An economic organization framed in the national interest would conform to the same principles as a political organization framed in the national interest. It would stimulate the peculiarly efficient individual by offering him opportunities for work commensurate with his abilities and training. It would grant him these opportunities under conditions which would tend to bring about their responsible use. And it would seek to make the results promote the general economic welfare. The peculiar advantage of the organization of American industry which has gradually been wrought during the past fifty years is precisely the opportunity which it has offered to men of exceptional ability to perform really constructive economic work. The public interest has nothing to gain from the mutilation or the destruction of these nationalized economic institutions. It should seek, on the contrary, to preserve them, just in so far as they continue to remain efficient; but it should at the same time seek the better distribution of the fruits of this efficiency. The great objection to the type of regulation constituted by the New York Public Service Commission Law is that it tends to deprive the peculiarly capable industrial manager of any sufficient opportunity to turn his abilities and experience to good account. It places him under the tutelage of public officials, responsible to a public opinion which has not yet been sufficiently nationalized in spirit or in purpose, and in case this tutelage fails of its object (as it assuredly will) the responsibility for the failure will be divided. The corporation manager will blame the commissions for vexatious, blundering, and disheartening interference. The commissions will blame the corporation manager for lack of cordial coöperation. The result will be either the abandonment of the experiment or the substitution of some degree of public ownership. But in either event the constructive economic work of the past two generations will be in some measure undone; and the American economic advance will be to that extent retarded. Such obnoxious regulation has been not unjustly compared to the attempt to discipline a somewhat too vivacious bull by the simple process of castration. For it must be substituted an economic policy which will secure to the nation, and the individual the opportunities and the benefits of the existing organization, while at the same time seeking the diffusion of those benefits over a larger social area.
III
THE FRUITS OF INDUSTRIAL ORGANIZATION
The only sound point of departure for a national economic policy is, as we have seen, the acceptance by the state of certain of the results of corporate industrial organization. Such state recognition is equivalent to discrimination in their favor, because it leaves them in possession of those fundamental economic advantages, dependent on terminals, large capital, and natural resources, which place them beyond effective competition; and the state has good reason to suffer this discrimination, because a wise government can always make more social capital out of a coöperative industrial organization than it can out of an extremely competitive one.
It is extremely improbable that, even when officially recognized in this way, the process of corporate combination would go beyond a certain point. It might result in a condition similar to that which now prevails in the steel industry or that of sugar refining; but it should be added that in industries organized to that extent there is not very much competition in prices. Prices are usually regulated by agreement among the leading producers; and competition among the several producers turns upon quickness of delivery and the quality of the service or product. Whether or not this restriction of competition works badly depends usually upon the enlightened shrewdness with which the schedule of rates and prices is fixed. A corporation management which was thoroughly alive to its own interest would endeavor to arrange a scale of prices, which, while affording a sufficient profit, would encourage the increased use of the product, and that is precisely the policy which has been adopted by the best managed American railroad and industrial corporations. But it must always be kept in mind that, in the absence of a certain amount of competition, such a policy cannot be taken wholly for granted. A short-sighted management may prefer to reap large profits for a short time and at the expense of the increased use of its product or service. Moreover, the margin between the cost of production and the particular price at which the product or service can be sold consistent with its largely increasing use may enable the producer to gather enormous profits; and such profits may not stimulate competition to any effective extent, precisely because they depend upon advantages in production which cannot be duplicated. No state desirous of promoting the economic welfare of its citizens can remain indifferent to the chance thus afforded of earnings disproportionately large to the economic service actually rendered.
In dealing with this question of possibly excessive profits under such a method of economic organization, the state has many resources at its disposal besides the most obvious one of incessant official interference with the essentials of corporation management. Of these the most useful consists unquestionably in its power of taxation. It can constitute a system of taxation, in respect to the semi-monopolistic corporations, which would deprive them of the fruits of an excessively large margin between the cost of production and the price at which the product or service could be increasingly sold. Net profits could be taxed at a rate which was graduated to the percentage paid; and beyond a certain point the tax should amount to much the larger fraction of the profits. In this way a semi-monopolistic corporation would not have any interest in seeking profits beyond a certain percentage. A condition would be established which, while it would not deprive the managers of a corporation of full responsibility for the conduct of its business, would give them an additional inducement always to work for the permanent improvement of the economic relation of the corporation to the community. They would have no interest in preferring large but insecure net earnings to smaller ones, founded on a thoroughly satisfactory service, a low schedule of prices, and the constantly increasing efficiency of the plant and organization of the company.
The objection will, no doubt, be immediately urged that a system of this kind would prevent any improvement of service from going beyond a certain point, just because it would cease to be profitable beyond a certain point. But such an objection would not be valid, provided the scale of taxation were properly graduated. I shall not attempt to define any precise scale which would serve the purpose because the possible adoption of such a plan is still too remote; but the state should, in return for the protection it extends to these semi-monopolistic corporations, take a certain percentage of all profits, and, while this percentage should increase until it might at a certain level reach as much as one half or three quarters, it should not become larger than three quarters—except in the case of a corporation earning, say, more than 20 per cent on its capital. To be sure the establishment even of such a level would conceivably destroy the interested motive for increased efficiency at a certain point, but such a point could hardly be reached except in the case of companies whose monopoly was almost complete.
The foregoing plan, however, is not suggested as a final and entirely satisfactory method of incorporating semi-monopolistic business organizations into the economic system of a nationalizing democracy. I do not believe that any formula can be framed which will by the magic of some chemical process convert a purely selfish economic motive into an unqualified public economic benefit. But some such plan as that proposed above may enable an industrial democracy to get over the period of transition between the partial and the complete adaptation of these companies to their place in a system of national economy. They can never be completely incorporated so long as the interest of their owners is different from that of the community as a whole, but in the meantime they can be encouraged to grow and perhaps to become more efficient, while at the same time they can be prevented from becoming a source of undesirable or dangerous individual economic inequalities; and I do not believe that such a transitional system of automatically regulated recognition would be open to the same objections as would a system of incessant official interference. In so far, indeed, as the constructive industrial leader is actuated merely by the motive of amassing more millions than can be of any possible use to himself or his children—in so far as such is the case, the inducement to American industrial organization on a national scale would be impaired. But if an economic democracy can purchase efficient industrial organization on a huge scale only at the price of this class of fortunes, then it must be content with a lower order of efficiency, and American economic statesmanship has every reason to reject such an alternative until there is no help for it. The best type of American millionaire seems always to have had as much interest in the work and in the game as in its prodigious rewards; and much of his work has always been done for him by employees who, while they were paid liberally, did not need the inducement of more money than they could wholesomely spend in return, for service of the highest efficiency.
In any event the plan of an automatically regulated recognition of semi-monopolistic corporations would be intended only as a transitional measure. Its object would be to give these somewhat novel industrial agents a more prolonged and thorough test than any they have yet received. If they survived for some generations and increased in efficiency and strength, it could only be because the advantages they enjoyed in the way of natural resources, abundant capital, organization, terminals, and responsible management were decisive and permanent; and in that case the responsibility of the state could not be limited to their automatic regulation and partial assimilation. A policy must be adopted of converting them into express economic agents of the whole community, and of gradually appropriating for the benefit of the community the substantial economic advantages which these corporations had succeeded in acquiring. Just in so far, that is, as a monopoly or a semi-monopoly succeeded in surviving and growing, it would partake of the character of a natural monopoly, and would be in a position to profit beyond its deserts from the growth of the community. In that event a community which had any idea of making economic responsibility commensurate with power would be obliged to adopt a policy of gradual appropriation.
The public service corporations in the large cities have already reached the stage of being recognized natural monopolies. In the case of these corporations public opinion is pretty well agreed that a monopoly controlling the whole service is more likely to be an efficient servant of the city than a number of separate corporations, among whom competition in order to be effective must be destructive and wasteful. American municipal policy is consequently being adapted to the idea of monopolized control of these public services. The best manner of dealing with these monopolies, after they have been created and recognized, is not settled by any means to the same extent; but the principle of restricting the franchises under which they operate to a limited term of years is well established, and the tendency is towards a constant reduction of the length of such leases and towards the retention of a right of purchase, exercisable at all or at certain stated times. The American city has come to realize that such privileges possess a value which increases automatically with the growth of the city and with the guarantee against competition; and this source of value should never be alienated except for a short period and on the most stringent terms. Wherever, consequently, a city has retained any control over such franchises, it is converting the public service corporations merely into temporary tenants of what are essentially exclusive economic privileges. During the period of its tenancy the management of a corporation has full opportunity to display any ability and energy whereof it may be possessed; and such peculiarly efficient management should be capable of earning sufficient if not excessive rewards. In the meantime, any increase in value which would result inevitably from the possession of a monopoly in a growing community would accrue, as it should, to the community itself.