This lesson is studied in the Classical Liberal Arts Academy’s HUM-431 Economics course.
Three Classes of Workers
With only a few exceptions, all people who are mentally and physically able to work are engaged in production. As a result of the division of labor in modern industry, the workers are divided into three great classes.
(1) Independent Workers
The independent workers are those who do not work for wages or salaries from other persons, and who either do not pay wages or salaries to others or at most employ only a few assistants. They plan their own work and receive their pay from those to whom they sell the products of their labor or for whom they perform services. Lawyers, doctors, dentists, poets, authors, and artists belong to this class. The village shoemaker, tailor, blacksmith, and small storekeeper are generally of this class; also the small farmer and gardener. Carpenters, masons, dressmakers, and others are often independent workers.
(2) Employers
Employers are those who hire workers to labor under their direction and pay them wages and salaries. Most business people belong to this class. Manufacturers, merchants, and contractors, master carpenters, master masons, master plumbers, owners of railways and ships, and many other kinds of business people belong to the employer class. Farmers who hire laborers to work for them are in this class. The government—national, state, and local—is also an employer of labor.
Employers are a very important class in modern capitalistic production. They bring capital and labor together to work with nature in producing wealth. They take the responsibility and the risks. They are the organizers, sometimes called the “captains of industry.” For these reasons the employers are often called entrepreneurs, a term meaning those who undertake direction and responsibility.
(3) Employees
Employees are persons who work for wages or salaries. They work under the direction of employers, from whom they receive their pay. This is by far the largest class of all. Men and women working in factories, clerks in stores, farm laborers, office workers, teachers, and many others are in this group.
In economics we use the term wages to include both wages and salaries; that is, salaries are regarded as a form of wages.
Capitalists: “Capital and Labor”
A capitalist is a person who owns a considerable amount of capital. Such a person may belong to the employer class or may belong to what is sometimes called the leisure class. In the first case, the capitalist uses his capital in business. In the second case, he does not manage a business himself but invests or lends his capital to others, who use it and pay him an income for its use.
It is possible for an independent worker or an employee to be a capitalist. Sometimes a person owns some capital but still works for wages or salary, either because he prefers to or because he does not have enough capital to live on its income. However, the employee class as a whole usually has relatively little capital.
People sometimes speak of the capitalistic class, by which they generally mean the employer and investor classes, as distinguished from the laboring class. The expression “capital and labor” is often used in this way.
Forms of Business Organization
In connection with the use of capital, there are three types of business organization:
the individual business, the partnership, and the corporation.
Individual Business
The individual business person owns and manages a business alone. He may own the land, buildings, and other wealth used in the business, or he may rent them. In the latter case he pays rent to the owners of such land or capital. He may also borrow money to use in the business, in which case he pays interest to those who lend him the funds.
The individual business owner pays wages and salaries and pays for materials and supplies. He receives money for goods sold or services performed and therefore either makes profits or suffers losses. He alone directs the business and bears its risks.
Partnership
A partnership is an association of two or more persons who own a business jointly. Each partner may contribute capital, or the capital may be furnished by only one or some of the partners. They may rent or borrow land or capital as the individual business owner does.
One or more of the partners may direct or manage the business. The profits and losses are divided among them according to an agreement made when the partnership is formed.
Partnerships are useful because two or more persons can often do better in business together than if each worked alone. For example, one person may have capital but little business ability, while another may have skill in managing a business but little capital. By combining their resources and abilities, they may accomplish more than either could alone.
Similarly, people with different kinds of skill may combine their efforts. One lawyer may be skilled in preparing cases, while another is more effective in presenting them in court. Together they can accomplish more than either working alone.
Corporation
A corporation is a special kind of association of capitalists which, in the eyes of the law, is regarded as an artificial person. Suppose a number of persons wish to unite their wealth for business purposes. Instead of forming a partnership, they may organize a corporation under the laws of the state.
They obtain from the state a charter, which gives permission to form the corporation and defines its rights and duties. They decide how much wealth shall be invested in the business and divide this amount into shares. Each person contributes money and receives shares in proportion to the amount contributed.
For example, suppose ten persons form a corporation and invest fifty thousand dollars. This may be divided into five hundred shares of one hundred dollars each. Each person subscribes for a number of shares and receives ownership accordingly. Those who hold shares are called shareholders.
The shareholders elect officers—such as a president, secretary, and treasurer—and a board of directors to manage the business. The law regards the corporation as a kind of person. It can own property, incur debts, buy and sell, hire workers, borrow money, and bring legal actions in court.
The corporation conducts business as an individual or partnership does. It may make profits, which are distributed among shareholders according to the number of shares they own, or it may suffer losses.
The corporation is so important in modern economic life that further study is devoted to it in the following chapter.
