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CHAPTER V

PROCESSES OF THE ECONOMIC ORDER

HE prevailing motive of business enterprise is the quest of profits. The production of goods and services goes on

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under the system that has developed out of the impulse of business men to make profits. Some enterprisers may feel other impulses more strongly but, under the existing system, only the exceptional man can afford to make his business a means of satisfying his sympathetic and intellectual dispositions.2 The commanding financial and industrial positions are apt to be gained by men of strong rivalrous and dominating dispositions, whose behaviour determines the trend of economic development in a direction that satisfies those dispositions. And the mass of business men who feel those impulses less strongly conform to the system developed by the leaders. The system thus developed and perpetuated not only facilitates individualistic profit-getting, which is the important economic result, but also stifles variations in industrial behaviour which, if fostered, might change the trend of industrial development in the direction of a rational economic order, that is, one in which the production of goods and services is determined primarily for the public welfare. The social psychologist sees variations subjected to the controlling powers of the system, the authoritative profit-seekers, rather than to the selection of the public as investor and consumer, or of the working classes, who compose the large part of the public and produce the goods and services. Hence the essential conflict in industrial relations is between individualistic profit-seeking on the one hand and the public welfare on the other.

The legal aspect of the economic order emphasizes the function of

1 Veblen, Theory of Business Enterprise, Chs. III-V; Mitchell, Business Cycles, Ch. II. For a statement of the situation by an industrial engineer see Gantt, Organizing for Work, Ch. I.

2 Burritt, Dennison, Gay and others, Profit Sharing, Ch. XII.

3 Mitchell, op. cit., 33. For a statement on this point by an industrial engineer, see Wolf, Securing the Initiative of the Workman, Amer. Econ. Rev., IX (Supplement): 120-121.

business enterprise as one of individualistic profit-seeking. Under the law the officers of a corporation must manage it for the benefit of the stockholders exclusively, and for failure to do this they may be held in an action for damages by the corporation. The law denies the legal right of directors to limit, on behalf of the public welfare, the dividends to be paid stockholders. This legal emphasis on the rights of profit-seekers as opposed to the public welfare is seen in the case of Dodge v. Ford Motor Company. The Dodges were large stockholders in the Ford Motor Company of which, however, Mr. Ford owned a majority of the stock, and so dominated the policy of the Company. The corporation had a capital stock of $2,000,000, on which it paid 60% a year and in addition, from 1911 to 1916, special dividends that totalled $41,000,000. In 1916, according to the bill of the plaintiffs, Mr. Ford "declared it to be the settled policy of the Company not to pay in the future any special dividends, but to put back into the business for the future all of the earnings of the Company other than the regular dividend of five per cent. (5%) monthly upon the authorized capital stock of the company-two million dollars. . . ."6 And plaintiffs charged that, in doing this, Mr. Ford alleged a humanitarian purpose, as follows: "My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back into the business." Plaintiffs declared the ground on which they brought their complaint to be that "The proposed scheme of expansion is not for the financial advantage of the corporation, either mediate or immediate, and is not to be prosecuted with that intent, but for the purpose of increasing the number of employés and of the cars produced, to the end of giving employment and low-priced cars to a greater number of people."s The plaintiffs, who owned one-tenth of the stock of the company, sued for a restraining order against the carrying out of the new policy. Counsel for plaintiffs alleged that the ends sought by Mr. Ford "are ends worthy in themselves but not within the scope of an ordinary business corporation-ends which, if prosecuted, should

Hirschl, Business Law, 441.

Dodge v. Ford Motor Co. Supreme Court of Michigan, Opinion and Decree, Feb., 1919, 4-5. (Decision published by Conway Brief Co., Detroit.)

• Ibid. 8.

Brief for Plaintiffs, 10. 8 Brief for Plaintiffs, 3.

Opinion and Decree, 9.

Plaintiffs' Reply Brief, 17, 18.

be by individuals associated for such purposes.' "9 The "chief basis of their bill was defendant Ford's alleged liberality towards the public and workers, to the sacrifice of stockholders' interests."10 Counsel for defendant replied that "Although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on with humanitarian motives such. charitable works as are incidental to the main business of the corporation." And counsel declared that Mr. Ford's policy might, in the long run, prove to be wise for the aggrieved stockholders in that Mr. Ford had said "he did not believe the public would stand for such excessive profits."12 The court decided that "there should be no confusion . . . of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his co-directors owe to protesting, minority stockholdA business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.' The court affirmed the decree of the lower court ordering the stated distribution of profits to the stockholders.14

ers.

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Predominant in the legal aspect of the economic system is the assumption that the utmost freedom of individualistic profit-seeking is for the public welfare, that this free competition for profits is worth more than it costs.15 The analysis of the legal aspect will not be carried further here as we have analyzed it at length elsewhere.1

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Our purpose is not to challenge the value of the capitalistic system as a mechanism of production and distribution, nor are we apologists for it. Our aim is to analyze its underlying psychological processes. Our analysis is not a culmination of a series of exhaustive investigations by many students of the subject, but an attempt to

Brief for Plaintiffs, 3. Opinion and Decree, 32, 47, 48. 10 Defendants' Reply to Plaintiffs' "Reply Brief,” 13.

11 Brief for Defendants, 127. Opinion and Decree, 48.

12 Supplemental Pages to the Original Brief for Defendants, 8.

13 Opinions and Decree, 49.

14 Ibid. 52.

15 Williams, The Foundations of Social Science, 253, 244.

16 Ibid. Chs. XI-XVIII.

bring together and to carry a stage further the beginnings of such investigations.

ment.

The work requires the strictest maintenance of the intellectual attitude. The reader, as well as the writer, must maintain that attitude. Without a conscious and deliberately maintained intellectual attitude, one subconsciously yields to the attitudes he has acquired through long susceptibility to the social suggestions of his environThe intellectual attitude requires that we turn the mind's eye on our heretofore unconscious attitudes and regard them critically. Otherwise, to accept the attitude of the class to whose influence we have been subject is to be prejudiced against the other. Yet so rare is this intellectual attitude that one who maintains it is regarded askance. If his opinions seem to favour the labouring class he is, by the employing class, regarded as prejudiced against them and for the labouring class; and, by the labouring class, as prejudiced favourably for them, and, therefore, against the employing class. Or else he is regarded as having the interested aloofness of the consumer, as being against any class whose action is believed to make for high prices. So rare is the intellectual attitude that the community generally refuses to believe that any man can be consistently actuated by it, and insists on identifying the man of intellectual attitude with that group in the community which his opinions seem to favour. Opinions that seem to favour one class and discredit another do not, therefore, necessarily have that significance in the mind of the scientific man. He states his facts and interpretations without regard to the likes or dislikes of any class. He writes only for those who, by the exercise of the intellectual attitude, free themselves from the influence of class attitudes. With this understanding as to our point of view we turn again to our analysis of the processes of the economic order.

Business is organized, for the quest of profits, in the form of corporations the liability of the stockholders of which usually is limited to their investment. This limited liability reduces to a minimum the risk taken by the investor, as well as his sense of responsibility for the effect of the activities of the corporation on the public welfare. For he surrenders his interest in the management to a board of directors, who are held accountable for its management. In a corporation of many stockholders only the large stockholders practically have any voice in its management.17 Economic behaviour thus loses the aspect 17 Brandeis, Other Peoples' Money and How Bankers Use It, 59-60.

of personal accountability that it had in the days of small business enterprises.18 The immense size of many of these corporations makes business a venture far more momentous for or against the public welfare than formerly. It becomes particularly so in a war period when the dependence of the government on the capitalistic class enables the latter to profiteer with impunity.19 Individual stockholders feel no blame for the profiteering policy of the corporation through which they profit. They are, for the most part, ignorant or "innocent" investors, who know little or nothing about the way in which their business is conducted. They know little about the relative security of investments, and have come to trust some investment bank which, because of this confidence of investors, or "goodwill" as it is called, is able to sell the securities of various corporations, and thus acquires an immense influence far and wide in the management of corporations.20 Investment banking interests are, in turn, subject to the control of a relatively small number of men, who so co-operate as to reduce the risk of extension of credits to a minimum,21 and are, therefore, in a position of financial power that stimulates to an extreme degree the rivalrous and dominating dispositions.

For working capital, as distinguished from fixed capital, the corporation is dependent on the commercial bank. "If, in the judgment of the commercial bankers, a particular borrower in a given line of industry is not entitled to credit, there is little chance of his survival in competition with others whose credit standing is unimpaired. Since the possession of adequate working capital is quite as indispensable as the possession of fixed capital, the commercial banker thus in a sense holds the veto power over the decision of the investment banker, even as the investment banker holds the veto power over the decision of

18 Dewey and Tufts, Ethics, 498-507; Fite, Moral Valuations and Economic Laws, Jour. Phil. Psy. Sc. M., XIV: 10-16; Veblen, The Modern Point of View and the New Order, The Dial, Dec. 14, 1918, 543-547.

19 For war profiteering in the U. S. see Friday, Profits, Wages and Prices, Chs. II-XI. Professor Hobson, after analysing the different kinds of war profiteering in England, which added several thousand million pounds to the property of the profiteers, writes: "That this mass of new wealth, due to war scarcity and risks, and obtained at the expense of the taxpayer or the consumer by a comparatively few rich, powerful, lucky or unscrupulous men, should have contributed little or nothing to the expenses of the war, is widely and justly resented, and lies at the root of our present discontents." (Hobson, Taxation in the New State, 178-179.) 20 Veblen, Theory of the Business Enterprise, 171-174; Brandeis, op. cit., 99, 113, 191.

21 Veblen, The Industrial System and the Captains of Industry, The Dial, May 31, 1919, 557.