FROM COMPETITION TO CO-OPERATION finally a time came when the means of produc- tion of commodities increased beyond the demand possible under existing conditions. England was the first nation to benefit from the competitive organization of society. While all Europe was plunged into the Napoleonic wars, England, protected by the ocean, organ- ized its trade and industries. Therefore Eng- land was the first nation in which the means of production developed beyond the possible demand. Temporarily the problem was solved by supplying the markets of the world, and thereby taking care of the rapidly increasing excess of its producing facilities over its own demand. Thus England became a great ex- porting nation, and by the profits of its foreign trade laid the foundation of its later financial power. But gradually the other nations caught up. So Germany, once — still within the memory of the present generation — an industrial depend- ency of England, became independent, then became England's competitor in the markets of the world, and to-day China is about the only large remaining outlet for the over-production of the industrial nations. Therefore the great interest of the nations in the "opening up of 21 AMETUCIA AND THE NEW EPOCH China," and their mad scramble to get control of its markets. America is in a peculiar and very fortunate position. As a new country with a vast capital in natural resources, and with a relatively low population density, but a rapidly growing pop- ulation, it offered great opportunities of devel- opment. That part of the United States which is least favored by nature, but which was settled first — the New England States — felt the pinch of the industrial problem already in the middle of the nineteenth century, but the problem was solved, at least temporarily, by forcibly ex- cluding foreign competition from the United States, and so reserving the markets of the South and of the West to the industrial New England States. This was the issue on which the Civil War was fought; the abolishment of slavery was merely an incident of this economic issue. The Civil War thus was an economic war, just as every great war has been; it con- solidated the United States industrially as one nation, while the Revolutionary War had made it politically one nation. The great industrial development of our country in the last generation was the result. Finally even in the United States the rapidly 22 FROM COMPETITION TO CO-OPERATION increasing means of production have crept up to and beyond the means of possible consump- tion. This occurred later than in any other civilized nation, for various reasons. The rap- idlj' increasing population meant an abnormal increase of demand. The development of the vast possibilities of the country in farming, mining, transportation, etc., absorbed a vast amount of industrial products, and offered em- ployment and means of living to millions, and this increase of population again increased the possible consmnption. The vast natural re- sources made it possible to use what we had not produced, and thereby led to an average consumption, an average standard of living, beyond that of any other country. This is a rather serious problem, as it means that our nation has largely been living on its capital and not on its income, and thereby acquired habits of the spendthrift. But our natural resources are greatly depleted, and when it will not be possible any more to cut down for lumber the trees which we have not planted, to take out from the soil as crops what we have not put in, but when every tree which we cut down will have to be planted and raised, as in other countries, when we shall have to put into the 23 AMERICA AND THE NEW EPOCH soil as fertilizer whatever we take out as crops, then under the present industrial organization of our country we will not be able to maintain our present standard of living. All these features together have created an abnormal increase of consuming capacity of our nation, and so it was only in the last decades that the means of possible production have be- gun to increase beyond the possible demand for consumption and the industrial problem has become urgent. This problem had not been expected in the early days of the competitive system of society, and while to-day most people throughout the civilized world feel that there is a hitch some- where in the working of free competition, most people do not yet clearly realize where and why competition failed to bring about that stable balance between production and consumption which was the orthodox idea of the economists of the past, in the early days of the individualis- tic era, and which is still the conception of many of those who, far from the work of the world under the student lamp and in the chairs of our universities, ponder over the problems of the nation. The conception of competition as a benevo- 84 FROM COMPETITION TO CO-OPERATION lent force in the industrial progress was based upon the theory that by competition between the producers prices would be lowered down to near the cost of production, stopping just as much above the cost of production as is neces- sary to give a fair profit. The fallacy involved in this reasoning is the neglect of the economic law that it is more economical to operate a business or a factory at a loss than it is to have it stand idle; be- cause to have an industry, a factory, stand idle, involves the continuous loss in fixed charges. The cost of production, whether it be that of a few quarts of milk which a farmer peddles through a country town, or of the most intri- cate machinery, or of common necessities, as shoes, clothing, or of the transi)ortation and distribution of goods, or of the electric energy supply of a city, always consists of two parts, a fixed cost and a proportionate cost. The former comprises all those expenses which go on whether anything is produced or the pro- duction stopped by lack of demand for the product. The latter represents that part of the cost which is proportional to the amount of commodity produced. Fixed cost, for instance, 25 AMERICA AND THE NEW EPOCH is the interest on the investment. Whether the factory is working full capacity, or only part of its capacity, or standing entirely idle, the interest charges continue the same. Proportionate cost, for instance, is that of raw materials; if we produce twice as much, twice as much material is needed. If the production ceases, the con- sumption of raw material ceases. Possibly, in bygone days of simplest individual production, the fixed cost may have been negligible; if the shoemaker in the earliest Colonial days did not find enough work in making shoes, he could probably do some harness-making, or some carpenter work in his shop, and so earn his living. But if to-day the demand W shoes falls off and the shoe-factory has to shut down, the interest on the investment represented by the factory goes on just the same; the depre- ciation of machinery, of buildings, etc., con- tinues; some maintenance is still required — that is, a considerable part of the cost of pro- duction continues even if the production has stopped. This part of the cost of production, which is called the fixed cost, as it is independ- ent of the amount of the product, and which continues even if there is no production, varies from a few per cent, in some simple opera- 2G FROM COMPETITION TO CO-OPERATION tions up to over 90 per cent, of the total cost of the product, in some hydro-electric power plants. The result is that unlimited competition, as soon as the ability of producing has increased beyond the available demand for the product, forces the price down not merely to the value giving a fair profit above the cost of production, as dreamt by the early economists, but the dropping of price stops only there, where it would become cheaper to stop production than to produce at a loss — that is, where the loss in production exceeds the loss of having the in- dustry stand idle: the limitation of price, forced by competition, is below the cost of produc- tion, a . I as the result the level reached by free industrial competition is an unstable condition, a condition of production at a loss, which can exist and continue for a limited time only, but finally ends in the bankruptcy of many of the producers, in serious losses to others, and in wide-spread destruction of values. Consider as an illustration the case of a very large industrial power plant: for every $100 invested in the plant the annual income may be $50. These $50 are disposed of as fol- lows; 27 AMERICA AND THE NEW EPOCH Labor $ 9 Fuel 6 Other materials and supplies 11 Taxes 3 Depreciation 6 Interest 5 Dividends 6 Surplus 4 Of these expenses, all the fuel, most of the labor and materials, and a part of the depre- ciation are proportionate costs — that is, costs which vary with the amount of commodity produced, and would, therefore, vanish if, due to competition, the production should cease. Taxes and interest, however, most of the depreciation, and a small part of labor and of materials are fixed costs — that is, continue re- gardless whether the plant is operating full capacity, or at reduced output, or entirely standing idle. (Dividends should in reality be included in fixed cost, as without dividends no capital could be induced to invest, and the plant could, therefore, not exist. They will, however, be omitted, as temporarily, for some years, an industrial organization can continue without dividends. Surplus represents the amount of income set aside for times when the income falls below the cost of production — that is, is an insurance against temporary losses.) 28 FROM COMPETITION TO CO-OPERATION The distribution of proportionate cost and of fixed cost per $100 capital invested in the plant thus would be: At an annual income of $50 : Proportionate Fixed Cost Cost Labor $ 8 $1 Fuel G Other materials 10 1 Taxes 3 Depreciation 2 4 Literest 5 Total $20 $14 Gram! total. . . $40 leaving $10 for dividends and surplus. If the production were entirely stopped, the $26 proportionate cost, per $100 invested, would be saved, but the $14 fixed cost, per $100 of capital invested, would continue, as a loss or impairment of capital, of 14 per cent, per year, and thus, in ^Y' = '^ years, the entire capital would be wiped out by the losses, and lost. Thus it is economically not possible to shut down the plant and wait until there is again a demand for the commodity. Suppose now, to maintain the plant in oper- ation, the price of the commodity were reduced from $50 to $33. At $40 total cost of production, this would 29 AMERICA AND THE NEW EPOCH give an annual loss of $40 — $33 = $7, or 7 per cent, of the invested capital, thus would wipe out the capital of the company in -7- = 14 years, and be destructive. Nevertheless, rather than close down entirely and incur the annual loss of 14 per cent, of the invested capital, it would be preferable, when forced by competi- tion, to lower the price of the commodity below cost, to $33, as the loss thereby incurred, of 7 per cent., is less than the loss in standing idle. For the different prices of the conii .odity, per $100 of investment, the profits and the losses, and the time until the capital invested in the plant is wiped out by the losses, would then be: rice of Commodity; Per $100 of Invested Capital Dividends and Surplus Per Cent. Loss Per Cent. Capital Wiped Out In $50 10 45 5 . . 40 0 0 35 5 20 years 30 10 10 " 26 14 7 " 25 15 0.7 " 20 20 5 Shut down: 14 7 " Thus, when forced by unrestricted competi- tion it would be more economical to operate, selling the product below cost, at any loss up to 30 IROM COMPETITION TO CO-OPERATION 14 per cent. — although this would inevitablj'^ ruin the company — rather than close down and ac- cept the still greater toss of the entire fixed cost. But operation at a loss, though not so rapidly destructive as shut down, still means financial disaster, and when forced by unrestricted com- petition thus ends in ruin. We have seen, and still see all around us, the destruction of producers wrought by com- petition, the waste of intellectual and physical values incident thereto, and the resultant dam- age to the industry, and with it to society. The failure of the industrial system of com- petition to come up to the expectations of the early days thus was due to the failure of recog- nizing in the theory of competition the bearing of the fixed cost of production on the level reached by competitive production. The natural result of this industrial law is that free competition cannot continue, but that intelligent people in charge of the industries all over the world — whether they be the milk- men or ice-dealers supplying a small country town, or the presidents of rolling-mills or rail- roads— have to come together and stop unlim- ited competition before the level of destruction is reached. 3 31 AMERICA AND THE NEW EPOCH This led to co-operation as the industrial force which is taking the place of competition. Many people in our country, in all walks of life, economists and statesmen, even, do not yet realize the working of this economic law and its consequence. They see competition vanishing before co- operation or consolidation, and, still dreaming of competition as the beneficent force which it was in the early days of industrial develop- ment, endeavor to restore competition. There- fore, you see all the attempts to resurrect to life a dead issue by legal enactments, by trying to break up the cori^orations, enforcing com- petition by law, etc. All this is contrary to the economic laws underlying industrial produc- tion, and is therefore helpless, and must remain a failure. No legal enactment can change this, but the laws of nature are above man-made laws, and political law violating the laws of nature is void. You may destroy the indus- tries by legal interference, and plunge the na- tion in disaster and chaos, but you cannot re- store competition. It is dead, just as dead as the feudalism of the Middle Ages. Co-operation is taking its place. This, here in America, many of our leaders 32 FROM COMPETITION TO CO-OPERATION of thought in the theoretical field, in our uni- versities, in our political offices, have not real- ized, neither do the mass of the people realize it yet, and consequently they mistake the effect for the cause. They imagine industrial consoli- dation is killing competition, and try to stop consolidation by breaking up the corporations, while in reality the death of competition as a beneficent industrial force is the cause of con- solidation, has led to the corporation as the only means of industrial production. Thus, not the "trusts" are killing competition, but the failure of competition is the cause of industrial consolidation, of the corporations. Thus, wherever outside forces did not inter- fere, the inevitable, because natural, industrial development in the individualistic era is, from small production by numerous independent in- dividual producers — in the days before Lincoln, in our country — to a smaller number of larger industrial establishments still personally owned and managed. Then by consolidation of the stronger, and elimination of the weaker ones, came the formation of industrial corpora- tions, each representing the combination of numerous individual producers. In the begin- ning these corporations were still largely domi- 33 AMERICA AND THE NEW EPOCH nated by individuals, their organizers, but gradually the personal element stepped into the background and vanished, the number of cor- porations decreased and their size increased until finally the entire industry was organized into a moderate number of very large corpora- tions, often still in fierce and destructive com- petition with one another. Of necessity then followed the formation of a co-operative ar- rangement between the corporations dominating the industry, for self-preservation against the general destruction inevitable by unrestrained competition. Sometimes it was the formation of a single corporation controlling the entire industry; more frequently one large corpora- tion controlling a large part of the industry, and a number of smaller corporations, which, while financially and administratively independent, by tacit understanding accepted the prices fixed by the dominating corporation. Usually, how- ever, with a number of large corporations in the field, the destructive competition was elimi- nated by agreements limiting production to that conforming with the demand, and agree- ing upon prices maintaining a fair margin of profit. Such CO - operative agreements varied in nature from practical consolidation FROM COMPETITION TO CO-OrERATION into a trust or syndicate to a mere gentle- man's agreement. Such a co-operative agreement on prices and production is necessary if the industry shall sur- vive and the nation escape industrial disaster, and in countries in which an intelligent central- ized government looked after the welfare of the nation, as in Germany, such elimination of competition and consolidation for the common good has been encouraged and assisted, and often enforced by the Government, while in countries in which the Government is entirely under the control of capitalism and has no in- dependent power, as in England, the Govern- ment has stood aside and allowed the corpora- tions to organize more or less efficiently^ Only in our country has the national Government, impelled by the remnants of the small individ- ual producers, the still powerful middle-class interests, attempted to outlaw the co-operation of corporations and by political laws to legis- late against economic laws, without realizing that economic laws are laws of nature, are inev- itable, and their defiance, whether by an indi- vidual or by a nation, means self-destruction.' There was, however, some excuse for the op- position against the co-operation of the corpo- 35 AxMERICA AND THE NEW EPOCH rations controlling the industry, in tlie danger to the public welfare which the power of such co-operative organization may involve in a na- tion like ours, which has no stable, permanent, and therefore responsible Government, but in which the Government is still largely dominated by the principle of rotation in office for the distribution of spoils. In the control of an industry by the co-operation of the industrial corporations in controlling production and prices, it is possible to limit production below the demand, and so "corner" the product, and to raise the prices beyond those giving a fair return on the legitimate investment of capi- tal. Then the combination becomes a national menace, especially where foreign competition does not act as a check, as in free-trade England. Sometimes such ex[)loilation of the public may be premeditated, but more often it is the result of the inefficiency of production, and the latter is the more serious side of the problem, as it is more difficult to deal with than a mere attempt of extortion. The modern corporation, which is the present expression of the co-operative system of indus- trial organization, is such a relatively new de- velopment that its structure is still crude and 30 FROM COMPETITION TO CO-OPERATION defective in many ways. Its activities are four- fold— financial, administrative, technical, and social. As capital is the foundation of our present industrial system, financial consolida- tion is the first step of industrial co-operation. Administrative consolidation and reorganiza- tion must follow, and then technical or engi- neering reorganization, to reap the benefit of industrial co-operation. The technical side of the corporation is the purpose of its existence; manufacture, transportation, etc., are technical or engineering pi'oblems, and the administra- tive and financial activities, therefore, merely means to accomplish the legitimate object of the corporation — production. Therefore, where the progress stops with administrative consoli- dation and does not reach engineering re- organization for the higher efficiency made possible thereby, the results are disappointing, and dissatisfaction of the public follows and sooner or later makes itself felt by hostile atti- tude toward the corporation. Where the work has stopped with the financial consolidation and does not reach administrative reorganiza- tion, waste and extravagance and financial disaster are liable to result. It cannot be denied that a considerable part 37 AMERICA AND THE NEW EPOCH of the public hostility against corporations re- sulted from the increase of the price of the com- modity controlled by some corporations. The failure of proceeding beyond financial consoli- dation, the failure of efficient administrative, and especially technical reorganization, re- sulted in not realizing the decreased cost of production which the economy of mass pro- duction should bring about, and the need of paying the cost of consolidation then led to an increase of the price of the commodity, instead of the decrease which should be the result of co-operative production, and the absence of competition then allowed such a situation to persist longer than is safe. At the same time, it must be realized that the corporations are the creations of man, that the industrial develop- ment of our country has been so enormously rapid and the number of men capable of direct- ing it safely is relatively so insufiicient that many things which should be done, which the corporation leaders realize as desirable and necessary and wish to have done, remain undone for a long time, because men capable of doing them cannot be found. The inevitable defects of the new industrial growth led to the demand for supervision and 38 FROM COMPETITION TO CO-OPERATION control of corporations, and siicli supervision and control thus has been established by legisla- tive action of municipalities, states, and nation, in the various commissions, from the Interstate Commerce Commission of tlie Federal Govern- ment down to municipal commissions dealing with local industries. The unfortunate feature is that the men who created these industrial commissions, and who serve in them, very often do not understand the economic position of the corporations as industry's most efficient tool, do not realize that we are in the transition from the competitive to the co-operative system of industry, and much of the legislation thus is inquisitorial rather than constructive, and as the result it is questionable whether thus far the legislation regarding corporations has not done more harm than good for the nation. The structural elements of the industrial cor- porations are human beings, and when replacing their separate industrial efforts as individual producers by their co-operative work in the corporate organization, their individual efforts for their own well-being also require consolida- tion into an organization for their common wel- fare. And, after all, while the purpose of the corpolration is industrial production, the pur- 39 AMERICA AND THE NEW EPOCH pose of industrial production is the welfare of the members of society, the producers, so that the final purpose of all is the welfare of societj^ \ The realization of "social work" as one of the essential activities of the corporation has come last. It is just being approached by many corporations. Sometimes it is the result of the pressure exerted by independent and often hostile employees' associations — labor unions. Or where the corporation has succeeded in suppressing organized action of its employees, by spontaneous outbreaks — syndicalism. But whatever the reasons may be for entering social work, it must be realized that it is not a "char- ity," a "social duty," but is just as integral a part of the corporation as the financial or the administrative activities. The most serious defect of the social activ- ities of the corporations to-day — welfare and ed- ucation— is the lack of men capable to direct the work. To organize and direct this imi)or- tant activitj'^ of the modern corporation requires men who have to a high degree the social sense, and at the same time are thoroughly familiar with the other activities of the company, finan- cial, administrative, and technical, so as to co- ordinate their social work with the other 40 FROM COMPETITION TO COOPERATION activities of the corporation. Such men are few, and herein hes the greatest limitation of the rapid advance of the corporate organiza- tion of society, which is necessary for its economic efficiency. The question is often asked by the extreme individuah'st. With industrial competition dead and the national — or international — corpora- tion taking the i)lace of the numerous independ- ent and competing producers, will not industrial progress stop, and stagnation — that is, retro- gression— result from the suppression of indi- vidual enterprise, the absence of the rivalry between competitors, which brings out their best efforts, their initiative and ambition? Industrial competition of everybody for himself and against everybody else — and the devil take the hindmost — has failed and is dis- appearing, is, indeed, practically dead, but there is growing up in the industrial organizations a competition to further the common end, the welfare and advance of the organization, a rivalry, who can accomplish most for the benefit of the corporation, and the reward is in power, in reputation, and also financially. It is this competition of co-operation which the change of the industrial system from competition to co- 41 AMERICA AND THE NEW EPOCH operation is introducing into the industries; the same competition of co-operation as exists in sci- entific circles in the universities of the world, the same as has made armies victorious and nations powerful and, when failing by the encroachment of class privilege and favoritism, has defeated armies and destroyed nations. Success is often measured by the accumula- tion of wealth; but does anybody really im- agine that to the multi-millionaires, to the great financiers of to-day, the accumulation of money far beyond any possible personal use is the in- ducement? Is it not rather the power which the money represents, and does not the power of great scientific reputation, of statesmanship, etc., attract equally great minds? If we speak of really great men — men whose greatness everybody recognizes — a Lincoln, Washington, Franklin — does anybody know or ask how rich they were, how "successful" they were from the point of view of measuring success by wealth? So ambition, rivalry, the success of power and accomplishment remain, even if money would cease to be the goal. However, even to-day the chances of financial success in unrestrained industrial competition are rather remote, and in the big corporation a far better 42 FROM COMPETITION TO CO-OPERATION chance of success is afforded than in individual production, even from the financial point of view. Thus the nightmare that the elimination of industrial competition and the development of the vast industrial corporation would stifle progress by destroying ambition requires no serious consideration; the reverse is the case. We still hear a lot of talk on the necessity of individual enterprise for progress, but even to- day and for some time back, when any really great work was considered, individual enter- prise usually failed, and the corporation, either the private corporation, or the public corpo- ration— municipality. State, or nation — had to step in.