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The Present Economic System

THE PRESENT ECONOMIC SYSTEM § 1. The place of private property. § 2. Nature of property. 5 3. Relation of wealth, property, and capital. Some theories of private property. Origin vs. justification. § 6. Limitations of private property. 7. Limitations of bequest and inheritance. § 8. Social expediency of private property. I 9. The monetary economy. 10. The competitive system. § 11. Limitation of competition by custom. § 12. Effect of modern forces upon custom. 13. Adam Smith's influence. § 14. The wage-system.

§ 1. The place of private property.

Of fully equal im portance with material wealth in determining the economic power of a people is the social system under which the nation lives. This is the term applied to the whole complex of in stitutions and arrangements in which and by which people live together in society. It is the embodiment of the opinions, ideas, and habits of life inherited by each generation from its forebears. It is, indeed, a people's whole state of civiliza tion, with its political, economic, intellectual, scientific, re ligious, and esthetic aspects.

The most important economic aspect of the existing system is, broadly speaking, the institution of private property. So closely connected with this that they are hardly more than different phases of the same thing are the use of money (the monetary economy), the wage system, and competition as a mode of distribution. "The institution of private property" is the general expression for the way in which men in the modern state make use of their own energies and of material wealth within the nation. We live in a regime of private prop erty, and all our economic problems are affected by that fact. The determination of the exact boundaries of private property makes up a large part of the politico-economic problems which the people in each generation have to solve. A large share, possibly, in a certain sense, every one of the economic problems that are discussed involve change, limitation, defini tion, or, more radically, abolition of present laws of property. Broadly understood, as above, therefore, determination of the nature of private property is the essential problem in eco nomic legislation.

§ 2. Nature of property. Property means ownership. and ownership is the abstract noun expressing the quality of possessing a thing. Correspondingly, owner is the Anglo-Saxon equivalent of "proprietor." Property thus. fundamentally, means, not an object held or possessed, but the right in or belonging to a person to control something that he owns. Ownership is a legal right to control under certain conditions.' Physical possession of an object is not necessarily ownership.

The law makes between property rights and equitable rights some subtle distinctions, which have their reason in the his tory, if not in the logic, of the law, but which are not essential to economic discussion. In some states this distinction has been in large measure abolished. What interests us are the rights (claims) that men have to the control of wealth and services, whether by technical law these are called legal or equitable, and this right is what is meant by "property" in our discussion of it.

There are different kinds of ownership. It may be private, as that of individuals, families, partnerships, or corporations; or it may be public, as that of nations, states, counties, cities, and towns, owning such things as public buildings, parks, highways, the Adirondack forest reserve, or the Erie Canal. These two kinds are equally effective as against the claims of outsiders, but the rights of those inside the circle of ownership differ. For example, the rights of one shareholder against I See Vol. I, pp. 264-267.

another, or the rights of one member of a family as against another, are not the same as the rights against outsiders. Private property is the characteristic feature of our present industrial society, but it exists side by side with public prop erty and with many intermediate grades between private and common property.

Though property meant originally and essentially the intan gible right to a thing, the word came to be applied also to the object of the right. This is done both in common speech and in judicial decisions, with inevitable ambiguity. This may be readily seen by trying to substitute the word ownership for property, a thing quite simple in some cases but impos sible in others. One would not point to a house and say, "This is my ownership," but either, "This is my property," or "I exercise ownership over it." It is well recognized that a man may have a property right in this abstract sense in or over his own services, as to practise a trade or in the "good will" of a business, or in an intangible patent or a copyright, quite as well as in a material object.

§ 3. Relation of wealth, property, and capital. A fail ure to see this distinction and to keep it clearly in mind has led to confusion, even on the part of legislatures, learned judges, and able economists. If property is said to be (for example) a house and lot and at the same time the right to that house and lot, then there are two properties at once for each economic good, viz.: the object itself and the right to it.' This difficulty could be avoided by the consistent definition and use of terms. A material economic object is a good, is a form of wealth. The usance of wealth and the service of laborers at the moment rendered constitute forms of income. The right of ownership, i. e., the right to control, use, or direct the use of wealth and services, is property, which is therefore the right to receive incomes. The value of the in 2 This confusion has had important practical consequences in the field of taxation. See Vol. 1, pp. 265-267, and above, ch. 18, H 3-5.

come of an individual constitutes his capital. Goods, rights to goods, value of rights to goods: these three things are clearly distinguishable.

§ 4. Some theories of private property. Various theories have been framed to explain the origin and to justify the ex istence of private property. The occupation theory is that property is based upon the priority of claim of one who finds wealth without an owner and appropriates it. This is not an explanation of the property rights that are arising every moment, nor does it give a logical reason for the continuance of ancient property rights. It is a statement applying to a case that has rarely happened, the settlement of an unoccupied territory.

More adequate to explain many cases is the conquest theory, that property is based on force; for nearly all lands to-day are occupied by the descendants of conquering invaders who took the lands and natural resources from the former in habitants, who in turn had taken them from other occupants many centuries before. The conquest theory applies, for ex ample, to the invasion of the Roman provinces by barbarian tribes who divided the country and developed the feudal sys tem based on land tenure. But it hardly applies to present day happenings, and at its best it cannot, to modern minds, "justify" present property rights.

The labor theory, meeting some queries where others fail, is that ownership is based on the act of production. It is declared that every man has a right to that to which his brain and his muscles have imparted value. It is apparent that this test leaves without explanation or justification a great num ber of things that do exist and have existed as property. Usually the basis of the labor theory of property is declared to be each individual's natural right to the results of his own labor, which claim is assumed to be an ultimate, undebatable, axiomatic fact. However, that type of natural-right doc trine, which makes no appeal to experience and results, is now quite discredited in political science.

Another form of natural-rights theory is that property is necessary for the realization of the dignity of human nature, and every individual has the natural right to self realization. This theory is, in a way, based on an appeal to experience as to the effect of property on human character, and it has the virtue of expressing one of the ideals of modern democracy. Although, in common with various other "natural-rights" theories, it must be deemed too absolute and too individualistic, it contains a far-reaching truth, of which due account must be taken in our social philosophy.

The legal theory is that property exists because the law says it shall. This expresses a truth, but is no more than a truism. The law determines the limits of property, but what determines the limits of the law? What practical or social justification is there for passing and continuing such law? The legal theory does not contain a final explanation.

Each of the five theories has its defects, but each points to some fact important and significant, at certain times and places, in the explanation of this widespread institution. They al,' find some place within a more comprehensive sixth theory, that of social expediency, which will be outlined be low. First, however, let us briefly survey some of the histori cal and legal qualifications of property as it has been and is.

§ 5. Origin vs. justification. The question of the origin is not the same as that of the present justification of the ex isting system of private property. The institution of private property has evolved under diverse conditions. In early so cieties individual property rights were not very clearly marked. Every tribe asserted against other tribes, and tried to uphold by war, its claims upon its customary hunting grounds ; but the claims of the individual hunters on land within the tribe did not often come into conflict. Private property at the outset was in personal possessions, ornaments, weapons, utensils, which were very meager in that primitive society in which it was the custom "to go calling with a club instead of a card-case." Only later came individual property in land. A few years ago it was generally believed that the organization of the old German tribes was politically an al most perfect democracy, and economically a communism in which all had equal claims upon the land. To-day this opin ion is very seriously questioned. It seems probable that there was a goodly measure of communism in the control and use of lands (though not in other things), but this was largely con fined to an oligarchy of the favored; whereas the masses lived in subjection, cut off from all but a meager share in the com mon lands. However that may have been, strong forces within historic times have put an end to the common ownership and tillage of land as it existed among the peasants of Europe. That system was shown by experience to be wasteful. Com petition tended to bring the economic agents into more effi cient hands, and the movement was furthered by many acts of injustice and violence on the part of those in power.

Inquiries into the origin and development of any social in stitution are interesting and helpful in forming an estimate of its present significance, but the problems of the past are not those of to-day. Whether or not the ancient beginning of property in Europe was in violence and evil has but a re mote bearing on the question as to the present working of it.

Social conditions and needs have not changed more than have the forms and limits of property itself. Each generation has its own problems to solve, and, ignoring for the most part the evils of the distant past, each generation must test existing in stitutions by their present results.

§ 6.

Limitations of private property. It is well, in dis cussing private property, to rid the mind at once of the idea that it is an absolute and unchanging thing. Few realize the manifold ways in which property rights are limited. Un modified private control of property is unknown; the public makes many reservations in its own interest. There is, first, a whole set of limitations to prevent nuisances. An owner in many situations is not free to build a slaughter-house or to start a glue-factory on his land. Property is governed by general public utility, and anything that threatens to become. a nuisance or a danger may be excluded. Under the right of eminent domain, the state or the railroad may take the old homestead from the owner who would live and die there. Although pecuniary damages are paid to him, this is a limita tion of his property rights. Rights of way on property exist either by contract or by prescription permitting its public use. Most important of all limitations is the right of tax ation, by which society takes more or less of private incomes for purposes of which the individual owners may not approve.

The law enforces a multitude of private claims by some persons against others. A variety of rights called easements or servitudes may attach to private property, modifying its exclusive use. Leases for any period are a limitation of the owner's control. Both the holder of the lease and the owner of the property have certain rights before the law. The lender of money secured by mortgage has a legally recognized and enforceable equity in the mortgaged wealth. Property is left in trust for the benefit of persons or of institutions or of the public, and is administered by trustees who are strictly bound to execute the terms of their instructions. Contracts of many sorts are entered into by owners, limiting their con trol in manifold ways, and the law enforces these contracts. These all form a complex of equitable claims, which together equal in value one undivided property right, which in turn equals the value of the These claims mutually de limit each other (whether they be called equitable claims, or liens, or property rights), and wealth is not multiplied by mu'tiplying the claims, as is unfortunately sometimes assumed to be the case.

§ 7 Limitations of bequest and inheritance. The term bequest implies a will, usually a written will in which the person, in anticipation of death, expresses his wishes as to the disposition of his property. It is said sometimes that bequest is a "logical" result of private property, but the law does not 3 See treat it as necessary. The right of bequest, or of gift at death, is limited in various ways in different countries. In countries where hereditary aristocracies exist, primogeniture is in some cases required by law, in others so strongly favored by public opinion that it is practically always followed. Custom limits bequests in England to members of the family, and wills giv ing outside the family are rare, and are almost always broken in the courts. John Stuart Mill contrasted this with the prac tice in America, frequent even in his day and still more fre quent now, of rich men giving for public purposes. In France the right of bequest outside the family is legally lim ited; only the share of one child can be willed away by the father, and the rest must be equally divided among the chil dren. "Settlements" and fidei commissa are limited in many countries because of the recognized social evils resulting from the tying up of estates for generations. Throughout the his tory of England, Parliament has given attention to the ques tion of mortmain, which chiefly concerned the drifting of great estates into the hands of the church or of corporations as the result of bequests by the pious. In England, of late (and to a less extent in this country), the policy of permitting unlim ited endowments to charitable institutions has been seriously questioned, and by legislation some of the old endowments have been diverted from their original purposes when these have ceased to be of social utility. Inheritance, in contrast

with bequest, usually means succession to the property of one who has died intestate, that is, has made no will. The law of inheritance likewise varies greatly with time and place.

§ 8. Social expediency of private property. In the light of history and of present political philosophy, the explanation and justification of private property must be on grounds of social expediency. This is a broad explanation, and it has the fault of a broad explanation that it needs to be further explained. Under it can be brought the many varying con ditions. Even if private property works hardships to in dividuals in many cases, it may be justified if, on the whole, it gives the best results that are practically possible. Laws must be judged by their average working, not by exceptional cases. In general, the system of private property must be judged by this test: Does it advance the welfare of the nation better than would any alternative plan for the control of economic wealth? The question is not whether it is fault less, for no human institution is so. Nor must it be assumed that the rule of property needs to be uniform in respect to all kinds of wealth. There are many kinds of property, and the test may be applied separately to the different forms and to the varying degrees of property rights. The varied and often strict limitations of property mentioned above are all determined by some thought, wise or foolish, of social ex pediency. In the last chapter have been seen many examples of the fact that different parts of wealth may be treated in different ways : there may be private property in wagons, and public property in roads; private property in houses, and public property in forests; private property in automobiles, and public property in railway carriages. But any rule of property, like any other workable human law, must be applicable to all individuals who meet the conditions.

The very acceptance of the theory of social expediency im plies the need of frequent readjustment of the institution of private property. The essential thought in the various at tacks on the institution of property is that, because it either causes or makes possible the inequality of incomes, it is not socially expedient. Private property, as it is found to-day, is complicated by many historical accidents. Survivals of ancient injustice and relics of feudal institutions that rest on no vital reason remain in our new country as well as in the older ones. The limits of property in many respects are de termined, not according to the logic of expediency, but by the social inertia that often governs successive generations.

The question is raised in many minds: If private property is not an absolute right, what shall be its limits? What changes should be made in it? These questions put one of the greatest economico-political problems of our day, one that contains within it, indeed, the many minor problems that have appeared in the foregoing pages.

§ 9. The monetary economy.

So greatly does the use of money facilitate the transfer, buying, and selling of private property, and so closely are property and pecuniary trade con nected in practice and in the thoughts of men, that every rad ical proposal or attempt to abolish private property, includ ing the recent marvelous performance of the Bolsheviki in Russia, has included a plan to do away with money also. But money and private property are not essentially and logically bound up together, for a certain measure of private property always has been found where money was little or not at all used. True, if there were absolutely no private property there would be little use for money, although it might still be used as a form of counter by the communistic state. We have already seen' how a monetary unit comes into use, and have treated of the nature of money. We note here that the use of money is an outstanding feature of the present economic system and gives rise to many of the problems of political economy.

§ 10. The competitive system.

The existing system is likewise characterized by competition 5 in the buying and sell ing of wealth and of the usances and of economic agents. By competition we mean here the condition of po litical freedom on the part of each man to trade his property (goods, uses, or services) as he chooses, and this combined with the disposition on his part to get what he values most highly for himself and his family. Whenever any one else (official or citizen) forbids and prevents a man from getting all he can, in so far competition is limited. Whenever any one is deterred by fear of, or by affection for, some other trader, from getting all he can, in so far competition is limited. Whenever any one conspires with another trader to act to + See Vol. I, p. 51, and above, ch. 2.

gether with him to withdraw or to alter his bid, in so far com petition is limited. Private property and economic competi tion do not merely happen to exist side by side, forming more or less favored conditions each for the other; they are essen tially connected.° It is not our task at this point to present the advantages and disadvantages of competition, but merely to indicate its important place in the actual economic world. Like private property, competition is not a universal feature of our pres ent system, but it is the most general and characteristic method of valuation, of price-fixing, and of trade.

§ 11. Limitation of competition by custom.' The rela tively large influence of competition in present society ap pears more plainly in comparing the present system with that of an earlier state of society or with that of a present savage tribe. A member of the lowest human societies is subject to law ; though he is a savage, he is not "untutored." On the contrary, he is bound in many ways to follow customary lines of conduct, and a large part of his time is given to learning the traditions and then to observing the ceremonials of the tribe. Primitive customs always take on a religious sanction, and every member of the tribe is piously bound to do as his fathers have done and as his neighbors are doing. This limi tation applies to the choice of food to eat, clothes to wear, time to hunt, plant, and harvest, weapons and tools to use, where and how to trade, how much to give or take, and to countless other details of economic choice. So, in early society, economic relations were complex and but slowly changing from generation to generation. Custom, rather than competition, ruled in manifold ways the economic actions of men.

Custom continued to rule a large share of the individual life 6 This will appear in comparing the competitive methods of distribu tion with other methods in ch. 34, §§ 7-11.

7 See Vol. I, p. 143, on medieval land tenures; p. 158, on customary rents; p. 190, on the effect of caste.

of the peoples of northern Europe through barbarian and feudal times. Its force has gradually decreased, but even yet is not entirely set aside. Political and economic interests were not clearly distinct in the Middle Ages. Land was the all-important kind of wealth. Military and other public serv ices were performed by the higher landlords (as vassals of their overlords), who in this way paid at the same time what we to-day would call rent and taxes. The landlord in turn received from his underlings services and goods in kind (food and supplies) and so (in modern eyes) was both a collector of taxes and a receiver of rent. The rent, however, was not a competitive price, but consisted of the dues and services that the forefathers had been accustomed to pay. In many ways also, in the towns, close organizations of craftsmen and of merchants regulated prices and kept others out of their industries. Industrial privilege pervaded the life of that time.


through all the Middle Ages ran the forces of competi tion. The inefficiency of customary services and the high prices charged by selfish privilege were constant invitations to men to become competitors. Men strove to break over the barriers of custom and of prejudice. The effort to attain freedom to compete was the vital force of the time. The in dustrial history of the Middle Ages was largely the story of the struggle of the forces of competition against the bonds of custom and privilege.

§ 12. Effect of modern forces upon custom. The in dustrial events following the discovery of America strength ened the forces making for economic freedom. Discoveries in the western hemisphere opened up a wide field for the ad venture and enterprise of Europe. Commerce is the strong est enemy of custom, and new opportunities gave a rude shock to the conservatism both of the manor and of the vil lage. With the rapid growth of industry and manufactures, old methods broke down. In an open market custom declines; it flourishes best in sheltered places. Further, the movement of thought in the Reformation, and the spirit of the times which expressed the principle of personal liberty and allowed the individual to follow his own opinions and take the con sequences, were favorable to competition. Despite these facts, the restraints of the national governments on trade con tinued great, in some respects increasing during the seven teenth and eighteenth centuries in France, Holland, and Eng land. The regulation before attempted by towns and vil lages was employed on a larger scale by national governments in their industrial systems. The colonies in America were used for the economic ends of the "mother country" and for the selfish interests of the home merchants in Europe. The American Revolution was one of the bitter fruits of the Eng lish policy of trade restriction.

§ 13. Adam Smith's influence. "The Wealth of Na tions," the first great work on political economy, was pub lished in the year 1776. That was the "psychological mo ment" for its appearance, as public thought was so prepared for it that it had its maximum possible influence. The year of the American Declaration of Independence gave the most striking object lesson on the evils of a selfish colonial policy that interfered on a grand scale with economic freedom. The old customs had become ill fitted to life, ill adapted to the rapid industrial changes that were going on. What was needed in many directions, both in politics and in industry, was merely negative action by the government, the repeal of the old laws, the overthrow of old abuses. The French Revolution, follow ing a few years later, emphasized this thought in the political field. The philosophers of the time believed in a "natural law" in industry and politics. The reformers of the time wished to throw off the trammels of the past and to give men opportunity to exert themselves "naturally." In America the old abuses never had taken deep root, as the conditions of a new continent were not favorable to monopoly and privilege. Although the movement for the repeal of medieval laws has continued in Europe from 1776 till the present time, yet cus torn still is stronger to-day in Europe than in America. Serf dom was not abolished until the first half of the nineteenth century in Austria and southeastern Europe, and not until the last half in Russia. Many economic and cultural forces fur thered this movement, but the most powerful intellectual force in its favor was the work of Adam Smith. So strong an im pression did Smith's book make that in the minds of men "free trade" became almost identical in thought with political economy, whereas that was but the temporary economic prob lem of the eighteenth century.

Many men then thought that in "free and unlimited com petition" had been found a solution of all economic problems for all time. But soon it was apparent that it was no such simple and absolute solution. Indeed, many of the present economic problems—in one sense all of them—center around this one: to determine the proper forms and limits of coin petition. This problem has appeared in various aspects throughout the foregoing pages.

§ 14. The wage system. Viewed in another aspect, the present economic and social order is called the wage system.' The wage contract, like the use of money, is not essential to the existence of a system of private property. Communities such as the American colonies and many of the newly set tled states may consist almost entirely of self-employed own ers of land. Bulgaria, before the Balkan wars called the peasant state, presented this organization (though of course with some wage payment), as did also its neighbor Serbia. But, given the institution of private property :with competition (freedom to buy and sell), let manufactures and commerce develop to any extent, and inequalities of fortunes increase while an increasing number of persons work for wages. It is noteworthy that as this goes on (as it has done in America at an increasing rate since the middle of the nineteenth century) it is the agricultural and rural hand industries that continue to be mainly worked by owner-managers and workers, while it 8 See Vol. I, p. 227, and above, ch. 20, §§ 1-4.

is the manufacturing, transporting, and large commercial en terprises in which the labor is done for wages. The accept ance of the wage system thus far has been the inevitable price to be paid for manufacturing and industrial development.

• REFERENCES.References.

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Ely, R. T., Competition: its nature, its permanency, and its benefi cence. A. E. Assn. Pubs., 3d ser.. 2; 55-70. 1901.

Ely, R. T., Property and contract in their relation to the distribu tion of wealth. N. Y. Macmillan. 1914. (2 vols.) Gladden, Washington, Tools and the man. N. Y. Houghton. 1893. (One example of a large number of American books appealing for the application of Christian ethics to social questions.) Gleason, A., What the workers want. A study of British labor. Pp. 518. New York. Harcourt, Brace and Howe. 1920.

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property, private, wealth, rights and social