ARTICLE II.

THE RELATIONS OF CAPITAL AND LABOR.1

BY LUCIEN C. WARNER, M. D.

IF I understand the broad aim and purpose of Sociology it is to better the condition of mankind, especially the condition of the so-called working classes, by which is usually meant the wage-earners. One of the most prominent questions to consider, therefore, is the relations of capital and labor, of employer and workman. I shall not attempt an elaborate discussion on this topic, but shall indicate some of the practical difficulties to be overcome, and a few general principles which may be useful in guiding us to correct conclusions. If my treatment of the subject is in some points chaotic, it will not inaptly represent the present condition of the problem I am discussing.

The ideal of workmen, as voiced by their leaders, is on the one hand coöperation, and on the other, governmental paternalism. They would have coöperation in the ownership and management of mercantile and manufacturing enterprises, and governmental ownership and control of railroads, telegraphs, and all of the various corporations that are dependent upon special franchises from the public. On the latter subject I have no experience, and no special opportunities for observation, so I shall confine myself to the relations of labor to manufacturing and mercantile enterprises.

The reason for favoring coöperation is chiefly that the workman may receive larger emoluments for his labor, or, in other words, a larger share of the profits. This necessarily

1 Paper read at the Oberlin Institute of Christian Sociology held November 14 and 15, 1894.

presupposes that there are profits to divide. The first difficulty that confronts us is that as a matter of fact a large number of business operations result in loss and not profit. It has been estimated that one-half of the men who go into mercantile or manufacturing business fail at some time during their business career. It is difficult to get accurate statistics on this point, but an examination of the failures reported through mercantile agencies will give us approximate results. The failures among the customers of the carefully conducted wholesale mercantile houses are about one-half of one per cent each year. Their risks, however, are selected with great care, and the merchants most likely to fail are refused credit. The report of Bradstreet and Company shows that the average failures of all mercantile and manufacturing houses for one year represents from one and one-fourth to one and one-half per cent of the actual number doing business. Allowing that the average business career of a man covers twenty-five years, it will be seen that during that time about one-third of the number fail in business. The importance of this factor in our discussion is perhaps better shown by the statement that the total number of failures reported each year in this country alone is from twelve to fifteen thousand.

The ratio of failures in railroads is much larger than that of merchants and manufacturers. This is due, however, not so much to the greater hazard of the railroad business as to the fact that railroads are often bonded for a much larger amount than their actual cost, and are, therefore, unable to earn the interest and dividends on their watered capital. This seems also to be a specially tempting field to the unprincipled speculator, and railroads are often wrecked for the profit to be made out of the reorganization.

In order to judge understandingly of coöperation we must carry our inquiry a little further, and ask, Why some succeed in business while others fail. If I were to give the

reason in a single sentence, it would be this: It is the dif ference between good management and bad management. There are some instances where conditions arise which no management can foresee or overcome, but such instances are rare and do not disprove the general rule. The so-called bad luck that many business men complain of is only another name for bad management. Their factory burns down when they discover that their insurance has just expired the week previous; or they buy too many goods, or at too high prices; or they sell to those who cannot pay their debts. Another difficulty more common than either is that they find their expenses are too heavy for the volume of their business, and so the profits are all consumed in expenses. Providence receives a large amount of blame for which it is in no way responsible, and which should be attributed to incompetent management. People are not willing to acknowledge their own shortcomings, and so in a cowardly manner they shift the fault upon Providence.

The question of profits in business is then largely a question of how to secure good management. Experience shows that this is more often accomplished by one man or by a small group of men with good judgment, than by many men. Our banks are among our most substantial business concerns, and these are chiefly managed by the president and cashier, though with the advice of a board of directors who meet from time to time. Our insurance companies, gas companies, mines, and many other large corporations are also managed in the same manner. The most successful mercantile and manufacturing enterprises have been managed either by one man, or at most by two or three men. The case of A. T. Stewart and Company, H. B. Claflin and Company, Marshall Field and Company, the Singer Sewing Machine Company, the McCormick Reaper, and the Standard Oil Company are marked illustrations of this principle.

Coöperation in this country has generally failed because

of the difficulty of securing wise and competent management. Men with ability to manage a large business successfully are very rare and are difficult to obtain, and when found they generally prefer to conduct a business for themselves rather than for others. They always command a high price in the market of the world, and coöperative societies are rarely willing to pay what is neccessary to secure such a manager. The feeling of equality among workmen makes them opposed to any wide discrimination in wages, and they will not pay a salary of five or six times their own average wages, as they would have to do to secure a really competent manager.

Cooperative stores and manufacturing concerns are brought into direct competition with other large establishments owned by one individual, or by a company managed with all the skill that keen business shrewdness can command, and unless skill is matched against skill, the coöperative company as the weaker must go to the wall. There are a few successful coöperative stores and factories in this country, but it is where the conditions are exceptionally favorable, and when these are compared with the very large number of failures, they do not disprove the rule that the chances of success at the present time are against coöperation.

That success is possible with coöperation is proven by the experience of banks and stock companies, which are in reality coöperative corporations, and differ from labor coöperative companies chiefly in the fact that the stock is mostly held and controlled by business men, and not by inexperienced workmen. The ownership of the stock may be widely scattered, but the control is in the hands of those who know what good management is and are willing to pay liberally to secure those competent to direct their affairs successfully. The success of these corporations shows that the trouble is not with the broad principle of coöperation, but with the special difficulty of securing good management when the control of the company is in the hands of those who have

not the skill and experience necessary to direct its affairs wisely.

Coöperative shops in London, and I think in some other parts of England, have been more successful than in this country. This would lead to the belief that they may ultimately succeed here when the general principles necessary for success are better understood by the working classes, and when they are more willing to comply with them.

The large risk and doubtful profits of coöperation have led many to advocate in its place what is known as profit-sharing. In schemes of profit-sharing the management and the greater part of the capital is in the hands of one, or at most two or three persons. Regular wages are paid to the employees, and then at the end of the year a per cent of profits over and above the expense of conducting the business and paying interest on the capital, is divided among the employees, usually in proportion to the amount of their respective wages. This is in my opinion the best of the various plans which have been devised for giving to workmen an interest in the profits of the business. It is entirely consistent with independent and efficient management, and it has the advantage over the ordinary wage system that it gives the employee an interest in the business, and is an incentive to him to do his best work.

Profit-sharing, however, is not a principle which can be universally applied in business, for, as we have before stated, business is often run at a loss, and the workman is neither able nor willing to share with the capitalist in this loss. Profit-sharing, therefore, is only applicable to well established ⚫ forms of business where at least a moderate profit may be confidently expected each year. Every new enterprise is an experiment for the first year or two, and workmen will not and ought not to be asked to share in this experiment. The right of the workman to his full wages cannot well be abridged. In fact these claims are so well recognized and established