benevolent despot. The physical facts and issues would be similar to those stated above. Caring as he would for the welfare of his people, this benevolent despot would be interested in seeing that "the product" was consumed productively; that the productive agents were kept intact or even increased; that the product was "turned back" into the productive agents in the proper proportion; that each agent was apportioned properly among the various industries of the community. Being omniscient-and nothing short of omniscience would suffice-he would know and judge sanely and well the needs of his people and he would know the proper mechanical combination of the factors. Knowing these things, he would order-using authority-social energy and products to be applied in the proper way, and, being a despot, he could have his orders carried out. But this assumes omniscience. Suppose we were to have a thoroughgoing socialistic society. What then? The same physical facts would be present and the same problems. know the needs of the people? Knowing these needs, how are they to control and apportion productive energy and products? With reference to learning the needs, various answers may be given. It may be by a statistical bureau. If so, it is worth keeping in mind that this would have to be extensive and expensive. It may be by retaining the money economy and the use of price levels as an index of needs. That is the device of our present society. It may be by arbitrary authority-by control of desires. A drab life of that kind is advocated by but few.

How are they to

Assume that the needs are known, how is the socialistic society to determine what part of its "product" is to be turned back into future productive agents; what proportion of each agent is to go to each given industry, and to what extent one productive factor is to be substituted for another? The omniscient despot could-by assumption-know the answer to these questions. The collectivist community cannot. There are no laws of mechanical engineering—at least not yet-which will point out the way, and it cannot be done on the basis of cost accounting-at least of the present kind-for there would be no market and hence no price for producers' goods.

Let us turn to our present society. The answer-none too satisfactory-to the questions propounded is immediately forthcoming. These things are worked out through price. The changing needs of the people are reflected in changing price levels and the resulting shifts in profit margins tempt—not order-owners and controllers

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of productive energy to direct this energy into the appropriate channels. What proportion of the "product" is to be turned back to further production is determined by price; note, for example, the function of interest in relation to the increase of capital. Whether it is worth while to turn more of this product back into capital and less into land or labor is also worked out through the price scheme. Price levels and profit margins send productive forces into industry x rather than into industry y, z, etc. Price further determines whether one factor of production shall be substituted for another, and here in the more highly organized businesses cost accounting comes to the rescue with methods of measurement.

Price may or may not be the best means that man will ever develop to solve the problems raised in the apportionment of productive energy. It is the chief means used today.

See also 6. A View of Industrial Society in a State of Equilibrium.

106. THE FORMATION, MAINTENANCE, AND APPORTIONMENT OF CAPITAL GOODS

Let us for the moment think of capital in terms of tools, machinery, raw materials, and other instruments of production. Any organization of society would be interested in utilizing capital as thus defined, for this would mean the harnessing of nature's forces to the use of man. Any society must accordingly face the problems involved in the formation of capital, in its maintenance after being formed, and in its apportionment among the various enterprises of the community.

In a society ruled by an omniscient benevolent despot, the situation would be, by assumption, artificially much simplified. This despot, being omniscient, would know that it was desirable to have capital, for thus he could better gratify the wants of his people. He would also know that this capital would not rain down from heaven, that its formation would be a physical, mechanical process. It would be clear to him that the only procedure open to him would be to direct the present productive energy of his community into the making of capital goods. Of course, a nice problem would exist with reference to how much productive energy should be devoted to the making of capital goods as opposed to the amount that should be devoted to betterment of land, betterment of labor, etc. But, being omniscient,

our despot would understand the mechanical situation involved and would take steps to make the proper apportionment.

After his capital had been formed, suppose that it became desirable for the despot to shift a part of this capital from one industry to another, presumably because of changing desires on the part of his people. Here again he would realize that the process is a physical one. Part of his capital-that which we call free capital-could undoubtedly be physically transferred from the one industry to the other without appreciable sacrifice or loss. Another part could be so transferred with some slight amount of remodeling. This remodeling would, of course, mean directing of some productive energy of the community into that channel. Still another part of his capital would be so highly specialized that even remodeling would be out of the question. Here he must take his choice. If he so desires, he may scrap that capital, and if he does, that amount of social energy has been lost. Unfortunate as that procedure would be, in case of rapid shifting of desires it might be the only course of action open to him. If, however, the desires should change more slowly, he might find another course available. He could continue working his old capital in the old industry, but instead of directing productive energy to be applied to the maintenance of this old capital, he could allow the capital to deteriorate in use-depreciate-have the community consume its product-a steadily dwindling product and direct his productive energy, not to the maintenance of this old capital, but to the creation of new capital for the new industry.

In a socialistic community the same issues would have to be faced, but it is probably fair to assume that omniscience would be lacking. For any conceivable reason, let our socialistic community decide that it needs more capital. Of course, the sensible reason to assign is that this community has been testing the needs of its people and decides to create more capital in order more fully to gratify these needs. The decision to obtain more capital having been reached, grim physical facts face this community also. The capital will not come by magic. It will come only provided this community directs its present agents of production to the making of capital goods. And it also will have nice problems to adjust with reference to whether these agents should be devoted to the making of capital goods or should be devoted to the improvement of land, to the gratification of the passing wants of its people, or to other purposes.

Capital once having been formed, suppose that it becomes necessary to shift capital from one industry to another under socialism. It will be clear, without the necessity of any argument, that the processes to be gone through with are identical with those pictured in the society of the omniscient benevolent despot.

And what happens in our own society? The same physical facts, with the motive forces operating through the medium of price and gain. Instead of social energy being directed by the authority either of a despot or of a collectivist community, the social energy is now directed into definite channels by the actions of individuals who own or control that energy. And why do they so direct it? Not because they love their fellow-man, but because they anticipate gain. And they anticipate gain, presumably, because the price situation leads them to believe that the desires of the people are turning to this particular field. The process might be called hard names. It might be said that it is a system of bribery. Hard names do not change the essential facts.

Under our present organization why and how is capital shifted from one industry to another? The why is clear enough. It is done in the hope of gain. The how follows the line of reasoning given in the case of the society ruled by the omniscient benevolent despot. Part of the capital may be physically shifted. Part may be remodeled and shifted. Another part may be allowed to wear out in its old service, disappear as capital goods and reappear as product, the same to be sold and the proceeds devoted to the creation of new capital goods-a sort of transmigration-of-souls effect.

It is not at once evident that this is really the process. At first glance it would seem that what happens is that someone saves money-perhaps through the medium of a savings bank—and that in this way capital is created. The thing to notice is that this is not the creation of capital goods. This is merely accumulating a command of money, and money is merely an agent for bribing the various productive factors of the community to go to work in any channel desired by the person who holds the price. In other words, the owner of money or of other forms of property is able to command social energy.. True, he does not command it as would the despot or as would the collectivist society. He commands by price, by rewarding, but he commands none the less. And by no other process than by the commanding and directing of productive energy can capital goods be formed or can they be shifted from one industry to another.

107. COSTS OF PROGRESS

We are now in a position to make a preliminary reckoning of the payments or provisions to be made out of the annual product for maintenance and growth of the industrial system. First, there are the costs of maintenance, or wear and tear fund, for the different factors of production. Secondly, there are the costs of growth, operating in two ways: (1) by evoking a better or intenser use of the labour, land, capital, or ability already in use, (2) by calling into use new supplies of these factors.

If the whole product were compelled by some necessary law of Nature to apportion itself among these several uses so accurately that it was wholly absorbed in these costs of maintenance and growth, we should have a completely rational and socially satisfactory system of production and distribution of wealth.

So far as mere maintenance and its "costs of production" are concerned, powerful laws of necessity do compel a fairly full and accurate provision. For though workers in a trade may be "sweated," in the sense that they are not paid a true subsistence wage, this can occur only where either these workers are subsidized from some other source, or where this worn-out labour power can be replaced out of a reserve of "waiting" or unemployed labour kept alive. out of some public or private charity. Apart from these abnormal circumstances "sweating" does not pay, and a trade habitually practicing it cannot live. The case is even clearer as regards the costs of maintenance of capital and land. A failure to make regular and adequate provision against wear and tear means nothing else than the starvation of the business. Individual unsuccessful businesses suffer this starvation, but trades do not thus perish, unless some change in the needs or tastes of consumers renders them no longer useful. A provision which may be regarded as almost automatic is thus made for the maintenance of the industrial fabric.

But as regards costs of growth there is no such security for adequate provision. The surplus of wealth remaining after costs of maintenance are defrayed does not automatically distribute itself among the owners of the several factors of production in such proportions as to stimulate the new productive energies required to promote the maximum growth of production. Instead of disposing itself in these proper proportions, the surplus may be so divided as to furnish

'Adapted by permission from J. A. Hobson, The Science of Wealth, pp. 76–86. (Henry Holt & Co., 1911.)