalism are, seen in economic terms—that is, from the point of view either of orientation to market advantages or of the consumption needs of budgetary units—irrational.

2. It is further clear that purely speculative opportunities for profit and pure consumption credit are, from the point of view both of want satisfaction and of the production of goods, irrational because they are determined by the fortuitous distribution of ownership and of market advantages. The same may also be true of opportunities for promotion and financing, under certain circumstances; but this is by no means necessarily always the case.

Apart from the rational capitalistic enterprise, the modern economic order is unique in its mode of regulation of the monetary system and in the commercialization of bills of exchange and securities. Both these peculiarities must be discussed—first the monetary system.

THE MONETARY SYSTEM OF THE MODERN STATE AND THE DIFFERENT KINDS OF MONEY

1. (a) The modern state has universally assumed the monopoly of regulation of the monetary system by legislation; (b) it has, almost without exception, assumed the monopoly of creating money, at least of the issue of coinage.

Originally, purely fiscal considerations were decisive in the creation of this monopoly—minting fees and other profits from coinage. This was the origin of the prohibition of the use of foreign money. But the monopolization of issue of money has not been universal even up to the present. Thus, up until the recent reform of the currency foreign coins were current in Bremen.

With the increasing importance of its taxation and its own economic enterprises, the state has become both the largest receiver of payments and the largest spender in the society, either on its own account, or through the accounts maintained on its behalf. Quite apart from the monopoly of monetary regulation and issue, because of the tremendous importance of the financial transactions of the state, which are always decisive for the monetary situation, it is crucial what attitude the authorities of the state take toward money. Above all, the question arises what types of money they actually have control over and can pay out, and what kind of money is imposed on the general public as legal. There is further the question, what money they will, on the one hand, accept in payment, on the other, will partly or wholly repudiate.

Thus paper money is partly repudiated when the payment of customs must be made only in coin. Full repudiation is illustrated by the cases of the final status of the assignats of the French Revolution, the money of the Confederate States of America, and that issued by the Chinese Government during the Tai Ping Rebellion.

Money can be defined as ‘legal’ only when it constitutes ‘legal tender’ which everyone, including, in particular, the public authorities, is obligated to accept or to pay, either up to given amounts, or without limit. ‘Public money’ may be defined as that which public bodies accept or themselves use in payment. ‘Compulsory legal money’ is that which is imposed on the public. The imposition of a type of money may be carried out on the basis of a long-standing legal authority for reasons of monetary policy; thus talers and five-franc pieces were issued after the cessation of silver coinage. But this did not, as is well known, succeed.

Or money may be imposed because the state is unable to make payment in any other monetary medium. In such a case an existing legal authority to issue money may be made use of for the first time or an ad hoc legal authority to impose a new means of payment may be created. This is almost always true of cases of resort to paper money. In this last case, what usually happens is that a means of exchange, which was previously in general use, whether legally possible or not, becomes in fact unredeemable.

Legally, it is possible for a state to make any object whatever a legal means of payment and every chartal object into money in the sense of a means of payment. It can establish any desired set of relations between the values of different objects; in the case of circulating money, it can establish parities. There are, however, certain formal disturbances of the monetary system which the state is either powerless to prevent at all or can prevent only with great difficulty.

(a) In the case of administrative money, the forgery of notes, which is almost always very profitable; and (b) with all forms of metallic money, the non-monetary use of the metal as a raw material, where its products have a high value. This is particularly true when the metal in question is in an undervalued monetary relation to others. It is also exceedingly difficult to prevent the export of metal to other countries where that metal has a higher value. Finally, it is difficult to compel the offer of a legal monetary metal for coinage where it is undervalued in its coinage rate, as compared with its market price.

With paper money the rate of interchange of one unit of the metal with its nominal equivalent of paper always becomes too unfavourable for the metal when redeemability of the notes is suspended, and this is what happens when it is no longer possible to make payments in metallic money.

The exchange ratios between several kinds of commercial money may be determined (a) by fixing the relation for each particular case; (b) by establishing rates periodically; and (c) by legal establishment of permanent rates, as in bimetallism.

Only in cases (a) and (b) is it usual for there to be only one public and effective standard metal, which in the Middle Ages was silver, with the others used as trading coins with varying rates. The complete separation of the specific modes of use of different types of market money is rare in modern monetary systems, but has at times been common, as in China and in the Middle Ages.

2. From a sociological point of view the definition of money as legal tender and as a product of the lytric administration of political bodies, is not exhaustive. As G. F. Knapp says, it starts from the fact of the existence of debts, especially obligations to make payment of taxes and interest to states. For meeting the legal obligation, what is essential is that the nominal amount of money should remain the same, even though the monetary metal may have changed in the meantime. If, on the other hand, the nominal unit has changed, it is the ‘historical’ definition which is decisive. But in addition to this, the individual to-day values the nominal monetary unit not as a chartal metallic coin or note, but as a certain proportion of his money income.

It is true that the state is in a position by legislation and by the action of its administrative agencies to dictate formally the valid monetary standard within the area under its control.¹⁰⁸108

The value of money, however, is not merely a matter of dealing with existing debts, but also with exchange in the present and the contraction of new debts to be paid in the future. In this connexion, however, it is necessary to consider primarily the status of money as a means of exchange. This lends primary importance to the probability that it will be at some future time acceptable in exchange for specified or unspecified goods in a price relationship which is capable of approximate estimate.

1. Under certain circumstances the probability that urgent debts can be paid off to the state or private individuals from the proceeds may also be importantly involved. This case may, however, be left out of account here because it only arises in emergency situations.

2. In spite of the fact that it is within its limits correct and brilliantly executed, hence of permanently fundamental importance, it is at this point that the incompleteness of G. F. Knapp’s Staatliche Theorie des Geldes becomes evident.

Furthermore, the state on its part needs the money which it receives through taxation or from other sources, both as a means of exchange and, often to a very large extent, for the payment of interest on its debt. Its creditors, in turn, will then wish to employ it as a means of exchange; indeed this is the main reason why they desire money. It is almost always true that the state needs money to a large degree, sometimes even entirely, as a means of exchange to cover future purchases of goods and supplies in the market. Hence, however necessary it is to distinguish it analytically, it is not the fact that money is a means of payment which is decisive.

The value of a monetary unit in exchange for other specific goods, which rests on its valuation in relation to marketable goods, will be called its ‘substantive’ value as opposed to its formal, legal value as a means of exchange.

In principle, as an observable fact, a monetary unit has a substantive value only in relation to particular kinds of goods and only for each separate individual as his own valuation on the basis of the marginal utility of money for him, which will vary with his income. This valuation is changed for the individual with any increase in the sums of money at his disposal. Thus the marginal utility of money to the issuing authority falls, not only, but above all, when it creates administrative money and uses it for obtaining goods by exchange or forces it on the public as a means of payment. There is a secondary change in the same direction for those persons who deal with the state and who, because of the higher prices resulting from the lowered marginal utility of money to public bodies, become the possessors of larger money funds. The increased purchasing power resulting from this—that is, the lowering of the marginal utility of money for these possessors—can in turn result in an increase in prices paid to those from whom they purchase, etc. If, on the other hand, the state were to withdraw part of the notes it receives from circulation—that is, should not pay them out again, but destroy them—the result would be that in proportion to the decrease in its expenditures the marginal utility of money for its lessened funds would rise and its market demand in money terms correspondingly fall. The results would be the exact opposite of those just outlined. It is hence possible for administrative money, though by no means only this, to have an important effect on the price structure in any given monetary area.¹⁰⁹

3. It has universally been true that a cheapening and increase in the supply, or vice versa, a rise in cost and curtailment of the supply in the production of monetary metals could have a similar effect in all countries using it for monetary purposes. Monetary and non-monetary uses of metals are closely interdependent, but the only case in which the nonmonetary basis of valuation has been decisive for its value as money, has been that of copper in China. In different areas money must always enjoy an equivalent valuation of the nominal standard metal unit less costs of coining as long as it is used as a means of payment between monetary areas and is also the money of market transactions in the monetary area of the leading commercial powers, as is true to-day of gold. In the past this was true of silver and would be to-day if silver were in the same situation as gold. A metal which is not used as a means of payment between monetary areas, but constitutes market money in some of them, will naturally be valued nominally in some definite relation to the monetary units of those areas. But these in turn will, according to the costs of adding to the supply and according to the quantities in circulation, and, finally, according to the so-called ‘balance of payments,’ have a fluctuating exchange relationship. Finally, a precious metal which is universally used for limited coinage into administrative money, but not as market money, is primarily valued on the basis of its non-monetary use. The question is always whether the metal in question can be profitably produced and at what rate. When it is completely demonetized, this depends entirely on its money cost of production reckoned in international means of payment in relation to the non-monetary demand for it. If, on the other hand, it is used universally as market money and as an international means of payment, its production will depend on costs in relation primarily to the monetary demand for it. When, finally, it has a limited use as market or administrative money, its production will depend in the long run on whether and how much the demand for it, as expressed in terms of international means of payment, is able to outweigh the costs of production. If its use as market money is limited, it is unlikely in the long run that its monetary use will be decisive. For the relation of this limited area of use to other monetary areas will in the long run tend to reduce its value. And it is only when domestic prices are completely cut off from this influence that they will not be affected. This has actually happened in China and Japan and is to-day true of the areas which are still actually cut off from each other by the war. Even in the case where a metal was used only as regulative administrative money, this possibility of use as a strictly monetary unit would play a decisive role in determining its value only when coinage rates were unusually high, and even then it will end in the same way as in the case of specialized free coinage and for the same reasons.

Though it was temporarily realized in practice in China, the monopolization of the total production and use of a monetary metal is essentially a theoretical, limiting case. If several competing monetary areas are involved and wage labour is used, it does not alter the situation as much as possibly might be expected. For if all payments by government agencies were made in terms of this metal, every attempt to limit its coinage or to tax it very heavily, which might well yield large profit, would have the same result as it did in the case of the very high Chinese seignorage. First in relation to the crude metal, the money would become very highly valued; and if wage labour were used, mining operations would to a large extent become unprofitable. As the amount in circulation declined, there would result a ‘contra-inflation’; and it is possible, as actually happened in China, where this led at times to complete freedom of coinage, that this would go so far as to lead to the use of money substitutes and to a large extension of the area of natural economy. This also happened in China. If a market economy is to continue, it is hardly possible for monetary policy in the long run to act otherwise than as if free coinage were legally in force. The only difference is that minting would no longer be left to the initiative of interested parties. With complete socialism, on the other hand, the problem of money would cease to be significant and the precious metals would hardly be produced at all.

4. The fact that the precious metals have normally become the monetary standard and the material from which money is made is historically an outcome of their function as ornaments and hence, specifically, as gifts. But apart from purely technical factors, this use was also determined by the fact that they were goods which were typically dealt with by weight. Their maintenance in this function is not at first sight understandable since to-day, for all except the smallest payments, everyone normally uses notes, especially bank-notes, and expects to receive them in payment. There are, however, important motives underlying retention of metal standards.

5. In all modern states, not only is the issue of money in the form of notes legally regulated, but it is monopolized by the state. It is either carried out directly by the state itself, or by one or a few issuing agencies enjoying special privileges but subject to the control of the state—the banks of issue.

6. The term ‘public legal tender money’¹¹⁰ will be applied only So money which is actually paid out by public agencies. On the other hand, any other money which, though not paid out under compulsory acceptance, is used in transactions between private individuals by virtue of formal legal provisions, will be called ‘accessory standard money.’ Money which may legally be used in private transactions only up to a given maximum amount, will be called ‘subsidiary money.’¹¹¹

‘Definitive’ currency means public legal tender money; whereas any type of money is to be called ‘provisional’ currency so far as it is in fact effectively exchangeable for or redeemable in terms of definitive currency.

7. In the long run, public legal tender currency must naturally coincide with the effective currency. It cannot be a separate official money with only a legal validity. Effective currency, however, is necessarily one of three things: (a) free market money; (b) unregulated; or (c) regulated, administrative money. The public treasury does not make its payments simply by deciding to apply the rules of a monetary system which somehow seems to it ideal, but its acts are determined by its own financial interests and those of important economic groups.

With regard to its chartal form, an effective standard money may in the first place be metallic money. Only metallic money can be a free market money, but this is not necessarily the case for all metallic money.

It is free market money when the lytric administration will coin any quantity of the standard metal or will exchange it for chartal coins— free coinage.¹¹² According, then, to the precious metal which is chosen as the standard, there will be an effective gold, silver, or copper standard. Whether the lytric administration is in fact in a position to maintain an actual system of free coinage, does not depend simply on its own desires, but on whether there are individuals present who are interested in presenting metal for coinage.

It is thus possible for free coinage to exist ‘officially’ without existing in fact. Whatever the official position may be, it is not effectively present (a) when, given free coinage of a plurality of metals in an official ratio, one or more of these comes to be undervalued in relation to the current market price of bullion. In that case, of course, only the overvalued metal will be offered by private individuals for minting or will be used to make payments. If public agencies withdraw the overvalued coins, they will have to remain in their hands until no other means of payment are available. If the price discrepancy is sufficiently large, the undervalued coins will then be melted down or sold as a commodity by weight in exchange for the overvalued coins.

(b) Free coinage is also not effective if persons making payments, including especially public agencies under stress of necessity, continually and on a large scale make use of their formal right or usurped power to compel acceptance of another form of means of payment, whether in metal or notes. This must not only be a form of provisional money, but must either have been accessory money or, if previously provisional, have ceased to be redeemable because of the inability of the issuing agency to pay.

In case (a) free coinage always ceases for the undervalued metal, and the same thing happens in case (b) when accessory forms of money or forms which are no longer effectively provisional are forced on the public persistently on a large scale.

The outcome in case (a) is to confine free coinage to the overvalued metal which becomes the only free market money, thus resulting in a new metallic standard. In case (b) the accessory metal or notes which are no longer effectively provisional become the standard money. In the first case we get a limited money standard; in the second, a paper standard.

It is also possible for free coinage to be effective without being official in the sense of being legally established.¹¹³

In view of what has just been said, a monometallic standard, which may be gold, silver, or copper, will be said to have existed when one metal is legally freely coined. A multimetallic standard, on the other hand, exists when more than one (it may be two or three) is freely coined in a fixed ratio to each other. A parallel standard exists when more than one metal is freely coined without a fixed ratio. A standard metal and a metallic standard will only be spoken of where the metal or metals are effectively freely coined; thus, in practice, constitute actual market money.

Bimetallism existed legally in all the countries of the Latin Union until the suspension of the free coinage of silver which followed the German currency reform. Effectively, however, only the metal which was for the time being overvalued was actually as a rule a standard metal. The process of stabilization through the ratio, however, worked so effectively that the change was often scarcely noted and there seemed to be effective bimetallism. But in so far as the standard shifted, the coins of the undervalued money became accessory money.¹¹⁴ At least where there is competition between several autocephalous and autonomous issuing agencies, bimetallism is an effective monetary standard only as a transitory phenomenon and is usually only a legal, as opposed to an effective, state of affairs.

The fact that the undervalued money is not brought to the mint is naturally the result, not of administrative action, but of the changed market situation in relation to the persistence of the legal coinage ratio of the metals. It would, of course, be possible for the mint to continue to coin that metal at a loss as administrative money, but since the nonmonetary uses of the money are more profitable, it could not be kept in circulation.

RESTRICTED MONEY¹¹⁵

Any type of metallic money which is legal tender will be called ‘restricted’ money if it is not freely coined. Restricted money may circulate as accessory money; that is, having a fixed relationship to some other legal tender money in the same monetary area. This latter may be another form of restricted money, paper money, or a market money.

Or restricted money may be oriented to an international standard. This is the case when it is the sole legal tender money in its own area, and provision is made for having international means of payment available for making payments abroad, either in coin or in bullion. This is an international restricted money standard with a reserve fund of foreign exchange.

(a) Restricted money will be called ‘particular’ when it is the only legal tender money, but is not oriented to an international standard.

Restricted money may then be valued internationally ad hoc each time international means of payment or foreign exchange is bought; or, when this is possible, it may be given a fixed relation to the international standard. Talers and silver five-franc pieces were restricted money with a fixed relation to the other money of the same country; thus both were accessory. The Dutch silver gulden have been oriented to the international gold standard after having been particular for a short time after the restriction of coinage, and now the rupee is in the same position. This is also true of the Chinese dollar, which according to the coinage regulations of 24 May 1910, is particular as long as free coinage, which is not mentioned in the statute, does not exist. The orientation to the international gold standard, as recommended by the American Commission, was rejected.

Where money is restricted, free coinage would be very profitable to the private owners of the precious metals. Nevertheless, and precisely for this reason, restriction is maintained because it is feared that the introduction of free coinage of the formerly restricted metals would lead to abandonment as unprofitable of free coinage of the other metal which was fixed in too low a ratio to it. The monetary stock of this metal, which would now become obstructed,¹¹⁶ would be put to more profitable non-monetary uses. The reason why a rational lytric administration wishes to avoid this is that the other metal, which would be forced out, is an international means of payment; (b) restricted legal tender money will be called ‘obstructed’ market money when, contrary to the case just cited, free coinage exists legally, but is unprofitable to private business and hence does not take place. This lack of profitability may rest on an unfavourable relation between the market price of the metal and its monetary ratio to the market money, if a metal, or to paper money. Such money must at some time in the past have been market money; but, with multimetallism, there would have to have been changes in the relative market prices of the metals or, with it and monometallism, financial catastrophes, which have made the payment of metallic money by the government impossible and forced it to adopt paper money which had been made irredeemable. The result has been the impossibility of the operation of free coinage by an appeal to private business interests. At least so far as action is rational, this money then ceases to be used in transactions; (c) apart from restricted legal standard money, which has alone been called restricted money here, there may be restricted metallic subsidiary money; that is, money which must be accepted as legal tender only up to a given amount. Usually, though not necessarily, it is then intentionally coined at a rate which undervalues it in relation to standard coin to protect it from being melted down. Usually, then, it has the status of provisional money in that it is redeemable at certain places.¹¹⁷

All subsidiary money and many types of restricted metallic money occupy a place in monetary systems similar to that of paper money. They differ from it only in that the monetary metal has a non-monetary use which is of some importance. Restricted metallic money is very closely related to a circulatory medium when it is provisional money; that is, when there is adequate provision for redemption in market money.

PAPER MONEY

Paper money naturally is always administrative money. For the purposes of a sociological theory of money, it is always the specific chartal form of document including the specific formal meaning printed on it which constitutes ‘money.’ It is not the claim to something else which may, though it need not, be involved. Indeed, in the case of unredeemable paper money, this is altogether absent.

From a formal legal point of view, paper money may consist in an officially redeemable certificate of indebtedness, acknowledged by a private individual, as in the case of the English goldsmiths in the seventeenth century, by a privileged bank, as in the case of bank-notes, or by a political body, as in the case of government paper. If it is effectively redeemable and thus functions only as a circulating medium or provisional money, it may be fully covered—thus constituting a certificate—or it may be covered only sufficiently to meet normal demands for redemption, which makes it a circulating medium. Coverage may be in terms of specified weights of bullion or of metal coin.

It is almost always the case that paper money has first been issued as a redeemable form of provisional money. In modern times, it has been typically a medium of circulation, almost always in the form of banknotes. They have thus been denominated in terms of units of an existing metallic standard.

1. Naturally the first part of the last paragraph is not true of cases where one form of paper money has been replaced by another; for example, where government paper has been replaced by bank-notes, or vice versa. But this is not a case of primary issue of money.

2. It is of course true that means of exchange and of payment may exist which do not take a chartal form, as coins or notes or otherwise. There is no doubt of this. It is not, however, expedient to speak of these as ‘money’ but, to use the term ‘unit of account’ or some other terms, which, according to the particular case, is appropriate. It is characteristic of money that it is associated with particular quantities of chartal objects. This is a property which is very far from being superficial or of secondary importance.

If what has previously been provisional money has its redeemability suspended, it is important to distinguish whether the interested parties regard this as a temporary measure or as definitive for as long as they can predict. In the first case it would be usual, since metallic money or bullion is sought after for international payments, for the paper money to fall to a discount in relation to its nominal metal equivalent. This is not, however, by any means inevitable; and the discount is often moderate. The discount may, however, become large if the need for foreign exchange is very acute. In the second case, after a time a definite paper money standard will develop. Then it is no longer appropriate to speak of the monetary unit as discounted, but rather, as history tends to show, of devaluation.

It is not beyond the range of possibility that the market price of the standard metal of the money which was originally the basis of the note but is now obstructed, may for some reason fall radically relative to international means of payment, while the fall in the value of the paper money is less marked. This must have the result, as it actually did in Austria and Russia, that in the long run what was earlier the formal nominal unit of weight of silver could be purchased with a smaller nominal amount than before in the notes, which had now become independent of it. That is readily understandable. In the initial stages following introduction of pure paper standard, the paper money is without exception valued at a lower figure than the same nominal amount of metal, because this step always results from inability to pay. But, as in the cases of Austria and Russia, the subsequent development depends on various things; on the development of the balance of payments, which determines the foreign demand for domestic means of payment, on the amount of paper money issued, and on the degree of success with which the issuing authority is able to obtain an adequate supply of international means of payment. It is possible for these three factors to be combined in such a way that the paper money is, in its relation to the international means of payment, in this case gold, the more stable, or even rises in value; whereas the earlier standard metal, on account of increased and cheapened production of silver and of its progressive demonetization, has continually fallen in relation to gold. A true independent paper standard exists in the case where there is no longer any prospect of effective resumption of redemption in terms of metal at the former rate.

THE FORMAL AND MATERIAL VALUE OF MONEY

It is true that by law and administrative action a state can insure the formal value of a form of money as the standard in its own area of jurisdiction if it is itself in a position to make payments in this money. It is not in a position to do this if it has allowed, in the case of metallic money, what was previously an accessory or provisional type of money to become free market money, or if it permits the development of an autonomous paper money. This is because these types of money must accumulate in the hands of the government until it commands no other kind and is hence forced to use them in its own payments.¹¹⁸

But naturally this formal power implies nothing as to the substantive value of money; that is, the rate at which it will be accepted in exchange for commodities. Nor does it yield any knowledge of whether and to what extent the monetary authorities can influence its substantive value. Experience shows that it is possible for the political authority by such measures as the rationing of consumption, the control of production, and the enforcement of maximum or minimum prices, to attain a high degree of control so far as it is a question of goods or services which are present or produced within its own territory. It is equally demonstrable from experience, however, that there are exceedingly important limits to the effectiveness of this kind of control, which will be discussed elsewhere. But in any case, such measures obviously do not belong in the category of monetary administration. The rational type of modern monetary policy has, on the contrary, had quite a different aim. The tendency has been to attempt to regulate the material value of domestic currency in terms of foreign currency; thus to influence the foreign exchange rate with other currencies, usually to maintain stability or in some cases the highest possible ratio. Among the interests determining such policy are those of prestige and political power. But on the economic side, the decisive ones are financial interests, with particular reference to future foreign loans, and other very powerful business interests, notably of importers and of industries which have to use raw materials from abroad. Finally, the interests as consumers of those elements in the population which purchase imponed goods are involved. To-day there can be no doubt that ‘lytric’ policy is in fact primarily concerned with regulation of the foreign exchanges.¹¹⁹

It is probable that England accepted the gold standard reluctantly because silver, though considered the more desirable standard, was undervalued by the official ratio. But all the other states in the modern world with a modern form of organization have chosen their monetary standard with a view to the most stable possible exchange relation with sterling. This has led to a pure gold standard, to a gold standard with restricted accessory silver money, or to a restricted silver standard, or, finally, to a regulated paper standard. In both the latter cases, lytric policy has been concerned primarily with the maintenance of gold reserves for international payments. The adoption of pure paper standards has always been a result of political catastrophe where it has been the only way to meet the problem of inability to pay in what was previously the standard money. This is happening on a large scale to-day.¹²⁰

It seems to be true that for the purpose of stabilizing foreign exchange in relation to gold, the free coinage of gold in one’s own monetary system is not the only possible means. The parity of exchange between different types of freely minted gold coins may in fact be seriously disturbed, even though the possibility of obtaining means of making international payments in foreign trade by exporting or recoining gold, may be very greatly facilitated by the internal free coinage of gold; and, furthermore, so long as this free coinage exists, only natural obstacles to trade or embargoes on the export of gold can lead to temporary large disturbances. On the other hand, experience shows that under normal peacetime conditions, it is also possible for an area with a well-ordered legal system, favourable conditions of production and a lytric policy which is deliberately oriented to procuring adequate foreign exchange for international payments, to maintain a relatively stable exchange situation. It is true, however, that other things being equal, this involves markedly higher costs to financial operations and to persons in need of gold. Exactly the same would be true, of course, if silver were the principal means of payment in international transactions and were recognized as such in the principal trading nations of the world.

METHODS AND AIMS OF MONETARY POLICY

Among the more elementary of the typical methods of lytric policy in relation to foreign exchange are the following:—¹²¹

(a) In countries with free coinage of gold: (1) The backing of the circulating medium, so far as it is not covered by gold, with commercial paper; that is, claims to payments for goods which have been sold and which are guaranteed by safe persons, in other words, proved entrepreneurs. The transactions of the note issuing banks on their own account are as far as possible limited to dealing with such bills, to making loans on the security of stocks of goods, to the receipt of deposits, the clearing of check payments, and, finally, acting as financial agent for the state; (2) the ‘discount policy’ of the banks of issue. This consists in raising the rate of interest charged on bills discounted when there is a probability that payments abroad will create a demand for gold sufficient to threaten the internal stock of gold, especially that in the hands of the issuing bank. The purpose is to encourage foreigners to take advantage of the higher rate of interest and to discourage internal borrowing.

(b) In areas with a restricted metal standard other than gold or with a paper standard the following are the principal measures: (1) Discount policy similar to that described under (a)(2) in order to check undue expansion of credit; (2) a gold-premium policy. This is a measure which is also common in gold-standard areas with an accessory restricted silver currency; (3) a deliberate policy of gold purchase and sale and deliberate control of foreign exchanges by purchase and sale of foreign bills.

This policy is in the first instance oriented purely to lytric considerations, but under certain circumstances it may come to involve substantive regulation of economic activity. The note-issuing banks occupy a position of great power in the system of commercial banks, since the latter are in many cases dependent on the credit extended by the bank of issue. The latter may influence the other banks to regulate the money market, that is, the conditions on which short-term credit is given, in a uniform way and thereby aim at a deliberate regulation of business credit, thereby influencing the direction of the production of goods. This is, within the framework of a capitalistic economic order, the closest approach to a planned economy. It is formally merely a matter of monetary administration, but actually involves substantive regulation of economic activity within the area controlled by the political authority in question.

These measures were all typical before the war. They were used in the interest of a monetary policy which was primarily oriented to the stabilization of a currency. But in case changes were desired, in countries with restricted or paper money, the authorities usually attempted to bring about a gradual rise in the foreign exchange value of their currency. It was, thus, in the last analysis, oriented to the freely coined monetary systems of the most important trading nations. But strong interests have made themselves felt which desired just the reverse policy. They have favoured a lytric policy of the following type: (1) Measures which would lead to a fall in the foreign exchange position of their own money in order to improve the position of exporting interests; (2) by increasing the issue of money through free coinage of silver in addition to gold (which would have meant instead of it), and even in some cases deliberate issue of paper money, to decrease the value of money in relation to domestic goods and thereby, what is the same thing, to raise the money prices of domestic goods. The object has been to improve prospects for profit in the production of such goods since the increase in their prices as reckoned in terms of domestic currency would probably be the first consequence of the increase of the amount of money in circulation and of the attendant fall in its foreign exchange position. This process is termed ‘inflation.’

The following points may be noted: (1) though its quantitative importance is still controversial, it is very probable that with any type of free coinage a very great cheapening in the production of the precious metal or other source of increase in its supply, as through very cheap forced seizures, will lead to a noticeable tendency toward a rise in the prices at least of many products in areas where that metal is the monetary standard, and in differing degrees of all products. (2) It is at the same time an undoubted fact that, in areas with an independent paper standard, situations of severe financial pressure, especially war, lead the monetary authorities to orient their policy overwhelmingly to the financial necessities of the moment. It is equally clear that countries with free coinage or with restricted metallic money have, in similar circumstances, not only suspended redemption of their paper currency, but have gone further to establish definitely a pure paper standard. But in the latter case, the metal money, since its premium in relation to notes is ignored, has become accessory and could only be used for non-monetary purposes. It has thus disappeared from circulation. Finally, it is established that in cases of that kind of shift to a pure paper standard, occurring along with unlimited issues of paper money, inflation has in fact ensued with all its consequences on a grand scale.

When all these processes are compared, it will be seen that so long as freely coined market money exists, the possibility of inflation will be narrowly limited. This will be true in the first place for mechanical reasons. Though it is somewhat elastic, the quantity of the precious metal in question available for monetary use is strictly limited. Secondly, there are economic reasons in that under free coinage the production of money normally takes place only on the initiative of private interests so that the demand for coinage is oriented to the needs of the economic system for means of payment. Inflation, then, is only possible if metal money which was previously restricted is thrown open to free coinage, as is the case to-day with silver in gold-standard countries. When, however, the restricted metal can be produced very cheaply and in large quantities, the effect may be very great.

Inflation through increase in the quantity of redeemable currency notes is conceivable over a very long period only as the result of gradual increase in the circulation through credit expansion. The limits are elastic but in the last resort this process is strictly limited by the necessity for maintaining the solvency of the note-issuing bank. There is acute danger of inflation only if there is danger that the bank will become insolvent. Normally this is likely to occur only where there is a paper standard resulting from war needs.¹²²

Where an independent paper standard exists, there may not be any greater danger of inflation itself since in time of war almost all countries soon go over to a paper standard. But in general there is a noticeably greater probability of the results of inflation being felt. Various financial difficulties are likely to arise; and once inflationary tendencies are started, the resulting higher prices lead to demands for increases in salaries and wages and to higher costs in other respects. Even though it would be possible to avoid inflation by making large sacrifices—and there is no absolute necessity to resort to it—there is a strong tendency for financial administrations to continue the inflationary process. As the differences between the conduct during the war of the Allied Powers, of Germany, and of Austria and Russia show, the difference is only one of degree, but nevertheless significant.

Lytric policy may thus, especially when there is an accessory restricted monetary metal or paper money, be an inflationary policy. In a country which, like the United States, has had relatively so little interest in the foreign exchange value of her money, this has been true for a time under quite normal conditions without being based on any motives derived from the field of public finance. In a number of countries which fell into inflationary measures during the War, the pressure of necessity has been such as to lead to its continuance after the War.

This is not the place to discuss the theory of inflation. Inflation always means, in the first place, a particular way of increasing the purchasing power available to certain interests. It must, however, be pointed out that, though it seems to be much easier to develop a planned rational course of monetary policy with administrative money, especially paper money, it is from the point of view of stabilization of the exchanges particularly easy for this to come under the influence of irrational interests.

The formal economic rationality of lytric policy and thus of the monetary system could, in conformity with the meaning of the term ‘rationality’ consistently held to here, only mean the exclusion of such interests. These interests are either, like the financial interest of the state, not oriented to the market at all, or not to the maintenance of stable exchange relations with other currencies as an optimum basis for rational calculation. What they wish is rather, on the contrary, to augment certain types of purchasing power for certain groups of interests by means of inflation and to maintain it even without financial pressure. Whether this phenomenon is to be regarded as desirable or regrettable, is naturally not a question capable of empirical solution. But there is no doubt of its real existence.

It is furthermore true that a point of view which is oriented to substantive social ideals can find a very important opening for criticism of free market money in this fact. It is true, namely, that the production of money and currency is, in a pure market economy, made an object of the play of interests from the point of view of profitability and is not considered in terms of the right sort of volume or type of money. It can be rightly argued that it is only administrative money which can be rationally controlled, but not market money. Thus the use of administrative money, especially paper money, which can be cheaply produced in any desired form and quantity is, from a substantively rational point of view, the correct way to handle the monetary question. This argument is conclusive in formal logical terms. Its value, however, is naturally limited in view of the fact that in the future as in the past it will be the interests of individuals rather than ideas which determine economic policy.¹²³123 Thus, the possibility of conflict between formal rationality in the present sense and the substantive rationality which would theoretically be open to any lytric authority which was entirely free of any obligation to maintain free coinage of metal, has been demonstrated. That was the sole purpose of this discussion.

It is evident that this whole treatment of money consists only in a kind of discussion with Knapp’s excellent book, Die Staatliche Theorie des Geldes, a discussion which is, however, confined to points relevant to the present problems and carried out on a highly schematic basis, entirely neglecting the finer points. Quite at variance with its author’s intentions, though perhaps not entirely without fault on his part, the work immediately became a battleground for value judgments. It was naturally greeted with especial warmth by the Austrian lytric administration, with its partiality to paper money. Events have by no means disproved Knapp’s theory in any point, though they have shown, what was known beforehand, that it is incomplete in its treatment of the substantive value of money. It will now be necessary to justify this statement in more detail.

CRITICAL NOTE ON THE ‘STATE THEORY OF MONEY’

Knapp succeeds in demonstrating that in every case the recent monetary policy both of states themselves and of agencies under the direction of the state have, in their efforts to adopt a gold standard or some other standard approximating this as closely as possible, been primarily concerned with the exchange value of their currency in relation to others, particularly the English. The object has been to maintain par of exchange with the English gold standard since this has been the money of the world’s largest trading area and has been most universally used as a means of payment in international trade. To accomplish this, Germany first demonetized silver; then France, Switzerland, and the other countries of the Latin Union, Holland, and finally India ceased to treat silver as market money and made it into restricted money. Apart from this, indirectly, they undertook measures providing for foreign payments in gold. Austria and Russia did the same by using unredeemable, independent paper money and also took measures to maintain its parity with gold and to be in a position to make at least foreign payments in gold at any time. They were thus concerned entirely with maintaining the greatest possible stability of their foreign exchanges. It is this on which Knapp bases the opinion that this is the only respect in which a metallic standard and free coinage are important. He concludes that this end of foreign exchange stability would be just as well served by the use of indirect measures to insure adequate gold reserves, if carried out by authorities using paper money or by the direct measures of the type undertaken by Austria and Russia. This is not, other things being equal, strictly and literally true for areas of free coinage. For, so long as two areas, which maintain the same kind of free coinage, refrain from embargoes on the exportation of monetary metal, whether they are both gold-standard or silver-standard countries, the fact of the existence of free coinage on both sides undoubtedly facilitates the maintenance of exchange parity considerably. Under normal conditions this is to a large extent the fact. But even so far as it is true, it does not prove that in the choice of a monetary standard—above all to-day in the choice between a metallic standard, whether gold or silver, and a paper standard—this would be the only set of considerations which would be important.¹²⁴

This would imply that a paper standard and a metallic standard would in other respects behave in the same way. But even from a formal point of view the difference is significant. Paper money is necessarily a form of administrative money, which may be true of metallic money, but is not necessarily so. It is impossible for paper money to be freely coined. The difference between depreciated paper money, such as the assignats, and the type of depreciation of silver which might at some future time result from its universal demonetization, making it exclusively an industrial raw material, is not negligible.¹²⁵

Paper has been and is to-day by no means a free good, just as the precious metals are not. But the difference, both in the objective possibility of increased production and in the costs of production in relation to probable demand, is enormous, since the production of metals is to a relative degree so definitely dependent on the existence of mineral deposits. This difference justifies the proposition that a lytric administration was, before the war, in a position to produce paper money, if it so desired, in the unlimited quantities. This is a significant difference even from copper, as used in China, certainly from silver, and very decidedly from gold. The costs would be, relatively speaking, negligible. Furthermore, the nominal value of the notes can be determined arbitrarily and need bear no particular relation to the amount of paper used. In the case of metallic money, this last has been true only of its use as subsidiary money; thus not in any comparable degree or sense. It is not true of standard metal. In the latter case, the available quantity has been somewhat elastic but has been subject to an immensely more rigid limit than is the case of the produceability of paper. This fact has imposed limits on the arbitrariness of monetary policy. It is of course true that, so far as the lytric administration has been oriented exclusively to the maintenance of the greatest possible stability of foreign exchange rates, it would be subject to no technically rigid limits in its production of paper money. This is the objection Knapp would make; and in saying this he would be right but only from a formal point of view.

What has been the actual history of independent paper money? Knapp would cite the cases of Austria and Russia to show that it was the same for them. The only difference was that the mechanical limits imposed by the scarcity of metal were absent. The question is whether this difference is unimportant, a question which Knapp ignores. He would no doubt say that there is no cure known to prevent the ‘death’ of a monetary standard. If the present¹²⁶ very abnormal limits to the production of paper be ignored, there unquestionably have been and still are certain factors tending to unlimited issue of paper money. In the first place, there are the interests of those in political authority who Knapp also assumes will bear ultimate responsibility for monetary policy, and there are also certain private interests. These are not of necessity primarily concerned with the maintenance of stable foreign exchange. It is even true, at least for certain periods, that their interests may lie in the opposite direction. These interests can, either from within the political and monetary administration or by exercising a strong pressure on it, have an important influence on policy which would lead to inflation. Knapp, who strictly avoids the term, could only describe this as a case of issue of paper money that was not oriented to the international rate of exchange. He would have to admit that it could occur.

There are, in the first place, financial temptations to resort to inflation. An average depreciation of the German mark by inflation to 1⁄20th of its former value in relation to the most important internal commodities and property would—once profits and wages had become adapted to this level of prices—mean, it may here be assumed, that all internal commodities and labour would nominally be valued 20 times as highly as before. This would further mean, for those in this fortunate situation, a reduction of the war debt to 1⁄20th of its original level. The state, which would receive a proportionate increase in its income from taxation as nominal money incomes rose, would at least enjoy important relief from this source. This is indeed an attractive prospect. It is clear that someone would have to bear the costs, but it is not clear that it is either the state or one of these two categories of private individuals, entrepreneurs and wage earners. The prospect is even more attractive of being able to pay old foreign debts in a monetary unit which can be manufactured at will and at negligible cost. Apart from the possibility of political intervention, there is of course the objection that the use of this policy toward foreign loans would endanger future credit. But the state is often more concerned with the present than with the more or less remote future. Furthermore, there are entrepreneurs who would be only too glad to see the prices of their products increased twenty-fold through inflation if, as is altogether possible, their workers, because of lack of bargaining power or through lack of understanding of the situation or for any other reason, were allowed to increase their nominal wages only by five- or possibly ten-fold.

It is usual for acute inflation from financial motives of this kind to be sharply disapproved by experts in economic policy. It is a fact that it is not compatible with Knapp’s form of foreign exchange policy. On the other hand, a deliberate but very gradual increase of the quantity of money in circulation, of the type which is sometimes undertaken by central banks by facilitating the extension of credit, is often looked upon favourably as a means of stimulating speculative attitudes. By holding out prospect of greater profits, it is held to stimulate the spirit of enterprise and with that an increase in capitalistic production by encouraging the investment of free money in profit-making enterprise, rather than its investment in fixed interest-bearing securities.

The question arises, however, of the way in which this more conservative policy is related to the stability of foreign exchange. Its direct effect—that is, the consequences of the stimulation of the spirit of enterprise—may be to create a more favourable balance of payment, or at least to check the fall in the foreign exchange position of the domestic currency. How often this works out and how strong the influence is, is, of course, another question. Also, no attempt will here be made to discuss whether the effects of a moderate increase in the circulation of money derived from financial sources would be similar. The costs of this enrichment of the supply of standard money, which are relatively harmless to the foreign exchange position, will be gradually paid by the same groups which would be subject to ‘confiscation’ in a case of acute financial inflation. This includes all those whose nominal income remains the same or who have securities with a constant nominal value, above all, the receivers of fixed investment income, and those who earn salaries which are fixed in that they can be raised only through a severe struggle. It is thus not possible to interpret Knapp as meaning that it is only the stability of foreign exchange which is significant for the management of paper money; indeed, he does not claim this. Nor is it legitimate, however, to believe as he does that there is a very high probability that this will in fact be alone decisive. It cannot, however, be denied that it would be the only consideration which would weigh with a completely rational lytric policy; that is, one which sought as far as possible to prevent disturbances of the price structure resulting from monetary sources. But it cannot be admitted, and Knapp does not claim this either, that the practical significance of the kind of monetary policy formulated is limited to the question of the stability of foreign exchange rates.

Inflation has here been spoken of as a source of price revolutions or at least changes in the price structure, and it has been pointed out that it may be influenced by the desire to bring about price changes. Naturally, an inflation so extensive as to create a price revolution, will inevitably upset the stability of foreign exchange; though this is by no means necessarily true of gradual increases in the circulating medium. Knapp would admit that. He obviously assumes, and rightly, that there is no place in his theory for a currency policy concerned with commodity prices, whether it be revolutionary, evolutionary, or conservative. Why does he do this? Presumably for the following formal reasons:—

The exchange relationship between the standards of two or more countries is expressed daily in a small number of formally specific and uniform foreign exchange rates, which can be used as a guide to a rational lytric policy. It is further possible for a monetary authority, especially one concerned with the volume of currency, to make certain estimates on the basis of facts which are made available through a periodical demand for them. These, which are only estimates, concern the probable variation in the quantity of means of payment for purposes of making payments alone, which a given population involved in market relationships with one another will, so long as conditions remain approximately the same, have need of for a certain future time. On the other hand, it is not in the same sense possible to estimate, quantitatively, the effect of an inflationary or deflationary process of a given magnitude on prices. To do this, it would, in the case of inflation, to which attention will be confined, be necessary to know the following additional facts: (1) The existing distribution of income; (2) connected with this, the present expectations of the direction of economic action for the different individuals engaged in economic activity; (3) the channels the inflationary process would follow, that is, who would be the primary and subsequent recipients of newly-issued money. This would involve knowing the order in which nominal incomes are raised by the inflation and the extent to which this would take place; (4) the way in which the newly-created demand for goods would be exercised, for consumption, for building up property investments, or for new capital. This would be important quantitatively, but even more so qualitatively; (5) the directions and the extent to which it would be possible that the production of goods would be further stimulated as a result of the changes in the price structure, the resultant changes in the distribution of income, and, finally, in turn, in purchasing power.

All these are data which would depend entirely on the decisions made by individuals when faced with the new economic situation. And these decisions would in turn react on the expectations as to prices of other individuals. These latter expectations would only be verified or the reverse as a result of the prices as actually determined by the future play of interests. In such a situation there can clearly be no question of forecasting in the form of such prediction as that the issue of an additional billion of currency units would result in a pig-iron price of ‘X’ or a grain price of ‘Y.’ The prospect is made even more difficult by the fact that it is possible temporarily to establish effective price regulation of domestic commodities, even though these can only be maximum and not minimum prices and their effectiveness is definitely limited. But even if this impossible task of calculating specific prices were accomplished, it would be of relatively little use. This would only determine the amount of money required as a means of payment, but in addition to this, and on a much larger scale, money would be required in the form of credit as a means of obtaining capital goods. Here, possible consequences of a proposed inflationary measure are involved which are inaccessible to any kind of accurate forecasting. It is thus understandable that, all things considered, Knapp should have entirely neglected the possibility of inflationary price policies being used in the modern market economy as a deliberate rational policy comparable to the maintenance of foreign exchange stability.

But historically the existence of such policies is a fact. To be sure, in a crude form and under much more primitive conditions of money economy, inflation and deflation have been repeatedly attempted in terms of the Chinese copper currency, though they have led to serious failures. In America, inflation has been proposed. Knapp, however, since his book operates on the basis only of what he calls demonstrable assumptions, contents himself with giving the advice that the state ought to be careful in the issue of independent paper money. Since he is entirely concerned with the maintenance of stable foreign exchange, this advice appears to be relatively unequivocal; he is merely pointing out that inflationary devaluation and depreciation in foreign exchange are usually very closely associated. But they are not identical, and it is far from true that every inflation is primarily caused by the foreign exchange situation. Knapp does not explicitly admit, but neither does he deny, that an inflationary price policy has been urged among others by the American silver producers during the free silver campaign and by the farmers who demanded ‘greenbacks.’ It is probably comforting to him that it has never been successful over a long period.

But the situation is by no means so simple as this. Whether or not they have been intended simply to raise the price level, inflations have in fact often taken place; and even in the Far East, to say nothing of Europe, such catastrophes as met the assignats are by no means unknown. This is a fact which a substantive theory of money must deal with. Knapp surely would not maintain that there is no difference whatever between the depreciation of silver and the depreciation of the assignats. Even formally this is not the case. What has been depreciated is not silver coin, but, on the contrary, the raw silver for industrial purposes. Coined silver, on the contrary, being restricted, has often had the opposite fate. On the other hand, it is ridiculous to speak of the paper which is available for industrial purposes being ‘depreciated.’ The term is applicable only to the chartal assignats. It is true, as Knapp would rightly point out, that they would fall to zero or to their values to collectors or as museum pieces only when they had finally been repudiated by the state. Thus even this results from a public action by the state. This may be granted, but their material value may have fallen to a minute proportion of what it formerly was, before their formal repudiation, in spite of the fact that they were still nominally valid for making payments of public obligations.

But quite apart from such catastrophes, history provides a considerable number of examples of inflation, and, on the other hand, in China, of deflationary movements as a result of non-monetary use of monetary metals. It is necessary to note in this connexion that under some circumstances, though by no means always, certain kinds of money which were not accessory before, have become so. They have tended to accumulate in the hands of the state and render obstructional changes in the standard necessary. Furthermore, it is imperative for a substantive theory of money, at least to formulate the problems of the ways in which prices and income, and hence the whole economic system, are influenced in such cases. How far it will be able to achieve a theoretical solution of such problems is, for the reasons which have been given, perhaps questionable. Similarly, a problem is suggested by the fact that, as a result of relative decline in the prices of either silver or gold in terms of the other, France, which has been formally a country of bimetallism, in fact has operated at times on a gold standard alone, and at others on a silver standard while the other metal became accessory. In such a case it is not sufficient merely to call attention to the fact that the resulting price changes originate from a monetary source. The same is true in other cases where monetary standards have been changed.

In addition to such considerations, it is necessary to inquire what are the sources of an increase in the supply of a precious metal, whether it has come from the booty of conquest (as in the case of Cortez and Pizarro), through the channels of trade (as in China early in the Christian era and since the sixteenth century), or from an increase of production. So far as the latter is the source, has production merely increased, or has it also become cheaper, and why? What is the part which may have been played by changes in the non-monetary uses of the metal? It may be that for a particular economic area, as, for instance, the Mediterranean area in Antiquity, a definitive export has taken place to an entirely distinct area like China or India, as happened in the early centuries of the Christian era. Or the reasons may lie wholly or partly in a change in the monetary demand arising from changes in customs touching the use of money, such as use in small transactions. It is necessary to consider how these and various other possibilities tend to affect the situation.

Finally, it is necessary to discuss the regulation of the demand for money in a market economy, and to inquire into the meaning of this concept. One thing is clear, that it is the actual demand for means of payment on the part of the parties to market relationships which determines the creation of free market money under free coinage. Furthermore, it is the effective demand for means of payment and, above all, for credit, on the part of market participants, in combination with care for the solvency of the banks of issue and the norms which have been established with this in view, which determines the currency policies of modern banks of issue. All this is in conformity with the general character of the modern economic order.

It is only this which, under the formal legal conditions of our economic system, can correctly be called ‘demand for money.’ This concept is thus quite indifferent with respect to substantive criteria, as is the related one of effective demand for goods. In a market economy there is an inherent limit to the creation of money only in the case of metallic money. But it is precisely the existence of this limit, as has already been pointed out, which constitutes the significance of the precious metals for monetary systems. The restriction of standard money to a material which is not capable of unlimited production at will, particularly to one of the precious metals, in combination with the coverage of currency by this standard, sets a limit to any sort of production of money. Even though it does not exclude a certain elasticity and does not make an evolutionary type of credit inflation altogether impossible, it still has a significant degree of rigidity. Where money is made out of a material which is, for practical purposes, capable of unlimited production, like paper, there is no such mechanical limit. In this case, there is no doubt that it is really a matter of the free decision of the political authorities freed from such mechanical barriers. That, however, means, as has been indicated, determination by their conception of the financial interests of the authority or even, under certain circumstances, the purely personal interests of the members of the administrative staff, as was true of the use of the printing presses by the Red armies. The significance of metallic standards to-day lies precisely in the elimination of these interests from influence on the monetary situation, or more precisely, since it is alwayspossible for the state to abandon them in favour of a pure paper standard, a check on such interests. In spite of the mechanical character of its operation, a metallic standard nevertheless makes possible a higher degree of formal rationality in a market economy because it permits action to be oriented wholly to market advantages. It is of course true that the monetary policy of lytric authorities under a pure paper standard, is not necessarily oriented either to the purely personal interests of the authority or the administrative staff, or the financial interests of the state. This is demonstrated by the cases of Austria and Russia. It is also not necessary that the cheapness of the monetary standard should be a ruling consideration. But there is, none the less, continually present a danger that these considerations will become dominant, which is not present in a comparable sense under free coinage. From the point of view of the formal order of a market economy, the existence of this danger is an ‘irrational’ factor present in any other form of monetary system than a freely coined metallic standard. This is true in spite of the fact that it may be readily admitted that, on account of its mechanical character, such a monetary system possesses only a relative degree of formal rationality. So much Knapp could and should admit.

However incredibly primitive the older forms of the quantity theory of money were, there is no denying that any inflation with the issue of paper money determined by financial needs is in danger of causing depreciation. Nobody, not even Knapp, would deny this. But his reasons for dismissing it as unimportant are not convincing. The claim that each individual is equally a debtor and a creditor, so that the value of money is indifferent to him, which Knapp in all seriousness puts forward as proof of the absolute indifference of depreciation, is, as we now see, a phantom. What becomes of this assumption, not only in the case of the receiver of fixed interest, but of people living on fixed salaries or income? Their income remains nominally constant or, at best, the financial situation will perhaps permit its doubling, and even that is dependent on the decisions of administrative authority, while his expenditures may very well have nominally increased twenty-fold. What happens to long-term creditors? The effect of this kind of radical alterations in the purchasing power of money is to-day to produce a chronic tendency toward social revolution in spite of the fact that many entrepreneurs are in a position to make unusual profits from the foreign exchange situation and that a few of the workers are powerful enough to secure increases in their nominal wages. It is, of course, open to anyone to welcome this revolutionary tendency and the accompanying tremendous unsettlement of the market economy. Such an opinion cannot be scientifically refuted. Rightly or wrongly, it is possible to hope that this tendency will lead to the transformation of a market economy into socialism. Or some may think that it proves that only a regulated economy with small-scale production is substantively rational, regardless of the sacrifices its establishment would entail. It is impossible for science to decide such questions, but at the same time it is its duty to state the facts about these effects as clearly and objectively as possible. Knapp’s assumption that people are both debtors and creditors in the same degree, which in the generalized form he gives the proposition is quite untenable, serves only to obscure the situation. There are particular errors in his work, but the above seems to be the most important element of incompleteness in his theory. It is this which has led certain scholars to attempt to attack him on grounds of principle. This seems to be altogether unnecessary.

THE NON-MONETARY SIGNIFICANCE OF POLITICAL BODIES FOR THE ECONOMIC ORDER

Apart from their relation to the monetary system, the fact that independent political units exist is important for the economic system primarily in the following respects:—:

(1) It is a fact that, other things being nearly equal, they tend to prefer their own subjects as sources of supply for the utilities they need. The significance of this fact is the greater the more the economy of these political bodies has a monopolistic character or that of a system of budgetary economic units.

(2) There is a possibility, through substantive measures, of deliberately encouraging, checking, or regulating trade over its boundaries.

(3) There is a possibility of various types of formal and substantive regulation of economic activity by political bodies, differing in stringency and in type.

(4) There are important consequences of the very great differences in the structure of authority and of political power and in the closely related structure of administration and of social classes, especially of those which enjoy the highest prestige. From these facts are generally derived the principal attitudes toward earning and profit-making.

(5) There may or may not be competition among the directing authorities of these political bodies to increase their own power and to provide the members under their authority with means of consumption and acquisition and with the corresponding opportunities for earnings and profits.

(6) There are differences in ways in which these bodies provide for their own needs. On this see the following paragraphs.

THE FINANCING OF POLITICAL BODIES

The most direct connexion between the economic system and primarily non-economic corporate groups lies in the way in which they secure the means of carrying on their corporate activity as such; that is, the activity of the administrative staff itself and that which is directed by it.¹²⁷ This mode of provision may be called ‘financing’ in the broadest sense, which includes the provision of goods in kind.

Financing—that is, the provision of corporate activity with economically produced means—may, considering only the simplest types, be organized in the following ways:—

(I) Intermittently, which may in turn be based on purely voluntary contributions or services. Such contributions may take one of three forms:

(a) That of large gifts or endowments.¹²⁸ This is typical in relation to charitable, scientific, and other ends which are primarily neither economic nor political.

(b) By begging. This is typical of certain kinds of ascetic communities.

In India, however, profane castes of beggars are also found; and elsewhere, particularly in China, organized groups of beggars. Begging may be extensively monopolized and systematized with a distribution of areas. Also, because response is regarded as a duty or as meritorious, begging may lose its intermittent character and even tend to be treated as a regular source of income.

(c) By gifts, which are formally free, to persons or organizations which are recognized as politically or socially superior. This includes gifts to chiefs, princes, patrons, landlords, or body lords. Because of the fact that they have become conventional, these may in fact be closely approximated to compulsory payments. But usually, they are not worked out on a basis of rational expediency, but are generally made on certain traditional occasions, such as particular anniversaries or on the occasion of events of family or political significance.

Intermittent financing may, on the other hand, be based on compulsory contributions.

The type case is furnished by such organizations as the Camorra in southern Italy and the Mafia in Sicily, and similar organized groups elsewhere. In India there have existed ritually separate castes of ‘thieves’ and ‘robbers,’ in China, sects and secret societies with a similar method of economic provision. The payments are only, prima facie, intermittent because they are formally extra-legal. In practice they often assume the character of a periodic rate and it is common for certain services to be offered in exchange—notably, a guarantee of security. About twenty years ago, a Neapolitan manufacturer replied to the author’s questions concerning the unfavourable effect of the Camorra on business, ‘Signor, the Camorra takes ten lire a month from me, but guarantees me security. The state might take ten times ten, but would guarantee me nothing.’ The secret societies which are typical of Africa, perhaps as survivals of the former ‘men’s house,’ function in the same way, and thus guarantee security. Political groups may, like the Ligurian ‘pirate state,’ rest primarily on the profits of booty. But this has never been the exclusive source of support over a long period.

(2) Financing may, on the other hand, be organized on a permanent basis.

A.—This may take place without any independent economic production on the part of the corporate group. Then, it may consist in contributions of goods, which may be based on a money economy. If so, funds are collected by money contributions and provision is made by the money purchase of the necessary utilities. In this case, all compensation of members of the administrative staff takes the form of money salaries. It may, on the other hand, be organized on the basis of a natural economy. Then, members are assessed with specific contributions in kind. Within this category, there are the following sub-types: the administrative staff may be provided for by benefices in kind and the needs of the group met in the same way. On the other hand, the contributions which were collected in kind may be sold wholly or in part for money and provision made in monetary terms.

Whether in money or in kind, the principal elementary types of contribution are the following:—

(a) Taxes; that is, contributions of a proportion of all possessions or, in money terms, property; or of all receipts, or, in money terms, incomes; or finally, from the means of production in the hands of certain kinds of profit-making enterprises, the so-called ‘profit tax.’

(b) Fees; that is, payments for using or taking advantage of facilities provided by the corporate group, of its property or of its services.

(c) ‘Duties’ on such things as various kinds of use or consumption of commodities, specific kinds of transactions, above all, the transportation of goods (tariffs) and the turn-over of goods (excise duties and sales tax).

Contributions may be collected by the corporate group itself or leased out (’farmed’) or lent out or pledged. The leasing of collection for a fixed sum of money (’tax farming’) may have a rational effect on the fiscal system since it may be the only possible way to budget accounts. Lending and pledging are usually irrational from the fiscal point of view, normally resulting from financial necessity or usurpation on the part of the administrative staff, a result of the absence of a dependable administrative organization.

A permanent appropriation from the receipts from contributions by creditors of the state, by private guarantors of the army or of tax payments, by unpaid mercenary chieftains and soldiers, and, finally, by holders of rights to official positions, will be called the granting of benefices.¹²⁹ This may in turn take the form of individual appropriation or collective appropriation with freedom of replacement from the group which has collectively carried out the appropriation.

Financing without any economic production on the part of the corporate group itself may also take place by imposing obligations to personal services; that is, direct personal services with specification of the work to be done.

B.—Permanent financing may further, contrary to the above cases, be based on the existence of a productive organization under the direct control of the corporate group. Such an organization may be a budgetary unit, as an oikos a feudal domain, or it may be a profit-making enterprise, which, in turn, may compete freely with other profit-making enterprises or be a monopoly.

Once more, exploitation may be directly under the administration of the corporate group or it may be farmed out, leased, or pledged.

C—Finally, it is possible for financing to be organized ‘liturgically’ by means of burdens which are associated with privileges. These may involve positive privileges, as when a group is freed from the burden of making particular contributions, or negative privileges, as when greater burdens are placed on other particular groups. The latter are usually either social classes¹³⁰ as such or property or income groups. Finally, the liturgic type may be organized correlatively by associating specific monopolies with liability to the burden of performing certain services or supplying certain goods. This may be organized by social classes, by compulsorily forming the members of the corporate group into hereditarily closed liturgical classes on the basis of property and occupation, each enjoying class privileges. Or it may be carried out capitalistically, by creating closed guilds or cartels, with monopolistic rights and a corresponding obligation to make money contributions.

This very rough classification applies to all kinds of corporate groups. Examples, however, will be given only in terms of political bodies.

The system of provision through money contributions without economic production is typical of the modern state. It is, however, quite out of the question to attempt even a schematic analysis of modern systems of taxation at the present point. The place where it belongs in a sociological analysis will be at a later point¹³¹ in relation to the kind of structure of authority which has typically influenced the development of its type of contribution, such as fees, excises, and taxes.

Contributions in kind, even in cases of fees, customs, excises, and sales taxes, were common throughout the Middle Ages. Their commutation into money payments is a relatively modern phenomenon.

Deliveries of goods in kind are typical in the form of tribute or of assessments of products laid upon dependent economic units. The transportation of goods in kind is only possible for small political units or under exceptionally favourable transportation conditions, as were provided by the Nile and the Chinese Grand Canal. Otherwise it is necessary for the contributions to be converted into money if the final recipient is to benefit from them. This was common in Antiquity. It is also possible for them to be exchanged for objects with different specified prices according to the distance they have to be transported. This is said to have been done in Ancient China.

Examples of obligations to personal service are obligations to military service, to act in courts¹³²and on juries, to maintain roads and bridges, to work on a dyke or in a mine, and all sorts of compulsory service for corporate purposes which are found in various types of corporate groups. The type case is furnished by the compulsory labour state,¹³³of which the best example is the New Kingdom of Ancient Egypt. Similar conditions are found at some periods in China, to a lesser extent in India, and to a still less extent in the late Roman Empire and in many groups in the early Middle Ages. Support by the granting of benefices is illustrated by the following cases: (1) In China, the recognition of the collective claims of successful examinees to official position; (2) in India to the private guarantors of military forces and tax payments; (3) to unpaid mercenary leaders and soldiers, as in the late Caliphate and under the regime of the Mamelukes; (4) to creditors of the state, as in the very common sale of offices.

Provisions from the group’s own productive organization administered on a budgetary basis, is illustrated by the exploitation of domains under the direct control of the political authority. Also, the obligation of subjects to compulsory services has been used, as in Egypt, to produce goods needed by the court or for political purposes. Modern examples are factories maintained by the state for the manufacture of munitions or of military clothing.

The use of productive organizations for profit in free competition with private enterprise is rare, but has occurred occasionally, for instance, in maritime trade. On the other hand, the monopolistic type is very common in all periods of history but reached its highest development in the Western World from the sixteenth to the eighteenth centuries.

Positive privileges on a liturgical basis are illustrated by the exemption of the literate classes in China from feudal obligations. There are similar exemptions of privileged groups from the more menial tasks all over the world. In many countries educated people have been exempt from military service.

Negative privilege is to be found in the extra liturgical burdens placed upon wealth in the democracies of Antiquity. It is also illustrated by the burden placed on the classes who did not enjoy the exemptions in the cases just mentioned.

To take the correlative case, subjecting particular classes to specifically liturgical obligations is the most important form of systematic provision for public needs on a different basis than that of regular taxation. In China, India, and Egypt, the countries with the earliest development of bureaucracy, which was usually based on irrigation, there has been a liturgical organization based on obligations to payments and services in kind. It was also in part taken over from these sources by the Hellenistic states and by the late Roman Empire, though there, to be sure, to an important extent, it took the form of liturgical obligations to pay money taxes rather than deliver goods. This type of provision always involves the organization of the population in terms of occupationally differentiated classes. It is by no means out of the question that it might reappear again in the modern world in this form if public provision by taxation should fall down and the satisfaction of private wants by capitalistic enterprise become subject to extensive regulation by the state. Up until now, the financial difficulties of the modern state have been adequately met by imposing burdens on the propertied classes in exchange for various privileges. A simple example is the compulsory control of the manufacture of explosives in Spain where they are monopolistically protected against competition in return for heavy taxation by the state. It is always tempting to use the socialization of particular branches of industry, starting with coal, in this way. Compulsory cartels or combinations could be imposed with obligations to pay large sums in taxes. Thus they could be made useful for fiscal purposes and production would be allowed to continue to be oriented rationally to the price situation.

REPERCUSSIONS OF FINANCING ON PRIVATE ECONOMIC ACTIVITY

The way in which political and hierocratic bodies provide for their corporate needs has a very important influence on the structure of private economic activity. If the finances of the state are based on money taxation, and even then only if taxes are collected under its own authority, the development of capitalistic enterprise rationally oriented to the market is given the most favourable opportunities. It is a further favouring circumstance if personal services are required by the state only for political and legal purposes. A state which collects money taxes by tax farming is a favourable environment for the development of politically oriented capitalism, but it does not encourage the orientation of profit-making activity to the market. The granting of rights to contributions and their distribution as benefices normally tends to check the development of capitalism by creating vested interests in the maintenance of existing sources of fees and contributions. It thus tends to stereotyping and traditionalizing of the economic system.

A political body based on deliveries in kind does not promote the development of capitalism. On the contrary, it hinders it to the extent to which it involves rigidly binding the decisions as to what will be economically produced to compulsory political needs, in a form which, from a point of view of profit-making enterprise, is irrational.

A system of provision by compulsory services in kind hinders the development of market capitalism; above all, in that it maintains control of labour forces and thus prevents the development of a free labour market. It is unfavourable to politically oriented capitalism because it removes the typical prospective advantages which enable it to develop.

Financing by means of monopolistic profit-making enterprises has in common with the use of contributions in kind which are sold for money and with liturgical obligations on property, the fact that they are all unfavourable to the development of a type of capitalism which is autonomously oriented to the market. On the contrary, they tend to repress it in favour of fiscal considerations which, from the point of view of the market, are irrational, such as the establishment of privileges and of opportunities for money making through other channels. They are, on the other hand, under certain conditions, favourable to politically oriented capitalism.

What is important for profit-making enterprises with fixed capital and careful capital accounting is, in formal terms, above all, the calculability of the tax load. Substantively, it is important that there shall not be unduly heavy burdens placed on the capitalistic employment of resources, above all, on market turnover. On the other hand, a speculative commercial type of capitalism is compatible with any form of organization of public finance which does not, through tying it to liturgical obligations, directly inhibit the commercial exploitation of goods as commodities.

Though important, the form of organization of the obligations imposed by public finance is not sufficient to determine completely the direction of development which the orientation of economic activity will take. In spite of the apparent absence of all the more important obstacles of this type, no important development of rational capitalism has occurred in large areas and for long periods. On the other hand, there are cases where, in spite of what appear to be very serious obstacles placed in the way by public finance, such a development has taken place. Various factors seem to have played a part. Substantively, economic policy may be very largely oriented to non-economic ends. The development of the intellectual disciplines, notably science and technology, is important. But above all, there have been obstructions in the types of value-attitude derived from ethical and religious sources which have tended to limit the development of an autonomous capitalistic system of the modern type to certain areas. It must, furthermore, not be forgotten that forms of organization and of enterprise must, like technical products, be ‘invented.’ From a historical point of view, it is possible only to cite circumstances which exert a negative influence on the relevant thought processes—that is, one which impedes or even obstructs them—or a positive favouring influence. It is not, however, possible to prove a strictly inevitable causal relationship in such cases, any more than it is possible in the case of any other kind of strictly individual events.¹³⁴

Apropos of the last statement, it may be noted that concrete individual events in the field of the natural sciences can be rigorously reduced to their particular causal components only under very special circumstances. There is thus no difference in principle between the field of action and other fields.

At this point it is possible to give only a few provisional indications of the fundamentally important inter-relationships between the form of organization and administration of political bodies and the economic system.

Historically, the most important case of obstruction of the development of market capitalism by turning public contributions into privately held benefices is China. The leasing of contributions, which is often identical with this, has existed in the Near East since the time of the Caliphs. Both will be discussed in the proper place. Tax farming is found in India, in the Near East, and in the Western World in Antiquity and the Middle Ages. Particularly, however, in Antiquity, as in the development of the Roman Equestrian Order, it became decisive in determining the mode of orientation of capitalistic acquisition. In India and the Near East, on the other hand, it was more important in determining the development and distribution of wealth, notably of land ownership.

The most important case in history of the obstruction of capitalistic development by a liturgical organization of public finance is that of later Antiquity. It was also perhaps important in India after the Buddhist era and at certain periods in China. This also will be discussed later.

The most important historical case of the monopolistic diversion of capitalism is, following the Hellenistic, especially the Ptolemaic models, the period of royal monopolies and monopolistic concessions in early modern times, which again will be discussed in the proper place. This was first initiated in certain measures introduced by Frederick II in Sicily, perhaps following a Byzantine model. It was finally doomed by the struggle under the Stuarts.

This whole discussion in such an abstract form has been introduced only in order to make an approximately correct formulation of problems possible. But before returning to the stages of development of economic activity and the conditions underlying that development, it is necessary to undertake a strictly sociological analysis of the non-economic components.

THE INFLUENCE OF ECONOMIC FACTORS ON THE ORGANIZATION OF CORPORATE GROUPS

Economic considerations have one very general kind of sociological importance for the organization of corporate groups if, as is almost always true, the directing authority and the administrative staff are remunerated. If this is the case, an overwhelmingly strong set of economic interests become bound up with the continuation of the organization, even though its primary ideological basis may in the meantime have ceased to exist.

It is an everyday occurrence that organizations of all kinds which, even in the eyes of the participants have become ‘meaningless,’ continue to exist because an executive secretary or some other official makes his ‘living’ out of it and without it would have no means of support.

Every advantage which is appropriated, or even under certain circumstances which has not been formally appropriated, may have the effect of stereotyping existing forms of social action. Among the opportunities for economic profit or earnings in the field of the peaceful provision for everyday wants, it is in general only the opportunities open to profit-making enterprise which constitute autonomous forces which are revolutionary in a rational sense; but even of them this is not always true.

For example, the interests of bankers in maintaining their commissions long obstructed the recognition of endorsements on checks. Similar cases of the obstruction of formally rational institutions by vested interests, which may well be interests in capitalistic profits, will frequently be met with below. They are, however, appreciably rarer than obstructions resulting from such factors as appropriation of benefices, class status, and various economically irrational forces.

MOTIVES OF ECONOMIC ACTIVITY¹³⁵

All economic activity in a market economy is undertaken and carried through by individuals to make provision for their own ideal or material interests. This is naturally just as true when economic activity is oriented to the patterns of order of corporate groups, whether they themselves are partly engaged in economic activity, are primarily economic in character, or merely regulate economic activity. Strangely enough, this fact is often not taken account of.

Even if an economic system were organized on a socialistic basis, there would be no fundamental difference in this respect. It is true that the decisions involved in control and management would lie primarily in the hands of the central authority. The functions of the normal individual engaged in the production of goods would be limited to the performance of ‘technical’ services; that is, of ‘labour’ in the sense of the term employed here. This would be true so long as the central authority followed a ‘dictatorial’ policy, proceeding autocratically without consultation with others. As soon as any rights of being consulted were granted, this would, even on a formal basis, immediately open the door to conflicts of interests. Such conflicts would inevitably influence policies in the organization of production, above all, those concerned with the amount of saving. But this is not the decisive point. What is important is that, even then, the individual will ask first of all how far the real income allotted to him and the labour service required of him, especially as compared with the situation of others, appear to conform with his interests. This would be the basis of his behaviour. According to the prevailing judgment of such interests, any one of a number of different developments might take place. There might be struggles for power over the alteration or maintenance of established allotments of real income, whether, for instance, there should be special allowances for heavy work; over appropriation of or expropriation from particular jobs, which were sought after because of extra remuneration or particularly favourable conditions of work; over the cessation of work by strikes or lockouts; over restriction of production to force alterations in the conditions of work in particular industries; over boycotts and the forcible dismissal of unpopular supervisors. In short, the moment the function of the worker goes beyond the purely technical sphere, all sorts of processes of appropriation and of conflicts of interests would become the normal thing. The fact that they would for the most part be fought out through organized groups and that advantages would be enjoyed on the one hand by the workers engaged in the most essential services, on the other hand by those who were physically strongest, would simply reflect the existing situation. But however that might be, it would be the interests of the individual, possibly organized in terms of the similar interests of many, especially as opposed to those of others, which would underlie all action. The structure of interests and the relevant situation might change; there would be other means of pursuing interests, but this fundamental factor would remain just as relevant as before. It is of course true that economic action which is oriented on purely ideological grounds to the interests of others does exist. But it is even more certain that the mass of men do not act in this way, and it is an induction from experience that they cannot do so and never will.

In a completely socialized planned economy there would be scope only for the following: (a) the distribution of real income by rationing in conformity with a systematic pattern of consumption; (b) the production of goods and services in kind according to a plan of production. The monetary category of ‘income’ would necessarily disappear, but rationed ‘receipts’ would be possible.

In a market economy the interest in the maximization of income is necessarily the ultimate driving force¹³⁶ of all economic activity. For any activity which requires goods and services which are not available to the actors as free goods, presupposes the orientation of action to the acquisition of and control over future income. Furthermore, practically every case of existing control over goods and services presupposes a previous income as its source. All the profits of business enterprise in a market economy become at some stage and in some form parts of the income of economically acting individuals. In a regulated economy the principal aim of the regulatory provisions is generally to influence the distribution of income.¹³⁷

Income and receipts may, from a sociological point of view, take the following principal forms and be derived from the following principal sources :—

A.—Incomes and receipts from personal services derived from specialized or specified functions:

(1) Wages, (a) which may be freely contracted wage income or receipts calculated according to the time worked, (b) Income and receipts paid according to an established scale, as in salaries and the remuneration of officials, (c) Conditional piece rates paid to employees, (d) The proceeds of entirely free labour contracts.

(2) Profits, (a) Profits from free exchange transactions involving the production of goods or services by business enterprises, (b) Regulated profits from exchange transactions by the same kinds of operation. In cases (a) and (b), net returns are arrived at by deducting costs, (c) The proceeds of ‘booty.’ (d) Profits arising from appropriation of rights such as those of exercising power, of occupying offices, of tax farming; acquisition through bribery, and from similar sources. In cases (c) and (d) costs must be deducted if these methods of acquisition are carried on as a permanent business. Otherwise, this does not always take place.

B.—Income and receipts from property, derived from the exploitation of control over important means of production:

(1) Those which are normally treated as net income after the deduction of costs, (a) Income derived from property in human beings, such as slaves, serfs or freedmen. These may be receipts in money or in kind; they may be fixed in amount or consist in shares after the deduction of costs of maintenance, (b) Appropriated income associated with positions of authority, usually after deducting costs of administration, (c) Income from land ownership. This may be based on leases dividing shares of the crop, on leases for fixed periods, or on receipts in the capacity of landlord, rather than merely owner. It may be in money or in kind. It should be reckoned after the deduction of taxes and costs of maintenance, (d) House rents after deduction of costs, (e) Receipts from appropriated monopolies—exclusive privileges, patents, etc., after deduction of fees.

(2) Property income which is normally reckoned without deduction of costs, (a) Income from fixed means of production¹³⁸derived from permission to use such facilities in return for the payment to a budgetary unit or a profit-making enterprise of a ‘rent.’¹³⁹ (b) Payments for the use of domestic animals.¹⁴⁰ (c) Interests on loans in kind and conditional allowances in kind, (d) Interest on money loans, (e) Money interest on mortgages, (f) Money returns from securities, which may consist in fixed interest or in dividends varying with profitability, (g) Other shares in profits, such as shares in exceptional profits and profits from rational speculative operations and a rationally assigned share in the long-run profits of all sorts of enterprises.

All ‘profits’ and the income derived from securities are either not arranged in advance at all or only with respect to certain assumptions such as their purchase price or agreed rates of interest. Fixed interest and wages, leases of land, and house rents are stipulated in advance. Income from the exercise of power, from ownership of human beings, from authority over as well as ownership of the land, and from ‘booty,’ all involve appropriation by force. Income from property may be divorced from any occupation in case the recipient does not administer the property himself, but through agents. Wages, salaries, labour profits, and entrepreneur’s profits are, on the other hand, occupational incomes. Other types of property income and profit may be either one or the other. It is not possible here to enter into a detailed classification.

Of all types of income, it is particularly those from business profits and from stipulated or free labour contracts which have a dynamic, revolutionary significance for economic life. Next to these stand incomes derived from free exchange and, in quite different ways, under certain circumstances, from ‘booty.’

Those having a static conservative influence on economic activity are above all incomes fixed in accordance with a scale, namely salaries, time wages, profits from the exploitation of official positions, and normally all kinds of fixed interest and rent.¹⁴¹

In an exchange economy, the economic source of income lies in the great majority of cases in the exchange situation of the market with respect to goods and labour services. Thus, in the last analysis, it is determined by consumers’ demand in connexion with the more or less strong naturally or socially determined monopolistic position of the parties to market relationships.

The economic source of receipts in a natural economy generally lies in the monopolistic appropriation of advantages; that is, in opportunities to exploit property or services for a return.

Underlying all these types of income is the possibility of the use of force in protecting appropriated advantages. ‘Booty’ and similar means of acquisition are the results of the actual use of force.

This sketch has been so rough that it has been impossible to make any attempt at refined systematization.¹⁴²