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expansion of the insurance principle. “Cannot a similar principle be applied to the risk of industrial loss? If it were possible to guarantee every entrepreneur at least his operating expenses, including depreciation, the loss would be minimized.” 45 The proposal is only in the stage of discussion, but its fundamental principle appears to be essentially sound from an economic point of view. If it is worked out practically in the course of time, the effect upon the inequalities of wealth would be of importance.

The three main groups of causes of inequalities of privilege, namely, inheritance, monopoly, chance, are not static, fixed causes. They are elements in the whole institution of property and under the pressure of the dynamic social and economic movement of the times, they are open to constructive modification.

Inequalities of Fortune Due to Unequal Abilities.—The psychology of individual differences has demonstrated marked inequalities in native intelligence and native ability. The technique of mental tests has been abused by many pseudo-psychologists, and such abuses have threatened to bring the whole principle of mental measurements into disrepute. However, to the cautious student, such abuses should not cause a neglect of the underlying elements of fact. From a conservative standpoint, mental measurement may be accepted as a useful scientific instrument.

The technique of mental measurement made its greatest advances during the war, in the army mental tests of the drafted personnel. Over 1,700,000 men in the army were put through these tests, and their mental abilities were recorded and classified. The draft troops were representative of all classes and strata of people and it may be assumed therefore that the findings for this group represent with approximate accuracy the findings that would be arrived at if it were possible to apply the test to every individual in the country. It should be borne in mind, too, that intelligence tests are not tests of memory, or of knowledge, or of feeling, but of the power of the mind to think.

The plain facts revealed by these comprehensive tests are briefly as follows: About 10 per cent of the population of the country are of very inferior intelligence. The best of this group are unable to get beyond the third or fourth grade in school, no matter how long they attend, and the others are either on the border line of mental deficiency or are feeble-minded. Their mental level is comparable to that of a child of ten years or less. More striking than these facts are the numbers of those individuals in the country whose mental level is comparable to that of a child twelve years of age or less. Forty-five per cent of the population are limited in intelligence to that level. Seventy per cent of the population register an intelligence equivalent only to an age of fourteen years or less. At the top of the rating scale are a group of people of very superior intelligence amounting to four and one-half per cent of the total population. And just below this grade of intelligence are a group whose mental level makes them average college material,

45 David Friday, Profits, Wages and Prices, Chapter XIV.

amounting to 9 per cent of the population. The sharp contrast between the two extremes of very superior and very inferior intelligence, and the enormous proportion, nearly one-half, of the total population, showing only a very moderate intelligence, give a fairly definite basis for a conception of the great inequalities of intelligence.

The upper grades of intelligence furnish the leadership of society. From these grades come the great statesmen, educators, lawyers, doctors and business executives. To the extent that these groups of high mentality are elevated to positions of power and responsibility, there is some assurance of efficiency in economic and social organizations. The grossest incompetencies occur, however, when individuals of low mental ability have power and responsibility thrust upon them. Democracy requires that the influence of these men in the highest levels of intelligence shall be paramount, for the influence of the lower levels is predominantly non-rational in character. The lowest 10 per cent in the army were deemed unfit to send overseas. They are scarcely able to behave with the minimum of self-guidance necessary to get along in industry under favorable circumstances; and under unfavorable circumstances, they become the glaring misfits and frequent tragedies of the industrial system. Just above this lowest 10 per cent is a group of 15 per cent of the population slightly but not much better off. This group includes many foreigners and many who are illiterate. They are weak in initiative and show very little resourcefulness. To get along in their jobs successfully they require close supervision by men who understand sympathetically their limitations. The grades just above this level suffer from similar limitations and handicaps in diminishing degrees. Industry abounds with individuals who cannot restrain themselves from outbursts of temper or from irrational obstinacies; with individuals who repeatedly make mistakes and who require an unusual amount of training before they can perform their work habitually and well; with individuals who are unable to think their way out of difficulties, but who blunder and fumble through, at great distress to themselves and their families and at great waste to society. The science of personnel administration is a serious attempt to understand and control the great inequalities of intelligence for the greater satisfaction of the individual and the greater efficiency of economic society. 48

These facts indicate how misleading it is to make sweeping references to “the people” or the “masses” as if they were all on a dead level and all alike. Difference, not uniformity, is the cardinal feature of the human equipment, and the inequalities of intelligence between various mental levels give the real character of the human nature which is of interest to economics. The inequalities of intelligence are matched

46 The psychologists are not agreed as to the significance of mental tests. Many competent authorities deny that such tests really measure intelligence. Undoubtedly the supporters of the tests did for a time greatly over-rate their value. Many absurd claims have been made for the tests. The author here accepts only a moderate and conservative version of intelligence tests, such as he believes to be supported by the more careful students of the subject.


by the inequalities of all the phases of human capacity. The entire human equipment of each individual qualifies that individual to assume a certain amount of responsibility and no more, and the prime task of economic democracy is to adapt the distribution of power and responsibility in economic life to the unequal distribution of human equipment.

It takes brains to earn a million dollars. The wage-earner at the other end of the scale has limited imagination, ability, initiative, and sagacity. He is poorly educated, and in the day's work has ambition ground out of him. Only in exceptional instances do there appear the men of indomitable energy who by their own merit force their way from poverty to riches. But it is this exceptional man whose ability is urgently needed for the smooth working of the economic organization and whose genius should be encouraged and evoked by the property institution. It is natural that when men of strikingly unequal native ability struggle for the same prize, the man of superior ability should win out. The freedom and rights of property encourage many men of superior gifts to exert their strength to the utmost. The rewards are high and success is a sure claim to social distinction.

A feature of this situation which is not often contemplated is the universally accepted conviction that the ability of a wage worker can never be great enough to deserve more than three or four thousand dollars a year. Superior endowment as a machinist, splendid gifts as a worker, the finest eye and most skilled hand all reach their limit of deserved reward, usually before a $2,500 wage is reached, certainly before a $5,000 figure is reached. No matter how great his ability as a laborer, he cannot actually earn beyond certain very narrow limits. It is only ability as a manager or director or property owner which earns the largest returns. This social maxim has become so axiomatic that it seems as natural as the air we breathe. We think nothing of it. The financial reward of a million dollar investment is not infrequently greater than the financial reward of a score of the most competent skilled laborers. The property investment of that amount is entitled to earn anywhere from 4 per cent to 4,000 per cent, but the finest ability of a score of laborers commands no such unlimited right of return. This idea is simply a matter-of-fact principle which every one takes for granted, and it obviously plays a part in the inequalities of wealth which prevail everywhere. Even a second-rate managerial ability is usually conceived as deserving a higher reward than the best type of manual dexterity or workmanship.

Income from investment need not be accompanied by any substantial exercise of ability or effort on the part of the owner. Clever management of property will make it accumulate more rapidly. But such managers can be hired at a salary, and their salaries are a truer measure of ability than is the property income which goes to the owner.

It should be noted too that these inequalities of ability tend to perpetuate themselves. The children of the unskilled laborer inherit a family and social environment which tends to hold them to that level, “There are no absolutely insurmountable barriers preventing those who are born into poor surroundings from forcing their way into the best paid professions if they have exceptional ability and grit, and there is nothing to prevent exceptionally incapable persons born in good surroundings from falling into the lowest class of workers. But all the same, it is, as every one knows, a great advantage to the ordinary person in the matter of earning his living, to be the child of fairly well-to-do parents, and an enormous disadvantage to be the child of parents belonging to the poorest class.” 47

There is a great reserve fund of ability in the lower-paid classes which is never developed. Lack of encouragement, of education, of opportunity, leaves enormous resources of ability untapped. The inertia of class habits, the barriers of tradition and custom, the difficulties of the struggle upward, -all such factors prevent great dormant capacities from ever being kindled into irresistible ambitions to win the highest rewards of economic activity. The degree of success achieved by the present economic system is largely due to the fact that in spite of all such barriers and obstructions the business world does arouse the energies and ambitions of enough men of great ability to win their way from the bottom to the top so that it constantly recruits a reasonable amount of able leadership.

A caution should be observed in usage of the term “ability." What people ordinarily refer to as “the reward for ability” is in reality "the reward for scarcity.” It is the scarcity of certain forms of ability which enables them to gain a high money return. If managerial ability were as commonplace as unskilled labor, it would be paid on the same level. Inequalities of fortune are traceable to unequal scarcities of different kinds of ability. In economic usage, diverse abilities as such are incommensurable. No one can measure by any common standard the relative abilities of an artist and a captain of industry, of a dean and a football coach, of a lawyer and a preacher. But owing to the various scarcities of these various forms of ability, different degrees of reward are gained. The concept of ability must be closely linked with the concept of scarcity, if we are to understand the relationship between inequalities of fortune and inequalities of ability.

Conclusion.—The inequalities in the distribution of wealth are due to institutional factors and to differences in native ability. Institutional factors enter into all phases of the modern private property régime. A more democratic distribution of wealth is possible through modification of property institutions. Whether or not the ideal of such a distribution is desirable is largely an ethical question. But whether or not the ideal can be accomplished is an economic question. The answer to the

47 Cannan, Wealth, Chapter XII. Space does not permit a fuller analysis of this very important factor in income inequalities. Special discussions of much value will be found in Dalton's The Inequalities of Income, pp. 239-270; Taussig's Principles of Economics, Chapter 54; Pigou's Wealth and Welfare, and Watkin's Growth of Large Fortunes.

economic question would seem to be that a more democratio distritation is possible.


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