Thorstein Veblen
THE THEORY OF BUSINESS ENTERPRISE.
(New York: Charles Scribner's Sons, 1904, vii, 400 p.)
-----------------------------------
Preface
In respect to its point of departure, the following inquiry into the nature, 
causes, utility, and further drift of business enterprise differs from other 
discussions of the same general range of facts. Any unfamiliar conclusions are 
due to this choice of a point of view, rather than to any peculiarity in the 
facts, articles of theory, or method of argument employed. The point of view is 
that given by the business man's work, - the aims, motives, and means that 
condition current business traffic. This choice of a point of view is itself 
given by the current economic situation, in that the situation plainly is 
primarily a business situation.
A much more extended and detailed examination of the ramifications and 
consequences of business enterprise and business principles would feasible, and 
should give interesting results. It might conceivably lead to something of a 
revision (modernization) of more than one point in the current body of economic 
doctrines. But it should apparently prove more particularly interesting if it 
were followed up at large in the bearing of this modern force upon cultural 
growth, apart from what is of immediate economic interest. This cultural bearing 
of business enterprise, however, belongs rather in the field of the sociologist 
than in that of the professed economist; so that the present inquiry, in its 
later chapters, sins rather by exceeding the legitimate bounds of economic 
discussion on this head than by falling short of them. In extenuation of this 
fault it is said that the features of general culture touched upon in these 
chapters bear too intimately on the economic situation proper to admit their 
being left entirely on one side.
Of the chapters included in the volume, the fifth, on Loan Credit, is taken 
without substantial change, from Volume IV of the Decennial Publications of the 
University of Chicago, where it appears as a monograph.

CONTENTS
Chapter                                                  Page
   I. Introductory                                          1
  II. The Machine Process                                   5
 III. Business Enterprise                                  20
  IV. Business Principles                                  66
   V. The Use of Loan Credit                               92
  VI. Modern Business Capital                             133
 VII. The Theory of Modern Welfare                        177
VIII. Business Principles in Law and Politics             268
  IX. The Cultural Incidence of the Machine Process       302
   X. The Natural Decay of Business Enterprise            374

[1]
THE THEORY OF BUSINESS ENTERPRISE

Chapter One
Introductory
The material framework of modern civilization is the industrial system, and the 
directing force which animates this framework is business enterprise. To a 
greater extent than any other known phase of culture, modern Christendom takes 
its complexion from its economic organization. This modern economic organization 
is the "Capitalistic System" or "Modern Industrial System," so called. Its 
characteristic features, and at the same time the forces by virtue of which it 
dominates modern culture, are the machine process and investment for a profit.
The scope and method of modern industry are given by the machine. This may not 
seem to hold true for all industries, perhaps not for the greater part of 
industry as rated by the bulk of the output or by the aggregate volume of labor 
expended. But it holds true to such an extent and in such a pervasive manner 
that a modern industrial community cannot go on except by the help of the 
accepted mechanical appliances [2] and processes. The machine industries - those 
portions of the industrial system in which the machine process is paramount - 
are in a dominant position; they set the pace for the rest of the industrial 
system. In this sense the present is the age of the machine process. This 
dominance of the machine process in industry marks off the present industrial 
situation from all else of its kind.
In a like sense the present is the age of business enterprise. Not that all 
industrial activity is carried on by the rule of investment for profits, but an 
effective majority of the industrial forces are organized on that basis. There 
are many items of great volume and consequence that do not fall within the 
immediate score of these business principles. The housewife's work, e.g., as 
well as some appreciable portion of the work on farms and in some handicrafts, 
can scarcely be classed as business enterprise. But those elements in the 
industrial world that take the initiative and exert a far-reaching coercive 
guidance in matters of industry go to their work with a view to profits on 
investment, and are guided by the principles and exigencies of business. The 
business man, especially the business man of wide and authoritative discretion, 
has become a controlling force in industry, because, through the mechanism of 
investments and markets, he controls the plants and processes, and these set the 
pace and determine [3] the direction of movement for the rest. His control in 
those portions of the field that are not immediately under his hand is, no 
doubt, somewhat loose and uncertain; but in the long run his discretion is in 
great measure decisive even for these outlying portions of the field, for he is 
the only large self-directing economic factor. His control of the motions of 
other men is not strict, for they are not under coercion from him except through 
the coercion exercised by the exigencies of the situation in which their lives 
are cast; but as near as it may be said of any human power in modern times, the 
large business man controls the exigencies of life under which the community 
lives. Hence, upon him and his fortunes centres the abiding interest of 
civilized mankind.
For a theoretical inquiry into the course of civilized life as it runs in the 
immediate present, therefore, and as it is running into the proximate future, no 
single factor in the cultural situation has an importance equal to that of the 
business man and his work.(1*)
[4] This of course applies with peculiar force to an inquiry into the economic
life of a modern community. In so far as the theorist aims to explain the 
specifically modern economic phenomena, his line of approach must be from the 
businessman's standpoint, since it is from that standpoint that the course of 
these phenomena is directed. A theory of the modern economic situation must be 
primarily a theory of business traffic, with its motives, aims, methods, and 
effects.
NOTES:
1. "Dem unbeteiligten Beobachter drängt sich die Erkenntnis auf, dass in dem 
Phänomen des Handels (here equivalent to "business") ein entscheidender 
allgemeiner Gedanke enthalten und eine der mächtigsten Thatsachen der Geschichte 
gegeben ist, mit der jede Zeit gezwungen wird, sich wohl oder übel abzufinden 
... Der Handel ist in folgerichtiger und unaufhaltsamer Entwicklung das führende 
Gewerbe geworden. Es ist für die anderen Gewerbe ein völlig aussichtsloser 
Versuch, ihn zu hemmen und durch Zwangsmittel in seine 'dienende Stellung' 
zurückzudrängen." - K. Th. Reinhold, Arbeit und Werkzeug, pp. ix, x.

[5]
Chapter Two
The Machine Process
In its bearing on modern life and modern business, the "machine process" means 
something more comprehensive and less external than a mere aggregate of 
mechanical appliances for the mediation of human labor. It means that, but it 
means something more than that. The civil engineer, the mechanical engineer, the 
navigator, the mining expert, the industrial chemist and mineralogist, the 
electrician, - the work of all these falls within the lines of the modern 
machine process, as well as the work of the inventor who devises the appliances 
of the process and that of the mechanician who puts the inventions into effect 
and oversees their working. The scope of the process is larger than the 
machine.(1*) In those branches of industry in which machine methods have been 
introduced, many agencies which are not to be classed as mechanical appliances, 
simply, have been drawn into the process, and have become integral factors in 
it. Chemical properties of minerals, e.g., are counted on in the carrying out of 
metallurgical processes with much the same [6] certainty and calculable effect 
as are the motions of those mechanical appliances by whose use the minerals are 
handled. The sequence of the process involves both the one and the other, both 
the apparatus and the materials, in such intimate interaction that the process 
cannot be spoken of simply as an action of the apparatus upon the materials. It 
is not simply that the apparatus reshapes the materials; the materials reshape 
themselves by the help of the apparatus. Similarly in such other processes as 
the refining of petroleum, oil, or sugar; in the work of the industrial chemical 
laboratories; in the use of wind, water, or electricity, etc.
Wherever manual dexterity, the rule of thumb, and the fortuitous conjunctures of 
the seasons have been supplanted by a reasoned procedure on the basis of a 
systematic knowledge of the forces employed, there the mechanical industry is to 
be found, even in the absence of intricate mechanical contrivances. It is a 
question of the character of the process rater than a question of the complexity 
of the contrivances employed. Chemical, agricultural, and animal industries, as 
carried on by the characteristically modern methods and in due touch with the 
market, are to be included in the modern complex of mechanical industry.(2*)
[7] No one of the mechanical processes carried on by the use of a given outfit 
of appliances is independent of other processes going on elsewhere. Each draws 
upon and presupposes the proper working of many other processes of a similarly 
mechanical character. None of the processes in the mechanical industries is 
self-sufficing. Each follows some and precedes other processes in an endless 
sequence, into which each fits and to the requirements of which each must adapt 
its own working. The whole concert of industrial operations is to be taken as a 
machine process, made up of interlocking detail processes, rather than as a 
multiplicity of mechanical appliances each doing its particular work in 
severalty. This comprehensive industrial process draws into its scope and turns 
to account all branches of knowledge that have to do with the [8] material 
sciences, and the whole makes a more or less delicately balanced complex of sub-
processes.(3*)
Looked at in this way the industrial process shows two well-marked general 
characteristics: (a) the running maintenance of interstitial adjustments between 
the several sub-processes or branches of industry, wherever in their working 
they touch one another in the sequence of industrial elaboration; and (b) an 
unremitting requirement of quantitative precision, accuracy in point of time and 
sequence, in the proper inclusion and exclusion of forces affecting the outcome, 
in the magnitude of the various physical characteristics (weight, size, density, 
hardness, tensile strength, elasticity, temperature, chemical reaction, actinic 
sensitiveness, etc.) of the materials handled as well as of the appliances 
employed. This requirement of mechanical accuracy and nice adaptation to 
specific uses has led to a gradual pervading enforcement of uniformity to a 
reduction to staple grades and staple character in the materials handled, and to 
a thorough standardizing of tools and units of measurement. Standard physical 
measurements are of the essence of the machine's régime.(4*)
The modern industrial communities show an unprecedented uniformity and precise 
equivalence in legally adopted weights and measures. Some-[9]thing of this kind 
would be brought about by the needs of commerce, even without the urgency given 
to the movement for uniformity by the requirements of the machine industry. But 
within the industrial field the movement for standardization has outrun the 
urging of commercial needs, and has penetrated every corner of the mechanical 
industries. The specifically commercial need of uniformity in weights and 
measures of merchantable goods and in monetary units has not carried 
standardization in these items to the extent to which the mechanical need of the 
industrial process has carried out a sweeping standardization in the means by 
which the machine process works, as well as in the products which it turns out.
As a matter of course, tools and the various structural materials used are made 
of standard sizes, shapes, and gauges. When the dimensions, in fractions of an 
inch or in millimetres, and the weight, in fractions of a pound or in grammes, 
are given, the expert foreman or workman, confidently and without reflection, 
infers the rest of what need be known of the uses to which any given item that 
passes under his hand may be turned. The adjustment and adaptation of part to 
part and of process to process has passed out of the category of craftsmanlike 
skill into the category of mechanical standardization. Hence, perhaps, the 
greatest, most wide-reaching gain in productive celerity and [10] efficiency 
through modern methods, and hence the largest saving of labor in modern 
industry.
Tools, mechanical appliances and movements, and structural materials are 
scheduled by certain conventional scales and gauges; and modern industry has 
little use for, and can make little use of, what does not conform to the 
standard. What is not competently standardized calls for too much of 
craftsmanlike skill, reflection, and individual elaboration, and is therefore 
not available for economical use in the processes. Irregularity, departure from 
standard measurements in any of the measurable facts, is of itself a fault in 
any item that is to find a use in the industrial process, for it brings delay, 
it detracts from its ready usability in the nicely adjusted process into which 
it is to go; and a delay at any point means a more or less far-reaching and 
intolerable retardation of the comprehensive industrial process at large. 
Irregularity in products intended for industrial use carries a penalty to the 
nonconforming producer which urges him to fall into line and submit to the 
required standardization.
The materials and moving forces of industry are undergoing a like reduction to 
staple kinds, styles, grades, and gauge.(5*) Even such forces as would [11] seem 
at first sight not to lend themselves to standardization, either in their 
production or their use, are subjected to uniform scales of measurement; as, 
e.g., water-power, steam, electricity, and human labor. The latter is perhaps 
the least amenable to standardization, but, for all that, it is bargained for, 
delivered, and turned to account on schedules of time, speed, and intensity 
which are continually sought to be reduced to a more precise measurement and a 
more sweeping uniformity.
The like is true of the finished products. Modern consumers in great part supply 
their wants with commodities that conform to certain staple specifications of 
size, weight, and grade. The consumer (that is to say the vulgar consumer) 
furnishes his hose, his table, and his person with supplies of standard weight 
and measure, and he can to an appreciable degree specify his needs and his 
consumption in the notation of the standard gauge. As regards the mass of 
civilized mankind, the idiosyncrasies of the individual consumers are required 
to conform to the uniform gradations imposed upon consumable goods by the 
comprehensive mechanical processes of industry. "Local color" it is said, is 
falling into abeyance in modern life, and where it is still found it tends to 
assert itself in units of the standard gauge.
From this mechanical standardization of consumable goods it follows, on the one 
hand, that the [12] demand for goods settles upon certain defined lines of 
production which handle certain materials of definite grade, in certain, 
somewhat invariable forms and proportions; which leads to well-defined methods 
and measurements in the processes of production, shortening the average period 
of "ripening" that intervenes between the first raw stage of the product and its 
finished shape, and reducing the aggregate stock of goods necessary to be 
carried for the supply of current wants, whether in the raw or in the finished 
form.(6*) Standardization means economy at nearly all points of the process of 
supplying goods, and at the same time it means certainty and expedition at 
neatly all points in the business operations involved in meeting current wants. 
Besides this, the standardization of goods means that the interdependence of 
industrial processes is reduced to more definite terms than before the 
mechanical standardization came to its present degree of elaborateness and 
rigor. The margin of admissible variation, in time, place, form, and amount, is 
narrowed. Materials, to answer the needs of standardized industry, must be drawn 
from certain standard sources at a definite rate of supply. Hence any given 
detail industry depends closely on receiving its supplies from certain, [13] 
relatively few, industrial establishments whose work belongs earlier in the 
process of elaboration. And it may similarly depend on certain other, closely 
defined, industrial establishments for a vent of its own specialization and 
standardization product.(7*) It may likewise depend in a strict manner on 
special means of transportation.(8*)
Machine production leads to a standardization of services as well as of goods. 
So, for instance, the modern means of communication and the system into which 
these means are organized are also of the nature of a mechanical process, and in 
this mechanical process of service and intercourse the life of all civilized men 
is more or less intimately involved. To make effective use of the modern system 
of communication in any way or all of its ramifications (streets, railways, 
steamship lines, telephone, telegraph, postal service, etc.), men are required 
to adapt their needs and their motions to the exigencies of the process whereby 
this civilized method of intercourse is carried into effect. The service is 
standardized, and therefore the use of it is standardized also. Schedules of 
time, place, and circumstance rule throughout. The scheme of everyday life must 
be arranged with a strict [14] regard to the exigencies of the process whereby 
this range of human needs is served, if full advantage is to be taken of this 
system of intercourse, which means that, in so far, one's plans and projects 
must be conceived and worked out in terms of those standard units which the 
system imposes.
For the population of the towns and cities, at least, much the same rule holds 
true of the distribution of consumable goods. So, also, amusements and 
diversions, much of the current amenities of life, are organized into a more or 
less sweeping process to which those who would benefit by the advantages offered 
must adapt their schedule of wants and the disposition of their time and effort. 
The frequency, duration, intensity, grade, and sequence are not, in the main, 
matters for the free discretion of the individuals who participate. Throughout 
the scheme of life of that portion of mankind that clusters about the centres of 
modern culture the industrial process makes itself felt and enforces a degree of 
conformity to the canon of accurate quantitative measurement. There comes to 
prevail a degree of standardization and precise mechanical adjustment of the 
details of everyday life, which presumes a facile and unbroken working of all 
those processes that minister to these standardized human wants.
As a result of this superinduced mechanical regularity of life, the livelihood 
of individuals is, [15] over large areas, affected in an approximately uniform 
manner by any incident which at all seriously affects the industrial process at 
any point.(9*)
As was noted above, each industrial unit, represented by a given industrial 
"plant", stands in close relations of interdependence with other industrial 
processes going forward elsewhere, near or far away, from which it receives 
supplies - materials, apparatus, and the like - and to which it turns over its 
output of products and waste, or on which it depends for auxiliary work, such as 
transportation. The resulting concatenation of industries has been noticed by 
most modern writers. It is commonly discussed under the head of the division of 
labor. Evidently the prevalent standardization of industrial means, methods, and 
products greatly increases the reach of this concatenation of industries, at the 
same time that it enforces a [16] close conformity in point of time, volume and 
character of the product, whether the product is goods or services.(10*)
By virtue of this concatenation of processes the modern industrial system at 
large bears the character of a comprehensive, balanced mechanical process. In 
order to an efficient working of this industrial process at large, the various 
constituent sub-processes must work in due coordination throughout the whole. 
Any degree of maladjustment in the interstitial coordination of this industrial 
process at large in some degree hinders its working. Similarity, any given 
detail process or any industrial plant will do its work to full advantage only 
when due adjustment is had between its work and the work done by the rest. The 
higher the degree of development reached by a given industrial community, the 
more comprehensive and urgent becomes this requirement of interstitial 
adjustment. And the more fully a given industry has taken on the character of a 
mechanical process, and the more extensively and closely it is correlated in its 
work with other industries that precede or follow it in the sequence of 
elaboration, the more [17] urgent, other things equal, is the need of 
maintaining the proper working relations with these other industries, the 
greater is the industrial detriment suffered from any derangement of the 
accustomed working relations, and the greater is the industrial gain to be 
derived from a closer adaptation and a more facile method of readjustment in the 
event of a disturbance, - the greater is also the chance for an effectual 
disturbance of industry at the particular point. This mechanical concatenation 
of industrial processes makes for solidarity in the administration of any group 
of related industries, and more remotely it makes for solidarity in the 
management of the entire industrial traffic of the community.
A disturbance at any point, whereby any given branch of industry fails to do its 
share in the work of the system at large, immediately affects the neighbouring 
or related branches which come before or after it in the sequence, and is 
transmitted through their derangement to the remoter portions of the system. The 
disturbance is rarely confined to the single plant or the single line of 
production first affected, but spreads in some measure to the rest. A 
disturbance at any given point brings more or less derangement to the industrial 
process at large. So that any maladjustment of the system involves a larger 
waste than simply the disabling of one or two members in the complex industrial 
structure.
[18] So much is clear, that the keeping of the balance in the comprehensive 
machine process of industry is a matter of the gravest urgency if the productive 
mechanism is to proceed with its work in an efficient manner, so as to avoid 
idleness, waste, and hardship. The management of the various industrial plants 
and processes in due correlation with all the rest, and the supervision of the 
interstitial adjustments of the system, are commonly conceived to be a work of 
greater consequence to the community's well-being than any of the detail work 
involved in carrying on a given process of production. This work of interstitial 
adjustment, and in great part also the more immediate supervision of the various 
industrial processes, have become urgent only since the advent of the machine 
industry and in proportion as the machine industry has advanced in compass and 
consistency.
It is by business transactions that the balance of working relations between the 
several industrial units is maintained or restored, adjusted and readjusted, and 
it is on the same basis and by the same method that the affairs of each 
industrial unit are regulated. The relations in which any independent industrial 
concern stands to its employées, as well as to other concerns, are always 
reducible to pecuniary terms. It is at this point that the business man comes 
into the industrial process as a decisive factor. The organization of the 
several [19] industries as well as the interstitial adjustments and 
discrepancies of the industrial process at large are of the nature of pecuniary 
transactions and obligations. It therefore rests with the business men to make 
or mar the running adjustments of industry. The larger and more close-knit and 
more delicately balanced the industrial system, and the larger the constituent 
units, the larger and more far-reaching will be the effect of each business move 
in the field.
NOTES:
1. Cf. Cooke Taylor, Modern Factory System, pp. 74-77.
2. Even in work that lies so near the fortuities of animate nature as dairying, 
stock-breeding, and the improvement of crop plants, a determinate, reasoned 
routine replaces the rule of thumb. By mechanical control of his materials the 
dairyman, e.g., selectively determines the rate and kind of the biological 
processes that change his raw material into finished product. The stockbreeder's 
aim is to reduce the details of the laws of heredity, as they apply within his 
field, to such definite terms as will afford him a technologically accurate 
routine of breeding, and then to apply this technological breeding process to 
the production of such varieties of stock as will, with the nearest approach to 
mechanical exactness and expedition, turn the raw materials of field and meadow 
into certain specified kinds and grades of finished product. The like is true of 
the plant-breeders. Agricultural experiment stations and bureaus, in all 
civilized countries, are laboratories working toward an effective technological 
control of biological factors, with a view to eliminating fortuitous, 
disserviceable, and useless elements from the processes of agricultural 
production, and so reducing these processes to a calculable, expeditious, and 
wasteless routine.
3. Cf. Sombart, Moderne Kapitalismus, vol. II, ch. III.
4. Twelfth Census (U.S.): "Manufactures," pt. I, p. xxxvi.
5. E.g., lumber, coal, paper, wool and cotton, grain, leather, cattle for the 
packing houses. All these and many others are to an increasing extent spoken 
for, delivered, and disposed of under well-defined staple grades as to quality 
and dimensions, weight and efficiency.
6. Well shown in the case of wheat and flour; but the like is true as regards 
the stocks of other commodities carried by producers, jobbers, retailers, and 
consumers.
7. Well illustrated by the interdependence of the various branches of iron and 
steel production.
8. As seen, e.g., in the dependence of oil production or oil refining on the 
pipe lines and their management, or in the dependence of the prairie farmers on 
the railway lines, etc.
9. It may be noted in this connection, on the one hand, that a population which 
is in no degree habituated to the modern industrial process is unable to adapt 
its mode of life to the requirements of this method of supplying human wants, 
and so can derive but little benefit, and possibly great discomfort, from a 
forcible intrusion of the machine industry; as, for instance, many of the 
outlying barbarian peoples with whom the Western industrial culture is now 
enforcing a close contact. On the other hand, it is also true that even the most 
adequately trained modern community, among whom the machine industry is best at 
home, does not respond with fruitless alacrity to the demands and opportunities 
which this system holds out. The adaptation of habits of life and of ideals and 
aspirations to the exigencies of the machine process is not nearly complete, nor 
does the untrained man instinctively fall into line with it. Even the 
best-trained, severely disciplined man of the industrial towns has his seasons of 
recalcitrancy.
10. The dependence of one process upon the working of the others is sometimes 
very strict, as, for instance, in the various industries occupied with iron, 
including the extraction and handling of the ore and other raw materials. In 
other cases the correlation is less strict, or even very slight, as, e.g., that 
between the newspaper industry and lumbering, through the wood-pulp industry, 
the chief component of the modern newspaper being wood-pulp.

[20]
Chapter Three
Business Enterprise
The motive of business is pecuniary gain, the method is essentially purchase and 
sale. The aim and usual outcome is an accumulation of wealth.(1*) Men whose aim 
is not increase of possessions do not go into business, particularly not on an 
independent footing.
How these motives and methods of business work out in the traffic of commercial 
enterprise proper - in mercantile and banking business does not concern the 
present inquiry, except so far as these branches of business affect the course 
of industrial business in the stricter sense of the term. Nor is it necessary 
were to describe the details of business routine, whether in the mer-[21]cantile 
pursuits or in the conduct of an industrial concern. The point of the inquiry is 
that characteristically modern business that is coextensive with the machine 
process described above and is occupied with the large mechanical industry. The 
aim is a theory of such business enterprise in outline sufficiently full to show 
in what manner business methods and business principles, in conjunction with the 
mechanical industry, influence the modern cultural situation. To save space and 
tedium, therefore, features of business traffic that are not of a broad 
character and not peculiar to this modern situation are left on one side, as 
being already sufficiently familiar for the purpose in hand.

In early modern times, before the régime of the machine industry set in, 
business enterprise on any appreciable scale commonly took the form of 
commercial business - some form of merchandising or banking. Shipping was the 
only considerable line of business which involved an investment in or management 
of extensive mechanical appliances and processes, comparable with the facts of 
the modern mechanical industry.(2*) And shipping was [22] commonly combined with 
merchandising. But even the shipping trade of earlier times had much of a 
fortuitous character, in this respect resembling agriculture or any other 
industry in which wind and weather greatly affect the outcome. The fortunes of 
men in shipping were on a more precarious footing than to-day, and the 
successful outcome of their ventures was less a matter of shrewd foresight and 
daily pecuniary strategy than are the affairs of the modern large business 
concerns in transportation or the foreign trade. Under these circumstances the 
work of the business man was rather to take advantage of the conjunctures 
offered by the course of the seasons and the fluctuations of demand and supply 
than to adapt the course of affairs to his own ends. The large business man was 
more of a speculative buyer and seller and less of a financiering strategist 
than he has since become.
Since the advent of the machine age the situation has changed. The methods of 
business have, of course, not changed fundamentally, whatever may be true of the 
methods of industry; for they are, as they had been, conditioned by the facts of 
ownership. But instead of investing in the goods as they pass between producer 
and consumer, as the merchant does, the business man now invests in the 
processes of industry; and instead of staking his values on the dimly foreseen 
conjunctures [23] of the seasons and the act of God, he turns to the 
conjunctures arising from the interplay of the industrial processes, which are 
in great measure under the control of business men.
So long as the machine processes were but slightly developed, scattered, 
relatively isolated, and independent of one another industrially, and so long as 
they were carried on on a small scale for a relatively narrow market, so long 
the management of them was conditioned by circumstances in many respects similar 
to those which conditioned the English domestic industry of the eighteenth 
century. It was under the conditions of this inchoate phase of the machine age 
that the earlier generation of economists worked out their theory of the 
business man's part in industry. It was then still true, in great measure, that 
the undertaker was the owner of the industrial equipment, and that he kept an 
immediate oversight of the mechanical processes as well as of the pecuniary 
transactions in which his enterprise was engaged; and it was also true, with 
relatively infrequent exceptions, that an unsophisticated productive efficiency 
was the prime element of business success.(3*) A further feature of that 
precapitalistic business situation is that business, whether handicraft or [24] 
trade, was customarily managed with a view to earning a livelihood rather than 
with a view to profits on investment.(4*)
In proportion as the machine industry gained ground, and as the modern 
concatenation of industrial processes and of markets developed, the conjunctures 
of business grew more varied and of larger scope at the same time that they 
became more amenable to shrewd manipulation. The pecuniary side of the 
enterprise came to require more unremitting attention, as the chances for gain 
or loss through business relations simply, aside from mere industrial 
efficiency, grew greater in number and magnitude. The same circumstances also 
provoked a spirit of business enterprise, and brought on a systematic investment 
for gain. With a fuller development of the modern close-knit and comprehensive 
industrial system, the point of chief attention for the business man has shifted 
from the old-fashioned surveillance and regulation of a given industrial 
process, with which his livelihood was once bound up, to an alert redistribution 
of investments from less to more gainful ventures,(5*) and to a strategic 
control of the conjunc-[25]tures of business through shrewd investments and 
coalitions with other business men.

As shown above, the modern industrial system is a concatenation of processes 
which has much of the character of a single, comprehensive, balanced mechanical 
process. A disturbance of the balance at any point means a differential 
advantage (or disadvantage) to one or more of the owners of the sub-processes 
between which the disturbance falls; and it may also frequently mean gain or 
loss to many remoter members in the concatenation of processes, for the balance 
throughout the sequence is a delicate one, and the transmission of a disturbance 
often goes far. It may even take on a cumulative character, and may thereby 
seriously cripple or accelerate branches of industry that are out of direct 
touch with those members of the concatenation upon which the initial disturbance 
falls. Such is the case, for instance, in an industrial crisis, when an 
apparently slight initial disturbance may become the occasion of a widespread 
derangement. And such, on the other hand, is also the case when some favorable 
condition abruptly supervenes in a given [26] industry, as, e.g., when a sudden 
demand for war stores starts a wave of prosperity by force of a large and 
lucrative demand for the products of certain industries, and these in turn draw 
on their neighbors in the sequence, and so transmit a wave of business activity.
The keeping of the industrial balance, therefore, and adjusting the several 
industrial processes to one another's work and needs, is a matter of grave and 
far-reaching consequence in any modern community, as has already been shown. 
Now, the means by which this balance is kept is business transactions, and the 
men in whose keeping it lies are the business men. The channel by which 
disturbances are transmitted from member to member of the comprehensive 
industrial system is the business relations between the several members of the 
system; and, under the modern conditions of ownership, disturbances, favorable 
or unfavorable, in the field of industry are transmitted by nothing but these 
business relations. Hard times or prosperity spread through the system by means 
of business relations, and are in their primary expression phenomena of the 
business situation simply. It is only secondarily that the disturbances in 
question show themselves as alterations in the character or magnitude of the 
mechanical processes involved. Industry is carried on for the sake of business, 
and not conversely; and the [27] progress and activity of industry are 
conditioned by the outlook of the market, which means the presumptive chance of 
business profits.
All this is a matter of course which it may seem simply tedious to recite.(6*) 
But its consequences for the theory of business make it necessary to keep the 
nature of this connection between business and industry in mind. The adjustments 
of industry take place through the mediation of pecuniary transactions, and 
these transactions take place at the hands of the business men and are carried 
on by them for business ends, not for industrial ends in the narrower meaning of 
the phrase.
The economic welfare of the community at large is best served by a facile and 
uninterrupted interplay of the various processes which make up the industrial 
system at large; but the pecuniary interests of the business men in whose hands 
lies the discretion in the matter are not necessarily best served by an unbroken 
maintenance of the industrial balance. Especially is this true as regards those 
greater business men whose interests are very extensive. The pecuniary 
operations of these latter are of large scope, and their fortunes commonly are 
not permanently bound up with the smooth working of a given sub-process in the 
industrial system. Their fortunes are rather related to the larger conjunctures 
of the industrial [28] system as a whole, the interstitial adjustments, or to 
conjunctures affecting large ramifications of the system. Nor is it at all 
uniformly to their interest to enhance the smooth working of the industrial 
system at large in so far as they are related to it. Gain may come to them from 
a given disturbance of the system whether the disturbance makes for heightened 
facility or for widespread hardship, very much as a speculator in grain futures 
may be either a bull or a bear. To the business man who aims at a differential 
gain arising out of interstitial adjustments or disturbances of the industrial 
system, it is not a material question whether his operations have an immediate 
furthering or hindering effect upon the system at large. The end is pecuniary 
gain, the means is disturbance of the industrial system, - except so far as the 
gain is sought by the old-fashioned method of permanent investment in some one 
industrial or commercial plant, a case which is for the present left on one side 
as not bearing on the point immediately in hand.(7*) The point immediately in 
question is the part which the business man plays in what are here called the 
interstitial adjustments of the industrial system; and so far as touches his 
transactions in this field it is, by [29] and large, a matter of indifference to 
him whether his traffic affects the system advantageously or disastrously. His 
gains (or losses) are related to the magnitude of the disturbances that take 
place, rather than to their. bearing upon the welfare of the community.
The outcome of this management of industrial affairs through pecuniary 
transactions, therefore, has been to dissociate the interests of those men who 
exercise the discretion from the interests of the community. This is true in a 
peculiar degree and increasingly since the fuller development of the machine 
industry has brought about a close-knit and wide-reaching articulation of 
industrial processes, and has at the same time given rise to a class of 
pecuniary experts whose business is the strategic management of the interstitial 
relations of the system. Broadly, this class of business men, in so far as they 
have no ulterior strategic ends to serve, have an interest in making the 
disturbances of the system large and frequent, since it is in the conjunctures 
of change that their gain emerges. Qualifications of this proposition may be 
needed, and it will be necessary to return to this point presently.
It is, as a business proposition, a matter of indifference to the man of large 
affairs whether the disturbances which his transactions set up in the industrial 
system help or hinder the system at [30] large, except in so far as he has 
ulterior strategic ends to serve. But most of the modern captains of industry 
have such ulterior ends, and of the greater ones among them this is peculiarly 
true. Indeed, it is this work of far-reaching business strategy that gives them 
full title to the designation, "Captains of Industry." This large business 
strategy is the most admirable trait of the great business men who with force 
and insight swing the fortunes of civilized mankind. And due qualification is 
accordingly to be entered in the broad statement made above. The captain's 
strategy is commonly directed to gaining control of some large portion of the 
industrial system. When such control has been achieved, it may be to his 
interest to make and maintain business conditions which shall facilitate the 
smooth and efficient working of what has come under his control, in case he 
continues to hold a large interest in it as an investor; for, other things 
equal, the gains from what has come under his hands permanently in the way of 
industrial plant are greater the higher and more uninterrupted its industrial 
efficiency.
An appreciable portion of the larger transactions in railway and "industrial" 
properties, e.g., are carried out with a view to the permanent ownership of the 
properties by the business men into whose hands they pass. But also in a large 
pro-[31]portion of these transactions the business men's endeavors are directed 
to a temporary control of the properties in order to close out at an advance or 
to gain some indirect advantage; that is to say, the transactions have a 
strategic purpose. The business man aims to gain control of a given block of 
industrial equipment - as, e.g., given railway lines or iron mills that are 
strategically important - as a basis for further transactions out of which gain 
is expected. In such a case his efforts are directed, not to maintaining the 
permanent efficiency of the industrial equipment, but to influencing the tone of 
the market for the time being, the apprehensions of other large operators, or 
the transient faith of investors.(8*) His interest in the particular block of 
industrial equipment is, then, altogether transient, and while it lasts it is of 
a factitious character.
The exigencies of this business of interstitial disturbance decide that in the 
common run of cases the proximate aim of the business man is to upset or block 
the industrial process at some one or more points. His strategy is commonly 
directed against other business interests and his ends are [32] commonly 
accomplished by the help of some form of pecuniary coercion. This is not 
uniformly true, but it seems to be true in appreciably more than half of the 
transactions in question. In general, transactions which aim to bring a 
coalition of industrial plants or processes under the control of a given 
business man are directed to making it difficult for the plants or processes in 
question to be carried on in severalty by their previous owners or managers.(9*) 
It is commonly a struggle between rival business men, and more often than not 
the outcome of the struggle depends on which side can inflict or endure the 
greater pecuniary damage. And pecuniary damage in such a case not uncommonly 
involves a setback to the industrial plants concerned and a derangement, more or 
less extensive, of the industrial system at large.
The work of the greater modern business men, in so far as they have to do with 
the ordering of the scheme of industrial life, is of this strategic character. 
The dispositions which they make are [33] business transactions, "deals," as 
they are called in the business jargon borrowed from gaming slang. These do not 
always involve coercion of the opposing interests; it is not always necessary to 
"put a man in a hole" before he is willing to "come in on" a "deal." It may 
often be that the several parties whose business interests touch one another 
will each see his interest in reaching an amicable and speedy arrangement; but 
the interval that elapses between the time when a given "deal" is seen to be 
advantageous to one of the parties concerned and the time when the terms are 
finally arranged is commonly occupied with business manoeuvres on both or all 
sides, intended to "bring the others to terms." In so playing for position and 
endeavoring to secure the largest advantage possible, the manager of such a 
campaign of reorganization not infrequently aims to "freeze out" a rival or to 
put a rival's industrial enterprise under suspicion of insolvency and "unsound 
methods," at the same time that he "puts up a bluff" and manages his own concern 
with a view to a transient effect on the opinions of the business community. 
Where these endeavors occur, directed to a transient derangement of a rival's 
business or to a transient, perhaps specious, exhibition of industrial capacity 
and earning power on the part of one's own concern, they are commonly 
detrimental to the industrial system at large; they act [34] temporarily to 
lower the aggregate serviceability of the comprehensive industrial process 
within which their effects run, and to make the livelihood and the peace of mind 
of those involved in these industries more precarious than they would be in the 
absence of such disturbances. If one is to believe any appreciable proportion of 
what passes current as information on this head, in print and by word of mouth, 
business men whose work is not simply routine constantly give some attention to 
manoeuvring of this kind and to the discovery of new opportunities for putting 
their competitors at a disadvantage. This seems to apply in a peculiar degree, 
if not chiefly, to those classes of business men whose operations have to do 
with railways and the class of securities called "industrials." Taking the 
industrial process as a whole, it is safe to say that at no time is it free from 
derangements of this character in any of the main branches of modern industry. 
This chronic state of perturbation is incident to the management of industry by 
business methods and is unavoidable under existing conditions. So soon as the 
machine industry had developed to large proportions, it became unavoidable, in 
the nature of the case, that the business men in whose hands lies the conduct of 
affairs should play at cross-purposes and endeavor to derange industry. But 
chronic perturbation is so much a matter of course and prevails with so [35] 
rare interruptions, that, being the normal state of affairs, it does not attract 
particular notice.

In current discussion of business, indeed ever since the relation of business 
men to the industrial system has seriously engaged the attention of economists, 
the point to which attention has chiefly been directed is the business man's 
work as an organizer of comprehensive industrial processes. During the later 
decades of the nineteenth century, particularly, has much interest centred, as 
there has been much provocation for its doing, on the formation of large 
industrial consolidations; and the evident good effects of this work in the way 
of heightened serviceability and economies of production are pointed to as the 
chief and characteristic end of this work of reorganization. So obvious are 
these good results and so well and widely has the matter been expounded, 
theoretically, that it is not only permissible, but it is a point of conscience, 
to shorten this tale by passing over these good effects as a matter of common 
notoriety. But there are other features of the case, less obtrusive and less 
attractive to the theoreticians, which need more detailed attention than they 
have commonly received.
The circumstances which condition the work of consolidation in industry and 
which decide whether a given move in the direction of a closer and wider 
organization of industrial processes will be practi-[36] cable and will result 
in economies of production, - these circumstances are of a mechanical nature. 
They are facts of the comprehensive machine process. The conditions favorable to 
industrial consolidation on these grounds are not created by the business men. 
They are matters of "the state of industrial arts," and are the outcome of the 
work of those men who are engaged in the industrial employments rather than of 
those who are occupied with business affairs. The inventors, engineers, experts, 
or whatever name be applied to the comprehensive class that does the 
intellectual work involved in the modern machine industry, must prepare the way 
for the man of pecuniary affairs by making possible and pitting in evidence the 
economies and other advantages that will follow from a prospective 
consolidation.
But it is not enough that the business man should see a chance to effect 
economies of production and to heighten the efficiency of industry by a new 
combination. Conditions favorable to consolidation on these grounds must be 
visible to him before he can make the decisive business arrangements; but these 
conditions, taken by themselves, do not move him. The motives of the business 
man are pecuniary motives, inducements in the way of pecuniary gain to him or to 
the business enterprise with which he is identified. The end of his endeavors 
is, not simply to effect an industrially [37] advantageous consolidation, but to 
effect it under such circumstances of ownership as will give him control of 
large business forces or bring him the largest possible gain. The ulterior end 
sought is an increase of ownership, not industrial serviceability. His aim is to 
contrive a consolidation in which he will be at an advantage, and to effect it 
on the terms most favorable to his own interest.
But it is not commonly evident at the outset what are the most favorable terms 
that he can get in his dealings with other business men whose interests are 
touched by the proposed consolidation, or who are ambitious to effect some 
similar consolidation of the same or of competing industrial elements for their 
own profit. It rarely happens that the interests of the business men whom the 
prospective consolidation touches all converge to a coalition on the same basis 
and under the same management. The consequence is negotiation and delay. It 
commonly also happens that some of the business men affected see their advantage 
in staving off the coalition until a time more propitious to their own interest, 
or until those who have the work of consolidation in hand can be brought to 
compound with them for the withdrawal of whatever obstruction they are able to 
offer.(10*) Such a coalition involves a loss of independent standing, [38] or 
even a loss of occupation, to many of the business men interested in the deal. 
If a prospective industrial consolidation is of such scope as to require the 
concurrence or consent of many business interests, among which no one is very 
decidedly preponderant in pecuniary strength or in strategic position, a long 
time will be consumed in the negotiations and strategy necessary to define the 
terms on which the several business interests will consent to come in and the 
degree of solidarity and central control to which they will submit.
It is notorious, beyond the need of specific citation, that the great business 
coalitions and industrial combinations which have characterized the situation of 
the last few years have commonly been the outcome of a long-drawn struggle, in 
which the industrial ends, as contrasted with business ends, have not been 
seriously considered, and in which great shrewdness and tenacity have commonly 
been shown in the staving off of a settlement for years in the hope of more 
advantageous terms. The like is true as regards further coalitions, further 
consolidations of industrial processes which have not been effected, but which 
are known to be feasible and desirable so far as regards the mechanical 
circumstances of the case. The difficulties in the way are difficulties of 
ownership, of business interest, not of mechanical feasibility.
These negotiations and much of the strategy [39] that leads up to a business 
consolidation are of the nature of derangements of industry, after the manner 
spoken of above. So that business interests and manoeuvres commonly delay 
consolidations, combinations, correlations of the several plants and processes, 
for some appreciable time after such measures have become patently advisable on 
industrial grounds. In the meantime the negotiators are working at crosspurposes 
and endeavoring to put their rivals in as disadvantageous a light as may be, 
with the result that there is chronic derangement, duplication, and misdirected 
growth of the industrial equipment while the strategy is going forward, and 
expensive maladjustment to be overcome when the negotiations are brought to a 
close.(11*)
Serviceability, industrial advisability, is not the decisive point. The decisive 
point is business expediency and business pressure. In the normal course of 
business touching this matter of industrial consolidation, therefore, the 
captain of industry works against, as well as for, a new and more efficient 
organization. He inhibits as well as furthers the higher organization of 
industry.(12*) Broadly, [40] it may be said that industrial consolidations and 
the working arrangements made for the more [41] economical utilization of 
resources and mechanical contrivances are allowed to go into effect only after 
they are long overdue.
In current economic theory the business man is spoken of under the name of 
"entrepreneur" or "undertaker," and his function is held to be the coordinating 
of industrial processes with a view to economics of production and heightened 
serviceability. The soundness of this view need not be questioned. It has a 
great sentimental value and is useful in many ways. There is also a modicum of 
truth in it as an account of facts. In common with other men, the business man 
is moved by ideals of serviceability and an aspiration to make the way of life 
easier for his fellows. Like other men, he has something of the instinct of 
workmanship. No doubt such aspirations move the great business man less urgently 
than many others, who are, on that account, less successful in business affairs. 
Motives of this kind detract from business efficiency, and an undue yielding to 
them on the part of business men is to be deprecated as an infirmity. Still, 
throughout men's [42] dealing with one another and with the interests of the 
community there runs a sense of equity, fair dealing, and workmanlike integrity; 
and in an uncertain degree this bent discountenances gain that is got at an 
undue cost to others, or without rendering some colorable equivalent. Business 
men are also, in a measure, guided by the ambition to effect a creditable 
improvement in the industrial processes which their business traffic touches. 
These sentimental factors in business exercise something of a constraint, 
varying greatly from one person to another, but not measurable in its aggregate 
results. The careers of most of the illustrious business men show the presence 
of some salutary constraint of this kind. Not infrequently an excessive 
sensitiveness of this kind leads to a withdrawal from business, or from certain 
forms of business which may appeal to a vivid fancy as peculiarly dishonest or 
peculiarly detrimental to the community.(13*) Such [43] grounds of action, and 
perhaps others equally genial and equally unbusinesslike, would probably be 
discovered by a detailed scrutiny of any large business deal. Probably in many 
cases the business strategist, infected with this human infirmity, reaches an 
agreement with his rivals and his neighbors in the industrial system without 
exacting the last concession that a ruthless business strategy might entitle him 
to. The result is, probably, a speedier conclusion and a smoother working of the 
large coalitions than would follow from the unmitigated sway of business 
principles.(14*)
But the sentiment which in this way acts in constraint of business traffic 
proceeds on such grounds of equity and fair dealing as are afforded by current 
business ethics; it acts within the range of business principles, not in 
contravention of them; it acts as a conventional restraint upon pecuniary 
advantage, not in abrogation of it. This code of business ethics consists, after 
all, of mitigations of the maxim, Caveat emptor. It touches primarily the 
dealings of man with man, [44] and only less directly and less searchingly 
inculcates temperance and circumspection as regards the ulterior interests of 
the community at large. Where this moral need of a balance between the services 
rendered the community and the gain derived from a given business transaction 
asserts itself at all, the balance is commonly sought to be maintained in some 
sort of pecuniary terms; but pecuniary terms afford only a very inadequate 
measure of serviceability to the community.
Great and many are the items of service to be set down to the business man's 
account in connection with the organization of the industrial system, but when 
all is said, it is still to be kept in mind that his work in the correlation of 
industrial processes is chiefly of a permissive kind. His furtherance of 
industry is at the second remove, and is chiefly of a negative character. In his 
capacity as business man he does not go creatively into the work of perfecting 
mechanical processes and turning the means at hand to new or larger uses. That 
is the work of the men who have in hand the devising and oversight of mechanical 
processes. The men in industry must first create the mechanical possibility of 
such new and more efficient methods and correlations, before the business man 
sees the chance, makes the necessary business arrangements, and gives general 
directions that the contemplated industrial advance shall go into [45] effect. 
The period between the time of earliest practicability and the effectual 
completion of a given consolidation in industry marks the interval by which the 
business man retards the advance of industry. Against this are to be offset the 
cases, comparatively slight and infrequent, where the business men in control 
push the advance of industry into new fields and prompt the men concerned with 
the mechanics of the case to experiment and exploration in new fields of 
mechanical process.
When the recital is made, therefore, of how the large consolidations take place 
at the initiative of the business men who are in control, it should be added 
that the fact of their being in control precludes industrial correlations from 
taking place except by their advice and consent. The industrial system is 
organized on business principles and for pecuniary ends. The business man is at 
the centre; he holds the discretion and he exercises it freely, and his choice 
falls out now on one side, now on the other. The retardation as well as the 
advance is to be set down to his account.
As regards the economies in cost of production effected by these consolidations, 
there is a further characteristic feature to be noted, a feature of some 
significance for any theory of modern business. In great measure the saving 
effected [46] is a saving of the costs of business management and of the 
competitive costs of marketing products and services, rather than a saving in 
the prime costs of production. The heightened facility and efficiency of the new 
and larger business combinations primarily affect the expenses of office work 
and sales, and it is in great part only indirectly that this curtailment and 
consolidation of business management has an effect upon the methods and aims of 
industry proper. It touches the pecuniary processes immediately, and the 
mechanical processes indirectly and in an uncertain degree. It is of the nature 
of a partial neutralization of the wastes due to the presence of pecuniary 
motives and business management, - for the business management involves waste 
wherever a greater number of men or transactions are involved than are necessary 
to the effective direction of the mechanical processes employed. The amount of 
"business" that has to be transacted per unit of product is much greater where 
the various related industrial processes are managed in severalty than where 
several of them are brought under one business management. A pecuniary 
discretion has to be exercised at every point of contact or transition, where 
the process or its product touches or passes the boundary between different 
spheres of ownership. Business transactions have to do with ownership and 
changes of ownership. The greater [47] the parcelment in point of ownership, the 
greater the amount of business work that has to be done in connection with a 
given output of goods or services, and the slower, less facile, and less 
accurate on the whole, is the work. This applies both to the work of bargain and 
contract, wherein pecuniary initiative and discretion are chiefly exercised, and 
to the routine work of accounting, and of gathering and applying information and 
misinformation.
The standardization of industrial processes, products, services, and consumers, 
spoken of in an earlier chapter, very materially facilitates the business man's 
work in reorganizing business enterprises on a larger scale; particularly does 
this standardization serve his ends by permitting a uniform routine in 
accounting, invoices, contracts, etc., and so admitting a large central 
accounting system, with homogeneous ramifications, such as will give a competent 
conspectus of the pecuniary situation of the enterprise at any given time.
The great, at the present stage of development perhaps the greatest, opportunity 
for saving by consolidation, in the common run of cases, is afforded by the 
ubiquitous and in a sense excessive presence of business enterprise in the 
economic system. It is in doing away with unnecessary business transactions and 
industrially futile ma-[48]noeuvring on the part of independent firms that the 
promoter of combinations finds his most telling opportunity. So that it is 
scarcely an over-statement to say that probably the largest, assuredly the 
securest and most unquestionable, service rendered by the great modern captains 
of industry is this curtailment of the business to be done, this sweeping 
retirement of business men as a class from the service and the definitive 
cancelment of opportunities for private enterprise.
So long as related industrial units are under different business managements, 
they are, by the nature of the case, at cross-purposes, and business 
consolidation remedies this untoward feature of the industrial system by 
eliminating the pecuniary element from the interstices of the system as far as 
may be. The interstitial adjustments of the industrial system at large are in 
this way withdrawn from the discretion of rival business men, and the work of 
pecuniary management previously involved is in large part dispensed with, with 
the result that there is a saving of work and an avoidance of that systematic 
mutual hindrance that characterizes the competitive management of industry. To 
the community at large the work of pecuniary management, it appears, is less 
serviceable the more there is of it. The heroic role of the captain of industry 
is that of a deliverer from an excess of business manage-[49]ment. It is a 
casting out of business men by the chief of business men.(15*)

The theory of business enterprise sketched above applies to such business as is 
occupied with the interstitial adjustments of the system of industries. This 
work of keeping and of disturbing the interstitial adjustments does not look 
immediately to the output of goods as its source of gain, but to the alterations 
of values involved in disturbances of the balance, and to the achievement of a 
more favorable business situation for some of the enterprises engaged. This work 
lies in the middle, between commercial enterprise proper, on the one hand, and 
industrial enterprise in the stricter sense, on the other hand. It is directed 
to the acquisition of gain through taking advantage of those conjunctures of 
business that arise out of the concatenation of processes in the industrial 
system.
In a similar manner commercial business may be said to be occupied with 
conjunctures that arise out of the circumstances of the industrial system at 
large, but not originating in the mechanical exigencies of the industrial 
processes. The conjunctures of commercial business proper are in the main 
fortuitous, in so far that they are [50] commonly not initiated by the business 
men engaged in these commercial pursuits. Commercial business, simply as such, 
does not aim to guide the course of industry.
On the other hand, the large business enterprise spoken of above initiates 
changes in industrial organization and seeks its gain in large part through such 
alterations of value levels as take place on its own initiative. These 
alterations of the value levels, of course, have their effect upon the output of 
goods and upon the material welfare of the community; but the effect which they 
have in this way is only incidental to the quest of profits.
But apart from this remoter and larger guidance of the course of industry, the 
business men also, and more persistently and pervasively, exercise a guidance 
over the course of industry in detail. The production of goods and services is 
carried on for gain, and the output of goods is controlled by business men with 
a view to gain. Commonly, in ordinary routine business, the gains come from this 
output of goods and services. By the sale of the output the business man in 
industry "realizes" his gains. To "realize" means to convert salable goods into 
money values. The sale is the last step in the process and the end of the 
business man's endeavor.(16*) When he has [51] disposed of the output, and so 
has converted his holdings of consumable articles into money values, his gains 
are as nearly secure and definitive as the circumstances of modern life admit. 
It is in terms of price that he keeps his accounts, and in the same terms he 
computes his output of products. The vital point of production with him is the 
vendibility of the output, its convertibility into money values, not its 
serviceability for the needs of mankind. A modicum of serviceability, for some 
purpose or other, the output must have if it is to be salable. But it does not 
follow that the highest serviceability gives the largest gains to the business 
man in terms of money, nor does it follow that the output need in all cases have 
other than a factitious serviceability. There is, on the one hand, such a 
possibility as overstocking the market with any given line of goods, to the 
detriment of the business man concerned, but not necessarily to the immediate 
disadvantage of the body of consumers. And there are, on the other hand, certain 
lines of industry, such as many advertising enterprises, the output of which may 
be highly effective for its purpose but of quite equivocal use to the community. 
Many well-known and prosperous enterprises which advertise and sell patent 
medicines and other proprietary articles might be cited in proof.
In the older days, when handicraft was the rule [52] of the industrial system, 
the personal contact between the producer and his customer was somewhat close 
and lasting. Under these circumstances the factor of personal esteem and 
disesteem had a considerable play in controlling the purveyors of goods and 
services. This factor of personal contact counted in two divergent ways: (1) 
producers were careful of their reputation for workmanship, even apart from the 
gains which such a reputation might bring; and (2) a degree of irritation and 
ill-will would arise in many cases, leading to petty trade quarrels and 
discriminations on other grounds than the gains to be got, at the same time that 
the detail character of dealings between producer and consumer admitted a degree 
of petty knavery and huckstering that is no longer practicable in the current 
large-scale business dealings. Of these two divergent effects resulting from 
close personal relations between producer and consumer, the former seems on the 
whole to have been of preponderant consequence. Under the system of handicraft 
and neighborhood industry, the adage that "Honesty is the best policy" seems on 
the whole to have been accepted and to have been true. This adage has come down 
from the days before the machine's régime and before modern business enterprise. 
Under modern circumstances, where industry is carried on on a large scale, the 
discretionary head of an industrial enterprise is commonly removed [53] from all 
personal contact with the body of customers for whom the industrial process 
under his control purveys goods or services. The mitigating effect which 
personal contact may have in dealings between man and man is therefore in great 
measure eliminated. The whole takes on something of an impersonal character. One 
can with an easier conscience and with less of a sense of meanness take 
advantage of the necessities of people whom one knows of only as an 
indiscriminate aggregate of consumers. Particularly is this true when, as 
frequently happens in the modern situation, this body of consumers belongs in 
the main to another, inferior class, so that personal contact and cognizance of 
them is not only not contemplated, but is in a sense impossible. Equity, in 
excess of the formal modicum specified by law, does not so readily assert its 
claims where the relations between the parties are remote and impersonal as 
where one is dealing with one's necessitous neighbors who live on the same 
social plane. Under these circumstances the adage cited above loses much of its 
axiomatic force. Business management has a chance to proceed on a temperate and 
sagacious calculation of profit and loss, untroubled by sentimental 
considerations of human kindness or irritation or of honesty.
The broad principle which guides producers and merchants, large and small, in 
fixing the prices at [54] which they offer their wares and services is what is 
known in the language of the railroads as "charging what the traffic will 
bear."(17*) Where a given enterprise has a strict monopoly of the supply of a 
given article or of a given class of services this principle applies in the 
unqualified form in which it has been understood among those who discuss railway 
charges. But where the monopoly is less strict, where there are competitors, 
there the competition that has to be met is one of the factors to be taken 
account of in determining what the traffic will bear; competition may even 
become the most serious factor in the case if the enterprise in question has 
little or none of the character of a monopoly. But it is very doubtful if there 
are any successful business ventures within the range of the modern industries 
from which the monopoly element is wholly absent.(18*) They are, at any rate, 
few and not of great magnitude. And the endeavor of all such enterprises that 
look to a permanent continuance of their business is to establish as much of a 
monopoly as may be. [55] Such a monopoly position may be a legally established 
one, or one due to location or the control of natural resources, or it may be a 
monopoly of a less definite character resting on custom and prestige (good-
will). This latter class of monopolies are not commonly classed as such; 
although in character and degree the advantage which they give is very much the 
same as that due to a differential advantage in location or in the command of 
resources. The end sought by the systematic advertising of the larger business 
concerns is such a monopoly of custom and prestige. This form of monopoly is 
sometimes of great value, and is frequently sold under the name of good-will, 
trademarks, brands, etc. Instances are known where such monopolies of custom, 
prestige, prejudice, have been sold at prices running up into the millions.(19*)
The great end of consistent advertising is to establish such differential 
monopolies resting on popular conviction. And the advertiser is successful in 
this endeavor to establish a profitable popular conviction, somewhat in 
proportion as he correctly apprehends the manner in which a popular conviction 
on any given topic is built up.(20*) The [56] cost, as well as the pecuniary 
value and the magnitude, of this organized fabrication of popular [57] 
convictions is indicated by such statements as that the proprietors of a certain 
well-known household remedy, reputed among medical authorities to be of entirely 
dubious value, have for a series of years found their profits in spending 
several million dollars annually in advertisements. This case is by no means 
unique.
It has been said,(21*) no doubt in good faith and certainly with some reason, 
that advertising as currently carried on gives the body of consumers valuable 
information and guidance as to the ways and means whereby their wants can be 
satisfied and their purchasing power can be best utilized. To the extent to 
which this holds true, advertising is a service to the community. But there is a 
large reservation to be made on this head. Advertising is competitive; the 
greater part of it aims to divert purchases, etc., from one channel to another 
channel of the same general class.(22*) And to the extent to which the efforts 
of advertising in all its branches are spent on this competitive disturbance of 
trade, they are, on the whole, of [58] slight if any immediate service to the 
community. Such advertising, however, is indispensable to most branches of 
modern industry; but the necessity of most of the advertising is not due to its 
serving the needs of the community nor to any aggregate advantage accruing to 
the concerts which advertise, but to the fact that a business concern which 
falls short in advertising fails to get its share of trade. Each concern must 
advertise, chiefly because the others do. The aggregate expenditure that could 
advantageously be put into advertising in the absence of competition would 
undoubtedly be but an inconsiderable fraction of what is actually incurred, and 
necessarily incurred under existing circumstances.(23*)
Not all advertising is wholly competitive, or at least it is not always 
obviously so. In proportion as an enterprise has secured a monopoly position, 
its advertising loses the air of competitive selling and takes on the character 
of information designed to increase the use of its output independently. But 
such an increase implies a redistribution of consumption on the part of the 
customers.(24*) So that the element of competitive selling is after all not 
absent in these cases, but takes the form of competition between different 
classes of wares [59] instead of competitive selling of different brands of the 
same class of wares.
Attention is here called to this matter of advertising and the necessity of it 
in modern competitive business for the light which it throws on "cost of 
production" in the modern system, where the process of production is under the 
control of business men and is carried on for business ends. Competitive 
advertising is an unavoidable item in the aggregate costs of industry. It does 
not add to the serviceability of the output, except it be incidentally and 
unintentionally. What it aims at is the sale of the output, and it is for this 
purpose that it is useful. It gives vendibility, which is useful to the seller, 
but has no utility to the last buyer. Its ubiquitous presence in the costs of 
any business enterprise that has to do with the production of goods for the 
market enforces the statement that the "cost of production" of commodities under 
the modern business system is cost incurred with a view to vendibility, not with 
a view to serviceability of the goods for human use.
There is, of course, much else that goes into the cost of competitive selling, 
besides the expenses of advertising, although advertising may be the largest and 
most unequivocal item to be set down to that account. A great part of the work 
done by merchants and their staff of employées, both wholesale and retail, as 
well as by sales-agents not [60] exclusively connected with any one mercantile 
house, belongs under the same head. Just how large a share of the costs of the 
distribution of goods fairly belongs under the rubric of competitive selling can 
of course not be made out. It is largest, on the whole, in the case of 
consumable goods marketed in finished form for the consumer, but there is more 
or less of it throughout. The goods turned out on a large scale by the modern 
industrial processes, on the whole, carry a larger portion of such competitive 
costs than the goods still produced by the old-fashioned detail methods of 
handicraft and household industry; although this distinction does not hold hard 
and fast. In some extreme cases the cost of competitive selling may amount to 
more than ninety per cent. of the total cost of the goods when they reach the 
consumer. In other lines of business, commonly occupied with the production of 
staple goods, this constituent of cost may perhaps fall below ten per cent. of 
the total. Where the average, for the price of finished goods delivered to the 
consumers, may lie would be a hazardous guess.(25*)

It is evident that the gains which accrue from this business of competitive 
selling and buying bear [61] no determinable relation to the services which the 
work in question may render the community. If a comparison may be hazarded 
between two unknown and indeterminate quantities, it may perhaps be said that 
the gains from competitive selling bear something more of a stable relation to 
the service rendered than do the gains derived from speculative transactions or 
from the financiering operations of the great captains of industry. It seems at 
least safe to say that the converse will not hold true. Gains and services seem 
more widely out of touch in the case of the large-scale financiering work. Not 
that the work of the large business men in reorganizing and consolidating the 
industrial process is of slight consequence; but as a general proposition, the 
amount of the business man's gains from any given transaction of this latter 
class bear no traceable relation to any benefit which the community may derive 
from the transaction.(26*)
As to the wages paid to the men engaged in the routine of competitive selling, 
as salesmen, buyers, accountants, and the like, - much the same holds true of 
them as of the income of the business men who carry on the business on their own 
initiative. [62] Their employers pay the wages of these persons, not because 
their work is productive of benefit to the community, but because it brings a 
gain to the employers. The point to which the work is directed is profitable 
sales, and the wages are in some proportion to the efficiency of this work as 
counted in terms of heightened vendibility.
The like holds true for the work and pay of the force of workmen engaged in the 
industrial processes under business management. It holds, in a measure, of all 
modern industry that produces for the market, but it holds true, in an eminent 
degree, of those lines of industry that are more fully under the guidance of 
modern business methods. These are most closely in touch with the market and are 
most consistently guided by considerations of vendibility. They are also, on the 
whole, more commonly carried on by hired labor, and the wages paid are 
competitively adjusted on grounds of the vendibility of the product. The brute 
serviceability of the output of these industries may be a large factor in its 
vendibility, perhaps the largest factor; but the fact remains that the end 
sought by the business men in control is a profitable sale, and the wages are 
paid as a means to that end, not to the end that the way of life may be smoother 
for the ultimate consumer of the goods produced.(27*)
[63] The outcome of this recital, then, is that wherever and in so far as 
business ends and methods dominate modern industry the relation between the 
usefulness of the work (for other purposes than pecuniary gain) and the 
remuneration of it is remote and uncertain to such a degree that no attempt at 
formulating such a relation is worth while. This is eminently and obviously true 
of the work and gains of business men, in whatever lines of business they are 
engaged. This follows as a necessary consequence of the nature of business 
management.
Work that is, on the whole, useless or detrimental to the community at large may 
be as gainful to the business man and to the workmen whom he employs as work 
that contributes substantially to the aggregate livelihood. This seems to be 
peculiarly true of the bolder flights of business enterprise. In so far as its 
results are not detrimental to human life at large, such unproductive work 
directed to securing an income may seem to be [64] an idle matter in which the 
rest of the community has no substantial interests. Such is not the case. In so 
far as the gains of these unproductive occupations are of a substantial 
character, they come out of the aggregate product of the other occupations in 
which the various classes of the community engage. The aggregate profits of the 
business, whatever its character, are drawn from the aggregate output of goods 
and services; and whatever goes to the maintenance of the profits of those who 
contribute nothing substantial to the output is, of course, deducted from the 
income of the others, whose work tells substantially.
There are, therefore, limits to the growth of the industrially parasitic lines 
of business just spoken of. A disproportionate growth of parasitic industries, 
such as most advertising and much of the other efforts that go into competitive 
selling, as well as warlike expenditure and other industries directed to turning 
out goods for conspicuously wasteful consumption, would lower the effective 
vitality of the community to such a degree as to jeopardize its chances of 
advance or even its life. The limits which the circumstances of life impose in 
this respect are of a selective character, in the last resort. A persistent 
excess of parasitic and wasteful efforts over productive industry must bring on 
a decline. But owing to the very high productive efficiency of the modern 
mechanical industry, the [65] margin available for wasteful occupations and 
wasteful expenditures is very great. The requirements of the aggregate 
livelihood are so far short of the possible output of goods by modern methods as 
to leave a very wide margin for waste and parasitic income. So that instances of 
such a decline, due to industrial exhaustion, drawn from the history of any 
earlier phase of economic life, carry no well-defined lesson as to what a modern 
industrial community may allow itself in this respect.
While it is in the nature of things unavoidable that the management of industry 
by modern business methods should involve a large misdirection of effort and a 
very large waste of goods and services, it is also true that the aims and ideals 
to which this manner of economic life gives effect act forcibly to offset all 
this incidental futility. These pecuniary aims and ideals have a very great 
effect, for instance, in making men work hard and unremittingly, so that on this 
ground alone the business system probably compensates for any wastes involved in 
its working. There seems, therefore, to be no tenable ground for thinking that 
the working of the modern business system involves a curtailment of the 
community's livelihood. It makes up for its wastefulness by the added strain 
which it throws upon those engaged in the productive work.
NOTES:
1. The ulterior ground of efforts directed to the accumulation of wealth is 
discussed at some length in the Theory of the Leisure Class, ch. II. and V, and 
the economic bearing of the business man's work is treated in a paper on 
"Industrial and Pecuniary Employments," in the Proceedings of the thirteenth 
annual meeting of the American Economic Association. Cf. also Marshall, 
Principles of Economics (3d ed.), bk. I. ch. III., bk. IV. ch. XII., bk. V. ch. 
IV., bk. VII. ch. VII. and VIII.; Bagehot, Economic Studies, especially pp. 53 
et seq.; Walker, Wages Question, ch. XIV; and more especially Sombart, Moderne 
Kapitalismus, vol. I. ch. I, VIII., XIV., XV.; Marx, Kapital, bk. I. ch. IV; 
Schmoller, Grundriss, bk. II. ch. VII.
2. It is significant that joint-stock methods of organization and management - 
that is to say, impersonally capitalistic methods - are traceable, for their 
origin and early formulation, to the shipping companies of early modern times. 
Cf. K. Lehmann, Die geschichtliche Entwickelung des Aktienrechts bis zum Code de 
Commerce. The like view is spoken for by Ehrenberg, Zeitalter der Fugger; see 
vol. II. pp. 325 et seq.
3. Cf. Cantillon, Essai sur le Commerce, 1e partie, ch. III., VI., IX., XIV., 
XV., Wealth of Nations, bk. I; Bucher, Entstehung der Volkswirtschaft (3d ed.), 
ch. IV. and V.; Sombart, Kapitalismus, Vol. I. bk. I.
4. Sombart, vol. I. ch. IV.-VIII.; Ashley, Economic History and Theory, bk. II., 
ch. VI., especially pp. 389-397.
5. Cf. Marshall, Principles of Economics, on the "Law of Substitution," e.g. bk. 
VI. ch. I. The law of substitution implies freedom of investment and applies 
fully only in so far as the investor in question is not permanently identified 
with a given industrial plant or even with a given line of industry. It requires 
great facility in shifting from one [25] to another point of investment. It is 
therefore only as the business situation has approached the modern form that the 
law of substitution has come to be of considerable importance to economic 
theory; for a theory of business, such as business was in mediaeval and early 
modern times, this law need scarcely have been formulated.
6. See Sombart, Kapitalismus, vol. I. ch. VIII.
7. It is chiefly the passive owner of stock and the like that holds permanently 
to a given enterprise, under the fully developed modern business conditions. The 
active business man of the larger sort is not in this way bound to the globe of 
the given business concern.
8. Cf. testimony of J. B. Dill, Report of the Industrial Commission, vol. I. pp. 
1078, 1080-1085; "Digest of Evidence," p. 77; also testimony of various 
witnesses on stock speculation and corporate management, and particularly the 
special report to the Commission, on "Securities of Industrial Combinations and 
Railroads," vol. XIII., especially pp. 920-933.
9. The history of the formation of any one of the great industrial coalitions of 
modern times will show how great and indispensable a factor in the large 
business is the invention and organization of difficulties desired to force 
rival enterprises to come to terms. E.g. the manoeuvres preliminary to the 
formation of the United States Steel Corporation, particularly the movements of 
the Carnegie Company, show how this works on a large scale. Cf. E. S. Meade, 
Trust Finance, pp. 204-217. Report of the Industrial Commission, vol. XIII., 
"Review of Evidence," pp. v-vii, with the testimony relating to this topic. The 
pressure which brings about a new adjustment (coalition) is commonly spoken of 
as "excessive competition."
10. Cf., e.g., the accounts of the formation of the United States Steel 
Corporation or the Shipbuilding Company.
11. Witness the rate wars and the duplications of inefficient track and terminal 
equipment among the railways, and the similar duplications in the iron and steel 
industry. The system of railway terminals in Chicago, e.g., is an illuminated 
object-lesson of systematic ineptitude.
12. The splendid reach of this inhibitory work of the captain of industry, as 
well as of his aggressive work of consolidation, is well shown, for instance, in 
the history and present position of the railway [40] industry in America. It is and 
has for a long term of years been obvious that a very comprehensive unification 
or consolidation, in respect of the mechanical work to be done by the railway 
system, is eminently desirable and feasible, - consolidation of a scope not only 
equalling, but far out reaching, the coalitions which have lately been effected 
or attempted. There is no hazard in venturing the assertion that several 
hundreds of men who are engaged in the mechanical work of railroading, in one 
capacity and another, are conversant with feasible plans for economizing work 
and improving the service by more comprehensive and closer correlation of the 
work; and it is equally obvious that nothing but the diverging interests of the 
business men concerned hinders these closer and larger feasible correlations 
from being put into effect. It is easily within the mark to say that the delay 
which railway consolidation has suffered up to the present, from business 
exigencies as distinct from the mechanical circumstances of the case, amounts to 
an average of at least twenty years. Ever since railroading began in this 
country there has been going on a process of reluctant consolidation, in which 
the movements of the business men in control have tardily followed up the 
opportunities for economy and efficient service which the railroad industry has 
offered. And their latest and boldest achievements along this line, as seen from 
the standpoint of mechanical advisability, have been foregone conclusions since 
a date so far in the past as to be forgotten, and taken at their best they fall 
short to-day by not less than some fifty per cent. of their opportunities. Cf. 
Report of the Industrial Commission, vol. XIX., "Transportation," especially pp. 
304-348.
Like other competitive business, but more particularly such business as has to 
do with the interstitial adjustments of the industrial system, the business of 
railway consolidation is of the nature of a game, in which the end sought by the 
players is their own pecuniary gain and to which the industrial serviceability 
of the outcome is incidental only. This is recognized by popular opinion and is 
made much of by popular agitators, who take the view that when once the game 
between the competing business interests has been played to a finish, in the 
definitive coalition of the competitors under one management, then the game will 
go on as a somewhat one-sided conflict between the resulting monopoly and the 
community at large.
So again, as a further illustration, it is and from the outset has been evident 
that the iron-ore beds of northern Wisconsin, Michigan, and Minnesota ought, 
industrially speaking, to have been worked as one collective enterprise. There 
are also none but business reasons [41] why practically all the ore beds and iron 
and steel works in the country are not worked as one collective enterprise. It is 
equally evident that such correlations of work as are permitted by the business 
coalitions already effected in this field have resulted in a great economy of 
production, and that the failure to carry these coalitions farther means an 
annual waste running up into the millions. Both the economies so effected and 
the waste so incurred are to be set down to the account of the business manners 
who have gone so far and have failed to go farther. The like is obvious as 
regards many other branches of industry and groups of industries.
13. Illustrative instances will readily suggest themselves. Many a business man 
turns by preference to something less dubious than the distilling of whiskey or 
the sale of deleterious household remedies. They prefer not to use deletrious 
adulterants, even within the limits of the law. They will rather use wool than 
shoddy at the same price. The officials of a railway commonly prefer to avoid 
wrecks and manslaughter, even if there is no pecuniary advantage in choosing the 
more humane course. More than that, it will be found true that the more 
prosperous of the craft, especially, take pride and pains to make the service of 
their roads or the output of their mills as efficient, not simply as the 
pecuniary advantage of the concern demands, but as the best pecuniary results 
will admit. Instances are perhaps not frequent, but they are also not altogether 
exceptional, where a prosperous captain of industry will go out of his way to 
heighten the [43] serviceability of his industry even to a degree that is of doubtful 
pecuniary expediency for himself. Such aberrations are, of course, not large; 
and if they are persisted in to any very appreciable extent the result is, of 
course, disastrous to the enterprise. The enterprise in such a case falls out of 
the category of business management and falls under the imputation of 
philanthropy.
14. The captains of the first class necessarily are relatively exempt from these 
unbusinesslike scruples.
15. See Report of the Industrial Commission. vol. I., Testimony of J. W. Gates, 
pp. 1029-1039; S. Dodd, pp. 1049-1050; N. B. Rogers, p. 1068; vol. XIII, C. M. 
Schwab, pp. 451, 459, H. B. Butler, p. 490; L. R. Hopkins, pp. 346, 347; A. S. 
White, pp. 254, 256.
16. Cf. Marx, Kapital, bk. I, pt. II.
17. The economic principle of "charging what the traffic will bear" is discussed 
with great care and elaboration by R. T. Ely, Monopolies and Trusts, ch. III., 
"The Law of Monopoly Price." Cf., for illustration of the practical working of 
this principle, testimony of C. M. Schwab, Report of the Industrial Commission, 
vol. XIII. pp. 453-455.
18. "Monopoly" is here used in that looser sense which it has colloquially, not 
in the strict sense of an exclusive control of the supply, as employed, e g., by 
Mr. Ely in the volume cited above. This usage is the more excusable since Mr. 
Ely finds that a "monopoly" in the strict sense of the definition practically 
does not occur in fact. Cf. Jenks, The Trust Problem, ch. IV.
19. E.g. the prestige value of Ivory Soap.
20. Cf. W. D. Scott, The Theory of Advertising; J. L. Mahin, The Commercial 
Value of Advertising, pp. 4-6, 12-13, 15; E. Fogg-Meade, "The Place of 
Advertising in Modern Business," Journal of Political Economy, March 1901; 
Sombart, vol. II. ch. XX.-XXI.; G. Tarde, Psychologie Economique, vol. I. pp. 
187-190. The writing and designing of advertisements (letterpress, display, and 
illustrations) has [56] grown into a distinct calling; so that the work of a skilled 
writer of advertisements compares not unfavorably, in point of lucrativeness, 
with that of the avowed writers of popular fiction.
The psychological principles of advertising may be formulated somewhat as 
follows: A declaration of fact, made in the form and with the incidents of taste 
and expression to which a person is accustomed, will be accepted as authentic 
and will be acted upon if occasion arises, in so far as it does not conflict 
with opinions already accepted. The acceptance of an opinion seems to be almost 
entirely a passive matter. The presumption remains in favor of an opinion that 
has once been accepted, and an appreciable burden of proof falls on the 
negative. A competent formulation of opinion on a given point is the chief 
factor in gaining adherents to that opinion, and a reiteration of the statement 
is the chief factor in carrying conviction. The truth of such a formulation is a 
matter of secondary consequence, but a wide and patent departure from known fact 
generally weakens its persuasive effect. The aim of the advertiser is to arrest 
attention and then present his statement in such a manner that it is easily 
assimilated into the habits of thought of the person whose conviction is to be 
influenced. When this is effectually done a reversal of the conviction so 
established is a matter of considerable difficulty. The tenacity of a view once 
accepted in this way is evidenced, for instance, by the endless number and 
variety of testimonials to the merits of well-advertised but notoriously 
worthless household remedies and the like.
So acute an observer as Mr. Sombart is still able to hold the opinion that "auf 
Schwindel ist dauernd noch nie ein Unternehmen begründet worden" (Kapitalismus, 
vol. II. p. 376). Mr. Sombart has not made acquaintance with the adventures of 
Elijah the Restorer, nor is he conversant with American patent-medicine 
enterprise. With Mr. Sombart's view may be contrasted that of Mr. L. F. Ward, an 
observer of equally large outlook and acumen: -
"The law of mind as it operates in society as an aid to competition and in the 
interest of the individual is essentially immoral. It rests primarily on the 
principle of deception. It is an extension to other human beings of the method 
applied to the animal world by which the latter was subjected to man. This 
method was that of the ambush and the snare. Its ruling principle was cunning. 
Its object was to deceive, circumvent, ensnare, and capture. Low animal cunning 
was succeeded by more refined kinds of cunning. The more important of these go 
by the names of business shrewdness, strategy, [57] and diplomacy, none of which 
differ from ordinary cunning in anything but the degree of adroitness by which 
the victim is outwitted. In this way social life is completely honeycombed with 
deception." - "The Psychologic Basis of Social Economics," Ann. of Am. Acad., 
vol. III. pp. 83-84 [475-476].
21. Fogg-Meade, "Place of Advertising in Modern Business," pp. 218, 224-236.
22. Advertising and other like expedients for the sale of goods aim at changes 
in the "substitution values" of the goods in question, not at an enhancement of 
the aggregate utilities of the available output of goods.
23. Cf. Jenks, The Trust Problem, pp. 21-28; Report of the Industrial 
Commission, vol. XIX. pp. 611-612.
24. Cf. Böhm-Bawerk, Positive Theory of Capital, bk. III., ch. V., VII.-IX., on 
the value of alternative and complementary goods.
25. Where competitive selling makes up a large proportion of the aggregate final 
cost of the marketed product, this fact is likely to show itself in an 
exceptionally large proportion of good-will in the capitalization of the 
concerns engaged in the given line of business; as, e.g., the American Chicle 
Company.
26. Cf. Ed. Hahn, Die Wirtschaft der Welt am Ausgang des XIX. Jahrhunderts. - 
"In unserem heutigen Wirtschaftsleben ist der Gewinn durch den Zuwachs der 
Produktion, mit dem frühere Jahrhunderte rechneten, ganz und gar zurückgedrängt, 
er ist unwesentlich geworden."
27. It might, therefore, be feasible to set up a theory to the effect that wages 
are competitively proportioned to the vendibility of the [63] product; but there is 
no cogent ground for saying that the wages in any department of industry, under 
a business régime, are proportioned to the utility which the output has to any 
one else than the employer who sells it. When it is further taken into account 
that the vendibility of the product in very many lines of production depends 
chiefly on the wastefulness of the goods (cf. Theory of the Leisure Class, ch. 
V.), the divergence between the usefulness of the work and the wages paid for it 
seems wide enough to throw the whole question of an equivalence between work and 
pay out of theoretical consideration. Cf., however, Clark, The Distribution of 
Wealth, especially ch. VII. and XXII.

[66]
Chapter Four
Business Principles
The physical basis of modern business traffic is the machine process, as 
described in Chapter II. It is essentially a modern fact, - late and yet in its 
early stages of growth, especially as regards its wider sweep in the 
organization of the industrial system. The spiritual ground of business 
enterprise, on the other hand, is given by the institution of ownership. 
"Business principles" are corollaries under the main proposition of ownership; 
they are principles of property, - pecuniary principles. These principles are of 
older date than the machine industry, although their full development belongs 
within the machine era. As the machine process conditions the growth and scope 
of industry, and as its discipline inculcates habits of thought suitable to the 
industrial technology, so the exigencies of ownership condition the growth and 
aims of business, and the discipline of ownership and its management inculcates 
views and principles (habits of thought) suitable to the work of business 
traffic.
The discipline of the machine process enforces a standardization of conduct and 
of knowledge in [67] terms of quantitative precision, and inculcates a habit of 
apprehending and explaining facts in terms of material cause and effect. It 
involves a valuation of facts, things, relations, and even personal capacity, in 
terms of force. Its metaphysics is materialism and its point of view is that of 
causal sequence.(1*) Such a habit of mind conduces to industrial efficiency, and 
the wide prevalence of such a habit is indispensable to a high degree of 
industrial efficiency under modern conditions. This habit of mind prevails most 
widely and with least faltering in those communities that have achieved great 
things in the machine industry, being both a cause and an effect of the machine 
process.
Other norms of standardization, more or less alien to this one, and other 
grounds for the valuation of facts, have prevailed elsewhere, as well as in the 
earlier phases of the Western culture. Much of this older standardization still 
stands over, in varying degrees of vigor or decay, in that current scheme of 
knowledge and conduct that now characterizes the Western culture. Many of these 
ancient norms of thought which have come down from the discipline of remote and 
relatively primitive phases of the cultural past are still strong in the 
affections of men, although most of them have lost greatly in their power of 
constraint. [68] They no longer bind men's convictions as they once did. They 
are losing their axiomatic character. They are no longer self-evident or 
self-legitimating to modern common sense, as they once were to the common sense 
of an earlier time.
These ancient norms differ from the modern norms given by the machine in that 
they rest on conventional, ultimately sentimental grounds; they are of a 
putative nature. Such are, e.g., the principles of (primitive) blood 
relationship, clan solidarity, paternal descent, Levitical cleanness, divine 
guidance, allegiance, nationality. In their time and under the circumstances 
which favored their growth these were, all and several, powerful factors in 
controlling human conduct and shaping the course of events. In their time each 
of these institutional norms served as a definitive ground of authentication for 
such facts as fell under its particular scope, and the scope of each was very 
wide in the day of its best vigor. As time has brought change of circumstances, 
the facts of life have gradually escaped from the constraint of these ancient 
principles; so that the dominion which they now hold over the life of civilized 
men is relatively slight and shifty.
It is among these transmitted institutional habits of thought that the ownership 
of property belongs. It rests on the like general basis of use and wont. The 
binding relation of property to its [69] owner is of a conventional, putative 
character. But while these other conventional norms cited above are in their 
decline, this younger one of the inherited institutions stands forth without 
apology and shows no apprehension of being crowded into the background of 
sentimental reminiscence.
In absolute terms the institution of ownership is ancient, no doubt; but it is 
young compared with blood-relationship, the state, or the immortal gods. 
Especially is it true that its fuller development is relatively late. Not until 
a comparatively late date in West European history has ownership come to be 
emancipated from all restrictions of a non-pecuniary character and to stand in a 
wholly impersonal position, without admixture of personal responsibility or 
class prerogative.(2*) Freedom and inviolability of contract has not until 
recently been the unbroken rule. Indeed, it has not even yet been accepted 
without qualification and extended to all items owned. There still are 
impediments in the way of certain transfers and certain contracts, and there are 
exemptions in favor of property held by certain privileged persons, and 
especially by certain sacred corporations. This applies particularly to the more 
backward peoples; but nowhere is the "cash nexus" free from all admixture of 
alien elements. Ownership is not all-pervading and all-[70]dominant, but it 
pervades and dominates the affairs of civilized peoples more freely and widely 
than any other single ground of action, and more than it has ever done before. 
The range and number of relations and duties that are habitually disposed of on 
a pecuniary footing are greater than in the past, and a pecuniary settlement is 
final to a degree unknown in the past. The pecuniary norm has invaded the domain 
of the older institutions, such as blood-relationship, citizenship, or the 
church, so that obligations belonging under the one or the other of these may 
now be assessed and fulfilled in terms of a money payment, although the notion 
of a pecuniary liquidation seems to have been wholly remote from the range of 
ideas - habits of thought - on which these relations and duties were originally 
based.

This is not the place for research into the origin and the primitive phases of 
ownership, nor even for inquiry into the views of property current in the early 
days of the Western culture. But the views current on this head at present - the 
principles which guide men's thinking and roughly define the right limits of 
discretion in pecuniary matters - this common-sense apprehension of what are the 
proper limits, rights, and responsibilities of ownership, is an outgrowth of the 
traditions, experiences, and speculations of past generations. [71] Therefore 
some notice of the character of these traditional views and the circumstances 
out of which they have arisen in the recent past is necessary to an 
understanding of the part which they play in modern life.(3*) The theory of 
property professed at a given time and in a given cultural region shows what is 
the habitual attitude of men, for the time being, on questions of ownership; for 
any theory that gains widespread and uncritical acceptance must carry a 
competent formulation of the deliverances of common sense on the matter with 
which it deals. Otherwise it will not be generally accepted. And such a 
commonplace view is in its turn an outcome of protracted experience on the part 
of the community.
The modern theories of property run back to Locke,(4*) or to some source which 
for the present purpose is equivalent to Locke; who, on this as on other 
institutional questions, has been proved by the test of time to be a competent 
spokesman for modern culture in these premises. A detailed examination of how 
the matter stood in the theoretical respect before Locke, and whence, and by 
what process of selection and digestion, Locke de-[72]rived his views, would 
lead too far afield. The theory is sufficiently familiar, for in substance it 
is, and for the better part of two centuries has been, held as an article of 
common sense by nearly all men who have spoken for the institution of property, 
with the exception of some few and late doubters.(5*)
This modern European, common-sense theory says that ownership is a "Natural 
Right." What a man has made, whatsoever "he hath mixed his labor with," that he 
has thereby made his property. It is his to do with it as he will. He has 
extended to the object of his labor that discretionary control which in the 
nature of things be of right exercises over the motions of his own person. It is 
his in the nature of things by virtue of his having made it. "Thus labor, in the 
beginning, gave a right of property." The per-[73]sonal force, the functional 
efficiency of the workman shaping material facts to human use, is in this 
doctrine accepted as the definitive, axiomatic ground of ownership; behind this 
the argument does not penetrate, except it be to trace the workman's creative 
efficiency back to its ulterior source in the creative efficiency of the Deity, 
the "Great Artificer." With the early spokesmen of natural rights, whether they 
speak for ownership or for other natural rights, it is customary to rest the 
case finally on the creator's discretionary dispositions and workmanlike 
efficiency. But the reference of natural rights back to the choice and creative 
work of the Deity has, even in Locke, an air of being in some degree 
perfunctory; and later in the life-history of the natural-rights doctrine it 
falls into abeyance; whereas the central tenet, that ownership is a natural 
right resting on the productive work and the discretionary choice of the owner, 
gradually rises superior to criticism and gathers axiomatic certitude. The 
Creator presently, in the course of the eighteenth century, drops out of the 
theory of ownership.
It may be worth while to indicate how this ultimate ground of ownership, as 
conceived by modern common sense, differs from the ground on which rights of the 
like class were habitually felt to rest in mediaeval times. Customary authority 
was the proximate ground to which rights, [74] powers, and privileges were then 
habitually referred. It was felt that if a clear case of devolution from a 
superior could be made out, the right claimed was thereby established; and any 
claim which could not be brought to rest on such an act, or constructive act, of 
devolution was felt to be in a precarious case. The superior from whom rights, 
whether of ownership or otherwise, devolved held his powers by a tenure of 
prowess fortified by usage; the inferior upon whom given rights and powers 
devolved held what fell to his lot by a tenure of service and fealty sanctioned 
by use and wont. The relation was essentially a personal one, a relation of 
status, of authority and subservience. Hereditary standing gave a presumption of 
ownership, rather than conversely. In the last resort the chain of devolution by 
virtue of which all rights and powers of the common man pertained to him was to 
be traced back through a sequence of superiors to the highest, sovereign secular 
authority, through whom in turn it ran back to God. But neither in the case of 
the temporal sovereign nor in that of the divine sovereign was it felt that 
their competence to delegate or devolve powers and rights rested on a 
workmanlike or creative efficiency. It was not so much by virtue of His office 
as creator as it was by virtue of His office as suzerain that the Deity was felt 
to be the source and arbiter of [75] human rights and duties. In the course of 
cultural change, as the medieval range of ideas and of circumstances begins to 
take on a more modern complexion, God's creative relation to mundane affairs is 
referred to with growing frequency and insistence in discussions of all 
questions of this class; but for the purpose in hand His creative relation to 
human rights does not supersede His relation of sovereignty until the modern era 
is well begun. It may be said that God's tenure of office in the medieval 
conception of things was a tenure by prowess, and men, of high and low degree, 
held their rights and powers of Him by a servile tenure. Ownership in this 
scheme was a stewardship. It was a stewardship proximately under the discretion 
of a secular lord, more remotely under the discretion of the divine Overlord. 
And the question then pressing for an answer when a point of competency or 
legitimacy was raised in respect of any given human arrangement or institution 
was not, What hath God wrought? but, What hath God ordained?
This medieval range of conceptions first began to break down and give place to 
modern notions in Italy, in the Renaissance. But it was in the English-speaking 
communities that the range of ideas upon which rests the modern concept of 
natural rights first gathered form and reached a competent expression. This 
holds true with [76] respect to the modern doctrines of natural rights as 
contrasted with the corresponding ancient doctrines. The characteristically 
modern traits of the doctrine of natural rights are of English derivation. This 
is peculiarly true as regards the natural right of ownership. The material, 
historical basis of this English right of ownership, considered as a habit of 
thought, is given by the modern economic factors of handicraft and trade, in 
contrast with the medieval institutions of status and prowess. England, as 
contrasted with the Continent, during modern times rapidly substituted the 
occupation of the merchant and the ubiquitous free artisan as the tone-giving 
factors of her everyday life, in place of the prince, the soldier, and the 
priest. With this change in the dominant interests of everyday life came a 
corresponding change in the discipline given by the habits of everyday life, 
which shows itself in the growth of a new range of ideas as to the meaning of 
human life and a new ground of finality for human institutions. New axioms of 
right and truth supplant the old as new habits of thought supersede the old.
This process of substitution, as a struggle between rival concepts of finality 
in political theory, reached a dramatic climax in the revolution of 1688. As a 
battle of axioms the transition comes to a head in the controversy between John 
Locke [77] and Sir Robert Filmer. Filmer was the last effective spokesman of the 
medieval axiom of devolution. Locke's tracing of natural rights, the right of 
property among the rest, back to the workmanlike performance of the Creator, 
marks the form in which, at the point of transition, the modern view pays its 
respects to the superseded axiom of devolution and takes leave of it.
The scope given to the right of ownership in later modern times is an outgrowth 
of the exigencies of mercantile traffic, of the prevalence of purchase and sale 
in a "money economy." The habits of thought enforced by these exigencies and by 
the ubiquitous and ever recurring resort to purchase and sale decide that 
ownership must naturally, normally, be absolute ownership, with free and 
unqualified discretion in the use and disposal of the things owned. Social 
expediency may require particular limitations of this full discretion, but such 
limitations are felt to be exceptional derogations from the "natural" scope of 
the owner's discretion.
On the other hand, the metaphysical ground of this right of ownership, the 
ultimate fact by virtue of which such a discretionary right vests in the owner, 
is his assumed creative efficiency as a workman; he embodies the work of his 
brain and hand in a useful object, - primarily, it is held, for his own personal 
use, and, by further [78] derivation, for the use of any other person to whose 
use he sees fit to transfer it. The workman's force, ingenuity, and dexterity 
was the ultimate economic factor, - ultimate in a manner patent to the common 
sense of a generation habituated to the system of handicraft, however doubtful 
such a view may appear in the eyes of a generation in whose apprehension the 
workman is no longer the prime mover nor the sole, or even chief, efficient 
factor in the industrial process. The free workman, master of his own motions 
and with discretion as to what he would turn his efforts to, if to anything, had 
by Locke's time become an habitual fact in the life of the English community to 
such a degree that free labor, of the character of handicraft, was accepted 
uncritically as the fundamental factor in all human economy, and as the 
presumptive original fact in industry and in the struggle for wealth. So settled 
did this habit of thought become that no question was entertained as to the 
truth of the assumption.
It became a principle of the natural order of things that free labor is the 
original source of wealth and the basis of ownership. In point of historical 
fact, no doubt, such was not the pedigree of modern industry or modern 
ownership; but the serene, undoubting assumption of Locke and his generation 
only stands out the [79] more strongly and unequivocally for this its 
discrepancy with fact. It is all the more evidently a competent expression of 
the trend which English common sense was following at this time, since this 
doctrine of a "natural" right of property based on productive labor carries all 
before it, in the face of the facts. In this matter English thought, or rather 
English common sense, has led; and the advanced Continental peoples have 
followed the English lead as the form of economic organization exemplified by 
the English-speaking communities has come to prevail among these Continental 
peoples.
Such a concept belongs to the régime of handicraft and petty trade, and it is 
from, or through, the era of handicraft that it has come down to the 
present.(6*) It fits into the scheme of handicraft, and it is less fully in 
consonance with the facts of life in any other situation than that of 
handicraft. Associated with the system of handi-[80]craft, as its correlate, was 
the system of petty trade; and as the differentiation of occupations was carried 
to a high degree, purchase and sale came to prevail very generally, and the 
community acquired a commercial complexion and commercial habits of thought. 
Under these circumstances the natural right of ownership came to comprise an 
extreme freedom and facility in the disposal of property. The whole sequence of 
growth of this natural right is, of course, to be taken in connection with the 
general growth of individual rights that culminated in the eighteenth-century 
system of Natural Liberty. How far the English economic development is to be 
accounted the chief or fundamental factor in the general growth of natural 
rights is a question that cannot be taken up here. The outcome, so far as it 
immediately touches the present topic, was that by the time of the industrial 
revolution a fairly consistent standardization of economic life had been reached 
in terms of workmanship and price. The writings of Adam Smith and his 
contemporaries bear witness to this. And this eighteenth-century standardization 
stands over as the dominant economic institution of later times.(7*) Such, in 
outline, seem to be the histori-[81]cal antecedents and the spiritual basis of 
the modern institution of property, and therefore of business enterprise as it 
prevails in the present.(8*)
This sketch of the genesis of the modern institution of property and of modern 
business principles may seem dubious to those who are inclined to give it a more 
substantial character than that of a habit of thought, - that is to say, those 
who still adhere to the doctrine of natural rights with something of the 
eighteenth-century naiveté. But whatever may be accepted as the ulterior grounds 
of that cultural movement which culminated in the system of Natural Liberty, it 
is plain that the industrial and commercial experience of western Europe, and 
primarily of England, from the fifteenth to the eighteenth century, had much to 
do with the outcome of the movement in so far as natural liberty touches 
economic matters. It is as an outcome of this recently past phase of economic 
development that we have incorporated in the law, [82] equity, and common sense 
of to-day, these peculiarly free and final property rights and obligations, that 
is to say, those peculiar principles that control current business and industry. 
We owe to the eighteenth century a very full discretion and free swing in all 
pecuniary matters. It has given freedom of contract, together with security and 
ease of credit engagements, whereby the competitive order of business has been 
definitively installed.(9*)

The subject-matter about which this modern pecuniary discretion turns, with all 
its freedom and inviolability of contract, is money values. Accordingly there 
underlies all pecuniary contracts, an assumption that the unit of money value 
does not vary. Inviolability of contracts involves this assumption. It is 
accepted unquestioningly as a point of departure in all business transactions. 
In the making and enforcement of contracts it is a fundamental point of law and 
usage that money does not vary.(10*) Capitalization as well as contracts are 
made in its terms, and the plans of the business men who control industry look 
to the money unit as the stable ground of all their transactions. Notoriously, 
business men are jealous of any attempt to change the value or lessen the 
stability [83] of the money unit, which goes to show how essential a principle 
in business traffic is the putative invariability of the money unit.(11*)
Usage fortified by law decides that when prices vary the variation is held to 
occur in the value of the vendible commodities, not in the value of the money 
unit, since money is the standard of value. There is, of course, no intention 
here to question the position, familiar to all economists, that fluctuations in 
the course of prices may as well be due [84] to variation on the part of the 
money metals as to a variation on the part of the articles whose prices 
fluctuate. In so far as the distinction so made between variations in the one or 
the other member of a value ratio has a meaning - which it is not always clear 
that it has - it does not touch the argument. It is a matter of common 
notoriety, which has also had the benefit of reiterated statistical proof, that, 
as measured, for instance, in terms of livelihood or of labor, the value of 
money has varied incontinently throughout the course of history.
But in the routine of business throughout the nineteenth century the assumed 
stability of the money unit has served as an axiomatic principle, in spite of 
facts which have from time to time shown the falsity of that assumption.(12*)
The all-dominating issue in business is the question of gain and loss. Gain and 
loss is a question [85] of accounting, and the accounts are kept in terms of the 
money unit, not in terms of livelihood, nor in terms of the serviceability of 
the goods, nor in terms of the mechanical efficiency of the industrial or 
commercial plant. For business purposes, and so far as the business man 
habitually looks into the matter, the last term of all transactions is their 
outcome in money values. The base line of every enterprise is a line of 
capitalization in money values. In current business practice, variations from 
this base line are necessarily rated as variations on the part of the other 
factors in the case, not as variations of the base line. The business man judges 
of events from the standpoint of ownership, and ownership runs in terms of 
money.(13*)
Investments are made for profit, and industrial plants and processes are 
capitalized on the basis of their profit-yielding capacity. In the accepted 
scheme of things among business men, profits are included as intrinsic to the 
conduct of business. So that, in place of the presumption in favor of a simple 
pecuniary stability of wealth, such as prevails in the rating of possessions 
outside of business traffic, there prevails within the range of business [86] 
traffic the presumption that there must in the natural course of things be a 
stable and orderly increase of the property invested. Under no economic system 
earlier than the advent of the machine industry does profit on investment seem 
to have been accounted a normal or unquestionably legitimate source of gain. 
Under the agrarian-manorial régime of the Middle Ages it was not felt that the 
wealth of the large owners must, as a matter of course, increase by virtue of 
the continued employment of what they already had in hand - whatever may be the 
historical fact as regards the increase of wealth in their hands. Particularly, 
it was not the sense of the men of that time that wealth so employed must 
increase at any stated, "ordinary" rate per time unit. Similarly as regards 
other traffic in those days, even as regards mercantile ventures. Gain from 
investment was felt to be a fortuitous matter, not reducible to a stated rate. 
This is reflected, e.g., in the tenacious protests against the taking or paying 
of interest and in the ingenious sophistries by which the payment of interest 
was defended or explained away. Only under more settled commercial relations 
during the era of handicraft did the payment of interest gradually come to be 
accepted into full legitimacy. But even then gains from other business 
employments than mercantile traffic were apparently viewed as an increase due to 
[87] productive labor rather than as a profit on investment.(14*) In industrial 
pursuits, as distinct from mercantile traffic proper, profits apparently come to 
figure as a regular and ordinary incident only when the industries come to be 
carried on on a mercantile basis by relatively large employers working with 
hired labor.
This orderly increase is, of course, taken account of in terms of the money 
unit. The "ordinary" rate of profits in business is looked upon as a matter of 
course by the body of business men. It is part of their common-sense view of 
affairs, and is therefore a normal phenomenon.(15*) Gain, they feel, is normal, 
being the purpose of all their endeavors; whereas a loss or a shrinkage in the 
values invested is felt to be an untoward accident which does not belong in the 
normal course of business, and which requires particular explanation. The 
normality, or matter-of-course character, of profits in the modern view is well 
shown by the position of those classical economists who are inclined to [88] 
include "ordinary profits" in the cost of production of goods.
The precise meaning of "ordinary profits" need not detain the argument. It may 
mean net average profits, or it may mean something else. The phrase is 
sufficiently intelligible to the business community to permit the business men 
to use it without definition and to rest their reasoning about business affairs 
on it as a secure and stable concept; and it is this commonplace resort to the 
term that is the point of interest here.
At any given time and place there is an accepted ordinary rate of profits, more 
or less closely defined, which, it is felt, should accrue to any legitimate and 
ordinarily judicious business venture. However shifty the definition of this 
rate of profits may be, in concrete, objective terms, it is felt by the men of 
affairs to be of so substantial and consistent a character that they habitually 
capitalize the property engaged in any given business venture on the basis of 
this ordinary rate of profits. Due regard being had to any special advantages 
and drawbacks of the individual case, any given business venture or plant is 
capitalized at such a multiple of its earning-capacity as the current ordinary 
rate of profits will warrant.(16*)
[89] Proceeding on the common-sense view built up out of this range of habits of 
thought with respect to normal profits and price phenomena, the business 
community holds that times are ordinary or normal so long as the accepted or 
reasonable rate of profit