Mr. Crane is a retired chemical manufacturer of Wilmington, Delaware.
A prominent American industrialist made a trip through the Orient recently, and in every country he visited from Russia to Hong Kong and Japan he met and talked with the ruler of that country. In every one of these conversations he would ask what he called the "$64 question"—"You have heard of the high standard of living in the United States. What do you believe to be the cause of America’s prosperity?" Most of those interviewed replied that it was our abundant natural resources with plentiful raw materials. The industrialist would then state that this was quite untrue, that some of these countries had more natural resources per capita than we did in America. The ruler of the country would then flounder about, but not one gave a reasonable reply. For instance, Nehru of India, a great man with complete authority over more than four hundred million people, thoughtfully considered the question and finally came out with the reply, "You’re lucky."
Yet, the true answer to the $64 question is simple — the provision of tools in a free country.
That answer is clearly manifested in our own country’s history as well as in other past and contemporary events. At the end of the eighteenth century, immediately after Independence, Americans turned to making things which the British, with their policy of mercantilism, had not permitted the colonials to do. There developed a great center of industry on the little Brandywine River, with 120 mills on the last twenty miles of that stream. Elsewhere, the growth of manufacturing industry throughout the country was prodigious. The tremendous release of energy among free men was the potent factor in manufacturing enterprises throughout the new nation. "Yankee ingenuity" was often spoken of, but the outburst of energy and the reasons for it have seldom been explained. It proceeded at an accelerating pace.
Throughout human history there have been occasional occurrences of increased freedom in various places, always accompanied by increased production and a better standard of living. The correct answer to the $64 question explains why this is always so.
We have recently witnessed the phenomenal progress of Western Germany. Prostrated by military defeat and in dire trouble in 1948, its situation seemed hopeless. Vice Chancellor Erhard consulted W. Röpke, the great economist at Geneva, and he advised, "Try freedom." Thereupon, despite the remonstrance of American officials in Germany, controls were taken off of wages and prices. In this climate of freer enterprise, the rebound of the German economy was theatrical. West Germany soon became the most prosperous country in Europe, with a much higher standard of living for themselves and for over six million refugees from communist countries. Moreover, they brought into their country great numbers of workers, particularly from Greece and Italy.
All goods and services are produced by changing the form, condition, and place of raw materials with the aid of human energy and tools. These are the three factors of production — human energy, raw materials, tools.
About 78 per cent of all private goods and services produced in the United States in 1965 came from firms using the corporate form of organization. The remaining 22 per cent of production covered the output of nonincorporated agriculture, shopkeepers, professions, personal and business service industries, and other unincorporated enterprises.
The relative importance of the three basic factors of production in noncorporate enterprises is difficult to judge, for lack of statistics, but some figures are available for corporate industry.
What Are Tools?
Tools are instruments of production (in addition to natural resources and human energy, mental and physical) — cultivated land, mechanical power, buildings, machinery, equipment, and apparatus of all sorts.
The use of tools by all animals other than man is practically nil.
They use unchanged the raw materials presented by nature. Charles Kettering told the story of travelers in Africa who would sit around a bonfire to counteract the chill of the evening. When they retired to their tents, monkeys would come down from the trees to warm themselves by the fire. And, he added, no monkey was ever known to put a piece of wood on the fire!
One of Aesop’s fables tells of the quarrel between the organs of digestion, each claiming that it did the major part of digestion and was not properly rewarded for its work. Their proper proportions of the digestive process can hardly be determined. However, the factors or elements of production of goods and services can be approximated by considering that a worker in the highly industrialized United States produces at least twenty times as much as a coolie laborer with only a tool such as a basket or other simple instrument. The toolless coolie is paid a few cents a day; the average American factory worker received $20.88 for an eight-hour day in 1965.
A prominent clergyman visiting Egypt found his sense of justice and decency offended by the fact that the "fellah" was paid only twelve cents a day. Yet, examination of the total income of Egypt showed that if it were divided equally to all the people, the daily wage would be thirteen cents a day. It wasn’t a question of distribution of income to be corrected by a sense of charity; for that was all the "fellah" could earn in the Egyptian economy. What they needed was more tools.
In America, the corporate investment in tools averaged over $12,000 per worker last year, and in some industries, such as petroleum, it ran as high as $97,000 per worker.
Analysis of the facts of private production in the United States indicates that raw materials —the value of ore, oil, and minerals in the ground; uncultivated land; standing timber in the forests; naturally occurring raw foodstuffs; and the like — account for about 2 per cent of the final price paid for goods and services in a free market. In some products, such as textiles, raw materials may constitute as much as 6 per cent of this final value; but the average for all goods and services seems to be approximately 2 per cent. About 4 per cent of end values may be ascribed to unassisted human energy, physical and mental. About 94 per cent of the value of private goods and services produced in the United States, therefore, may be attributed to the use of tools. This high figure attributable to tools may surprise those who have not studied this matter; but it will be realized that production in other times and, sadly, even today in some places, depends on slave labor and crude tools.
Today in the United States, every worker has sixty "slaves" working for him in the form of mechanical power. Several times more power is released by the automobile than by all other mechanical energy and only a small portion of this motor car energy is used for production purposes. So we modify the statement above, the correct figure being close to twenty mechanical slaves for each worker, and that worker is paid seven to ten times as much as is paid out in dividends.
The truth of this is evident when we consider how much useful work a man can do on a farm or garden with only his bare hands as tools, and how dependent we are upon even the simple farm tools for winning livelihood from the land. It is clearly revealed when one sees in backward lands farmers plowing with a wooden plow or sharpened stick. One must realize that the amount of a farmer’s production has been multiplied many times by the complicated and efficient farm machinery available today in the United States.
The proof of these assertions is clearly shown by the fact that when the white man came to America the estimated Indian population was two hundred thousand —all the country could support in their practically toolless economy. Today, there are two hundred million inhabitants (including almost four hundred thousand Indians) with a per capita income twenty-five times that of the Indian before the white man came.
The production of automobiles is truly marvelous. The assembly line was one of man’s greatest inventions. A leading automobile manufacturer some years ago experimentally constructed an ordinary car by bringing simple tools to the point of manufacture, similar to the way in which a house is built. The result was a cost of $10,000 for that car, whereas his company was selling the model at the time for less than $2,000.
Another instance of the value of the best tools was given to me while visiting one of the largest motor car manufacturers in a foreign country a few years ago. The manager of the plant, and a great admirer of American methods, said that it cost them eighteen cents a pound to produce a car of the Chevrolet type; whereas, in Michigan the cost was ten cents a pound for the same type. Yet, the American worker received three times the daily wage of the worker in the plant abroad. They still had a long way to go in reducing manual operations and using better tools.
How Are Tools Supplied?
In a free country, investors in companies supply tools for use by the worker who has not sufficient capital to buy them himself. Such companies are in competition with other corporations in the same line of business. The payment investors receive for the use of tools they supply for manufacturing purposes averaged about 4.8 per cent of the market price of the goods produced over the past decade.
In a socialist country, government supplies the tools, but at a high cost. For instance, according to figures for Russia released some twenty years ago, the government in effect owned all tools and supplied them to the worker at markups averaging over 15 per cent of sales. Thus, the Russian worker at that time, although he did not realize it, was paying three times as much for his tools as did the American.
So-called "surplus income," both private and corporate, is not only a mighty force in helping to finance charitable, community, educational, and religious organizations, but is the principal source of the funds for providing tools.
Socialists claim that they will finance their services by appropriating "surplus income," by which they mean corporation profits and private income beyond the necessities of life. Every such effort has failed. Bismarck, taking over the Sozial Politik from the socialists, thought to finance it by seizing the railroads and employing their income for the government’s social services. Soon, railroad income turned into deficits. Heavier taxation followed and, finally, war and disaster.
Britain employed the Marxian formula of heavy and steeply graduated income taxes. This destroyed private fortunes. Clement Atlee boasted that while there once had been several thousand personal incomes of $16,000 or more per year after taxes, now there were only sixteen such fortunes left in the country. The deficits of British socialism have outrun the loans and gifts from America. Now the "luxuries" of the people — "beer, baccy, and bedding"— are taxed to fuel the socialist state. The resulting poverty, particularly in formerly thrifty Scotland, is appalling. But it is the consequence of government ownership and control of industry. And in Britain, as in other welfare states, what cannot be taxed directly is confiscated through inflation.
So-called "surplus income" is important in an economy, for out of corporate profits and the savings of the people comes the money needed to buy the tools. In fact, successful corporations and other cooperative enterprises retain much of their income for the renewal, improvement, and expansion of tools. This vital point is often ignored, people imagining that once an industry is fully operating, it needs no further supply of tools. The success of any industry depends on keeping its tools up-to-date by repairs, replacement, and improvement. This vital supply of equipment comes from adequate charges for depreciation and obsolescence, from income retained and invested in business, and from additional capital supplied by investors. Corporation dividends, along with personal savings such as are invested in savings banks and life insurance, are important phases in the process of providing tools.
The most valuable public-service income in any country is the part of savings used for buying tools. Capital formation in plant and properties is the life blood of a successful corporation, enabling it to continue and increase its services to customers. If earnings and savings are insufficient to meet the needs and growth of the business, the corporation goes downhill or succumbs. And a nation that thus cuts off the source of tools is destined to lose position in the world and dwell in poverty.
Those of socialistic philosophy object that the use of tools is at the expense of employment, that it throws people out of work. Historically, in England, the early use of labor-saving machinery was violently fought and the new equipment often destroyed on the ground that men were losing their jobs. The record shows, however, that labor-saving machinery not only lifted drudgery from men’s backs but also greatly increased the production of goods and services, creating new jobs and greater income for all.
That the process of industrialization, the saving and investing in tools, is further advanced in the United States than elsewhere explains our high and rising wage rates and level of living. And of total corporate income in the country, 85 per cent goes to employees — the users of tools — and 15 per cent to the suppliers.
So, let us beware of foolish talk about the evils of this tool-using age! Let us not kill the goose that lays the golden eggs!