Front Page Titles (by Subject) CHAPTER 34: METHODS OF DISTRIBUTION - Economics, vol. 2: Modern Economic Problems
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CHAPTER 34: METHODS OF DISTRIBUTION - Frank A. Fetter, Economics, vol. 2: Modern Economic Problems 
Economics, vol. 2: Modern Economic Problems, 2nd edition, revised (New York: The Century Co., 1923).
Part of: Economics, 2 vols.
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METHODS OF DISTRIBUTION
§ 1. The problem of distribution. § 2. Distribution by force and by status. § 3. Social effects of the right to transmit property. § 4. Effects of the right to inherit property. § 5. Broader social effects of inheritance. § 6. Limitations upon intestate inheritance. § 7. Some merits of competition. § 8. Wide acceptance of competition. § 9. “Economic harmonies” and discords. § 10. Competition modified by charitable distribution. § 11. Competition modified by authoritative distribution. § 12. Progressive versus reactionary. § 13. Progressive versus radical.
§ 1. The problem of distribution. The great economic progress of the past two centuries has been mainly in lines of technical production. The developing natural sciences and mechanic arts have given men a marvelously increased control over forces and materials. This has multiplied the quantities of goods of most kinds at the disposal of men, collectively considered. All men, with rare exceptions, have been gainers; but the increased production has been very unequally distributed among the members of the community. More and more insistently the plea and the demand have been made for better methods of distribution that will give to the masses of the people a larger share of the goods produced. Production is largely a problem of the technical arts; distribution is a problem of social economy. Distribution as a problem of incomes is not to be confused with distribution of physical goods by transportation (as on the railroads) or by commercial agencies transferring goods from producer to consumer (as in coöperative stores and marketing).
Two aspects of the distribution of incomes may be distinguished. Functional distribution is the attribution of value (yields) to wealth and labor considered impersonally, as groups of productive agents. Functional distribution is the prime subject of the theory of value and price1 (e. g., usance, value of labor, time preference, profits), a study of which is prerequisite to an intelligent study of the problems of personal distribution.
Personal distribution is the actual movement of incomes into the control of persons. Personal incomes, whether monetary, real, or psychic, are the sum of a number of elements. Some parts are due to services performed by the person himself. When one combs his own hair he is performing for himself a service that is a part of his income. Benjamin Franklin said it was better to teach a boy to shave himself than to give him a thousand dollars with which to pay barbers for a life-time. Other parts of income are the uses and fruits of legally controlled wealth; chance finds, as gifts of value or lost and abandoned goods; goods assigned to one by authority; wealth inherited; illegal gains by robbery; goods secured on credit; gifts either of things or of services. The many methods by which incomes are distributed to the persons making up a society may be grouped in the following five general classes: (1) force, (2) status, (3) charity, (4) competition, and (5) authority. These will be discussed in order.
§ 2. Distribution by force and by status. Distribution by force is the most primitive mode of distribution. The stronger takes from the weaker. Slavery is distribution by force, as is the levying of war indemnities from a conquered people. Forceful distribution still persists in the form of crime, and, if we include fraud within the term, it still affects an enormous amount of income. The lawless take whatever they can, and the supporters and officers of the law do what they can to check the acts.
Distribution may be by status, or set rules and customs. In this case men receive incomes that are independent of their efforts and outside of their control. Distribution by status is guided neither by the personal merit of the recipients nor by the value of their direct services, but by the merits and acts of men not living. Feudal society was built on status. Men were born to certain privileges and positions; they inherited property which could neither be bought nor sold; they followed trades which could rarely be entered by any outside of favored families. Caste in India and in other Oriental countries regulates a large part of the life of the people.
This method still prevails to a greater extent in our society than is usually recognized.2 By public opinion and by prejudice, status is still maintained in respect to the choice of occupations even where the law has formally abolished it, as is seen in modern race problems. In western countries to-day inheritance of property is the main legal form of status and it shades off into other forms of distribution. Private property must find its justification in social expediency.3 There is no feature of it that is more questioned than is the right of inheritance.
§ 3. Social effects of the right to transmit property. The right to transmit property by inheritance or by bequest may be judged with reference to its effects upon the giver, upon the receiver, and upon society at large. It is well to take these three points of view. The right to dispose of property either during life or at death has undoubtedly in many ways a good effect upon the character of men. It stimulates the husband and father to provide for his wife and children, and spurs others to continued economic activity. There is a joy in giving, a joy in the power to bestow one’s wealth upon those one loves, or as one pleases. Much of the existing wealth probably never would have been created if men had not had this right. But there is a limit to the working of this motive, and other motives often are more effective. Many a man after gaining a competence continues to work for love of wealth and power in his own lifetime, as the miser continues to toil for love of gold. When men without families die wealthy, when men not having the slightest interest in their nearest relatives labor till their dying days to amass wealth, it is apparent that the right to bequeath property has little to do with their efforts. Love of accumulation and love of power in these cases supply the motive. A more limited liberty to dispose of property at death might still suffice, therefore, to call out the greater part of the efforts now made to accumulate property.
§ 4. Effects of the right to inherit property. That the effects upon the receiver of the property are good is somewhat more doubtful. It is true that children reared in families of large incomes would be great sufferers if plunged into poverty at the death of their parents. There is much social justification for permitting families to maintain an accustomed standard of comfort. Few would deny that provision by parents to provide education and opportunity for their children is commendable and desirable. But the evil effects of waiting for dead men’s shoes are proverbial. Many a boy’s greatest curse has been his father’s fortune. Many a man of native ability waits idly for fortune to come and lets opportunities for self-help slip by unheeded. The world often exclaims over the failure of the sons of noted men to achieve great things, for, despite confusing evidence, men still have faith in biologic heredity. A too easy fortune saps ambition and relaxes energy; and thus rich men’s sons, if not most carefully and wisely trained, are often made paupers in spirit, while the self-made fathers think their boys have better opportunities than they themselves enjoyed. The greater social loss is not the dissipated fortunes, but the ruined characters. Andrew Carnegie said that it would be a good thing if every boy had to start in poverty and make his own way. Cecil Rhodes recorded in his will his contempt for the idle expectant heir.
§ 5. Broader social effects of inheritance. Inheritance has good effects for the community in so far as it helps to secure efficient management of wealth. If the son or relative has been in business with the deceased, there is a reason why he should inherit the property, and his succession to it makes the least disturbance to existing business conditions. This consideration, however, has less weight as the corporate form of organization becomes well-nigh universal in “big business.” Every profligate son, every incompetent heir, is an argument against the inheritance of property. It is to society’s interest that no able-bodied member should stand idle. Every child should have presented to him the motive to use his powers in useful ways. Moreover, many feel that the great fortunes now accumulating through successive generations in the hands of a few families are a danger to our free society, even if these fortunes should continue to be well administered. There is a widespread feeling that the heredity of great wealth is, like the heredity of political power, out of harmony with the democratic spirit. Democracy wishes to see men and individuals put to the test, not profiting forever by the deeds of their forebears. This feeling is shared by those who cannot be charged with radical prejudices. It was startling when a conservative body of lawyers, meeting in their state association in Illinois, passed a resolution favoring moderate limits to inherited fortunes. Almost every year sees bills of this purport introduced in the legislatures and in Congress. Probably no one of many current radical proposals is more widely favored than this among men of otherwise conservative social views. The sum most often mentioned as the proper limit is $1,000,000, but usually it is a sum larger than the fortune of the person speaking.4
§ 6. Limitations upon intestate inheritance. A proposal less crude, and with strong reasons of social expediency in its favor, is to limit the right of intestate inheritance to persons that have been in essential economic and social relations with the deceased. The foregoing considerations show that the case for the right of gift in the lifetime of the giver is strongest; that for the right of bequest comes next. The man who has acquired wealth may usually be trusted to decide who bear to him close social or personal relations, and to say whose lives have in a measure furnished the motives of his activity. But the right of intestate inheritance by distant relatives is one that stands on weak social foundations. It is a survival from more patriarchial conditions when, in the large family or clan, the bond of unity was very strong. A truer test to-day of the proper limits for intestate inheritance is whether the wish to provide for these heirs has furnished the motive for the producing and preserving of the wealth. The claims of those nearest in blood and closest in personal relations are strongest. Family affection and friendship form the strongest of social ties, and it is socially expedient to cultivate them. Motives for abstinence and industry must be strengthened. But the same test shows that the zealous regard of the American law for the rights of distant kinsmen in foreign lands or in distant quarters of this country is irrational, and is unjust to the community where the fortune was made. Public opinion tends strongly toward this idea.
Property rights as they exist are clearly seen not to be a product of pure reason. They are the result of social evolution, of historical accidents, of class legislation, and in many cases of selfish interests. Changing social conditions and ideas are bringing many changes in law, and further changes must be expected to come that will reduce the influence of inheritance of property in fostering status in distribution. Especially important are the increasing application of the progressive principle to incomes and inheritance,5 and the development of insurance to put family savings into the form of terminable annuities instead of capital sums.6
§ 7. Some merits of competition. The dominant method of distribution to-day is that of competition.7 It is evident from the voices of praise and of blame that competition has its good and its bad aspects. Let us observe first the good ones. Competition acts to distribute the working force over the field of industry wherever it is most needed. The remarkable (though far from perfect) adjustment of industry to the needs of each neighborhood is brought about by individual motives, not by centralized authority. Wherever consumers settle, stores are started and factories are built. Wherever work is to be done, men come in about the right number to do it. It is not mere chance that produces this result. The available skill is adjusted to varying needs by the delicate measurement of the market rate of wages. Two-sided competition gives a definite rule of price—the only definite impersonal rule. The theoretical competitive price is the standard to which things tend constantly to adjust themselves in an open market.8
Competition is an essentially economic method as contrasted with the legal and personal methods above and later described, because it is impersonal and reducible to a rule of value. Distribution under competition is made, not with reference to abstract ethical principles or to personal affection, but to the value of the product. Each worker strives to do what will bring him the largest return, and the price others pay expresses their estimates of the service in that market. Each seeking his own interest is led to make himself more valuable to others. In most cases and in large measure, competition stimulates men to sacrifice, to invention, to preparation; thus is zeal animated and are efforts sustained. In the economic realm, as is now seen to be the case in the biologic realm, competition of some effective kind is an indispensable condition not only of progress but of life without degeneration. Monopoly, as we have noted, never has ceased to rest under the ban of Anglo-Saxon law, and therefore to exemplify compulsory as opposed to competitive distribution. A striking feature of the competitive method is its decentralization. Each helps to value the economic services of each. If one pays more for the services of the singer than for those of the cook, it is not because one would rather listen to the singing than to eat when starving, but because by apportioning one’s income one can get the singing and the eating too. In the existing circumstances, the singer’s services seem to the music lover to be worth paying for, and he backs his opinion with his money. So each is measuring the services of all others, and all are valuing the services of each. It is distribution by valuation, and it is valuation by democracy, with all of the defects of the frail and foolish human beings who are expressing their choices.
§ 8. Wide acceptance of competition. On purely abstract and a priori grounds competition cannot be accorded an unqualified ethical sanction, as is sometimes assumed. It is not always and necessarily “right” and “best” in an absolute sense. However, its dominant place is not a mere accident, but is a resultant of unending experimentation with different methods of distribution carried on since the beginning of human society. A method of distribution had to be found and retained that would work under the conditions of human nature at each stage of social progress; and competition has worked, however imperfectly, because it has met in large measure the pragmatic test. The competitive rule of distribution appeals to all men (even to those who denounce it) as having in many of its applications a moral character, as compared with the other possible methods of distribution. Indeed, the competitive rule is the only rule that does not involve either personal and arbitrary judgment (force, charity, and authority) or status. Even such a measure of justification as is found in status is traceable, in the long run, to competition. The case for a limited application of status (as in property and inheritance laws) is based upon its results in stimulating motives of effort and accumulation.9 When the rule of authority is applied to-day in the large field of public regulation where actual competition has become impossible, almost the only guiding rule is hypothetical competition. The just rate is felt to be that which in the long run would be just sufficient to afford “normal” incomes to labor and to capital, to call forth the necessary effort, skill, judgment, forethought, abstinence, and investment, if competition were at work, as it is not.10 Only this rule of hypothetical competition redeems these public rates from arbitrariness, favoritism, and force.
§ 9. “Economic harmonies” and discords. Every truth in political philosophy finds some exaggerated expression. Competition, as compared with status and custom, has some notable merits; and when the eighteenth century was throwing off some of the burdens inherited from the more static Middle Ages, competition appeared to be a panacea for all the ills of society.11 The belief in the benefits of competition and the virtues of economic freedom found its extremist expression in the first half of the nineteenth century in the doctrine of the “economic harmonies.” According to this, if men are left entirely free to do as their interests dictate, the highest efficiency and best results for all will follow; the economic interests of all men are in harmony. Corresponding with this doctrine is the economic policy of extreme laissez faire.
But experience has shown that the economic interests of the individuals in a community are only partly, very rarely are they wholly, in harmony. There are three planes of competition in every market: that between sellers, that between buyers, and that between sellers on the one hand and buyers on the other.12 If at any point free competition is hindered, even the disciple of economic harmony must, from the very nature of his doctrine, expect a discordant result. In reality, competition is rarely quite complete on both sides, and when it is not the weak usually suffer. Men do not start with fair opportunities. All that they may be entitled to have under competition may be so little that social sympathy seeks to better the results; hence poor relief, public and private. Society as a whole has an interest in the outcome of the individual’s economic struggle. It cannot see men starving or driven into crime. Moreover, when competition is the rule of valuation, it, like all valuations, partakes of the quality of those choosing—wise or foolish, good or evil.13 And though competition is the rule of democracy in economics, yet democracy cannot permit the economic vote of a vicious or of a foolish group to stand, where the goods, services, and prices resulting offend the prevailing public judgment and social conscience.
§ 10. Competition modified by charitable distribution. In practice the competitive method of distribution always has been modified or supplemented in varying degrees by the other methods. Important among these is charitable distribution. Charitable is here used in its original sense, as synonymous with benevolence and affection. First is parental love, the root and type of all the forms of charity. There is a complete lack of economic equivalence in the relation of parent and child in early years. The helpless infant does nothing for the parent, the parent gives all and does all for the child. Gradually, however, the balance is regained; as the years go on, not only do children repay in affection, but in many cases they repay in material ways. Especially in the factory districts and on the farm, the child sooner or later begins to reëstablish the balance, becomes a worker, and contributes to the family income as much as the cost of his support, and finally more. A student of modern English town life has traced the curve of poverty traversed by the average poor family as the children are first an economic burden and later an aid to their parents. In the middle, or propertied, classes the children do not for many years cease to be a financial burden to their parents, and in most cases the economic balance is never reëstablished. It is not to the parents, but to the succeeding generation, that the debt is tardily paid.
Friendship widens the range of generosity and multiplies the mass of gifts. Broad sentiments of humanity lead to gifts outside the range of personal affection and personal interest, to the beggar on the street, to institutions devoted to charity. In New York state alone a sum of more than $20,000,000 a year is expended by institutional charities. About $512,000,000 in public benefactions were given in the United States by private donors in the year 1915, and in this respect that year was not exceptional. An enormous and increasing body of property is thus being year by year socialized, largely through bequests from persons without direct heirs. Great public subscriptions to the sufferers from unusual disasters, such as the Irish and the Indian famines, the Chicago fire, the Galveston flood, the San Francisco earthquake, the great European war, bespeak a widening generosity. Religion impels to the building of churches, to the support of priests, missions, and manifold religious undertakings. Charity in this connection is the expression of a sentiment that varies from the most intense personal affection to the broadest and most general humanitarian sentiment.
§ 11. Competition modified by authoritative distribution.Authority is essentially the assignment of a common, or social, income to individuals by some person or persons chosen, or accepted, by the society to perform this function. After force, it is the oldest and was the earliest widely operative method of distribution. It shades into force, status, and charity in manifold ways. But it may be distinguished from force, which takes for itself what belongs to another; and from charity, which gives to another what belongs to one’s self; and from status, which transmits claims to income from one generation to another by a fixed impersonal rule, not by a personal judgment in the particular case.
Authoritative distribution is the dominant method in patriarchal tribes, in communal societies, and in monastic and other religious orders. Each person works at what he is commanded to do, and some one in authority (patriarch, head of the community, father of the monastic order) portions out the tasks and the rewards. In the family this rule largely prevails, and even after the children have come to years of discretion they not infrequently accept, from habit or affection, the will of the parents, and give up their entire wages to receive back a portion. The method of charitable distribution while the child is young gradually changes to authoritative distribution after the child becomes a worker. The untrained and indocile youth, however, is made the subject of compulsory distribution.
The collection and distribution of taxes is by public authority. No attempt is made to give back an exact equivalent to each taxpayer. The money is taken and spent by authority. The new forms, or at least the new extensions, of taxation, especially of incomes and inheritances at progressive rates, are very important examples of authoritative distribution. The courts sometimes find themselves obliged to apply the method of authoritative distribution, although they do it unwillingly. They try to confine their efforts to interpreting the contracts men have voluntarily entered into, and they avoid, as far as possible, the making of contracts or the fixing of rates. Authoritative distribution is exemplified in the work of many commissions appointed by law to fix rates or settle disputes, such as boards of conciliation and arbitration and railway commissions.
§ 12. Progressive versus reactionary. Distribution in the present economic system, in all its modifications in the various industrial states of the world, thus is revealed by our examination to be determined, not by a single principle, but by an eclectic grouping of various principles and methods. It is further revealed not as final truth fixed in its details, not as an absolute expression of human wisdom, but as a constantly changing result of human experience. The world of free parliamentary governments is a vast laboratory of experimentation wherein the institutions of property and the process of distribution are being shaped by the forces of public opinion. Changes are constantly embodied in legislation, in judicial interpretation, and in the administration of the laws.14
The different individuals and groups in our society take various attitudes in respect to our present economic system and to the views just expressed. Indeed, opinions are innumerable and grade off with manifold differences of degree and in detail from one extreme to the other. However, all opinions on this subject may be classified broadly in two groups—conservative and destructive (or disruptive); the one favoring the present economic system in its essentials, the other rejecting the essentials of the present system. Each of these broad groups may again be subdivided: the conservatives having two wings, the stand-pat conservatives (the extreme being the reactionaries) and the other the progressive conservatives. (It need hardly be said that progressive is not used here with reference to any political party or group that has been designated by that name.) The reactionary conservatives are numerically a small group, but in wealth, social position, and political influence are very powerful. They favor the existing order, excepting in those features designed to limit wealth and the use of monopolistic power. The stand-pat conservatives are a much larger group of moderately well-to-do, including most of the residents on “Main Street,” who like things just as they are.
§ 13. Progressive versus radical. The conception of the present economic system outlined above may likewise be called conservative, but it must be modified by the adjective progressive, or liberal, as contrasted with reactionary. In this view the central features of the present economic system must continue much as they are, and progress must be won by gradual correction of evils. These are recognized to be many, and to call constantly for remedial legislation and remedial effort in our rapidly shifting industrial conditions. The progressive-conservatives believe that the evils are not due solely or mainly to the “present economic system”; they believe that a workable economic system cannot be devised by doctrinaire philosophers as a thing apart from human nature, a thing to be declared absolutely good or bad without reference to the kind of people who compose the community. The present economic system can be made better only slowly and as the individuals who compose the community keep pace with growth in virtue and wisdom. Therefore, the progressive-conservative sees that much of the task of social progress is individual and family education, moralizing the oncoming generations with the old-fashioned virtues of thrift, honesty, loyalty, and duty. All such suggestions are impatiently and angrily rejected by the more radical social reformers, who (again with varying emphasis and with many gradations of opinion) advocate abandoning the present economic system and substituting for competition with private property a universal principle of authority.
[1 ]Treated throughout Vol. I.
[2 ]See Vol. I, pp. 190, 223; and above, ch. 32, §§ 11-13.
[3 ]See Vol. I, pp. 248-255, 297, 298, 406, 408, 415-418, 480, 481, 483, 484; also Vol. II, chs, 11, 20, and various passages in the chapters of this Part.
[4 ]See ch. 32, § 7, on limitations upon bequest and inheritance.
[5 ]See ch. 19.
[6 ]See ch. 13, § 9 and § 10.
[7 ]See ch. 32, § 10.
[8 ]See Vol. I, pp. 54 and 66; also pp. 504-507 on an organic theory of value.
[9 ]See above, § 2, note 3.
[10 ]Compare, e. g., portions of chs. 9, 14, 21, 22, 28; and 31, § 16.
[11 ]See ch. 32, §§ 11-13.
[12 ]See Vol. I, p. 75.
[13 ]See, e.g., Vol. I, pp. 25, 71, 205, 479, 509, 511, 513.
[14 ]Almost every chapter of this volume gives examples of these statements; but recall especially chs. 17, 22, 23, 29, 31, 33.