The rewards and punishments of the economic world are singularly unequal.  One man earns as much in a week or even in a day as another does in a year.  This man by hard, manual labor makes only enough to pay for humble shelter and plain food.  This other by what seems a congenial activity, fascinating as a game of chess, acquires uncounted millions.  A third stands idle in the market place asking in vain for work.  A fourth lives upon rent, dozing in his chair, and neither toils nor spins.  A fifth by the sheer hazard of a lucky “deal” acquires a fortune without work at all.  A sixth, scorning to work, earns nothing and gets nothing; in him survives a primitive dislike of labor not yet fully “evoluted out;” he slips through the meshes of civilization to become a “tramp,” cadges his food where he can, suns his tattered rags when it is warm and shivers when it is cold, migrating with the birds and reappearing with the flowers of spring.

Yet all are free.  This is the distinguishing mark of them as children of our era.  They may work or stop.  There is no compulsion from without.  No man is a slave.  Each has his “natural liberty,” and each in his degree, great or small, receives his allotted reward.

But is the allotment correct and the reward proportioned by his efforts?  Is it fair or unfair, and does it stand for the true measure of social justice?

This is the profound problem of the twentieth century.

The economists and the leading thinkers of the nineteenth century were in no doubt about this question.  It was their firm conviction that the system under which we live was, in its broad outline, a system of even justice.  They held it true that every man under free competition and individual liberty is awarded just what he is worth and is worth exactly what he gets:  that the reason why a plain laborer is paid only two or three dollars a day is because he only “produces” two or three dollars a day:  and that why a skilled engineer is paid ten times as much is because he “produces” ten times as much.  His work is “worth” ten times that of the plain laborer.  By the same reasoning the salary of a corporation president who receives fifty thousand dollars a year merely reflects the fact that the man produces ­earns ­brings in to the corporation that amount or even more.  The big salary corresponds to the big efficiency.

And there is much in the common experience of life and the common conduct of business that seems to support this view.  It is undoubtedly true if we look at any little portion of business activity taken as a fragment by itself.  On the most purely selfish grounds I may find that it “pays” to hire an expert at a hundred dollars a day, and might find that it spelled ruin to attempt to raise the wages of my workingmen beyond four dollars a day.  Everybody knows that in any particular business at any particular place and time with prices at any particular point, there is a wage that can be paid and a wage that can not.  And everybody, or nearly everybody, bases on these obvious facts a series of entirely erroneous conclusions.  Because we cannot change the part we are apt to think we cannot change the whole.  Because one brick in the wall is immovable, we forget that the wall itself might be rebuilt.

The single employer rightly knows that there is a wage higher than he can pay and hours shorter than he can grant.  But are the limits that frame him in, real and necessary limits, resulting from the very nature of things, or are they mere products of particular circumstances?  This, as a piece of pure economics, does not interest the individual employer a particle.  It belongs in the same category as the question of the immortality of the soul and other profundities that have nothing to do with business.  But to society at large the question is of an infinite importance.

Now the older economists taught, and the educated world for about a century believed, that these limitations which hedged the particular employer about were fixed and assigned by natural economic law.  They represented, as has been explained, the operation of the system of natural liberty by which every man got what he is worth.  And it is quite true that the particular employer can no more break away from these limits than he can jump out of his own skin.  He can only violate them at the expense of ceasing to be an economic being at all and degenerating into a philanthropist.

But consider for a moment the peculiar nature of the limitations themselves.  Every man’s limit of what he can pay and what he can take, of how much he can offer and how much he will receive, is based on the similar limitations of other people.  They are reciprocal to one another.  Why should one factory owner not pay ten dollars a day to his hands?  Because the others don’t.  But suppose they all do?  Then the output could not be sold at the present price.  But why not sell the produce at a higher price?  Because at a higher price the consumer can’t afford to buy it.  But suppose that the consumer, for the things which he himself makes and sells, or for the work which he performs, receives more?  What then?  The whole thing begins to have a jigsaw look, like a child’s toy rack with wooden soldiers on it, expanding and contracting.  One searches in vain for the basis on which the relationship rests.  And at the end of the analysis one finds nothing but a mere anarchical play of forces, nothing but a give-and-take resting on relative bargaining strength.  Every man gets what he can and gives what he has to.

Observe that this is not in the slightest the conclusion of the orthodox economists.  Every man, they said, gets what he actually makes, or, by exchange, those things which exactly correspond to it as regards the cost of making them ­which have, to use the key-word of the theory, the same value.  Let us take a very simple example.  If I go fishing with a net which I have myself constructed out of fibers and sticks, and if I catch a fish and if I then roast the fish over a fire which I have made without so much as the intervention of a lucifer match, then it is I and I alone who have “produced” the roast fish.  That is plain enough.  But what if I catch the fish by using a hired boat and a hired net, or by buying worms as bait from some one who has dug them?  Or what if I do not fish at all, but get my roast fish by paying for it a part of the wages I receive for working in a saw mill?  Here are a new set of relationships.  How much of the fish is “produced” by each of the people concerned?  And what part of my wages ought I to pay in return for the part of the fish that I buy?

Here opens up, very evidently, a perfect labyrinth of complexity.  But it was the labyrinth for which the earlier economist held, so he thought, the thread.  No matter how dark the passage, he still clung tight to it.  And his thread was his “fundamental equation of value” whereby each thing and everything is sold (or tends to be sold) under free competition for exactly its cost of production.  There it was; as simple as A. B. C.; making the cost of everything proportional to the cost of everything else, and in itself natural and just; explaining and justifying the variations of wages and salaries on what seems a stern basis of fact.  Here is your selling price as a starting point.  Given that, you can see at once the reason for the wages paid and the full measure of the payment.  To pay more is impossible.  To pay less is to invite a competition that will force the payment of more.  Or take, if you like, the wages as the starting point:  there you are again, ­simplicity itself:  the selling price will exactly and nicely correspond to cost.  True, a part of the cost concerned will be represented not by wages, but by cost of materials; but these, on analysis, dissolve into past wages.  Hence the whole process and its explanation revolves around this simple fundamental equation that selling value equals the cost of production.

This was the central part of the economic structure.  It was the keystone of the arch.  If it holds, all holds.  Knock it out and the whole edifice falls into fragments.

A technical student of the schools would digress here, to the great confusion of the reader, into a discussion of the controversy in the economic cloister between the rival schools of economists as to whether cost governs value or value governs cost.  The point needs no discussion here, but just such fleeting passing mention as may indicate that the writer is well and wearily conversant with it.

The fundamental equation of the economist, then, is that the value of everything is proportionate to its cost.  It requires no little hardihood to say that this proposition is a fallacy.  It lays one open at once, most illogically, to the charge of being a socialist.  In sober truth it might as well lay one open to the charge of being an ornithologist.  I will not, therefore, say that the proposition that the value of everything equals the cost of production is false.  I will say that it is true; in fact, that is just as true as that two and two make four:  exactly as true as that, but let it be noted most profoundly, only as true as that.  In other words, it is a truism, mere equation in terms, telling nothing whatever.  When I say that two and two make four I find, after deep thought, that I have really said nothing, or nothing that was not already said at the moment I defined two and defined four.  The new statement that two and two make four adds nothing.  So with the majestic equation of the cost of production.  It means, as far as social application goes, as far as any moral significance or bearing on social reform and the social outlook goes, absolutely nothing.  It is not in itself fallacious; how could it be?  But all the social inferences drawn from it are absolute, complete and malicious fallacies.

Any socialist who says this, is quite right.  Where he goes wrong is when he tries to build up as truth a set of inferences more fallacious and more malicious still.

But the central economic doctrine of cost can not be shaken by mere denunciation.  Let us examine it and see what is the matter with it.  We restate the equation.

Under perfectly free competition the value or selling price of everything equals, or is perpetually tending to equal, the cost of its production. This is the proposition itself, and the inferences derived from it are that there is a “natural price” of everything, and that all “natural prices” are proportionate to cost and to one another; that all wages, apart from temporary fluctuations, are derived from, and limited by, the natural prices paid for the things made:  that all payments for the use of capital (interest) are similarly derived and similarly limited; and that consequently the whole economic arrangement, by giving to each person exactly and precisely the fruit of his own labor, conforms exactly to social justice.

Now the trouble with the main proposition just quoted is that each side of the equation is used as the measure of the other.  In order to show what natural price is, we add up all the wages that have been paid, and declare that to be the cost and then say that the cost governs the price.  Then if we are asked why are wages what they are, we turn the argument backward and say that since the selling price is so and so the wages that can be paid out of it only amount to such and such.  This explains nothing.  It is a mere argument in a circle.  It is as if one tried to explain why one blade of a pair of scissors is four inches long by saying that it has to be the same length as the other.  This is quite true of either blade if one takes the length of the other for granted, but as applied to the explanation of the length of the scissors it is worse than meaningless.

This reasoning may seem to many persons mere casuistry, mere sophistical juggling with words.  After all, they say, there is such a thing as relative cost, relative difficulty of making things, a difference which rests upon a physical basis.  To make one thing requires a lot of labor and trouble and much skill:  to make another thing requires very little labor and no skill out of the common.  Here then is your basis of value, obvious and beyond argument.  A primitive savage makes a bow and arrow in a day:  it takes him a fortnight to make a bark canoe.  On that fact rests the exchange value between the two.  The relative quantity of labor embodied in each object is the basis of its value.

This line of reasoning has a very convincing sound.  It appears in nearly every book on economic theory from Adam Smith and Ricardo till to-day.  “Labor alone,” wrote Smith, “never varying in its own value is above the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared.”

But the idea that quantity of labor governs value will not stand examination for a moment.  What is quantity of labor and how is it measured?  As long as we draw our illustrations from primitive life where one man’s work is much the same as another’s and where all operations are simple, we seem easily able to measure and compare.  One day is the same as another and one man about as capable as his fellow.  But in the complexity of modern industrial life such a calculation no longer applies:  the differences of skill, of native ingenuity, and technical preparation become enormous.  The hour’s work of a common laborer is not the same thing as the hour’s work of a watchmaker mending a watch, or of an engineer directing the building of a bridge, or of an architect drawing a plan.  There is no way of reducing these hours to a common basis.  We may think, if we like, that the quantity of labor ought to be the basis of value and exchange.  Such is always the dream of the socialist.  But on a closer view it is shattered like any other dream.  For we have, alas, no means of finding out what the quantity of labor is and how it can be measured.  We cannot measure it in terms of time.  We have no calculus for comparing relative amounts of skill and energy.  We can not measure it by the amount of its contribution to the product, for that is the very matter that we want to discover.

What the economist does is to slip out of the difficulty altogether by begging the whole question.  He deliberately measures the quantity of labor by what is paid for it.  Skilled labor is worth, let us say, three times as much as common labor; and brain work, speaking broadly, is worth several times as much again.  Hence by adding up all the wages and salaries paid we get something that seems to indicate the total quantity of labor, measured not simply in time, but with an allowance for skill and technical competency.  By describing this allowance as a coefficient we can give our statement a false air of mathematical certainty and so muddle up the essential question that the truth is lost from sight like a pea under a thimble.  Now you see it and now you don’t.  The thing is, in fact, a mere piece of intellectual conjuring.  The conjurer has slipped the phrase, “quantity of labor,” up his sleeve, and when it reappears it has turned into “the expense of hiring labor.”  This is a quite different thing.  But as both conceptions are related somehow to the idea of cost, the substitution is never discovered.

On this false basis a vast structure is erected.  All prices, provided that competition is free, are made to appear as the necessary result of natural forces.  They are “natural” or “normal” prices.  All wages are explained, and low wages are exonerated, on what seems to be an undeniable ground of fact.  They are what they are.  You may wish them otherwise, but they are not.  As a philanthropist, you may feel sorry that a humble laborer should work through a long day to receive two dollars, but as an economist you console yourself with the reflection that that is all he produces.  You may at times, as a sentimentalist, wonder whether the vast sums drawn as interest on capital are consistent with social fairness; but if it is shown that interest is simply the “natural price” of capital representing the actual “productive power” of the capital, there is nothing further to say.  You may have similar qualms over rent and the rightness and wrongness of it.  The enormous “unearned increment” that accrues for the fortunate owner of land who toils not neither spins to obtain it, may seem difficult of justification.  But after all, land is only one particular case of ownership under the one and the same system.  The rent for which the owner can lease it, emerges simply as a consequence of the existing state of wages and prices.  High rent, says the economist, does not make big prices:  it merely follows as a consequence or result of them.  Dear bread is not caused by the high rents paid by tenant farmers for the land:  the train of cause and effect runs in the contrary direction.  And the selling price of land is merely a consequence of its rental value, a simple case of capitalization of annual return into a present sum.  City land, though it looks different from farm land, is seen in the light of this same analysis, to earn its rent in just the same way.  The high rent of a Broadway store, says the economist, does not add a single cent to the price of the things sold in it.  It is because prices are what they are that the rent is and can be paid.  Hence on examination the same canon of social justice that covers and explains prices, wages, and interest applies with perfect propriety to rent.

Or finally, to take the strongest case of all, one may, as a citizen, feel apprehension at times at the colossal fortune of a Carnegie or a Rockefeller.  For it does seem passing strange that one human being should control as property the mass of coin, goods, houses, factories, land and mines, represented by a billion dollars; stranger still that at his death he should write upon a piece of paper his commands as to what his surviving fellow creatures are to do with it.  But if it can be shown to be true that Mr. Rockefeller “made” his fortune in the same sense that a man makes a log house by felling trees and putting them one upon another, then the fortune belongs to Mr. Rockefeller in the same way as the log house belongs to the pioneer.  And if the social inferences that are drawn from the theory of natural liberty and natural value are correct, the millionaire and the landlord, the plutocrat and the pioneer, the wage earner and the capitalist, have each all the right to do what he will with his own.  For every man in this just world gets what is coming to him.  He gets what he is worth, and he is worth what he gets.

But if one knocks out the keystone of the arch in the form of a proposition that natural value conforms to the cost of production, then the whole edifice collapses and must be set up again, upon another plan and on another foundation, stone by stone.