mechanical labor, and machine processes may be so co-ordinated as to enhance to the greatest possible degree the productivity of the capital saved.

The advantages of the corporation are readily seen, then, to be both interacting and cumulative. The productivity of capital is increased by the choice and co-ordination of productive factors rendered possible by large-scale industry. Accumulated capital is put to immediate use where it is most productive. The value of the increased income is enhanced by the limitation and distribution of risks. And all these work together to stimulate and to accelerate investment.

V

PROBLEMS OF THE BUSINESS CYCLE

Under the simple conditions assumed in the last division, the problem of the organization of industrial life was found to present many bewildering aspects. But placed in a developing society it becomes doubly bewildering. None of the economic and ethical questions which were noted have disappeared and the new setting adds its own quota of problems.

The disturbing elements in the larger situation are closely associated with those regularly recurring phenomena which are usually called "crises" and "depressions." It was once held that these played havoc with "economic gear and cogs," throwing the "industrial machine" "out of joint," or leaving it "half stalled." Such conditions were looked upon as abnormal; they were thought to create problems of a mechanical character; they called for the services of the industrial mechanician. But, the damage once repaired, the "industrial machine" could run its prosperous course until another catastrophe threw "the monkey-wrench into the machine."

Recent analysis, however, has shown that the matter is not so simple as all this. Two closely related lines of movement converge to produce these disturbances. The first is the development of the industrial system. This involves change in technique, in organization, in markets, and in the demand for goods. The instruments of production are largely specialized; labor is mobile only within fixed limits; and only newly accumulated capital is possessed of this characteristic. Capital values are based upon the earnings anticipated in view of the known and predictable, not the novel, elements in the situation. Particular productive goods are turned out with an expectation that they will be used in the production of particular consumptive goods. The system as a whole has far too much of rigidity successfully and immediately to adapt itself to those radical changes. Yet so delicate is the system that anything which affects a particular industry is certain to have an appreciable effect upon the whole.

The second is "the rhythm of business activity," or the economic cycle. A depression, characterized by conservatism in business and financial activity, gradually leads to an improvement in conditions; as business expands a spirit of optimism arises, and stimulates further expansion; the latter reacts upon the feeling of optimism and causes it to assume a tone of overconfidence, which leads to "flush times" and feverish activity; sooner or later business overshoots the mark, losses occur, and perhaps a crisis, contraction is necessary, and a depression again appears. The cycle is a closed one; it has no logical begining and no consummation. From lean to fat to lean years it ever runs its varied round.

But the situation is further complicated by the different behavior of different industries and industrial agents during the cycle. If the price scheme were such that values as a whole could be quickly readjusted to meet new conditions, much trouble might be avoided. But such is not the case. Sheer necessity alone must be depended upon to establish the lower price level. But businesses occupy different strategic positions; the baker and the manufacturer of steel rails are likely to be affected in different ways by price-making forces at different stages of the cycle. The man with fixed salary and the

employee whose contract runs in terms of a few months or weeks are on a different footing. The result is that all values do not go up or go down together. The output of various industries, similarly, do not increase or decrease together. Yet all of these industries are involved in a delicate system that calls for nice adjustments.

It is these movements which are responsible for the facts that no two cycles or crises-are alike; that the cycle varies greatly in length, in sweep, and in intensity, and that a myriad of dissimilar theories have been put forward to account for them, few of which contain no germ of truth.

Its spectacular character has singled out the crises for particular attention almost to the exclusion of the more important "flush times" and depressions. It is not surprising that antecedent business and industrial conditions are often overlooked, and crises are explained in terms of monetary standards and banking systems. Undoubtedly our banking laws in the past have made our crises unusually severe. The elasticity of credit and noteissue secured by the recent currency act should do much to relieve financial stringency when a crisis arises. It should also do something to prevent its occurrence. But those who expect it to cause the industrial process to pursue a more even course are likely to be disappointed.

The violence of the ebb and flow of business activity increases tremendously the difficulty of properly organizing society through price. It also reveals grave breaks in the organization. Capital is insecure and funded wealth may disappear over night. The cycle is associated with a rhythm of overemployment, non-employment, and underemployment. The capitalists and laborers whose products satisfy marginal wants are put in a very precarious economic position. The crisis destroys wealth, specialized talent, and organization, all of which must be replaced.

The economic cycle involves the whole industrial system. No simple device will arrest the violence of its rhythm. It can be reached only by a complex of many complementary measures. If we are to control the cyclewe must learn to control the introduction of new technique; the demand for goods must be steadied; we must develop an art of predicting business conditions; a means must be found for co-ordinating recently accumulated capital and opportunities for investment; a higher sense of responsibility in making loans must be developed by the bankers; a feeling of responsibility must be engendered in the promoter; and means must be devised for checking the speculative mania.

In time, as our very rapid industrial development slows up, the sweep of the economic cycle may be expected to be less extreme. Then perhaps we shall hear complaints about a prosaic age that has no speculative prizes to dangle before the eyes of investors to tempt them to take chances with unknown opportunities. Then, perhaps, men will point to the "golden age" of the past, when unexploited opportunities were on all sides. They may go so far as to conclude that our violent fluctuations in business were a small price to pay for our rapid industrial development.

A. THE DELICATE MECHANISM OF INDUSTRY

96. The Spirit of Business Enterprise1

BY WESLEY C. MITCHELL

Money economy has attained its fullest development in our own day under the influence of machine production. Its essential feature

1Adapted from Business Cycles, 21-26. Copyright by the author (1913). Published by the University of California Press

is that economic activity takes the form of making and spending money incomes. Instead of producing the goods their families require, men "make money," and with their money incomes buy for their own use goods made by unknown hands. The economic comfort or misery of the modern family, accordingly, depends not upon its efficiency in making useful goods and its skill in husbanding supplies, but upon its ability to command an adequate money income. and upon its pecuniary thrift. Even in years when crops are short and mills are idle, the family with money need not go cold or hungry. But the family without money leads a wretched life even in years of abundance. Always the elaborate co-operative process by which a nation's myriad workers provide for the meeting of each other's needs is brought into precarious dependence upon the factors which determine the prospects of making money.

For purposes of making money men have gradually developed the modern business enterprise—an organization which seeks to realize pecuniary profits upon an investment of capital by a series of contracts for the purchase and sale of goods in terms of money. Business enterprises of the full-fledged type have come to occupy almost the whole field in finance, wholesale trade, railway and marine transportation. They dominate mining, lumbering and manufacturing. In retail trade they play an important rôle, and in agriculture they have secured a foothold. But, despite this wide extension of business aims and methods, there still remain broad differences of degree between the enterprises typical of the several fields of effort. In size, in complexity of organization, in dependence on the money market, in singleness of business aim, the typical farm and the small retail store are not comparable with the typical corporate enterprises of transportation, mining and finance.

This uneven development of business organization in different fields is highly important. For it is within the circles of full-fledged business enterprises that the alternations of prosperity and depression appear most clearly. Branches of trade which are not organized elaborately are much less susceptible both to the stimulus of prosperity and to the inhibition of depression. In country districts, for example, the pace of activity is subject to seasonal but not to cyclical changes such as occur in factory towns. The farmers are never thrown out of work except by bad weather, and they are never overrushed except by seed-time and harvest. In other words, the scope and intensity of prosperity and depression appear to depend upon the extent and the perfection of business organization.

No less important is the thoroughgoing interdependence of business enterprises. As a plant concerned with the handling of

commodities, the typical enterprise is one cog in a great machine. Our industries are carried on by sets of nominally independent plants which pass on goods to each other. For example, one series embraces wheat-growers, grain-carrying railways, elevators, flour mills, wholesale dealers in provisions, bakeries, and retail distributing agencies. Each set of members in such a series is dependent upon the preceding set for its chief supplies and upon the succeeding set for its chief vent. Further, no industrial series is self-sufficing. Each set of enterprises in our example, from the farms to the retail agencies, is industrially dependent on other industrial series which equip it with buildings, machines, fuel, office supplies, etc. A peculiar mutual dependence exists between the whole mass of industries and the railways. Coal-mining and the steel trade also touch practically every industrial establishment. Since the transfers of goods are maintained by contracts of purchase and sale, each enterprise is affected by the fortunes of its customers, its competitors, and the purveyors of its supplies. Financial interdependence is also in part but another aspect of the industrial and commercial bonds. Complicated relationships of debtor and creditor arise from the purchase and sale of goods on credit, and make the disaster of one enterprise a menace to many.

A business enterprise may participate in the work of providing the nation with useful goods or it may not. For there are divers ways of making money which are positively detrimental to future welfare. But it is more important that even the enterprises which are making useful goods do so only so far as the operation is expected to serve the primary business end of making profits. Any other attitude is impracticable under the system of money economy. For the man who allowed his humanitarian interests to control his business policy would soon be forced out of business. From the business standpoint the useful goods produced are merely byproducts of the process of earning dividends. A clear appreciation of this fact is necessary to an understanding of the relations between industry, commerce, and business. For the well-being of the community, efficient industry and commerce are vastly more important than successful money-making. A panic which did not interrupt the making and distributing of wares desired by the community would be no great disaster. But the whip-hand belongs to business. In practice, industry and commerce are thoroughly subordinated to it. The ebb and flow of contemporary economic activity is primarily concerned with the phenomena of business traffic-that is, of money-making.

Business prosperity depends upon the factors which control present and prospective profits, together with present and prospec