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Presented to the
LIBRARY of the
UNIVERSITY OF TORONTO
by
NORAH DE PENGIER
ELEMENTS OF ECONOMICS
VOL. I.
ELEMENTS OF
ECONOMICS OF INDUSTKY
BEING THE FIRST VOLUME OF
ELEMENTS OF ECONOMICS
BY
ALFRED MARSHALL
Professor of Political Economy in the University of Cambridge, Honorary Fellow of Balliol College, Oxford.
SECOND EDITION
{Fifth Impression).
HontJon: MACMILLAN AND CO., Limited.
NEW YORK: THE MACMILLAN COMPANY. 1898
[All Rights reserved.]
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First Edition printed 1892. Reprinted 1893, 1894. Second Edition 1896, 1898.
'■^'OV 1 5 1965
1022143
PREFACE TO THE FIRST EDITION.
THIS Volume is an attempt to adapt the first Volume of my Principles of Eeonomics (Second Edition, 1891), to the needs of junior students.
The necessary abridgement has been effected not by syste- matic compression so much as by the omission of many discussions on points of minor importance and of some difficult theoretical investigations. For it seemed that the difficulty of an argument would be increased rather than diminished by curtailing it and leaving out some of its steps. The argu- mentative parts of the Principles are therefore as a rule either reproduced in full or omitted altogether; reference in the latter case being made in footnotes to the corresponding places in the larger Treatise. Notes and discussions of a literary character have generally been omitted.
The influence of Trade-Unions on wages depends much on the course of Foreign Trade and on Commercial Fluctua- tions; and therefore in the Principles all discussion of the subject is postponed to a late stage. But in the present Volume, the practical convenience of discussing it in close connection with the main theory of Distribution seemed to outweigh the disadvantages of treating it prematurely and in some measure incompletely ; and a Chapter on Trade-Unions has been added at the end of Book VI.
A few sentences have been incorporated from the Economics of Industry J published by my wife and myself in 1879.
VI PREFACE.
Though she prefers that her name should not appear on the title-page, my wife has a share in this Volume also. For in writing it, and in writing the Principles, I have been aided and advised by her at every stage of the MSS. and the proofs -J and thus the pages which are now submitted to the reader are indebted twice over to her suggestions, her judg- ment and her care.
Dr Keynes, Mr John Burnett and Mr J. S. Cree have read
the proofs of the Chapter on Trade-Unions, and have given
me helpful advice with regard to it from three different points
of view.
18 February, 1892.
*^* The changes In this edition follow those made in the third edition of my Principles. Book I. Ch. iv. and v. and Book III. Ch. VI. have been rewritten in order to make more clear how closely the economist adheres in substance to the methods of inference and judgment of ordinary life ; and how thorough are the harmony and the mutual dependence be- tween the analytical and the historical methods of economic study. In Book II., Ch. iv. and v. have been thrown to- gether to make a new Chapter iv. ; the old definition of Capital regarded from the point of view of the business man is retained; but Capital is defined from the general point of view as wealth which yields "income" in forms that are admitted in the broader use of the term in the market place. Book VI. Ch. I. and ii. have been recast, with further explanations, and a fuller rehearsal of the chief results obtained in the earlier Books.
June 1896.
CONTENTS.
[Italics are tised to (/ire references to definitions of technical terms.']
BOOK I.
PKELIMINAKY SUEVEY.
Chapter I. Introduction. § 1. Economics is a study of wealth, and a part of the study of man, § 2. Urgency of the problem of poverty. I 3. Economics is a science of recent growth. § 4. Characteristics of modern business. Free Industry and Enterprise. § 5. Preliminary account of value . . ■ pp. 1 — 0
Chapter II. The Growth of Free Industry and Enterprise. § 1.
Early civilizations. Influence of climate and of custom. § 2. The Middle Ages. Free towns. § 3. New forces promoting freedom.
pp. 10—13 Chapter III. The Growth of Free Industry and Enterprise con- tinued. § 1. Englishmen early developed a faculty for organized action. § 2. Influence of the Reformation. § 3. Beginnings of modern forms of business management. § 4. Else of the factory system. The new organization accompanied by great evils. §§ 5, 6. Many of these were due to the pressure of war, taxes and bad harvests ; and competition was seen at its worst. But now with the increase of knowledge and wealth we should seek to restrain its evil and to retain its good influences pp. 14 — 25
Chapter IV. The Growth of Economic Science. § 1. Origin of modern Economics. Early regulation of trade. § 2. The Physiocrats. Adam Smith. § 3. Eicardo and his followers. § 4. Mill and modern Economics pp. 26 — 32
Chapter V. The Scope ol !Ccononiics. § 1. Economics as a social science. §§ 2 — 4. Chiefly concerned with motives that are measurable, but not exclusively selfish. Difiiculties of measui'ement. § 5. The desire for money is the result of many various motives. Motives to col- lective action. § 6. Economics deals mainly with one side of life, but not with the life of fictitious beings pp. 33 — 41
Chapter VI. Methods of Study. Nature of Economic Law. §§ 1, 3.
Induction and deduction are inseparable. Neither reasoning alone nor observation alone is of much service. § 4. Uses of the machinery of science. §§ 5, 6. Social Laio. Economic Law. Normal. The Action, of a Law pp. 42 — 48
Chapter VII. Summary and Conclusion. § 1. Order of economic inquiries. Relation of science to practice. § 2. Questions to be in- vestigated. § 3. Practical issues lying partly within the range of Economics pp. 49 — 53
Vlll CONTENTS.
BOOK 11.
SOME FUNDAMENTAL NOTIONS.
Chapter I. Introductory. § 1. Difficulties of definition in Economics.
pp. 54 — 55
Chapter II. Wealth. § 1. Classification of Gooda. Wealth. § 2. Per- sonal Wealth. Broad meaning of wealth. § 3. Collective Goods.
pp. 56—61
Chapter III. Production. Consumption. Labour. Necessaries.
§ 1. Man produces and consumes only utilities. Consumption and Pro- duction Goods. § 2. Productive labour and Productive consumption. § 3. Necessaries for existence and for efficiency. Conventional neces- saries ........... pp. 62 — 65
Chapter IV. Capital. Income. § 1. The term Capital has many uses. It includes Trade Cajntal. § 2. Social Capital is wealth which yields income as commonly understood. § 3. Circulating, Fixed, Specialized and Personal Capital. Consumption and Auxiliary Capital. § 4. Net Income. § 5. Net Advantages. Interest. Profits. Earnings of Manage- ment. Rent. § 6. Social Income pp. 66 — 74
BOOK III.
DEMAND OK CONSUMPTION.
Chapter I. Introductory. § 1. Relation of Book III. to the rest of the volume p. 75
Chapter II. Wants in relation to Activities. §§ 1—3. Wants are progressive. Desire for variety and distinction. § 4. Desire for excel- lence. Eelation of Wants to Activities .... pp. 76 — 80
Chapter III. The Law of Demand. § 1. The Law of Satiable Wants or Diminishing Utility. Total Utility. Marginal Increment. Mai'ginal Utility. § 2. Marginal Demand Pnce. § 3. The marginal utility of money varies. § 4. A person's Demand Schedule. § 5. Demand of a Market. Law of Demand pp.81 — 87
Chapter IV. Law of Demand, continued. Elasticity of Demand.
§ 1. Elasticity of Demand §§ 2, 3 varies with diflferent incomes. § 4. Demand for Necessaries. § 5. Causes that obscure the influence of price on demand pp. 88 — 93
Chapter V. The Choice between different uses of the same thing. Immediate and deferred uses. §§ 1, 2. Distribution of me.ms between different uses. § 3. Distribution between present and future needs. Discounting future pleasures pp. 94 — 97
Chapter VI. Value and Utility. §§ 1 — 3. The doctrine of Consumers' Rent gives definite expression to a familiar notion. Allowance for collec- tive wealth. § 4. Wisdom in the pursuit and use of wealth pp. 98 — 106
CONTENTS. IX
BOOK IV.
THE AGENTS OF PRODUCTION. LAND, LABOUR, CAPITAL AND ORGANIZATION.
Chapter I. Introductory. § 1. The agents of production. §§ 2, 3. Marginal disutility. Although work is sometimes its own reward it gene- rally has a supply price. Supply Schedule. Supply Price pp. 107 — 110
Chapter II. The Fertility of Land. § 1. Land in what sense a free gift of nature. § 2. Conditions of fertility. Man's power of altering the character of the soil pp.111 — 114
Chapter III. The Fertility of Land, continued. The Law of Diminishing Return. § 1. The basis of the Laio of Diminishing Eeturn. The return is measured by the amount not the price of produce. § 2. A Dose of capital and labour, marginal dose, marginal i-etwn, margin of cultivation. Surplus Produce. Its relation to rent. § 3. The Order of relative fertility changes with circumstances. § 4. Good cultivation a relative term. § 5. Misunderstandings of Ricardo's doctrine. § 6. Addi- tions to it. § 7. The return from fisheries, mines and building ground.
pp. 115—128
Chapter IV. The Growth of Population. § 1. Malthus. §§ 2, 3.
C3flS6i?^hat determine marriage-rate and birth-rate. § 4. History of
population in England. § 5. Modern causes affecting marriage-rate.
pp. 129-136
Chapter V. The Health and Strength of the Population. §§ 1, 2.
Geniiral conditions of health and strength. § 3. Hope, freedom and change. § 4. Influence of occupation. Town life. § 5. Nature's ten- dency to select the strongest for survival is often counteracted by man.
pp. 137—145
_ '"I. Industrial Training. § 1. Unskilled labour a relative term. Tleneral and Specialized Ability. §§ 2, 3. Liberal and Technical Education. Apprenticeships. § 4. Education as a National investment. § 5. Mill's four industrial grades ; but sharp lines of division are fading away pp. 146 — 154
ChaQt£X-^|9I«- The Growth of Wealth. § 1. Early and modem forms Cf-tTealtii. § 2. Slow growth of habits of saving. § 3. Security as a condition of saving. § 4. The chief motive of saving is family affection. § 5. The source of accumulation is surplus income. Profits. Rent and Earnings. Collective savings. § 6. Interest is the reward of waiting. Influence of changes in the rate of interest on saving . . pp. 155 — 164
Chapter VIII. Industrial Organization. § 1. Organization increases efficiency. Teachings of biology. The law of the struggle for survival. § 2. Harmonies and discords between individual and collective interests.
pp. 165—167
Chapter IX. Industrial Organization, continued. Division of La- bour. The Influence of Machinery. § 1. Practice makes perfect. The provinces of manual labour and machinery. § 2. Interchangeable parts. Machinery increases the demand for general intelligence and weakens barriers between different trades. § 3. It relieves the strain on human muscles, and thus prevents monotony of work from involving
X CONTENTS.
monotony of life. § 4. Specialized skill and specialized machinery com- pared. External and Internal economies .... pp. 168 — 176
Chapter X. Industrial Organization, continued. The Concentra- tion of Specialized Industries in Particular Localities. § 1.
Primitive fonns of localized industi'ies ; their various origins. § 2. Ad- vantages of localized industries ; hereditary skill, subsidiary trades, spe- cialized machinery, local market for skill. Their disadvantages. Move- ments of English industries PP. 177 — 181
Chapter XI. Industrial Organization, continued. Production on a large scale. §§ 1, 2. Advantages of a large producer as to economy of material, specialization of and improvements in machinery, buying and selling; specialized skill, especially in matters of management, but the small producer makes many detailed savings . . . pp. 182 — 187
Chapter XII. Industrial Organization, continued. Business Management. § 1. Various forms of business management classified with reference to the tasks of undertaking risks and of superintendence. § 2. Faculties required in the ideal manufacturer. § 3. Hereditary businesses, why they are not more common. § 4. Private partnerships. § 5. Joint-stock companies. Government imdertakings. § 6. Co-opera- tion. Profit Sharing. § 7. The rise of the working man hindered by his want of capital and even more by the growing complexity of business. § 8. Adjustment of capital to business ability. Net and Gross Earnings of Management pp. 188—204
Chapter XIII. Conclusion. The Law of Increasing in Relation to that of Diminishing Return. § 1. Eelation of the later chap- ters of this Book to the earlier. A. Representative Finn. The Lairs of Increasing and Constant Return. § 2. Conditions under which an increase of numbers leads to a more than proportionate increase of collective efficiency pp. 205 — 209
BOOK V.
THE THEORY OF THE EQUILIBEIUM OF DEMAND AND SUPPLY.
Chapter I. On Markets. § 1. Most economic problems have a common kernel relating to the equilibrium of supply and demand. § 2. Definition of a Marhet. §§ 3, 4. Lmiitations of a market with regard to space. Conditions of a wide market. Grading. Portability. World markets.
pp. 210—215
Chapter II. Temporary Equilibrium of Demand and Supply.
§ I^ Equilibrium between desire and effort. Illustration from a local corn-market of a true though temporary equilibrium . . pp. 216 — 218
Chapter III. Equilibrium of Normal Demand and Supply. § 1.
Transition from market to normal price. § 2. Real and Money Cost of Production. Expenses of Production. Factors of Productio7i. Rent in relation to Expenses of production. § 3. The Law of 8id)stitiition. § 4.^ Basis of the general theory. The Supply Schedule. § 5. Equi- librium amount and equilihrium price. § 6. Influence of Utility and
CONTENTS. XI
Cost of Production on value. The former preponderates in market values, the latter in normal values pp. 219 — ^229
Chapter IV. The Investment of Capital in a Business. Prime Cost and Total Cost. § 1. Motives determining the investment of capital. § 2. Different routes are chosen in obtaining the same end. The margin of profitableness. § 3. Prime Cost. Supplementary and Total Cost pp. 230— 233
Chapter V. Equilibrium of Normal Demand and Supply, Con- tinued. The Term Normal with Reference to Long and Short Periods. §§ 1 — 3. Elasticity of the term normal. Long and short period normal prices. Illustrations. § 4. The general drift of the term Normal Supply Price is the same for short and long periods. But for short periods the appliances of production have to be taken for granted ; meanwhile the income derived from them affords a Quasi-rent.
pp. 234—243
Chapter VI. Joint and Composite Deniand. Joint and Composite Supply. § 1. Derived demand and joint demand. Illustration, taken from a labour dispute. § 2. Conditions under which a check to supply may raise much the price of a factor of production. Moderating influence of the Law of Substitution. § 3. Composite demand. § 4. Joint Supply. § 5. Composite Supply pp. 244 — 249
Chapter VII. Prime and Total Cost in relation to Joint Products. Cost of Marketing. Insurance against Risk. § 1. Difhculties as to the joint products of the same business and as to the expenses of marketing. § 2. Insurance against risk .... pp. 250 — 253
Chapter VIII. Changes of Demand and Supply. Monopolies.
§ 1. Effects of an increase of normal demand on price. § 2. Monopoly price. Relation between the interests of monopoly jiroducers and of con- sumers pp. 254 — 257
BOOK VI.
VALUE, OR DISTRIBUTION AND EXCHANGE.
Chapter I. Preliminary Survey of Distribution and Exchange.
§ 1. The Physi6crats. Adam Smith. Malthus and Ricardo. J. S. Mill. §§ 2—5. Illustrations of the influence of demand in distribution. §§ 6, 7. The Law of Substitution in relation to demand for labour, and for capital. § 8. The National Dividend pp. 258—270
Chapter II. Preliminary Survey of Distribution and Exchange, continued. §§ 1 — 3. Recapitulation of causes, discussed in Book IV., which govern the supply of various forms of labour and capital. These causes play a part coordinate with those affecting demand in governing distribution. § 4. Land is on a different footing. § 5 Mutual relations between earnings and eflBciencies of different groups of workers. § 6. Competition is not supposed to be perfect, but to act as it does in real life. § 7. Provisional conclusion as to the general relations of capital and labour. The so-called Wages-fund pp. 271—286
XU CONTENTS.
Chapter III. Demand and Supply in relation to Labour. Real and Nominal Earnings. § 1. Time-earnings. Payment by Piece- vork. Kificiency- earnings. Time-earnings do not tend to equality, but Efficiency-earnings do. § 2. Ileal loages and Nominal wages. § 3. Un- certainty of success. Irregularity of employment. Supplementary earn- ings. § 4. The attractiveness of a trade depends on its Net Advantages.
pp. 287—295
Chapter IV. Demand and Supply in relation to Labour, con- tinued. § 1. Many peculiarities in the action of demand and supply with regard to labour are cumulative in their effects. §§ 2 — 4. The Avorker sells his work, but he himself has no price, consequently the investment of capital in him is limited l)y the means, forethought and unselfishness of his parents. Economic importance of moral forces. § 5. The seller of labour must deliver it himself. § 6. Labour is perish- able, and the sellers of it are often at a disadvantage in bargaining.
pp. 296—304
Chapter V. Demand and Supply in relation to Labour, con- cluded. § 1. Slowness of growth of new supplies of labour. Difficulties of forecasting the future. § 2. The movements of adult labour are of increasing importance. § 3. Fluctuations of earnings chiefly governed by those of demand. § 4. Causes which determine earnings during long and short periods respectively pp. 305 — 309
Chapter VI. Demand and Supply in relation to Capital. Gross and Net Interest. § 1. Interest on capital has been jealously scruti- nized ; and not altogether without reason : but it is as truly a return for services rendered as the wages of labour are. §§ 2, 3. Net and Gross interest. Gross interest includes some Insurance against risks both Trade and Personal, and also Earnings of Management, and therefore does not tend to equality as net interest does . . . pp. 310 — 314
Chapter VII. Demand and Supply in relation to Capital, Busi- ness Power and Industrial Organization. § 1. Action of the Struggle for Survival. Services of those who pioneer. § 2. Action of the Law of Substitution in controlling Earnings of Management. § 3. The Law of Substitution acts through the employer and also on him. The business man working with borrowed capital. § 4. Joint Stock com- panies. § 5. The supply of business ability is drawn from a wide area and is non-specialized. The adjustment of Earnings of Management to the difficulty of the work to be done is fairly accurate . . pp. 315 — 322
Chapter VIII. Demand and Supply in relation to Capital and Business Power, concluded. § 1. Profits. Mate of profits how far tendmg to equality. Profits in small bushiesses appear higher than they are. Rate of profits declines generally as the size of the business in- creases. § 2. Profits are high where the Circulating Capital is large relatively to the Fixed. § 3. The rate of profits on the turnover varies much more widely than the annual rate of profits on capital. § 4. Profits are a constituent element of normal supply-price, but the income derived from capital already invested is generally determined by the price of the product (and is a Quasi-rent). §§ 5, 6. The earnings of business power fluctuate more and vary more from one individual to another than ordi- nary earnings do PP. 323 — 330
CONTENTS. Xiu
Chapter IX. Demand and Supply in relation to Land. Pro- ducers' Surplus. § 1. General view of the causes that determine Producers' Sui-phis. § 2. The argument so far applicable to nearly all systems of land tenure PP. 331 — 334
Chapter X. Demand and Supply in relation to Land, continued. Land Tenure. § 1. Early forms of Land-tenure have generally been based on partnerships. § 2. Metayage or rental by shares. Peasant- proprietorship, its advantages and disadvantages. The American farmer. § 3. The English system enables the landlord to supply that capital over which he can keep control and it gives considerable fi'eedom of selection. §§ 4, 5. Large and small holdings. Allotments. Co-operation. § 6. Con- flict between public and private interests in the matter of building on open spaces PP- 335 — 345
Chapter XI. General view of Distribution. § 1. Eesum^ of the gene- ral theory of equilibrium of demand and supply. §§ 2 — 4. In the last eight chapters is traced a thread of continuity transverse to that in Book v., and establishing a unity between the causes that govern the normal values of the various agents and appliances of production, material and human. § 5. The various agents of production are the sole source of employment for one another. How an increase of capital enriches the field for the employment of labour. § 6. Eelations between the interests of different classes of workers in the same trade. § 7. Trade-unions and combinations among employers tend to make the problem of distribu- tion indeterminate pp. 346 — 357
Chapter XII. The Influence of Progress on Value. § 1. The rich- ness of the field of employment for capital and labour in a new country depends partly on its access to markets in which it can sell its goods and mortgage its future income for present supphes of what it wants. § 2. England's direct gains from the progress of manufactures have been less than at first sight appears, but those from the new means of transport have been greater. § 3. Changes in the labour values of corn, meat, house-room, fuel, clothing, water, light, news and travel. § 4. Progress has raised the labour value of English land, urban and rural, taken together. § 5. The increase of capital has lowered its proportionate but not its total income. §§ 6, 7. Changes in the earnings of different indus- trial classes. § 8. Earnings of exceptional ability. § 9. Progress has probably lessened inconstancy of employment. § 10. Broader influence of progress. Standard of Comfort and Standard of Life. § 11. Pro- gress in relation to leisure. The wastefulness of excessive work. § 12. In some trades shorter hours combined with double shifts would bring almost unmixed gain. § 13. But in many trades shortening the hours of labour would lessen the output. §§ 14, 15. Fallacies underlying the opinion that a general lessening of the hours of labour would raise wages. § 16. General conclusion as to the good and evil of a reduction of the hours of labour pp. 358 — 389
Chapter XIII. Trade-Unions. § 1. Early history of Trade-unions. § 2. General organization. § 3. Opening of inquiry as to the influence they can exert on wages. Kecapitulation of effects of a permanent limita- tion of the supply of labour. §§ 4, 5. Transition to effects of temporary limitations, by strikes or otherwise, of the supply of labour. Disadvan- tage in bargaining of the isolated workman without reserve. Claim of "Unions to make economic friction side with, instead of against, the work-
XIV CONTENTS.
man; and thus to raise wages generally. §§ 6 — 8. Rejoinder by oppo- nents of Unions. § 9. The issue turns mainly on the question whether Unions on the whole hamper business and lessen production; and this needs some detailed study of their chief modes of procedure under the heads of :— § 10. Strikes ; § 11, Fixed local minimum wage ; and § 12. Piece-work. § 13. In trades much subject to foreign competition Unions generally follow an enlightened policy and facilitate business. § 14. Other trades in which strong Unions may on the whole facilitate business. § 15. Influence on the National Dividend exerted by combinations of employers and of employed in trades not much subject to external compe- tition. §§ 16, 17. Influence of Unions on the character and efficiency of the worker. § 18. Facts seem to show that, other things being equal, wages are generally high in trades that have strong Unions relatively to those that have not ; but they do not enable us to determine what is the effect of Unions on the aggregate of wages. §§ 19, 20. Smnmary and general conclusions. Moral and economic aspects of the problem. Power and responsibihty of public opinion pp. 390—427
References to the "Principles" are generally applicable to its second and third Editions, except vjhen "Ed. III." is added. Most of them are applicable also to the first Edition, if it be remembered that Booh VI. of the first Edition was absorbed into the latter part of Booh V. of the second and third; and that conseqtiently Booh VI. of the new editions corresponds to Booh VII. of the first Edition.
BOOK I.
PRELIMINARY SURVEY. CHAPTER I.
INTRODUCTION.
§ 1. Political Economy, or Economics, is a study of man's actions in the ordinary business of life; it Economics is inquires how he gets his income and how he a study of
... , . , III! wealth, and a
uses it. Ihus it IS on the one side a study or part of the wealth, and on the other, and more important study of man. side, a part of the study of man. Eor man's character has been moulded "by his every-day work, and by the material re- sources which he thereby procures, more than by any other influence unless it be that of his religious ideals ; and the two great forming agencies of the world's history have been the religious and the economic. Here and there the ardour of the military or the artistic spirit has been for a while pre- dominant : but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together. Religious motives are more intense than eco- nomic; but their direct action seldom extends over so large a part of life. For the business by which a person Character earns his livelihood generally fills his thoughts formed by during by far the greater part of those hours in ^^ ^ ^°^ ' which his mind is at its best; during them his character is being formed by the way in which he uses his faculties in
M. ^ 1
2 BOOK I. CH. I. §§ 1, 2.
his work, by the thoughts and the feelings which it suggests, and by his relations to his associates in work, his employers or his employes.
And very often the influence exerted on a person's character by the amount of his income is hardly less, if it is less, than that exerted by the way in which it is earned. Poverty causes I^ makes little difference to the fulness of life degradation. ^f ^ family whether its yearly income is .£1000 or ^5000. But it makes a very great difference whether the income is £30 or £150: for with £150 the family has, with £30 it has not, the material conditions of a complete life. It is true that in religion, in the family affections and in friendship, even the poor may find scope for many of those faculties which are the source of the highest happiness. But the conditions which surround extreme poverty, especially in densely crowded places, tend to deaden the higher faculties. Those who have been called the Residuum of our large towns have little opportunity for friendship ; they know nothing of the decencies and the quiet, and very little even of the unity of family life; and religion often fails to reach them. No doubt their physical, mental, and moral ill-health is partly due to other causes than poverty, but this is the chief cause.
And in addition to the Residuum there are vast numbers of people both in town and country who are brought up with insufiicient food, clothing, and house-room, whose education is broken off early in order that they may go to work for wages, who thenceforth are engaged during long hours in exhausting toil with imperfectly nourished bodies, and have therefore no chance of developing their higher mental faculties. Their life is not necessarily unhealthy or unhappy. Rejoicing in their affections towards God and man, and perhaps even possessing some natural refinement of feeling, they may lead lives that are far less incomplete than those of many who have more material wealth. But, for all that, their poverty is a great and almost unmixed evil to them. Even when they
INTRODUCTION. 3
are well, their weariness often amounts to pain, while tlieir pleasures are few; and when sickness comes, the suffering caused by poverty increases tenfold. And though a contented spirit may go far towards reconciling them to these evils, there are others to which it ought not to reconcile them. Overworked and undertaught, weary and careworn, without quiet and without leisure, they have no chance of making the best of their mental faculties.
Although then some of the evils which commonly go with poverty are not its necessary consequences ; yet, broadly speaking, "the destruction of the poor is thdrjpoverty," and the study of the causes of^overfy is the study of the causes of the degradation of a large part of mankind.
§ 2. Slavery was regarded by Aristotle as an ordinance of nature, and so probably was it by the slaves is poverty ne- themselves in olden time. The dignity of man cessary? was proclaimed by the Christian religion: it has been as- serted with increasing vehemence during the last hundred years: but it is only through the spread of education during quite recent times that we are beginning at last to feel the full import of the phrase. N^ow at last we are setting our- selves seriously to inquire whether it is necessary that there should be any so-called "lower classes" at all: that is, whether there need be large numbers of people doomed from their birth to hard work in order to provide for others the requisites of a refined and cultured life; while they themselves are pre- vented by their poverty and toil from having any share or part in that life.
The hope that poverty and ignorance may gradually be extinguished derives indeed much support from the steady progress of the working classes during the present century. The steam-engine has relieved them of much exhausting and degrading toil; wages have risen; education has been improved and become more general; the railway and the printing-press have enabled members ^f the same trade in
1—2
4 BOOK I. CH. I. §§ 2, 3, 4.
different parts of the country to communicate easily with one another, and to undertake and carry out broad and far- seeing lines of policy; while the growing demand for intel- ligent work has caused the artisan classes to increase so rapidly that they now outnumber those whose labour is entirely unskilled. A great part of the artisans have ceased to belong to the "lower jjlasses" in the sense in which the term was originally used; and some of them already lead a 5 more refined and noble life than did the majority of the upper classes even a century ago.
This progress has done more than anything else to give practical interest to the question whether it is really impossible that all should start in the world with a fair chance of leading a cultured life, free from the pains of poverty and the stagnating influences of excessive mechanical toil; and this question is being pressed to the front by the growing earnestness of the age.
/ The question cannot be fully answered by economic / science ; for the answer depends partly on the moral and > political capabilities of human nature; and on these matters the economist has no special means of information; he must do as others do, and guess as best he can. But the answer depends in a great measure upon facts and inferences, which are within the province of economics; and this it is which gives to economic studies their chief and their highest in- terest.
§ 3. It might have been expected that a science, which Reasons why deals with questions so vital for the well-being of i^ThTSa'in of mankind, would have engaged the attention of recent growth, many of the ablest thinkers of every age, and be now well advanced towards maturity. But the bearing of economics on the higher well-being of man has been over- looked; and it has not received that share of attention which its importance and its difficulty require.
Its progress has been hindered also by the fact that many
INTRODUCTION. 5
of those conditions of industrial life, and of those methods of production, distribution and consumption, with which modern economic science is concerned, are constantly changing, and that their present forms are only of recent date\
§ 4. It is often said that the modern forms of business are distinguished from the earlier by being more competitive. But this account is not quite satis- factory. The strict meaning of competition seems to be the racing of one person against another, with special reference to bidding for the sale or purchase of anything. This kind of racing in business is no doubt both more intense and more widely extended than it used to be : but it is only a secondary, and one might almost say, an accidental consequence from the fundamental characteristics of modern business.
There is no one term that will express these characteristics adequately. They are, a.^,we shall presently see, a certain independence and habit of choosing one's own course for one- self, a self-reliance; a deliberation and yet a promptness of choice and judgment, and a habit of forecasting the future and of shaping one's course with reference to distant aims. They may and often do cause people to compete with one another; but on the other hand they may tend, and just now indeed they are tending, in the direction of co-operation and combination of all kinds good and evil. But these tendencies towards collective ownership and collective action are quite
1 It is indeed true that the change in substance is in some respects not so great as the change in outward form ; and much more of modern economic theory than at first appears can be adapted to the conditions of backward races. But the changes in form have hindered Avriters of each successive age from deriving much benefit from the work of their predecessors. Modern economic conditions however, though very complex, are in many ways more definite than those of earlier times : business is more clearly marked off from other concerns of life; the rights of individuals as against others and as against the community are more sharply defined; and above all the emancipa- tion from custom, and the growth of free activity, of constant forethought and restless enterpi-ise have given a new precision and interest to the study of value.
6 BOOK I. CH. I. § 4.
different from those of earlier times, because they are the result not of custom, not of any passive drifting into asso- ciation with one's neighbours, but of free choice by each individual of that line of conduct which after careful delibe- ration seems to him the best suited for attaining his ends, whether they are selfish or unselfish.
Further the term "competition" not only fails to go to the root of the matter, and thus errs by defect; it also errs by excess. For it has gathered about .it evil savour, and has come to imply a certain selfishness and indifference to the well-being oT^otHers. Now it is true that there is less delibe- rate selfishness in early than in modern forms of industry; but there is also less deliberate unselfishness. It is the delibe- rateness, and not the selfishness, that is the characteristic of the modern age.
Custom in a primitive society extends the limits of the M n is n t family, and prescribes certain duties to one's more selfish neighbours which fall into disuse in a later civi- t an e was, jj^ation ; but it also prescribes an attitude of hostility to strangers. \ In a modern society the obligations of family kindness become Inore intense, though they are concen- trated on a narrower area; and neighbours are put more nearly on the same footing with strangers^. In ordinary deal- ings with both of them the standard of fairness and honesty is lower than in some of the dealings of a primitive people with their neighbours, but it is much higher than in their dealings with strangers. Thus it is the ties of neighbourhood alone that have been relaxed. The ties of family are in many ways stronger than before; family affection leads to much more self-sacrifice and devotion than it used to do. And again sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness that never existed before the modem age. That country which is the birthplace of modern competition devotes a larger part of its income than any other to charitable uses, and spent twenty
INTRODUCTION. 7
millions on purchasing the freedom of the slaves in the West Indies. In every age poets and social reformers have tried to stimulate the people of their own time to a nobler life by enchanting stories of the virtues of the heroes of old. But neither the records of history nor the contemporary observa- tion of backward races, when carefully studied, give any support to the doctrine that man is on the whole harder and harsher than he was, or that he was ever more willing than he is now to sacrifice his own happiness for the benefit of others in cases where custom and law have left him free to choose his own course. Among races whose intellectual capa- city seems not to have developed in any other direction, and who have none of the originating power of the modern busi- ness man, there will be found many who show an evil sagacity in driving a hard bargain in a market even with their neigh- bours. No traders are more unscrupulous in taking advantage of the necessities of the unfortunate than the corn-dealers and money-lenders of the East.
Again, the modern era has undoubtedly given new open- ings for dishonesty in trade. The advance of nor more dis- knowledge has discovered new ways oFlmaking honest, things appear other than they are, and has rendered possible many new forms of adulteration. The producer is now far removed from the ultimate consumer; and his wrong-doings are not visited with the prompt and sharp punishment which falls on the head of a person who, being bound to live and die in his native village, plays a dishonest trick on one of his neighbours. The opportunities for knavery are certainly more numerous than they were ; but there is no reason for thinking that people avail themselves of a larger proportion of such opportunities than they used to do. \0n the contrary, modern methods of trade imply habits of trustfulness on the one side and a power of resisting temptation to dishonesty on the other, which do not exist among a backward peopleX Instances of simple truth and personal fidelity are met with under all social
8 BOOK I. CH. I. §§ 4, 5.
conditions : but those who have tried to establish a business of modern type in a backward country find that they can scarcely ever depend on the native population for filling posts of trust. Adulteration and fraud in trade were rampant in the middle ages to an extent that is surprising when we consider the difiiculties of wrong doing without detection at that time.
The term "competition" is then not well suited to describe the special characteristics of industrial life in the modern age. We need a term that does not imply any moral qualities, whether good or evil, but which indicates the undisputed fact that modern business is characterized by more self-reliant habits, more forethought, more deliberate and free choice. There is not any one term adequate for this purpose : but
Economic FREEDOM OF INDUSTRY AND ENTERPRISE, Or mOre
Freedom. shortly, Eco.sOMic FREEDOM, points in the right
direction, and may be used in the absence of a better.
Of course this deliberate and free choice may lead to a cer- tain departure from individual freedom, when co-operation or combination seems to offer the best route to the desired end. The questions how far these deliberate forms of association are likely to destroy the freedom in which they had their origin, and how far they are likely to be conducive to the public weal, will occupy a large share of our attention towards the end of this treatise.
§ 5. "The word value" says Adam Smith "has two different meanings, and sometimes expresses the utility of some particular object and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called value in use, the other value in exchange." In the place of "value in use" which is a misleading expression, we now speak of " uijlitv ; " while instead of "value in exchange" we often say "exchange- value " or simply J', value." ^-v Th£,„;j:;giiM,e„— that is, the exchange value — of one thing in
^ -^ terms of another at any place and time, is the amount of that
^
INTRODUCTION. 9
Second thing which can be got there and then in exchange for 'the first. Thus the term value is relative, and expresses the / -relation between two things at a particular place and time.
Civilized countries generally adopt gold or silver or both as money. Instead of expressing the values of lead and tin, and wood, and corn and other things in terms of one another we express them in terms of money in the first instance ; and call the value of each thing thus expressed its price. If we know that a ton of lead will exchange for fifteen sovereigns at any place and time, while a ton of tin will exchange for ninety sovereigns, we say that their prices then and there are £15 and .£90 respectively, and we know that the value of a ton of tin in terms of lead is six tons then and there.
The price of every thing rises and falls from time to time and place to place; and with every such change the purchasing power of money changes so far as that thing goes. If the purchasing power of money rises with regard to some things and at the same time falls equally with regard to equally important things, its general purchasing power (or its power of purchasing things in general) has remained station- ary. It is true that this way of speaking is vague, because we have not considered how to compare the importance of different things. That is a diflftculty which we shall have to deal with later on : but meanwhile we may accept the phrase in the vague but quite intelligible usage that it has in ordi- nary discourse. Throughout the earlier stages of our work it will be best to speak of the exchange value of a thing at any place and time as measured by its price, that is, the amount of money for which it will exchange then and there, and to assume that there is no change in the general purchasing power of money'.
1 This chapter is suhstantially the same as the first chapter of the first Book of my Principles of Political Economy; or — to use a mode of abbreviation that will always be adopted hereafter — as Principles 1. 1. See note at end of Table of Contents.
CHAPTER II.
THE GROWTH OF FREE INDUSTRY AND ENTERPRISE.
§ 1. The growth of Economic Freedom has been slow Early civiii- ^nd fitful. Early civilizations were necessarily zations. jj^ warm climates because no great advance in
culture can be made except where there is a considerable Influence of surplus above the bare necessaries of life; and, climate. i^ a cold climate man's whole energies are ab-
sorbed in providing these necessaries, unless he is aided by accumulated wealth and knowledge. But a warm climate lowers energy and in consequence the great body of workers in the old civilizations of the East were of a submissive and unenterprising character; and were kept to their work by the discipline of the ruling castes. These ruling castes had generally come at no distant date from a more bracing climate, either in mountainous regions or in the distant North. They devoted themselves to war, to political and sacerdotal func- tions, and sometimes to arl; but they avoided manual work, and left that to serfs and slaves. The manual labour classes scarcely even conceived the idea of freedom; but looked to custom as the great protector against arbitrary oppression. Influence of It is true that some customs were very cruel; custom. |3^^ jf customs were merely cruel they speedily
destroyed the lower classes and therefore also the upper classes who rested on them. And in consequence those races which have had a long history are also those whose customs have on the whole been kindly, and the good largely pre- dominates over the evil in the records of the influence of custom on moral as well as phj^sical well-being.
GROWTH OF ECONOMIC FREEDOM. 11
Greek civilization was beautiful, and in many respf^cts modern. But the Greeks, as well as the Romans
' . Ancient
who learnt much from them, regarded industry Greece and as belonging especially to slaves, and they did °'"^* not anticipate the ethicQze<^oiiomic problems of modern life.
§ 2. The Teutonic races which overthrew the Koman Empire were slow to adopt the culture of the The Middle people whom they conquered; and the Western Ages, world, under their rule, seemed almost to have fallen back into barbarism. But the ruling classes respected hard work, and the working classes maintained freedom and independence of character. Meanwhile the Christian religion was proclaiming the nobility of all honest labour and the dignity of man as man. By slow degrees power passed into the hands of the industrial classes; and their well-being began to appear to the ruling classes as an im- portant end in itself, and not merely as a necessary condition of political and military strength.
A view of society which was more modern in many respects was accepted by the groups of handicraftsmen The free who took the chief part in founding many of the towns, mediaeval "free" cities. And though, as time went on, class distinctions showed themselves even here, yet the great body of the inhabitants frequently had the full rights of citizens, deciding for themselves the foreign and domestic policy of their city, and at the same time working with their hands and taking pride in their work. They organized themselves into ^Gilds, thus increasing their cohesion and educating them- selves in self-government; and though the Gilds gradually became exclusive, and their trade-regulations ultimately re- tarded progress, yet they did excellent work before this deadening influence had shown itself.
The citizens gained culture without losing energy; without neglecting their business, they learnt to take an intelligent interest in many things besides their business. They led the
r
5^
12 BOOK I. CH. ir. §§ 2, 3.
way in the fine arts, and they were not backward in those of war. They took pride in magnificent expenditure for public purposes; and they took equal pride in a careful husbanding of the public resources, in clear and clean State budgets, and in systems of taxes levied equitably and based on sound business principles. Thus they led the way towards modern industrial civilization; land if they had gone on their course undisturbed, and retained their first love of liberty and social equality, they would probably long ago have worked out the solutions of many social and economic problems which we are only now beginning to face. But after being long troubled by tumults and war, they at last succumbed to the growing power of the countries by which they were surrounded. For meanwhile the forces of feudalism had grown in strength and had at last been merged in the great monarchies, especially those of Spain, Austria and /France; and they gradually wore out or destroyed the free j cities, whose material strength rested on a much narrower basis.
§ 3. But the hopes of progress were again raised by the , - invention of Printing, the Revival of Learninor,
-Jew lorces ,,^_ o' ,^.,^., o'
/promoting the Reformation, and the discovery of the New World. The countries which took the lead in the new maritime adventure were those of the Spanish Peninsula. It seemed for a time as though the leadership of the world having settled first in the most easterly penin- ^i- «* J- s^l^ ^^ *he Mediterranean, and thence moved to
The Mediter- i . i , .
ranean and the the middle peninsula, would settle again in that Atlantic. westerly peninsula which belonged both to the
Mediterranean and the Atlantic. \But the power of industry had by this time become sufficient to sustain wealth and civilization in a northern climate. And the Spanish and Portuguese could not hold their own for long against the more sustained energy and the more generous spirit of the northern people; the colonists of England, Holland, and even
GROWTH OF ECONOMIC FREEDOM. 13
France demanded and obtained far more freedom than those of Spain and Portugal.
The early history of the people of Holland is indeed a brilliant romance/.^ Founding themselves on fish- ing and weaving, they built up a noble fabric of Art and Literature, of Science^ and Government. But their natural resources were small, and they were not defended by the sea from the great armies of the Continent as England was. After bravely maintaining a long but unequal struggle Holland sank into the second rank among nations; and the struggle for the Empire of the New World, in which the Spanish Peninsula had at first taken a great part, was left to be fought out between France and England. In ITGOjJie 7 contest was decided in favour of England, and from that time onward the leadership of the world in trade and industry lay chiefly with England and her colonies'.
1 This chapter corresponds to, but is throughout much abridged from Princijileti 1. ii.
CHAPTER III.
THE GROWTH OF FREE INDUSTRY AND ENTERPRISE, CONTINUED.
§ 1. England's geographical position caused her to be peo- The character pled by the strongest members of the strongest men. races of northern Europe; a process of natural
selection brought to her shores those members t)f each succes- sive migratory wave who were most daring and self-reliant. Her climate is better adapted to sustain energy than any other in the northern hemisphere. She is divided by no high hills, and no part of her territory is more than twenty miles from navigable water, and thus there was no material hin- drance to freedom of intercourse between her different parts ; while the strength and wise policy of the Norman and Plan- tagenet kings prevented artificial barriers from being raised by local magnates.
As the part which Rome played in history is chiefly due to her having combined the military strength of a great empire with the enterprise and fixedness of purpose of an oligarchy residing in one city, so England owes her greatness to her combining, as Holland had done on a smaller scale before, much of the free temper of the mediaeval city with the strength and broad basis of a nation. The towns of England had been less distinguished than those of other lands ; but she assimi- lated them more easily than any other country did, and so gained in the long run most from them.
The ciistom of primogeniture inclined the younger sons of noble families to seek their own fortunes ; and, having no special caste privileges, they mixed readily with the common
GROWTH OF ECONOMIC FREEDOM. 15
people. This fusion of different ranks tended to make poli- tics business-like ; while it warmed the veins of business ad- venture with the generous daring and romantic aspirations of noble blood. Resolute on the one hand in resistance to tyranny, and on the other in submission to authority when it is justified by their reason, the English have made many revolutions ; but none without a definite purpose. While reforming the constitution they have abided by the law : they alone, unless we except the Dutch, have known how to com- bine order and freedom ; they alone have united a thorough reverence for the past with the power of living for the future rather than in the past. But the strength of character which in later times made England the leader of manufacturing pro- gress, showed itself at first chiefly in ^oljtics, in war, and in agriculture.
The English yeoman archer was the forerunner of the English artisan. He had the same pride in the superiority of his food and his physique over those of his Continental rivals ; he had the same indomitable perseverance in acquiring perfect command over the use of his hands, the same free in- dependence and the same power of self-control and of rising to emergencies ; the same habit of indulging his humours when the occasion was fit, but, when a crisis arose, of preserv- ing discipline even in the face of hardship and misfortune.
But the industrial faculties of Englishmen remained latent for a long time. They had not inherited much acquaintance with nor much care for the comforts and luxuries of civiliza- tion. In manufactures of all kinds they lagged behind the Latin countries, Italy, France and Spain, as well as the free cities of Northern Europe. Gradually the wealthier classes got some taste for imported luxuries, and England's trade slowly increased.
Whilst still an agricultural nation the English gave indica- tions of their modern faculty for organized action. Even in the middle ages there were signs of the coming system of
16 BOOK I. CH. III. §§ l;2.
large farms cultivated by farmers, who rent the land from its owners and employ hired labourers at their own risk. And this agricultural system prepared the way for the so-called capitalistic forms of modern manufacture, in which the em- ployer, often working largely with borrowed capital, under- takes at his own risk the employment of a great number of hired workers.
§ 2. But it was not till after the Reformation that Eng- influenee of land's industrial character showed itself fully. ti'on^on^°Slg- The natural gravity and intrepidity of the stern land. races that had settled on the shores of England
inclined them to embrace the doctrines of the Reformation; and these reacted on their character, making it deeper and giving a serious and almost sombre tone to their industry. It made her people care more for the solid and substantial comforts, and less for the festivities and the luxuries on which other nations spent a great part of their surplus income.
This influence was strengthened by the fact that many of those who had adopted the new doctrines in other countries sought on her shores a safe asylum from religious persecution. By a sort of natural selection, those of the French and Flem- ings, and others whose character was most akin to the English, and who had been led by that character to sturdy thorough- ness of work in the manufacturing arts, came to mingle with them, and to teach them those arts for which their character had all along fitted them.
These were the conditions under which the modern in- dustrial life of England was developed : the desire for material comforts tends towards a ceaseless straining to extract from every week the greatest amount of work that can be got out of it. The firm resolution to submit every action to the deliberate judgment of the reason tends to make every one constantly ask himself whether he could not improve his position by changing his business, or by changing his method of doing it. And, lastly, complete political freedom and
GROWTH OF ECONOMIC FREEDOM. 17
security enable everyone to adjust his conduct as he has de- cided that it is his interest to do, and fearlessly to commit his person and his property to new and distant under- takings.
In short, the same causes which have enabled England and her colonies to set the tone of modern politics, have made them also set the tone of modern business. The same qualities which gave them political freedom gave them "also free enterprise in industry and commerce.
§ 3. Freedom of industry and enterprise, so far as its action reaches, tends to cause everyone to seek Beginnings of that employment of his labour and capital in ^fb^^^nggs""^ which he can turn them to best advantage, management, this again leads him to try to obtain a special skill and facility in some particular task, by which he may earn the means of purchasing what he himself wants. And hence results a complex industrial organization, with much subtle division of labour.
The most important form of this divis^'^^^ ^f ,1g.]b<;)ur for our present purpose, — the form which is most characteristic of the modern world generally, and of the English race in particular — is that by which the work within each trade is so divided up that the planning and arrangement of the business, its management and its risks, are borne by one set of people, while the manual work required for it is done by hired labour. This may be merely a passing phase in man's development; it may be swept away by the further growth of that free enter- prise which has called it into existence. But for the present it stands out for good and for evil as the chief fact in the form of modern civilization, the kernel of the modern economic problem.
The power of large capitalist manufacturers is of early origin, but it received a great impetus from the discovery of the New World and the opening up of large markets across the sea for the simple manufactures of the Old World. And
M. 2
18 BOOK I. CH. III. §§ 8 — 5.
this demand has exercised a constantly increasing influence over the economic conditions of England.
§ 4. In the latter half of the eighteenth century a series of ffreat mechanical inventions and a wide
Rise of the ° . p t^ ^ ^, • • a
factory extension of iLn^lands empire m America and
system. Asia combined to make the changes in the con-
ditions of her industry move very fast. It is true that the first effect of this change was not so much to increase the size of factories, as to develop the system of con- tracting, in which a comparatively few wealthy capitalists distributed their orders to a great number of small masters scattered over the country wherever there was water-power to be had; they themselves undertaking the risks of buying the raw material and selling the manufactured goods, i It was only when steam-power began to displace water-power that the size of the factories increased rapidly \ ' But, both in its earlier and its later forms, the new movement tended to release the bonds that had bound nearly everyone to live in the parish in which he was born; and it developed free markets
1 The quarter of a century beginning with 1760 saw improvements follow one another in manufacture even more rapidly than in agriculture. During that period the transport of heavy goods was cheapened by Brindley's canals, the production of power by Watt's steam-engine, and that of iron by Cort's processes of puddling and rolling, and by Koebuck's method of smelting it by coal in lieu of the charcoal that had now become scarce ; Hargreaves, Cromp- ton, Arkwright, Cartwright and others invented, or at least made economi- cally serviceable, the spinning jenny, the mule, the carding machine, and the power-loom; Wedgwood gave a great impetus to the pottery trade that was already growing rapidly; and there were important inventions in printing from cylinders, bleaching by chemical agents, and in other processes. A cotton factory was for the first time driven directly by steam-power in 1785, the last year of the period. The beginning of the nineteenth century saw steam-ships and steam printing-presses, and the use of gas for lighting towns. Railway locomotion, telegraphy and photography came a little later. Our own age has seen numberless improvements and new economies in production, prominent among which are those relating to the production of steel, the tele- phone, the electric light, and the gas-engine; and the social changes arising from material progress are in some respects more rapid now than ever. But the groundwork of the changes that have happened since 1785 was chiefly laid in the inventions of the years 1700 to 1785.
I
GROWTH OF ECONOMIC FREEDOM. 19
for labour, which invited people to resort to them, and to take their chance of finding employment. Up to the eighteenth century manufacturing labour had been hired, as it were, always retail; in that century it began to be hired wholesale. Up to that time its price had been in the main either nominally fixed by custom, or determined by the in- cidents of bargaining in very small markets : the bargaining had been sometimes for the hire of labour, sometimes for the sale of its products, the workman having himself undertaken the risks of production. But since then its price has more and more been determined by the circumstances of supply and demand over a large area — a town, a country, or the whole world.
/The new organization of industry added vastly to the efiiciency of production^ but it brought with it great evils. Which of these evils was unavoidable we cannot The new tell. For just when the change was moving I'f^ZltZ most quickly, England was stricken by a com- by great evils, bination of calamities almost unparalleled in history. They were the cause of a great part — it is impossible to say of how great a part — of the suiferings that are commonly ascribed to the sudden outbreak of unrestrained competition. The loss of her great colonies was quickly followed by the great French war, which cost her more than the total value of the accu mulated wealth she had at its commencement. An un precedented series of bad harvests made bread fearfully dear.' And worse than all, a method of administration of the poor law was adopted which undermined the independence and vigour of the people.
The first part of this century therefore saw free enterprise establishing itself in England under unfavourable circum- stances, its evils being intensified, and its benefits being lessened by external misfortunes.
§ 5. The old trade customs and gild regulations were unsuitable to the new industry. In some places they were
2—2
20 BOOK I. CH. III. § 5.
abandoned by common consent: in others they were suc- Attempts to cessfuUy upheld for a time. But it was a fatal maintain old success; for the new industry, incapable of flourish- regu a ions. .^^ under the old bonds, left those places for others where it could be more free. Then the workers , turned to Government for the enforcement of old laws of \ Parliament prescribing the way in which the trade should be ^carried on, and even for the revival of the regulation of prices ^and wages by justices of the peace.
These efforts could not but fail. The old regulations had been the expression of the social, moral and economic ideas of the time; they had been felt out rather than thought out; they were the almost instinctive result of the experience of generations of men who had lived and died under almost unchanged economic conditions. In the new age changes came so rapidly that there was no time for this. Each man had to do what was right in his own eyes, with but little guidance from the experience of past times; those who en- deavoured to cling to old traditions were quickly supplanted.
\ The new race of manufacturers consisted chiefly of those who had made their own fortunes, strong, ready, enterprising men: who, looking at the success obtained by their own energies, were apt to assume that the poor and the weak were to be blamed rather than to be pitied for their mis- fortunes. \ Impressed with the folly of those who tried to bolster up economic arrangements which the stream of pro- gress had undermined, they were apt to think that nothing more was wanted than to make competition perfectly free and let the strongest have their way. They glorified^ indi- vidualism, and were in no hurry to find a modern substitute for the social and industrial bonds which had kept men together in earlier times.
Meanwhile misfortune had reduced the total net income of the people of England. In 1820 a tenth of it was absorbed in paying the mere interest on the National Debt. The goods
GROWTH OF ECONOMIC FREEDOM. 21
that were cheapened by the new inventions were chiefly manu- factured commodities of which the working man influence of was but a small consumer : |but the Corn-Laws J^J^'^ anTdear- prevented him from getting cheaply the bread nessoffood. on which he often spent three-fourths of his little wagesj) He had to sell his labour in a market in which the forces of supply and demand would have given him a poor pittance even if they had worked freely. But he had not the full advantage of economic freedom ; he had no efficient union with his fellows ; he had neither the knowledge of the market, nor the power of holding out for a reserve price, which the seller of commodities has, and he was urged on to work and to let his family work during long hours and under unhealthy conditions. This reacted on the efficiency of the working population, and therefore on the net value of their work, and therefore it kept down their wages. ■ The employment of chil- dren during excessive hours began in^he seventeenth century, and remained grievous till after the repeal of the corn laws.^ But after the workmen had recognized the folly of attempt- ing to revive the old rules regulating industry, there was no longer any wish to curtail the freedom of enterprise. The sufferings of the English people at their worst were never comparable to those which had been caused by the want of freedom in France before the Revolution; and it The new was argued that, had it not been for the strength E^n^iand^from which England derived from her new industries,^ French armies, she would probably have succumbed , to a foreign military despotism, as the free cities had done before her. Small as her population was she at some times bore almost alone the burden of war against a conqueror in control of nearly all the re- sources of the Continent ; and at other times subsidized larger, but poorer countries in the struggle against him. Rightly or wrongly, it was thought at the time that Europe might have fallen permanently under the dominion of France, as she had fallen in an earlier age under that of Rome, had not the
22 BOOK I. CH. III. §§ 5, 6.
free energy of English industries supplied the sinews of war against the common foe. Little was therefore heard in com- plaint against the excess of free enterprise, but much against that limitation of it which prevented Englishmen from obtain- ing food from abroad in return for the manufactures which they could now so easily produce.
And even trades-unions, which were then beginning that brilliant though chequered career which has been more full of interest and instruction than almost anything else in , English history, passed into the phase of seeking little from authority except to be left alone.\ They had learnt by bitter experience the folly of attempting W enforce the old rules by which Government had directed the course of industry; and they had as yet got no far-reaching views as to the regula- tion of trade by their own action : their chief anxiety was to increase their own economic freedom by the removal of the laws against combinations of workmen.V
§ 6. It has been left for our own generation to perceive Dangers of a all the evils which arose from this sudden in- cr^asTof free- urease of economic freedom. Now first are we dom. getting to understand the extent to which the
capitalist employer, untrained to his new duties, was tempted to subordinate the wellbeing of his workpeople to his own desire for gain; now first are we learning the importance
tof insisting that the rich have duties as well as rights in their individual and in their collective capacity; now first is the economic problem of the new age showing itself to us as it really is. This is partly due to a wider knowledge and a growing earnestness. But however wise and virtuous our grandfathers had been, they could not have seen things as we do ; for they were hurried along by urgent necessities and terrible disasters.
But we must judge ourselves by a severer standard. For we are not now struggling for national existence; and our resources have not been exhausted by great wars : on the con-
r
GROWTH OF ECONOMIC FREEDOM. 23
trary our powers of production have been immensely increased ; and, what is at least as important, the repeal of ^j^g nation the Corn Laws and the growth of steam com- is richer, and
5* . need not sacri-
munication have enabled a largely increased fice everything population to obtain sufficient supplies of food on ^° production, easy terms. The average money income of the people has more than doubled; while the price of almost all important commodities except animal food and house-room has fallen by one-half or even further. It is true that even now, if wealth were distributed equally, the total production of the country would only suffice to provide necessaries and the more urgent comforts for the people*, and that as things are, many have barely the necessaries of life. But the nation has grown in wealth, in health, in education and in morality ; and we are no longer compelled to subordinate almost every other consi- deration to the need of increasing the total produce of industry.
In particular during the present generation this increased prosperity has made us rich and strong enough to impose new restraints on free enterprise; some temporary material loss being submitted to for the sake of a higher and greater ultimate gain. But these new restraints are different from the old. They are imposed not as a means of class domi- nation ; but with the purpose of defending the weak, and especially children and the mothers of children, in matters in which they are not able to use the forces of competition in their own defence. The aim is to devise, deliberately and promptly, remedies adapted to the quickly changing circum- stances of modern industry ; and thus to obtain the good.
1 The average income per head in the United Kingdom which was about £15 in 1820 is about £33 now; i.e. it has risen from about £75 to £165 per family of five. There are not a few artisans' famiHes, the total earnings of which exceed £165, so that they would lose by an equal distribution of wealth : but even they have not more than is required to support a healthy and many- j sided life.
1
24 BOOK I. CH. III. § 6.
without the evil, of the old defence of the weak that in other ages was gradually evolved by custom. And by the aid of the The influence telegraph and the printing-press, of representa- of the tele- tive government and trade associations, it is printing- possiblo for the people to think out for them-
I press. selves the solution of their own problems. The
\ growth of knowledge and self-reliance has given them that true self-controlling freedom, which enables them to impose of their own free will restraints on their own actions ; and the problems of collective production, collective ownership and collective consumption are entering on a new ^ phase.
Projects for great and sudden changes are now, as ever, foredoomed to fail, and to cause reaction. We are still unable to move safely, if we move so fast that our new plans of life altogether outrun our instincts. It is true that human nature can be modified; new ideals, new opportunities and new methods of action may, as history shows, alter it very much even in a few generations. This change in human nature has perhaps never covered so wide an area and moved so fast as in the present generation. But still it is a growth, and therefore gradual; and changes of our social organization must wait on it, and therefore they must be gradual too.
But though they wait on it, they may always keep a little Movement ^^ advance of it, promoting the growth of our towards higher social nature by giving it always some
forms of col- new and higher work to do, some practical ideal lectivism. towards which to strive. Thus gradually we may attain to an order of social life, in which the common good overrules individual caprice, even more than it did in the early ages before the sway of individualism had begun. But unselfishness then will be the offspring of deliberate will, though aided by instinct individual freedom then will develop itself in collective freedom; — a happy contrast to the old
GROWTH OF ECONOMIC FREEDOM. 25
order of life, in which individual slavery to custom caused collective slavery and stagnation, broken only by the caprice of despotism or the caprice of revolution^.
We have been looking at this movement from the English point of view. But other nations are taking their share in it. America faces new practical difficulties with such intrepidity and directness that she is already contesting with England the leadership in economic affairs ; she supplies many of the most instructive instances of the latest economic tendencies of the age, such as the growing democracy of trade and industry, and the development of speculation and trade combination in every form, and she will probably before long take the chief part in pioneering the way for the rest of the world. Nor is Australia showing less signs of vigour than her elder sister ; she has in- deed some advantage over the United States in the greater homogeneity of her people.
On the Continent the power of obtaining important results by free association is less than in English speaking countries ; and in consequence there is less resource and less thoroughness in dealing with industrial problems. But their treatment is not quite the same in any two nations : and there is something characteristic and instructive in the methods adopted by each of them ; particularly in relation to the sphere of governmental action. In this matter Germany is taking the lead. It has been a great gain to her that her manufacturing industries developed later than those of England ; and she has been able to profit by England's experience and to avoid many of her mistakes.
1 The earlier half of this Chapter is much abridged from Principles I. III.; the second half is reproduced with but little change.
CHAPTER IV.
THE GROWTH OF ECONOMIC SCIENCE.
§ 1. Having watched some of the changes which have been wrought in economic conditions by the growth of free enterprise, we may next glance at the parallel changes in the science which studies those conditions.
Modern economics had its origin in common with other ^ . . , sciences towards the end of the Middle Ases,
Origin of mo- . i . ri '• ""^
dernecono- and at first it was chiefly concerned with the ^^^^- monetary problems which were at that time of
paramount interest, as a result of the discovery of the mines of the New^ World and of other causes.
In all ages, but especially in the early Middle Ages, states- men and merchants had busied themselves with endeavours to enrich the State by regulating trade. One chief object of their concern had been the supply of the precious metals, which they thought the best indication if not the chief cause of material prosperity, whether of the individual or the nation. But the voyages of Vasco de Gama and Columbus raised commercial questions from a secondary to a dominating posi- tion among the nations of Western Europe. Theories with regard to the importance of the precious metals and the best means of obtaining supplies of them, became the arbiters of public policy : they dictated peace and war, they determined alliances that issued in the rise and fall of nations and they governed the migration of peoples over the face of the globe.
Regulations as to trade in the precious metals were but one group of a vast body of ordinances, which undertook,
GROWTH OF ECONOMIC SCIENCE. 27
with varying degrees of minuteness and severity, to arrange for each individual what he should produce and ^,
^ The early
how he should produce it, what he should earn regulation of and how he should spend his earnings. The ^^^ ^' natural adhesiveness of the Teutons had given custom an exceptional strength in the early Middle Ages. And this strength told on the side of trade gilds, of local authorities and of national Governments when they set themselves to cope with the restless tendency to change that sprang directly or indirectly from the trade with the New World. In France this Teutonic bias was directed by the Roman genius for system, and paternal government reached its zenith ; the trade regulations of Colbert have become a proverb \
§ 2. The first systematic attempt to form an economic science on a broad basis was made in France The Physio - about the middle of the eighteenth century by a "^^^^ group of statesmen and philosophers under the leadership of Quesnay, the noble-minded physician to Louis XY. The corner-stone of their policy was obedience to Nature, and they were therefore called Physiocrats^.
1 It was just at this time that economic theory first took shape and the so- called Mercantile system became prominent. The Mercantilists are commonly believed to have promoted the state regulation of trade and industry. But they did not. The regulations and restrictions which are found in their sys- tem belonged to the age; the changes which they set themselves to bring about were in the direction of the freedom of enterprise. In opposition to those who wished to prohibit absolutely the exportation of the precious metals, they argued that it should be permitted in all cases in which the trade would in the long run bring more gold and silver into the country than it took out. They thus started the movement towards economic freedom, which gra- dually went on broadening till, in the latter half of the eighteenth century, the time was ripe for the doctrine that the well-being of the community almost always suffers when the State attempts to oppose its own artificial regulations to the "natural" liberty of every man to manage his own affairs in his own way. (For details see Principles I. iv. 1.)
2 They fell into a confusion of thought which was common even among scientific men of their time, but which has been banished after a long struggle from the physical sciences. They confused ethical princijiles of conformity to Nature, which ordain that certain things ouyht to be done, with those causal
28 BOOK I. CH. IV. §§ 2, 3.
The next great step in advance, the greatest step that economics has ever taken, was the work, not of a school but of an individual. Adam Smith was not indeed am mi . ^.^^ ^^^^ great English economist of his time; but his breadth was sufficient to include all that was best in all his contemporaries, French and English; and, though he un- doubtedly borrowed much from others, yet the more one compares him with those who went before and those who came after him, the more excellent does his genius appear.
He developed the Physiocratic doctrine of F^ee Trade with so much practical wisdom, and with so much knowledge of the actual ccyiditions of business, as to make it a great force in real life; (and he is most widely known both here and abroad for his argument^that Government generally does harm by interfering in traded J
But this was not his chief work. His chief work was to give a unity to economic science by combining and developing the speculations of his French and English contemporaries and predecessors as ip^alue. For he was the first to make a careful and scientific inquiry into the manner in which value measures human motive, on the one side measuring the desire of purchasers to obtain wealth, and on the other the efibrts and sacrifices (or " Real Cost of Production") undergone by its producers.
None of Adam Smith's contemporaries and immediate successors had a mind as broad and well balanced as his. But they did excellent work, each giving himself up to some class of problems to which he was attracted by the natural
laws which science discovers by interrogating Nature, and which state that certain results loill follow from certain causes. But the chief motive of their study was not, as it had been with most of their predecessors, to increase the riches of merchants and fill the exchequers of kings; it was to diminish the suffering and degradation which was caused by extreme poverty. They thus gave to economics its modern aim of seeking after such knowledge as may help to raise the quality of human life. (See Princijdes I. iv. 2.)
1 He was however aware that the interests of the individual trader do not always coincide with those of the public ; comp. Princi])les I. iv. 3.
GROWTH OF ECONOMIC SCIENCE. 29
bent of his genius, or the special events of the time in which he wrote. During the remainder of the eighteenth century the chief economic writings were historical and descriptive, and bore upon the condition of the working classes, especially in the agricultural districts \
§ 3. But at the beginning of this century statesmen and merchants, with Ricardo^ at their head, again Ricardoand threw themselves into problems of money and his followers, foreign trade with even more energy than they used to do when these questions were first started in the earlier period of the great economic change at the end of the Middle Ages ; and so long as they were well within their own province their work was excellent ^.
There was however a certain narro^jiess in their views of social and economic problems. The people whom they knew most intimately were business men; and they sometimes expressed themselves so carelessly as almost to imply that
1 Arthur Young continued the inimitable records of his tour, Eden wrote a histoiy of the poor which has served both as a basis and as a model for all succeeding historians of industry ; while Malthus showed by a careful investi- gation of history what were the forces which had as a matter of fact controlled the growth of population in different countries and at different times.
2 Ricardo himself, and many of his chief followers were much influenced by Bentham. See Pnnciples I. rv. 4 and 5 on this subject and for a fui-ther notice of the character of Ricardo's work,
8 The theory of currency is just that part of economic science in which but little harm is done by neglecting to take much account of any human motives except the desire for wealth ; and the brilliant school of deductive reasoning which Ricardo led was here on safe ground. They next addressed themselves to the theory of foreign trade and cleared away many of the flaws which Adam Smith had left in it. There is no other part of economics except the theory of money, which so nearly falls within the range of pure deductive reasoning. It is true that a full discussion of a free trade policy must take account of many considerations that are not strictly economic ; but most of these, though important for agricultural countries, and especially for new countries, had little bearing in the case of England.
During all this time the study of economic facts was not neglected in England; and indeed the pubhc and private collections of statistics and the economic histories that were produced in England at the end of the last century and the beginning of this, may fairly be regarded as the origin of systematic historical and statistical studies in economics.
30 BOOK I. CH. IV. §§ 3, 4.
all other Englishmen were very much like those whom they knew in the city. Partly indeed for the sake of simplicity, they argued as though everyone were quick to find out where his own pecuniary interest lay, and to seek it to the neglect of all other considerations. They often spoke of labour as a coiijmodity without staying to 'throw themselves into the point of view of the workman; and without dwelling upon the allowances to be made for his human passions, his in- stincts and habits, his sympathies and antipathies, his class jealousies and class adhesiveness, his want of knowledge and of the opportunities for free and vigorous action. Ijhey s^Z thei'efore attributed to the forces of suppl^and demand a much more mechanical and regular action than is to IBelound in real life^Jp-nd they laid down laws with regard to profits and wages that did not really hold even for England in their own time.
But their most vital fault was that they did not see how liable to change are the habits and institutions of industry. In particular they did not see that the poverty of the poor is the chief cause of that weakness and inefficiency which are the causes of their poverty : they had not the faith that modern economists have in the possibility of a vast improve- ment in the condition of the working classes.
§ 4. When we come to compare the modern view of the Mill and vital problem of the Distribution of Wealth with
modern econo- that which prevailed at the beginning of the "^^^^' century we shall find that over and above all
changes in detail and all improvements in scientific accuracy of reasoning, there is a fundamental change in treatment; for, while the earlier economists argued as though man's character and efficiency were to be regarded as a fi^d quantity, modern economists keep constantly in mind the fact that it is a product of the circumstances under which he has lived. This change in the point of view of economics is partly due to the fact that the changes in human nature during the last fifty
GROWTH OF ECONOMIC SCIENCE. 31
years have been so rapid as to force themselves on the attention; partly to the direct influence of individual writers, socialists and others; and partly to the indirect influence of the general growth of scientific knowledge, and especially of biology'.
The first important indication of the new movement was seen in John Stuart Mill's admirable Principles of Political Economif.
Mill's followers have continued his movement away from the position taken up by the immediate followers of Ricardo; and the human as distinguished from the mechanical element is taking a more and more prominent place in economics. The new temper is shown alike in Jevons' subtle analysis of utility and other many-sided and original work, in Cliffe Leslie's historical inquiries, and in the writings of Bagehot, Cairnes, and others who are yet living.
England has recently made great advances in wealth and in knowledge, in temperance and in earnestness. A higher notion of social duty is spreading everywhere. In Parliament, in the press and in the pulpit, the spirit of humanity speaks more distinctly and more earnestly than it did. Mill and the economists who have followed him, have helped onwards this general movement, and they in their turn have been helped onwards by it. At the same time the historical basis of the science is becoming broader, and its reasonings more careful and precise. This greater exactness is showing that many of. the older applications of general reasoning were invalid, because no care had been taken to think out all the assumptions that were implied and to see whether they could fairly be made in the special cases under discussion; and many dogmas have been destroyed which appeared to be 1 On this point see Principles I. iv. 7.
12 He had been educated by his father in the straitest tenets of Bentham and Ricardo; and in 1830 he wrote an essay on economic method in which he proposed to give increased sharpness of outline to the abstractions of the science. But in his Piinciples, written in 1848, he took account of all sides of human nature, and adhered closely to the facts of life. i
32 BOOK I. CH. IV. § 4.
simple only because they were loosely expressed; but which, for that very reason, served as an armoury with which partisan disputants (chiefly of the capitalist class) have equipped themselves for the fray.
This destructive work might appear at first sight to have diminished the value of processes of general reasoning in economics: but really it has had the opposite result. It has cleared the ground for newer and stronger machinery, which is being steadily and patiently built up. It has enabled us to take broader views of life, to proceed more surely though more slowly, to be more scientific and much less dogmatic than those good and great men who bore the first brunt of the battle with the difiiculties of economic problems; and to whose pioneering work we owe our own more easy course. But this brings us to consider the scope and the methods of economics as they are now understood \
1 In America, in Austria and France, in Italy and the Netherlands, and above all in Germany, the last fifty years have seen important contributions to economic science. Germans have taken the lead in the "comparative" study of economic, as well as of general history. They have brought side by side the social and industrial phenomena of different countries and of different ages ; have so arranged them that they throw light upon and interpret one another, and have studied them all in connection with the suggestive history of jurisprudence. It would be difficult to overrate the value of the work which they and their fellow workers in other countries have done in tracing and explaining the history of economic habits and institutions. It is one of the great achievements of our age; and an important addition to our real wealth. It has done more than almost anything else to broaden our ideas, to increase our knowledge of ourselves, and to help us to understand the central plan, as it were, of the Divine government of the world.
On the recent progress of economics abroad, see PrincivUs I. iv. 8.
I
CHAPTER V.
THE SCOPE OF ECONOMICS.
,§ 1. All aspects of social life are connected with one another : none can be studied profitably without taking some account of the others. But when the attempt is made to discuss them in one unified social science, the Relation of results are not satisfactory. One thinker after economics to
, , T , • 1 • 1 other branches
another proposes broad generalizations, which of social fascinate men's minds for a time, but seldom s<='e"ce. endure for long the test of severe scrutiny. Thus, in social as well as physical science, experience shows that solid progress can be made only by breaking up broad problems into parts, and working at each separately : and the economist is follow- ing the best examples that have been set by other scientific students when he gives his chief attention to certain limited aspects of social life, while yet taking some account of all others^.
§ 2. What then ^re thaJLiiniis of those social studies which the economist regards as his special domain ? To answer this' we must first consider what are the advantages which have enabled economics, though far behind the more advanced physical sciences, yet to outstrip every other branch of social
1 As Mill says {On Comte, p. 82): — "A person is not likely to be a good economist who is nothing else. Social phenomena acting and re-acting on one another, they cannot rightly be understood apart ; but this by no means proves that the material and industrial phenomena of society are not themselves sus- ceptible of useful generalizations, but only that these generalizations must necessarily be relative to a given stage of social advancement." On the whole subject see Dr Keynes' Scope and Method of Political Economy.
M. a
34 BOOK I. CH. V. §§ 2, 3.
science. For it would seem reasonable to conclude that any broadening of the scope of the science which brings it more closely to correspond with the actual facts, and to take account of the higher aims of life, will be a gain on the balance pro- vided it does not deprive the science of those advantages: but that any further extension beyond that limit would cause more loss than gain.
The advantage which economics has over other branches of social science appears to arise from the fact that it concerns Economics itself chiefly with that class of actions the mo- chieflycon- tives of which are measurable, and therefore
cerned with • n • i /• . . ^
measairabie Specially suited for scientific treatment. An motives. opening is made for the methods and the tests of
exact science as soon as the force of a person's motives can be measured by the sum of money, which he will just give up in order to secure a desired satisfaction, or again the sum which is just required to induce him to undergo a certain fatigue.
But here a little explanation is needed. The economist does not attempt to weigh the real value of the higher affec- tions of our nature against those of our lower : he does not balance the love for virtue against the desire for agreeable food. Such measure- -^^^ ^® estimates the incentives to action by their ment corre- effects just in the same way as people do in com- .practiceof ^ nion life. He makes no strange assumptions, ordinary life, jjq arbitrary hypotheses; but he follows the course of ordinary conversation, differing from it only in taking more precautions to make clear the limits of his know- ledge as he goes. ' These precautions are laborious, and make some people think that economic reasonings are artificial. But the opposite is the fact. For he does but bring into promi- nence those assumptions and reservations, which everyone makes unconsciously every day.
For instance, if we find a man in doubt whether to spend a few pence on a cigar, or a cup of tea, or on riding home
THE SCOPE OF ECONOMICS. 35
instead of walking home, then we may follow ordinary usage, and say that he expects from them equal pleasures. Again if we find that the desires to secure either of two pleasures will induce people in similar circumstances each to do just an hour's extra work, or will induce men in the same rank of life and with the same means each to pay a shilling for it, we then may say that those pleasures are equal for our purpose.
Next suppose that the person whom we saw doubting be- tween several little gratifications for himself had thought after a while of a poor invalid whom he would pass on his way home, and had spent some time in making up his mind whether he would choose a physical gratification for himself, or would do a kindly act and rejoice in another's joy. As his desires turned now towards the one, now the other, there would be change in the quality of his mental states. But the economist treats them in the first instance merely as motives to action, which are evenly balanced. No doubt his concern with them does not end there. Even for the narrower uses of economic studies, it is important to know whether the desires which prevail are such as will help to build up a strong'and righteous character. \,And in the broader uses of those studies, when they are being applied to practical problems, the economist, like every one else, must concern himself with the ultimate aims of man, and take account of differences in real value between gratifications that are equally powerful motives or incentives to action and have therefore equal mone^jralues. A study of these money values is only the starting-point otm economics ; but it is the starting-point. \ f
§ 3. There are other ways in which the money values of various efforts and benefits fail to measure their real values. Some people can derive more happiness and more well-being of all kinds than others from the same money income. When a tax of <£1 is taken from each of two persons hav- Difficulties of ing an income of £300 a-year, each will give up measurement, that =£1 worth of pleasure (or other satisfaction) which he can
3-2
36 BOOK I. CH. V. §§ 3, 4.
most easily part with, i.e., each will give up what is measured to him by just £1 : but the intensities of the satisfaction given up may not be nearly equal.
Again the desire to earn a shilling is a much stronger motive to a poor man with whom money is scarce than to a rich one. A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a year will walk to business in a heavier rain than the clerk with £300 a year; for a six- penny omnibus fare measures a greater pleasure to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The pleasure that is measured in the poorer man's mind by sixpence is greater than that measured by it in the richer man's mind.
These difficulties can however be avoided. For if we take Allowance for ^^^I'^gss Sufficiently broad to cause the personal the different peculiarities of individuals to counterbalance one moiey\o rich another, the money which people of equal incomes and poor. y^[i\ give to obtain a pleasure or avoid a pain is a
sufficiently accurate measure of the pleasure or the pain. If there are a thousand families living in Sheffield and another thousand in Leeds, each with about £100 a-year, and a tax of £1 is levied on all of them, we may be sure that the loss of pleasure which the tax will cause in Sheffield is very nearly equal to that which it will cause in Leeds : and similarly any- thing that increased all the incomes by a £1 would give com- mand over very nearly the same amount of additional pleasure in the two towns.
But next suppose that instead of falling on families with an income of about £100 a-year, the loss fell in each of the two towns on 600 families with an average income of £50 and on 400 families with an average income of. £100; then,
THE SCOPE OF ECONOMICS. 37
although the loss of pleasures to the poorer group would be much greater than to the richer, yet the aggregate loss in Leeds might be taken to be about the same as in Sheffield; because in each case it was distributed in equal proportions among the richer and the poorer. And in fact it happens that by far the greater number of the events with which eco- nomics deals affect in about equal proportions all the different classes of society; so that if the money measures of the hap- piness caused by two events are equal, there is not in general any very great difference between the amounts of the happi- ness in the two cases.
Next it must be remembered that nobody's actions are all governed by careful calculation ; in fact even the
° -, , , _.. It is not as-
most deliberate persons are much under the m- sumed that all
fluence of habit and impulse. But on the other deliberate hand hS/^t itself is largely based on deliberate choice : and further the side of life with wLich economics is \ specially concerned is that in which man's conduct is most \ deliberate, and in which he most often reckons up the advan- tages and disadvantages of any particular action before he enters on it. It is that side of his life in which, when he does follow habit and custom, and proceed for the moment without calculation, the habits and customs themselves are most nearly sure to have proceeded from closely watching the advantages and disadvantages of different courses of .conduct.
§ 4. Thus " money " or " general purchasing power " or| " command over material wealth," is the centre around which! economic science clusters; this is so, not because money or material wealth is regarded as the main aim of human effort, nor even as affording the main subject-matter for the study of the economist, but because in this world of ours it is the one convenient, means of measuring humq.n motive on a large scale; and if the older economists had made this clear, they would have escaped many grievous misrepresentations. The splendid teachings of Carlyle and Rusk in as to the right aims
38 BOOK I. CH. V. §§ 4, 5.
of liuman endeavour and the right uses of wealth, would not
then have been marred by bitter attacks on eco-
motivesare nomics, based on the mistaken belief that that
not exclusively science had no concern with any motive except
selfish. '' \
the selfish desire for wealth, or even that it inculcated a policy of sordid selfishness'.
(So far from confining their attention to selfish motives, economists have always given a prominent place to the unselfish sacrifices which men make in order to secure com- fortable provision for their families. The grounds for doing this are obvious on the principle which we have adopted. For family affection acts with so much uniformity in any given stage of civilization that its effects can be systema- tically observed, reduced to law and measured ; and it is there- fore reasonable for economists to take it always into account ; while yet they do not attempt to study the working of many other benevolent and self-sacrificing motives whose action is irregbijiar. But the greater part of those actions, which are due to "a feeling of duty and love of one's neighbour, cannot be classed, reduced to law and measured; and it is for this reason, and not because they are not based on self-interest, that the machinery of economics cannot be brought to bear on them.
§ 5. There is another direction in which the range of The desire for economics has been wider than is commonly money is the thought. When the motive to a man's action is
result of many o
various mo- spoken of as Supplied by the money which he will earn, it is not meant that his mind is closed to all other considerations save those of gain. For even the most purely business relations of life assume honesty and good faith; while many of them take for granted, if not
1 It is pointed out in Principles I. v. 4, that a theory of economics similar to our own might exist in a world in which there was no private propertj in material wealth, and no money, provided that motives could be measured, as for instance by transferable honours.
THE SCOPE OF ECONOMICS. 39
generosity, yet at least the absence of meanness ; and the pride which every honest man takes in acquitting himself well, is an important factor of economic efficiency. Again, much of the work by which people earn their living is pleasurable in itself; and there is truth in the contention of socialists that more of it might be made so. Indeed in business work, that seems at first sight unattractive, many persons find a distinct pleasure, which is partly direct, and partly arises from the gratification which the work affords to their instincts of rivalry and power. \ Just as a race-horse or an athlete strains every nerve to get in advance of his com- petitors, and delights in the strain; so a manufacturer or a trader is often stimulated much more by the hope of victory over his rivals than by the desire to add something to his fortune. \ '
But a;gain, the desire to make money does not itself necessarily proceed from motives of a low order, even when it is to be spent on oneself. Money is a nieans. towards ends, and if the ends are noble, the "desire for the means is not ignoble. The lad who works hard and saves all he can, in order to be able to pay his way afterwards at a University, is eager for money; but his eagerness is not ignoble. In short, money is general purchasing power, and is sought as a means to all kinds of ends, high as well as low, spiritual as well as material.
The earlier English economists paid almost exclusive at- tention to the motives of individual action. Motives to coi- But it must not be forgotten that economists, lective action, like all other students of social science, are concerned with individuals chiefly as members of the social organism. As a cathedral is something more than the stones of which it is built, as a pearson is something more than a series of thoughts and feelings, «o the life of society is something more than the sum, of the lives of its individual members\ It is true that the action of the whole is made up of that or its constituent
40 BOOK I. CH. V. §§ 5, 6.
parts; and that in most economic problems the l>est starting- point is to be found in the motives that affect the individual, regarded not indeed as an isolated atom, but as a member of some particular trade or industrial group ; but it is also true, as German writers have well urged, that economics has a great and an increasing concern in motives connected with the collective ownership of property and the collective pursuit of important aims. Many new kinds of voluntary association are growing up under the influence of other motives besides that of pecuniary gain ; and the Co-operative movement in particular is opening to the economist new opportunities of measuring motives whose action it had seemed impossible to reduce to any sort of law.
§ 6. To conclude provisionally : "We study the actions of indi- viduals, but. study them in relation to social life ; and concern ourselves but little with personal peculiarities of temper and character. We take as little notice as possible of individual The individual Peculiarities of temper and character. We watch regarded as a the conduct of a whole class of people — sometimes industrial the whole of a nation, sometimes only those living
group. jj^ a certain district, more often those engaged
jn .some particular trade at some time and place : and by the aid of statistics, or in other ways, we ascertain how much money on the average the members of the particular group we are watching, are just willing to pay as the price of a certain thing which they desire, or how much must be offered to them to induce them to undergo a certain effort or ab- stinence that they dislike. The measurement of motiye-^us obtained is not indeed perfectly accurate; for if it were, economics would rank with the most advanced of the physical sciences, and not as it actually does with the least advanced.
But yet the measurement is accurate enough to enable experienced persons to forecast fairly well the extent of the results that will follow from changes in which motives of ^liis kind are chiefly concerned. Thus, for instance, they can
THE SCOPE OF ECONOMICS. 41
estimate very closely the payment that will be required to produce an adequate supply of labour of any grade, from the lowest to the highest, for a new trade which it is proposed to start in any place. And, when they visit a factory of a kind that they have never seen before, they can tell within a shilling or two a week what any particular worker is earning, by merely observing how far his is a skilled occupation and what strain it involves on his physical, mental and moral faculties.
And, starting from simple considerations of this kind, they can go on to analyse the causes which govern the local distribution of different kinds of industry, the terms on which people living in distant places exchange their goods with one another, and so on. They can explain and predict the ways in which fluctuations of credit will affect foreign trade, or again the extent to which the burden of a tax will be shifted from those on whom it is levied on to those for whose wants they cater, and so on.
In all this economists deal with man as he is : not with an abstract or " economic " man ; but a man of flesh and blood ; influenced by egoistic motives and shaping his business life to a great extent with reference to them ; but not above the frailties of vanity or recklessness, and deal mainly not below the delight of doing his work well for ^n^e°buttot its own sake, nor below the delight in sacrificing the life of a fie - himself for the good of his family, his neighbours, * '°"^ ^*"^" or his country, and not below the love of a virtuous life for its own sake. They deal with man as he is. But being concerned chiefly with those aspects of life in which the action of motive is so regular that it can be predicted, and the estimate of the motor-forces can be verified by results, they have established their work on a scientific basis ^
1 Some further considerations, chiefly philosophical and logical, bearing on this subject will be found in Principles I. v.
CHAPTER YI.
METHODS OF STUDY. NATURE OF ECONOMIC LAW.
§ 1. It is the business of economics, as of almost every other science, to collect facts, to arrange and interpret them, and to draw inferences from them. All the devices for the discovery of the relations between cause and eiFect, which are described in treatises on scientific method, have to be used in their turn by the economist : there is not any one method of Induction and i'^'^^stigation which can properly be called the deduction are method of economics ; but every method must be insepara e. made Serviceable in its proper place, either singly or in combination with others. And as the number of com- binations that can be made on the chess-board is so ofreat that probably no two games exactly alike were ever played ; so no two games which the student plays with nature to wrest from her her hidden truths, which were worth playing at all, ever made use of quite the same methods in quite the same way.
But in some branches of economic inquiry and for some purposes, it is more urgent to ascertain new facts, than to trouble ourselves with the mutual relations and explanations of those which we already have. While in other branches there is still so much uncertainty as to whether those causes of any event which lie on the surface and suggest themselves at first are both trus causes of it and the only causes of it, that it is even more urgently needed to scrutinize our reasonings about facts which we already know, than to seek for more facts.
The reasoning from particular facts to general principles is called induction; the reasoning from general principles to
METHODS OF STUDY. 43
particular facts is called deduction. fProf. SchmoUer, an emi- nent German historian and economist, says well : " Induction and deduction are both needed for scientific thought as the right and left foot are both needed for walking.... They rest on the same tendencies, the same beliefs, the same needs of our reason." |
§ 2. There is however no scope in economics for long chains of deductive reasoning; that is for chains in which each link is supported, wholly or mainly, by that which went be- fore, and without obtaining further support and guidance from observation and the direct study of real life. This
. . Long chains of
can be done m astronomy and m some other mere reason - branches of physical science, in which the cha- ^"ofi4\ie°^ racter and strength of all the chief causes at work are known so exactly that we can predict beforehand the effect of each singly, and thence infer the combined effect of all. But it cannot be done as yet in chemistry; for we cannot be quite sure how a new combination of chemical elements will work until we have tried. And when drugs are used medicinally, " it is often found that they affect different people in different ways : it is not always safe to give a large dose of a new drug to one patient, trusting to the fact that it has worked well in an apparently similar case. And economics has as various and uncertain a subject-matter to deal with as has medical science.
Thus if we look at the history of such strictly economic relations as those of business credit and banking, of trade- unionism or co-operation, we see that modes of working, that have been generally successful at some times and places, have uniformly failed at others. The difference may sometimes be explained simply as the result of variations in general en- lightenment, or of moral strength of character and habits of mutual trust; but sometimes the explanation is more difficult \
1 In the corresponding section of Principles (Ed. iii.) this class of con- siderations is studied at length. It is shown how in some respects economic
44 BOOK I. CH. VI. §§ 8 — 5.
§ 3. On the other hand, there is need at every stage for The expiana- analysis, that is, for taking to pieces each complex tionofob- part and studying the relations of the several*
served facts ^ *' f i , i i , .
involves rea- parts to one another and to the whole : and m soning. doing this we are constantly making inferences,
that is, short steps of reasoning both inductive and deductive. The process is substantially the same whether we are explain- ing what has happened or predicting what is likely to happen. lExplanation and prediction are really the same mental opera- jtion ; though they are worked in opposite directions, the one |from effect to cause, the other from cause to effect \
Observation may tell us that one event happened with or after another, but only by the aid of analysis and reason can we decide whether one was the cause of the other, and if we reason hastily we are likely to reason wrong. Wider ex- perience, more careful inquiry, may show that the causes to which the event is attributed could not have produced it un- aided ; perhaps even that they hindered the event, which was brought about in spite of them by other causes that have escaped notice^.
forces resemble mechanical rather than chemical forces, because their action in combination can often be predicted with some certainty from their separate action; and how this fact enables deduction to go a little further in economics than it otherwise would. The classical economists are-often supposed to have forged long chains of deductive reasoning: but they did not: they had too much common sense and practical knowledge of the affairs of life to attempt it.
1 It is only when we go beyond a first step that a great difference arises between the certainty of prediction and the certainty of explanation : for any error made in the first step of prediction will be accumulated and intensified in the second ; while in interpreting the past, error is not so likely to be accu- mulated; for observation or recorded history will probably bring a fresh check at each step.
2 If we are dealing with the facts of remote times we must allow for the changes that have meanwhile come over the whole character of economic life : however closely a problem of to-day may resemble in its outward incidents another recorded in history, it is probable that a closer examination will detect a fundamental difference between their real characters. Till this has been made, no valid argument can be drawn from one case to the other.
This line of argument is developed in Principles I. vi. §§ 3, 4, where Cap- tain Mahan's remark that more light is thrown on modern problems by the
NATURE OF ECONOMIC LAW. 45
§ 4. The part which systematic scientific reasoning plays in the production of knowledge resembles that ^
which machinery plays in the production of machinery of goods. For when the same operation has to be ^'^*®"'^^- performed over and over again in the same way, it generally pays to make a machine to do the work ; and where there is so much changing variety of detail that it is unprofitable to use machines the goods must be made by hand. Similarly in knowledge, when there are any processes of investigation or reasoning in which the same kind of work has to be done over and over again in the same kind of way, then it is worth while to reduce the processes to system, to organize methods of reasoning and to formulate general Laws.
It is true that there is so much variety in economic problems, economic causes are intermingled with others in so many different ways, that exact scientific reasoning will seldom bring us very far on the way to the conclusion for which we are seeking. But it would be foolish to refuse to avail ourselves of its aid, so far as it will reach : — just as foolish as would be the opposite extreme of supposing that science alone can do all the work, and that nothing will remain to be done by practical instinct and trained common sense \
§ 5. A scientific Law is a general proposition or state- ment of uniformity, more or less certain, more or The nature of less definite. The laws of gravitation, of conser- scientific laws.
strategy than the tactics of past naval warfare is adapted to the teachings of economic history.
1 Natural instinct will select rapidly and combine justly considerations which are relevant to the issue in hand ; but it will select chiefly from those which are familiar ; it will seldom lead a man far below the surface, or far be- yond the limits of his personal experience. And we shall find that in econo- mics, neither those effects of known causes, nor those causes of known effects which are most patent, are generally the most important. " That which is not seen" is often better worth studying than that "which is seen." Especially is this the case when we are trying to go behind the immediate causes of events and trying to discover their causes {catcsce causantes).
46 BOOK I. CH. VI. §§ 5, 6.
vation of energy, &c. in physics are universal, certain and exact. Economics has of course no laws of this class : but it has many which may rank with the secondary laws of biology and medical science, and even the science of the tides. For these laws also are concerned with the action of many different kinds of causes, and vary much in definiteness, in certainty and in range of application'.
A Law of social science, or a Social law, is a statement
that a certain course of action may be expected
aw. ^j^jjgj. certain conditions from the members of a
social group.
Economic laws are those Social Laws which relate to Economic branches of conduct in which the strength of the
law. motives chiefly concerned can be measured by a
money price. They are statements in the indicative mood of relations between causes and effects, and not precepts in the imperative mood^.
Following our definition of an economic law, we may say that the course of action which may be expected under certain conditions from the members of an industrial group is the NORMAL action of the members of that group ^.
1 The number of general statements that are made in the course of every science is very great : but it is not customary to give to all of them a formal character and name them as Laws. The selection is directed less by purely scientific considerations than by practical convenience. If there is any general statement which one wants to bring to bear so often, that the trouble of quo- ting it at length, when needed, is greater than that of burdening the discussion with an additional formal statement and an additional technical name, then it receives a special name, otherwise not.
2 Of course an economist retains the liberty, common to all the world, of expressing his opinion that a certain course of action is the right one under given circumstances ; and if the difficulties of the problem are chiefly economic he may speak with a certain authority. But so may a chemist with regard to other problems, such for instance as some of those connected with sanitation and with dyeing ; and yet the laws of chemistry are not precepts.
3 Corresponding to the substantive "law" is the adjective "legal." But this term is used only in connection with "law" in the sense of an ordinance of government; not in the sense of a scientific statement of connection between cause and effect. The adjective used for this purpose is derived from
NATURE OF ECONOMIC LAW. 47
Normal action is not always morally right; very often it is action which we should use our utmost efforts
-n • 1 1 I'l • p Normal.
to stop, ror uistance, the normal condition oi many of the very poorest inhabitants of a large town is to be devoid of enterprise, and unwilling to avail themselves of the opportunities that may offer for a healthier and less squalid life elsewhere; they have not the strength, physical, mental and moral, required for working their way out of their miser- able surroundings. The existence of a considerable supply of labour ready to make match-boxes at a very low rate is normal in the same way that a contortion of the limbs is a normal result of taking strychnine. It is one result, a deplorable result, of the action of those laws which we have to study.
[The phrase just used — the action of a law — is convenient on account of its brevity. But a law itself does The action of not take action, it merely records action. When ^ ^*^- we speak of the action of a law, what we mean is the action of those causes, the results of which are described by the law.]
§ 6. Further, the laws of economics as of other sciences are statements as to the effects which will be „ ^. .
Conditions are
produced by certain causes, not absolutely, but assumed in all subject to the condition that other things are ^^^^°"^"s^- equal, and that the causes are able to work out their effects undisturbed \
"norma," a term which is nearly equivalent to "law," and might perhaps with advantage be substituted for it in scientific discussions.
1 There is, however, no reason for regarding economics as a hypothetical science in any sense, in which the physical sciences are not also hypothetical. Almost every scientific doctrine, when carefully and formally stated, will be found to contain some proviso to the effect that other things are equal : the action of the causes in question is supposed to be isolated ; certain effects are attributed to them, but only on the hypothesis that no cause is permitted to enter except those distinctly allowed for. These conditioning clauses must be often repeated in economics, because its doctrines are apt to be quoted by persons who have had no scientific training, and who perhaps have heard them only at second hand and without their context. See Principles I. vi. 6 (Ed. HI.).
48 BOOK I. CH. VI. § 6.
It is sometimes said that physical laws are more universally true and less changeable than economic laws. It would be better to say that an economic law is often applicable only to a very narrow range of circumstances which may exist together at one particular place and time, but quickly pass away. When they are gone, the law, though still true as an abstract proposition, has no longer any practical bearing; because the particular set of causes with which it deals are nowhere to be found acting together without important dis- turbance from other causes. Though economic reasoning is of wide application, we cannot insist too urgently that every age and every country has its own problems ; and that every change in social conditions is likely to require a new develop- ment of economic doctrines.
It is true also that human effort may alter the conditions under which people live, and their characters, and thus may affect the economic laws that will be valid in the next generation. It may for instance destroy the conditions under which the most helpless of our match-box makers have been formed ; in the same way as it has substituted sheep whose law of life it is to mature early, for the older breeds which did not attain nearly to their full weight till their third year.
The " normal " conditions with which economics deals are
constantly being changed, partly through the un-
-norm^'Ms conscious influence of general social progress,
relative to partly throusrh conscious and deliberate endea-
place and time. ^ ^ -, •, .-, . , i • i i ^
vour. And while with advancing knowledge we are constantly finding that economic analysis and general reasoning have wider and wider applications, and are learning in unexpected ways to see the One in the Many and the Many in the One ; we are also getting to understand more fully how every age and every country has its own problems, and how every change in social conditions is likely to require a new development of economic doctrines.
CHAPTER VII.
SUMMARY AND CONCLUSION.
§ 1. Economics has then as its purpose firstly to acquire knowledge for its own sake, and secondly to Relation of throw light on practical issues. But though we science to are right before entering on any study to con- practice. sider carefully what are its uses, we should not plan out our work with direct reference to them. For by so doing we are tempted to break off each line of thought as soon as it ceases to have immediate bearing on that particular aim which we have in view at the time : the direct pursuit of practical aims leads us to group together bits of all sorts of knowledge, which have no connection with one another except for the immediate purposes of the moment ; and which throw but little light on one another. Our mental energy is spent in going from one to another; nothing is thoroughly thought out ; no real progress is made.
The grouping, therefore, which is best for the purposes of science is that which collects together all those facts and reasonings which are similar to one another in nature : so that the study of each may throw light on its neighbour. By working thus for a long time at one set of considerations, we get gradually nearer to those fundamental unities which are called nature's laws : we trace their action first singly, and then in combination ; and thus make progress slowly but surely. \ The practical uses of economic studies should never be out of the mind of the economist, but his special business is to study and interpret facts and to find out what are the effects of different causes acting singly and in combination. \ M, 4 V
50 BOOK I. CH. VII. §§ 2, 3.
§ 2. I Economics is tlien the science which investigates Questions to be JUJin's action in the ordinary business of life. ) It investigated, pursues the inquiries : —
I How does economic freedom tend, so far as its influence / reaches, to arrange the demand for wealth and its production, / diRf.T^'hntion and exchange? What organization of industry and trade does economic freedom tend to bring about ; what forms of division of labour; what arrangements of the money market, of wholesale and retail dealing, and what relations between employer and employed? How does it tend to adjust values, that is, the prices of material things whether produced on the spot or brought from a distance, rents of all kinds, interest on capital and the earnings of all forms of work, including that of undertaking and managing business enterprises ? How does it affect the course of foreign trade ? Subject to what limitations is the price of anything a measure of its real utility ? What increase of happiness is priind facie likely to result from a given increase in the wealth of any class of society ? How far is the industrial efficiency of any class impaired by the insufficiency of its income? How far would an increase of the income of any class, if once effected, be likely to sustain itself through its effects in increasing their efficiency and earning power ?
How far does, as a matter of fact, the influence of economic freedom reach (or how far has it reached at any particular time) in any place, in any rank of society, or in any par- ticular branch of industry ? What other influences are most powerful there ; and how is the action of all these influences combined ? In particular, how far does economic freedom tend of its own action to build up combinations and monopolies, and what are their effects? How are the various classes of society likely to be affected by its action in the long run; what will be the intermediate effects while its ultimate results are being worked out ; and, account being taken of the time over which they will spread, what is the relative importance
SUMMARY AND CONCLUSION. 51
of these two classes of ultimate and intermediate effects? What will be the incidence of any system of taxes ? What burdens will it impose on the community, and what revenue will it afford to the State ?
^vThe above are the main questions with which economic science has to deal directly, and with reference to which its maiifwork of collecting facts, of analysing them and reasoning about them should be arranged.\ This work supplies part of the material which conscience and common sense have to tujrn to account in solving practical problems.
§ 3. The practical issues which, though lying for the greater part outside the range of economic science, yet supply a chief motive in the background to the work of Practical the economist, vary from time to time, and from issues lying place to place, even more than do the economic the range of facts and conditions which form the material of ^*=°"°"^**^^- his studies. The following problems seem to be of special urgency now in our own country : —
How should we act so as to increase the good and diminish the evil influences of economic freedom, both in its ultimate j:esults and in the course of its progress? If the first are good and the latter evil, but those who suffer the evil, do not reap the good ; how far is it right that they should suffer for the benefit of others ?
Taking it for granted that a more equal distribution of ■ wealth is to be desired, how far would this justify changes in pthe institutions of property, or limitations of free enterprise] 5ven when they would be likely to diminish the aggregate of J
realth? In other words, how far should an increase in the
icome of the poorer classes and a diminution of their work aimed at, even if it involved some lessening of national
laterial wealth? How far could this be done without in- justice, and without slackening the energies of the leaders )f progress? How ought the burdens of taxation to be
listributed among the different classes of society ?
62 BOOK I. CH. VII. § 3.
Ought we to rest content with the existing forms of division of labour ? Is it necessary that large numbers of the people should be exclusively occupied with work that has no elevating character? Is it possible to educate gradually among the great mass of workers a new capacity for the higher kinds of work ; and in particular for undertaking co-operatively the management of the businesses in which they are themselves employed 1
i What are the proper relations of individual and collective I action in a stage of civilization such as ours 1 How far ought voluntary association in its various forms, old and new, to be left to supply collective action for those purposes for which such action has special advantages? What business affairs should be undertaken by society itself acting through its Government, imperial or local? 'Have we, for instance, carried as far as we should the plan oi collective ownership and use of open spaces,, of works of art, of the means of instruction and amusement, as well as of those material re- quisites of a civilized life, the supply of whi(^h requires united action, such as gas and water, and railways ? -
When Government does not itself directly intervene, how far should it allow individuals and corporations to conduct their own affairs as they please ? How far should it regulate the management of railways and other concerns which are to some extent in a position of monopoly, and again of land and other things the quantity of which cannot be increased by man ? Is it necessary to retain in their full force all the existing rights of property ; or have the original necessities for which they were meant to provide, in some measure passed away ? ^ Are the prevailing methods of using wealth entirely I justifiable? What scope is there for the moral pressure of social opinion in constraining and directing individual action in those economic relations in which the rigidity and violence
SUMMARY AND CONCLUSION. 53
of Goveriiuieiit interference would be likely to do more harm than good ?
In what respect do the duties of one nation to another . in economic matters differ from those of members of the same nation to one another ? y
Economics is thus taken to mean a study of the economic aspects and conditions of man's political, social and private life ; but more especially of his social life. ( The aims of the study are to gain knowledge for its own sake, ^^ ^ ^. and to obtain guidance in the practical conduct nance of social of life, and especially of social life/} The need modern eco- for such guidance was never so urgent as now ; a no"i>c studies, later generation may have more abundant leisure than we for researches that throw light on obscure points in abstract speculation, or in the history of past times, but do not afford immediate aid in present difficulties.
But though thus largely directed by practical needs, economics avoids as far as possible the discussion of those exigencies of party organization, and those diplomacies of home and foreign politics of which the statesman is bound to take account in deciding what measures that he can propose will bring him nearest to the end that he desires to secure for his country. It aims indeed at helping him to determine not only what that end should be, but also what are the best methods of a broad policy devoted to that end. But it shuns many details of political tactics, which the practical man can- not ignore : and it is therefore a Science, Pure and Applied, j rather than a Science and an Art. And it is better described as Social Economics, or as Economics simply, than as Political | Economy \
1 This chapter is reproduced with but little change, except the omission of a summary of Book I., from rrincqdes I. vii.
BOOK 11
SOME FUNDAMENTAL NOTIONS. CHAPTER I.
INTRODUCTORY.
§ 1. Since Economics is the study of man's actions in the Difficulties of Ordinary affairs of life, it needs to borrow more definition in than other Sciences do from the experiences and suggestions of those who are not professed students. Its reasonings must therefore be expressed in language that is intelligible to the general public; it must endeavour to conform itself to the familiar terms of every- day life, and, so far as possible, to use them as they are com- monly used.
But unfortunately in common use almost every word has many shades of meaning, and therefore needs to be interpreted by the context: this difficulty, however, is not a very great one in practice; provided only it is faced boldly, and ex- planatory clauses are introduced freely whenever they are wanted.
We must then analyse carefully the real characteristics of the various things with which we have to deal; and we shall thus generally find that there is some use of each term which has distinctly greater claims than any other to be called its leading use, on the ground that it represents a distinction that is more important for the purposes of modern
INTRODUCTORY. 55
science than any other. This may be laid down as the meaning to be given to the term whenever nothing to the contrary is stated or implied by the context. When the term is wanted to be used in any other sense, whether broader or narrower, the change must be indicated; and a formal interpretation clause must be supplied if there is the slightest danger of a misunderstanding ^.
1 As Mill says: — "The ends of scientific classification are best answered when the objects are formed into groups respecting which a greater number of general propositions can be made, and those propositions more important, than those which could be made respecting any other groups into which the same things could be distributed." But we meet at starting with the difficulty that those propositions which are the most important in one stage of economic development, are not unhkely to be among the least important in another, if indeed they apply at all. Darwin points out that those parts of the structure which determine the habits of life and the general place of each being in the economy of nature, are as a rule not those which throw most light on its origin, but those which throw least. And in like manner those properties of an economic institution which play the most important part in fitting it for the work which it has to do now, are for that very reason likely to be in a great measure of recent growth.
But on the other hand we must keep constantly in mind the history of the terms which we use. For, to begin with, this history is important for its own sake ; and because it throws side lights on the history of the economic development of society. And further, even if the sole purpose of our study of economics were to obtain knowledge that would guide us in the attainment of immediate practical ends, we should yet be bound to keep our use of terms as much as possible in harmony with the traditions of the past ; in order that we might be quick to perceive the indirect hmts and the subtle and subdued warnings, which the experiences of our ancestors offer for our instruction.
The divergence from an ideally perfect system of classification caused by the special needs and difiiculties of economics, is discussed in Princii)les II. i.
\
CHAPTER II.
§ 1. In the absence of any term in common use to re-
Goods.
present all desirable things, or things that satisfy human wants, we may adopt the term Goods for tlmt purpose. ■ -
yAlljA^ealth consists of things that satisfy wautfij-jdijcefitly or indirectly. All wealth therefore consists of desirable things ; but not all desirable things are reckoned as wealth. The affection of friends, for instance, is a very iniportsint--^ element of well-being, but it is not ever reckoned as wealth, except by a poetic licence. ■ Let us then begin by classifying desirable things or Goods, and then consider which of them should be accounted as elements of wealth.
Desirable things are Material, or Personal and Immaterial. Classification MATERIAL Goods consist of useful material things, of goods. aj^(j 'ofail rights to hold, or use, or derive benefits
from material things, or to receive them at a future time\
A man's PERSOX^^Goods fall into two classes. Under the first come the benefits he derives from other persons, such as labour dues and personal services of all kinds, property in slaves, the organization of his business, and his business connection generally. The second class consists of his own qugilities and faculties for action and for enjoyment.
1 Thus they uiclude the physical gifts of nature, land and water, air and climate; the products of agriculture, mining, fishing, and manufacture; buildings, machinery, and implements ; mortgages and other bonds ; shares in public and private companies, all kinds of monopolies, patent-rights, copy- rights ; also rights of way and other rights of usage. Lastly, opportunities of trarel, access to good scenery, museums, etc. ought, strictly speaking, to be reckoned under this head.
WEALTH. 57
The former of these two classes, together with all Material goods, may be described as external, and the tatter as
INTERNAL gOOds. ~
Again, Goods may be transferable or non-transferable ^
Those Goods are free, which are not appropriated and are afforded by Nature without requiring the effort of man^.
Exchangeable Goods are all those transferable Goods which are limited in quantity and not free. This distinction is however not very important practically, because there are not many Goods which are transferable, but^eing freCj^JieiY© na^g^cteigajKalije.
"When a man's wealth is spoken of simply, and without any interpretation clause in the context, it is to be taken to consist of two classes of Goods.
In the first class are those Material Goods to which he has (by Law or Custom) private rights oFproperty, and which are therefore transferable and exchangeable^.
1 Among the latter are to be classed tlie whole of a person's (Internal Goods) i.e. his qualities and faculties for action and enjoyment; also such part of his business connection as depends on personal ti'ust in him, and cannot be transferred as part of his vendible good will ; also the advantages of climate, light, air, and his privileges of citizenship and rights and opportunities of making use of public property.
2 The land in its original state was a free gift of nature. But in settled coun- tries it is not a free good from the point of view of the individual. Wood is still free in some Brazilian forests : the fish of the sea are free generally : but some sea fisheries are jealously guarded for the exclusive use of members of a certain nation, and may be classed as national property. Oyster beds that have been planted by man are not free in any sense ; those that have grown naturally are free in every sense if they are not appropriated ; if they are private property they are still free gifts from the point of view of the nation, but since the nation has allowed its rights in them to become vested in indi- viduals they are not free from the point of view of the individual, and the same is true of private rights of fishing in many rivers. But the wheat grown on free land and the fish caught in free fisheries are not free : for they have been acquired by labour.
3 These include not only such things as land and houses, furniture and machineiy, and other material things which may be in his single private ownership, but also any shares in public companies, debenture bonds, mort- gages and other obligations which he may hold from others to pay goods to him. On the other hand, the debts which he owes to others may be regarded
58 BOOK II. CH. II. §§ 2, 3.
In the second class are those of his Imiiia4^eiial Goods which are External to him, and serve directly as the means of enabling him to acquire Material Goods ^; such, for instance, jas the good will of his business or professional practice.
This use of the tenn Wealth is in harmony with the usage of ordinary life: and, at the same time, it includes those Goods, and only those, which come clearly within the scope of economic science, as defined in Book i. For it includes all those things. External to a man, which (i) belong to him, and do not belong equally to his neighbours, and therefore are distinctly his; and (ii) which are directly capable of a money measure, — a measure that represents on the one side the efforts and sacrifices by which they have been called into existence, and, on the other, the wants which they satisfy.
§ 2. A broader view of wealth has indeed to be taken for some purposes; but then recourse must be had to a special interpretation clause, to prevent confusion. Thus, for instance, the carpenter's skill is as direct a means of enabling him to satisfy other people's material wants, and therefore indirectly his own, as are the tools in his work basket ; and therefore it is convenient to have a term which will include it as part of wealth in a broader use. Pursuing the lines indicated by Adam Smith, and followed by most continental Personal economists, we may define Personal Wealth
^^^ * ■ so as to include all those energies, faculties, and
habits which directly contribute to making people industrially
as negative wealth ; and they must be subtracted from his Gross possessions before his true Net wealth can be found. It is perhaps hardly necessary to say specially that services and other Goods, which pass out of existence in the same instant that they come into it, do not contribute to the stock of wealth, and may therefore be left out of our account.
1 But it excludes all his own personal qualities and faculties, even those which enable him to earn his living. They were indeed included by Adam Smith in Personal capital ; and there are some purposes for which it is best to regard them as part of Wealth. But whenever wealth is used in this broad sense, special notice of the fact should be taken in the oontext.
WEALTH. 59
efficient ; together with those business connections and associa- tions of any kind, which we have already reckoned as part of wealth in the narrower use of the term. Industrial faculties have a claim to be regarded as economic, not only on account of their importance as factors in the production of wealth, but because their value is as a rule capable of indirect measurement.
But confusion would be caused by using the term "wealth" simply when we desire to include a person's indus- trial qualities. For this purpose it will be best to use the more explicit phrase "material and personal wealth." "Wealth" simply should always mean external wealth only.
§ 3. But we still have to take account of those Material Goods which are common to him with his neighbours; and which therefore it would be a needless trouble to mention when comparing his wealth with theirs; though they may be important for some purposes, and especially for comparisons between the economic conditions of distant places or distant times \
Many of these things are CoiA^Q,Tj.yiE^GooT)S-, i.e. goods w:hich are not in private ownersmp. And this collective brings us to consider wealth from the Social, as Goods, opposed to the Individual point of view.
1 These Goods consist of the benefits which he derives from living in a certain place at a certain time, and being a member of a certain state or com- munity ; they include civil and military security, and the right and opportunity to make use of public property and institutions of all kinds, such as roads, gaslight, etc., and rights to justice or to a free education. The townsman and the countryman have each of them for nothing many advantages which the other either cannot get at all, or can get only at great expense. Other things being equal, one person has more real wealth in its broadest sense than another, if the place in which the former lives has a better climate, better roads, better water, more wholesome drainage, and cheaper and better news- papers, and places of amusement and instruction. House-room, food and clothing, which would bo insufficient in a cold chmate, may be abundant in a warm climate: on the other hand, that warmth which lessens men's physical needs, and makes them rich with but a slight provision of material wealth, makes them poor in the energy that procures wealth.
60 BOOK II. CH. JI. § 3.
Let us then look at those elements of the wealth of a nation which are commonly ignored when estimating the wealth of the individuals composing it. The most obvious forms of such wealth are public material property of all kinds, such as roads and canals, buildings and parks, gasworks and waterworks; though unfortunately many of them have been secured not by public savings, but by public borrowings, and there is the heavy "negative" wealth of a large debt to be set against them.
But the Thames has added more to the wealth of England than all its canals, and perhaps even than all its railroads. And though the Thames is a free gift of nature, except in so far as its navigation has been improved, while the canal is the work of man, we ought for many purposes to reckon the Thames a part of England's wealth \
1 We should also, in accord with German economists, lay stress on the non-material elements of national wealth. Scientific knowledge indeed, wherever discovered, soon becomes the property of the whole civilized world, and may be called cosmopolitan rather than specially national wealth. The same is true of mechanical inventions and of many other improvements in the arts of production; and it is true of music. But those kinds of literature which lose their force by translation, may be regarded as in a special sense the wealth of those nations in whose language they are written. And the organi- zation of a free and well-ordered State is an important element of national wealth.
But National wealth includes the Individual as well as the Collective pro- perty of its members. And in estimating the aggregate sum of their individual wealth, we may save some trouble by omitting all debts and other obligations due to one member of a nation from another. For instance, so far as the English national debt and the bonds of an English railway are owned within the nation, we can adopt the simple plan of counting the railway itself as part of the national wealth, and neglecting railway and Government bonds alto- gether. But we still have to deduct for those bonds etc. issued by the EngUsh Government or by private Englishmen, and held by foreigners ; and to add for those foreign bonds etc. held by Englishmen.
There are many things which lie across the lines of division indicated in the text, partly on one side, and partly on the other. Some of these cases are discussed in Pnncixtles II. ii. with reference especially to the distinctions between Transferable and Non-transferable Goods; to personal advantages that are and are not to be classed as Personal Wealth ; and to the relations in which the privileges, which individuals derive from their credit and business connections, stand to National Wealth.
CHAPTER III.
PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES.
§ 1. Man Qannot create material tilings. In the mental and moral world indeed he may produce new „
•^ ^ Man can pro-
ideas ; but when he is said to produce material duce only things, he really only produces utilities ; or in "*^ ities^,.- other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants. All that he can do in the physical world is either to re-adjust matter so as to make it more useful, as when he makes a log of wood into a table ; or to put it in the way of being made more useful by nature, as when he puts seed where the forces of nature will make it burst out into life\
Consumption may be regarded as negative pj^oductigii. Just as man can produce only utilities, so he can ^^^ ^^^ ^^^_ consume nothing more. He can produce ser- sume only vices and other immaterial products, and he can consume them. But as his production of material products is
^ It is sometimes said that traders do not produce : that while the cabinet- maker produces furniture, the furniture-dealer merely sells what is already- produced. But there is no scientific foundation for this distinction. They both produce utihties, and neither of them can do more : the furniture-dealer moves and re-arranges matters so as to make it more serviceable than it was before, and the carpenter does nothing more. The sailor or the railway-man who carries coal above ground produces it, just as much as the miner who carries it underground ; the dealer in fish helps to move on fish from where it is of comparatively little use to where it is of greater use, and the fisherman does no more. It is true that if there are more traders than are necessary there is waste. But there is also waste if there are two men to a plough which can be well worked by one man; in both cases all those who are at work, produce, though they may produce but little.
62 BOOK II. CH. III. §§ 1 — 3.
Ireally nothing more than a rearrangement of matter which I gives it new utilities; so his consumption of them is nothing I more than a disarrangement of matter, which lessens or I destroys its utilities. Often indeed when he is said to con- sume things, he does nothing more than to hold them for his use, while, as Senior says, they "are destroyed by those numerous gradual agents which we call collectively time." As the "producer" of wheat is he who puts seed where Nature will make it grow, so the "consumer" of pictures, of curtains and even of a house or a yacht does little to wear them out himself; but he holds them and uses them while time wastes them.
And here we may note that Goods may be divided into Consumption Goods \ which satisfy wants directly,
Consumption - ' "^ *'
and production such as food, clothes, etc. ; and Prodttctt on Goods ^°° ^* which satisfy wants, not directly, but indirectly
by contributing towards the production of consumption goods. The latter are sometimes called Intermediate Goods.
§ 2. All labour is directed towards producing some effect.
For though some exertions are taken merely for
labour is in their own sake, as when a game is played for
sonie sense amuscmeut, thcv are not counted as labour. \ We
productive. ' ./ . V .
may define ljU^our as any exertion of mind
or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the workX And if we had to make a fresh start it would be best to regard all labour as productive except that which failed to promote the aim towards which it was directed, and so produced no utility. But both business men and economists have used the word Productive in narrower senses, without however a-ny general agreement as to details. And on the whole it seems best to decide that, when used alone it will
1 The line of division between the two classes is however vague, is drawn in different places by different writers, and can seldom be used safely without special explanation. For instance wheat is sometimes placed in the first class as food, sometimes in the second as raw material of food.
CONSUMPTION. LABOUR. 63
Tiieaii Productive of the oneans of jrroduction, and of lasting sources of enjoyment^. And if ever we want to use it in a different sense we must say so : for instance we may speak of labour as productive of necessaries, of iriatericd wealth, <&c.
Productive consumption is commonly defined as the use of wealth in the production of further wealth. But Productive this definition is ambiijuous. For it is sometimes consumption, taken to include everything that is actually consumed by people engaged in productive work, even though it may not conduce at all to their efiiciency as workers. But Productive consuTnption, strictly so called, must be taken to include only such consumption by productive workers as is necessary for their work; under which head may be reckoned the necessary consumption of children, who will hereafter be productive workers, as well as that of adults during sickness.
§ 3. This brings us to consider the term Necessaries.\ It is common to divide wealth intovNecessaries, Com|prts / and Lij^fjir^'ps ; the first class including all things required to meet wants which jnust be satisfied, while the latter consist of things that meet wants of a less urgent character. But here again there is a troublesome ambiguity. When we say that a want must be satisfied, what are the consequences which we have in view if it is not satisfied? Do they include death? Or do they extend only to the loss of strength and vigour? In other words, are Necessaries the things which are necessary for life, or those which are necessary for efficiency?
The older use of the term Necessaries was limited to those
1 No doubt the dividing line between permanent and ephemeral sources of enjoyment cannot be drawn rigidly. But this is a difficulty which exists in the nature of things and cannot be evaded by any device of words. We can speak of an increase of taU men relatively to short, without deciding whether all those above five feet nine inches are to be classed as tall, or only those above five feet ten. And we can speak of the increase of productive labour at the expense of unproductive without fixing on any rigid, and therefore arbitrary line of division between them. If such an artificial line is required for any particular purpose, it must he drawn explicitly for the occasion. But in actual fact such occasions seldom or never occur.
64 BOOK II. CH. III. § 3.
things which were sufficient to enable the labourers, taken one
with another, to support themselves and their
for exlstemTe families. But we now recognize that a distinction
andforeffi- jniust be made between the necessaries for effi- ciency. / . . p -"^ ^-7'- ■'" -^ aency and the necessaries for existence ; and that
there is for each rank of industry, at any time and place, a more or less clearly defined income which is necessary for merely sustaining its members; while there is another and larger income which is necessary for keeping it in full efficiency.
Thus in the South of England population has increased during the present century at a fair rate, allowance being made for migration. But the efficiency of labour, which in earlier times was as high as that in the North of England, has sunk relatively to the North; so that the low-waged labour of the South is often dearer than the more highly paid labour of the North. This indicates that the labourers in the South have had the bare necessaries for existence and the increase of numbers, but they have not had the necessaries for efficiency.
It may be true that the wages of any industrial class might have sufficed to maintain a higher efficiency, if they had been spent with perfect wisdom. But every estimate of necessaries must be relative to a given place and time; and unless there be a special interpretation clause to the contrary, it may be assumed that the wages will be spent v/ith just that amount of wisdom, forethought, and unselfishness, which prevails in fact among the industrial class under discussion. With this understanding we may say that the income of any class in the ranks of industry is below its necessary level, when any increase in their income would in the course of time produce a more than proportionate increase in their efficiency. Consumption may be economized by a change of habits ; but any stinting of necessaries is wasteful.
The necessaries for the efficiency of an ordinary agricul-
NECESSARIES. 65
tural or of an unskilled town labourer and his family, in England in this generation, may be said to consist of a well- drained dwelling with several rooms, warm clothing, with some changes of under-clothing, pure water, a plentiful supply of cereal food, with a moderate allowance of meat and milk, and a little tea, tfec, some education and some recreation, and lastly, sufficient freedom for his wife from other work to enable her to perform properly her maternal and her household duties. If in any district unskilled labour is deprived of any of these things, its efficiency will suffer in the same way as that of a horse that is not properly tended, or a steam-engine that has an inadequate supply of coals. All consumption up to this limit is strictly productive consumption: any stinting of this consumption is not economical, but wasteful.
In addition, perhaps, some consumption of alcohol and tobaccg, and some indulgence in fashioimWe dress conventional are in many places so habitual, that they may be necessaries, said to be conventionally necessary, since in order to obtain them, the average man and woma-n will sacrifice some things which are necessary for efficiency. ; Their wages are therefore less than are practically necessary for efficiency, unless they provide not only for what is strictly necessary consumption, but include also a certain amount of conventional necessaries'.
1 The consumption of Conventional Necessaries by productive workers is commonly classed as productive consumption ; but strictly speaking it ought not to be ; and in critical passages a special interpretation clause should be added to say whether or not they are included.
Principles II. in. contains some notes on the history of the terms defined in this chapter, and discusses some difficult questions connected with the scope of necessaries.
M.
CHAPTER IV.
CAPITAL. INCOME.
§ 1. We have already divided wealth into that which satisfies wants diii^tly, and that which satisfies them in- directly by providing the means of producing further wealth. "We have now to consider a distinction of a somewhat similar character between the wealth that is and that which is not capital. '^^^ —
tJnfortunately the term Capital has many uses both in the language of the market-place and in the writings of economists. There is no other part of economics in which the temptation is so strong to invent a completely new set of technical terms; each of which should have a precise and fixed meaning, while between them they should cover all the various significations which are given to the one term capital in the language of the market-place. But this would throw the science out of touch with real life; and academic exact- ness of logical form would be obtained at the cost of grave substantial injury. We must therefore take the ordinary usages of the term as the foundation of our account; and add such general explanations, and even in some cases such special interpretation clauses, as are required to give to our use of the term some measure of clearness and precision. 'VAdam Smith said that a person's capital is that part of Capital yields his stock from which he expects to derive an income. income. Its most conspicuous elements are such
things as the factory and the business plant of a manufacturer; that is, his machinery, his raw material, any food, clothing, and house-room tliat he may hoIH for the use of his employes,
CAPITAL. INCOME. 67
and the goodwill of his business. These are things from which their owner expects to derive an income in the special form of money ; and this may be called his Trade
"^ ' . '' - - - - Trade capital.
Capital. But or course we must add to the things in his possession those to which he has a right and from which he is drawing income : including loans which he has made on mortgage or in other ways, and all the command over capital which he may hold under the complex forms of the modern "money-market." On the other hand debts owed by him must be deducted from his capital.
This may be taken as the standard use of Capital for the purposes of business life. But a broader use is needed when we come to regard capital from the point of view, not of the individual, but of Society as a whole ; or, in other words, when we seek for a definition of capital in general, or Social Capital ^
1 For this purpose the ordinary business use of the term Capital is un- suited. For instance it compels us to regard as capital the yachts, but not the carriage, belonging to a yacht builder. If therefore he had been hiring a carriage by the year, and instead of continuing to do so, sold a yacht to a carriage builder ^vho had been hiring it, and bought a carriage for his own use ; the result would be that the total stock of capital in the country would be diminished by a yacht and a carriage. And this, though nothing had been destroyed; and though there remained the same products of saving, them- selves productive of as great benefits to the individuals concerned and to the community as before, and probably even of greater benefits. Nor can we avail ourselves here of the notion that capital is distinguished from other forms of wealth by its superior power of giving employment to labour. For fact, when yachts and carriages are in the hands of dealers and are thus )unted as capital, less employment is given to labour by a given amount of yachting or carriage driving than when the yachts and carriages are in private lands and are not counted as capital.
It must however be admitted that some economists have given little weight such considerations as these, and have shown a tendency towards this larrow use of Capital even in discussing broad problems. This has especially sen the case with those writers who have given their chief attention to the organized conflicts between employers and employed. For a manufacturer's leaUngs with those who work in his factory are often different in substance id in tone from those with his private coachman or gardener. This point las been emphasized by Karl Marx and his followers, who have avowedly le the definition of capital turn on it.
5—2
68 BOOK II. CH. IV. §§ 2, 8.
§ 2. The chief concern of the economist with capital in Social ca itai g®^®^^! ^r sociaj capital, is when he is considering is wealth the way in which the three agents of production,
income^as ^ l^l^ (that is, natural agents), labour and capital, commonly contribute to producing the national income (or the National Dividend, as it will be called later on); and the way in which this is distributed between the three agents.
Now there is a tacit, but thorough agreement among all writers on economics, to treat this income in its broad out- lines only, and not to trouble about petty details. So far as scientific considerations go, we should be quite at liberty to count as part of that income all the income of benefit that everyone derives from the use of his own clothes, furniture, &c. If we did that, we should need to regard everyone to this extent as a capitalist; and to credit him under this head with the share of the total national income which corresponds to the use value of his own goods. But in ordinary life no one ever thinks of doing this.
The ordinary practice of life, as exemplified in the rules of the income tax commissioners, is governed by the same con- siderations as that of economists in this matter. For the purposes of both, it is expedient to count in everything which is commonly regarded as a means of income and treated in a business fashion ; even though it may happen, like a dwelling- house inhabited by its owner, to yield its income of comfort directly : and this partly because of its intrinsic importance, and partly because the real income accruing from it can easily be separated ofi" and estimated.
In all discussions of Distribution therefore, in the present treatise, capital (regarded from the social point of view) will be taken to consist of those kinds of wealth, other than the free gifts of nature, which yield income that is generally reckoned as such in common discourse : together with similar things in public ownership, such as government factories.
CAPITAL. INCOME. 69
Thus it will include all things held for trade purposes, whether machinery, raw material or finished goods ; theatres and hotels, home farms and houses: but not furniture or clothes owned by those who use them. For the former are and the latter are not commonly regarded as yielding income by the world at large, as is shown by the practice of the income tax commissioners.
It will be found that nearly every broad proposition which is commonly made as to the relations between national or social well-being and national or social capital is true of capital thus defined.
There remain some minor points to be noticed firstly in relation to Capital, and secondly in relation to Income.
§ 3. We may follow Mill in distinguishing circulating cAPTjAT- "which fulfils the whole of its office in _. , "T"
^--*'****^ _ ... Circulating
the production in which it is engaged, by a and Fixed single use," from fixed capital "which exists *^^p**^ • in a durable shape, and the return to which is spread over a period of corresponding duration."
Sometimes again we have to distinguish certain kinds of capital as specialized because having been de- specialized signed for use in one trade they cannot easily be capital, diverted to another. / Consumption capital consists of Goods in a form to \
(satisfy wants directly; that is, Goods which consumption ' afford a direct sustenance to the workers, such as capital. j
food, clothes, house-room, &c. i
j^uxiLiARY CAPWrL' is SO Called because it consists of all thejGoods Jhat aid {labour /in production. Under Auxiliary this head come tools, machines, factories, rail- capital, ways, docks, ships, &g.; and raw materials of all kinds \
1 Mill and others have used Fixed capital sometimes in the sense that we
have retained for it, sometimes in the senses that we have given to Specialized
■L^ and to Auxiliary capital. But there is much Fixed capital which is not Spe-
70 BOOK II. CH. IV. §§ 3, 4.
We have already defined Personal wealth to consist firstly Personal ^^ those energies, faculties and habits which capital. directly contribute to making people industrially
efiicient, and secondly of their business connections and associations of every kind. All these are productive; and therefore if they are to be recko^ied as wealth at all, they are also to be reckoned as capital, '^^^hus Personal wealth and Personal capital are convertible ;\and it seems best to follow here the same course as in the case of wealth, and for the same reasons. That is, it is best to assume that the term "capital" when taken alone includes none but external goods; but yet to raise no objection to an occasional broad use of the term in which it is explicitly stated to include Personal capitaP.
many different trades : while materials of manufacture and some other kinds of Circulating capital are Specialized. Again much Fixed capital is also Con- sumption capital, as for instance workmen's cottages.
1 The difficulties connected with the definition of Capital are not suitable for full discussion in the present treatise, for which reference must be made to the corresponding chapter of the Principles (Ed. in.). But a few remarks on the subject here may be of interest to some readers.
The chief demand for capital in general arises from its productiveness, from the services which it renders, for instance, in enabling wool to be spun and woven more easily than by unaided hand, or in causing water to flow freely wherever it is wanted instead of being carried laboriously in pails ; (though there are other services rendered by it, as for instance when it is lent to a spendthrift, which cannot easily be brought under this head). And on the other hand the supply of capital is controlled by the fact that in order to accumulate it, men must Q.ct prospectively: they must "wait" and "save", they must sacrifice the present to the future. And, as we shall see, the exchange value of the services rendered by capital is governed in the long run by the pressure of the eagerness of demand against the sluggishness of supply. These two qualities of productiveness and prospectiveness belong indeed to some extent to every form of wealth ; but they have been made prominent, though in un- equal degrees, in nearly all definitions of capital.
Some writers have tried to take their stand definitely on the notion of prospectiveness, and to regard capital as a store of things the result of human efforts and sacrifices, devoted mainly to securing benefits in the future rather than in the present ; but they have found themselves on an inclined plane, and have not reached a stable resting-place till they have included all accumulated wealth as capital.
In order to avoid this difficulty, most of the attempts to define capital from
CAPITAL. INCOME. 71
§ 4. To pass to Income. If a person is engaged in business, he is sure to have to incur certain outgoings for raw material,
a purely economic point of view, whether in England or other countries, have turned on its productivity : and have regarded social capital as a means for acquisition [Enoerhshapital), or as a supply of the requisites of production {Productions-mittel-Vorrath). But this general notion has been treated in different ways.
According to the older English traditions capital consists of those things which aid or support labour in production. But, with some inconsistency, this has often been taken to include all the things which employers directly or in- directly provide in payment for the work of their employees — Wage capital or Remuneratory capital, as it is called; but yet not to include any of the things needed for their own support, or that of architects, engineers, and other professional men. To complete this notion of capital we should include the necessaries for efficiency of all classes of workers; and ought, strictly speaking, to exclude the luxuries of the manual labour classes as well as of other workers. But if it had been pushed to this logical conclusion, it would not have played the prominent part which it did in the discussion of the rela- tions of employers and employed in the first half of the century. [It may be noticed, in passing, that a desire to keep in close touch with English traditions caused the present writer to seek to develop the notion of capital in this direc- tion, in earlier editions. But further consideration seems to show that, for the reasons stated in the text, the time has come for a bolder departure.]
In other countries however, and especially in Germany and Austria, there has been some tendency to confine capital (from the social point of view) to that which English writers have called Auxiliary capital, and which is now sometimes called Instrumental capital. It is argued that in order to keep clear the contrast between production and consumption, nothing which enters directly into consumption should be regarded as a means to production. But there appears no good reason why a thing should not be regarded in a twofold capacity, if it be found convenient to do so. It is further contended that those things which render their services to man not directly, but through the part which they play in preparing other things for his use, form a compact class ; because their value is derived from that of the things which they help to produce. There is much to be said for having a name for this group. But there is room for doubt whether capital is a good name for it ; and also for doubt whether the group is as compact as it appears at first sight.
These divergencies are explained by the fact that the notion of social capital enters into many veins of economic thought ; and whatever definition a writer takes at starting he finds that the various elements of which capital is composed differ more or less from one another in the way in which they enter into the different problems with which he has successively to deal, and he is compelled to supplement his standard definition by an explanation of the bearing of each several element of capital on the point at issue. Thus the divergence at starting turns out to be a less evil than it seemed. For ulti- mately there is a general convergence; and the reader is brought to very much the same conclusion by whatever route he travels, though it may some-
72 BOOK II. CH. IV. §§ 4, 5.
the hire of labour &c. And, in that case, his true or Net
Income is found by deductina^ from his across in- Net Income. ; . -^ , , , .
come the outgoings that belong to its production.
Now anything which a person does for which he is paid directly or indirectly in money, helps to swell his money income; while no services that hie performs for himself are reckoned as adding to his nominal income, though they may be a very important part of his total real income if they are of a kind which people commonly pay for having done for them.\. Thus a woman who makes her own clothes or a man who digs in his own garden or repairs his own house, is earning income just as would the dressmaker, gardener or carpenter who might be hired to do the workX
It would be a great convenience if there were two words available: one to represent a person's total income and an- other his money income, i.e. that part of his total income which comes to him in the form of money. For scientific pur- poses it would be best that the word iiijpqme when occurring alone should always mean total real income.X But as this plan is inconsistent with general usage we must, whenever there is any danger of misunderstanding, say distinctly whether the term is to be taken in its narrower or its broader use.
§ 5. In this connection we may introduce a term of which Netadvan- we shall have to make frequent use hereafter, tages. rJ^^Q need for it arises from the fact that every
times require a little trouble to discern the unity in substance, underlying the differences in the words, which are used by different schools of economists to express their doctrines.
For instance, whatever definition of capital be taken, it will be found to be true that a general increase of capital augments the demand for labour and raises wages : and, whatever definition be taken, it is not true that all kinds of capital act with equal force in this direction, or that it is possible to say how great an effect any given increase in the total amount of capital will have in raising wages, without specially inquiring as to the particular form which the increase has taken. This inquiry is the really important part of the work : it has to be made, and it is made by all careful writers in very much the same manner, and it comes to the same result, whatever be the definition of capital with which we have started.
I
CAPITAL. INCOME. 73
occupation involves other disadvantages besides the fatigue of the work required in it, and every occupation offers other advantages besides the receipt of money wages. \['be true reward which an occupation offers to labour has to be calcu- lated by deducting the money value of all its disadvantages from that of all its advantages ; and we may describe this true reward as the Net Advantages of the occupation.\
The income derived from wealth has many forms. It in- cludes all the various benefits which a person derives from the ownership of wealth whether he uses it as capital or not. Thus it includes the benefits which he gets from the use of his own piano, equally with those which a piano dealer would win by letting out a piano on hire. And it includes, as a special case, the money income which is derived from capital. This income is most easily measured when it takes the form of a payment made by a borrower for interest of - the use of a loan for, say, a year; it is then capital. ,
expressed as the ratio which that payment bears to the loan, *' and is called interest.
This is one of a group of notions, which we shall need to study carefully hereafter, but of which provisional definitions may conveniently be introduced here.
When a man is engaged in business, his profits for the year are the excess of his receipts from his busi- ness during the year over his outlay for his ' business ; the difference between the value of his stock and plant at the end and at the beginning of the year being taken as part of his receipts or as part of his outlay, according 'as there has been an increase or decrease of value. What re- . mains of his profits after deducting interest on Earnings of I his capital at the current rate may be called his Management, *
EARNINGS OF UNDERTAKING Or MANAGEMENT. T
■'****''rhe income derived from the ownership of land and other free gifts of nature is commonly called rent; and the term is sometimes stretched, so as to
74 BOOK II. CH. IV. §§ 5, 6.
include the income derived from houses and other thino:s the supply of which is limited and cannot quickly be increased. § 6. Social Income may be estimated by adding together the incomes of the individuals in the society in
Social income. ,. i ,i ., i
question, whether it be a nation or any other larger or smaller group of persons. B\d to reckon it directly is for most purposes simplest and best, n^ very thing that is produced in the course of a year, every service rendered, every fresh utility brought about is a part of the national income7*N;<.
Thus it includes the benefit derived from the advice of a physician, the pleasure got from hearing a professional singer, and the enjoyment of all other services which one person may be hired to perform for another. It includes the services rendered not only by the omnibus driver, but also by the coachman who drives a private carriage. It includes the services of the domestic servant who makes or mends or cleans a carpet or a dress, as well as the results of the work of the upholsterer, the milliner, and the dyer*.
1 We must however be careful not to count the same thing twice. If we have counted a carpet at its full value, we have already counted the values of the yarn and the labour that were used in making it ; and these must not be counted again. But if the carpet is cleaned by domestic servants or at steam scouring works, the value of the labour spent in cleaning it must be counted in separately; for otherwise the results of this labour would be altogether omitted from the inventory of those newly-produced commodities and conve- niences which constitute the real income of the country.
Again, suppose a landowner with an annual income of £10,000 hires a private secretary at a salary of £500, who hires a servant at Avages of £50. It may seem that if the incomes of all these three persons are coimted in as part of the net income of the country, some of it will be counted twice over, and some three times. But this is not the case. The landlord transfers to his secretary, in return for his assistance, part of the purchasing power derived from the produce of land ; and the secretary again transfers part of this to his servant in return for his assistance. The farm produce the value of which goes as rent to the landlord, the assistance which the landlord derives from the work of the secretary, and that which the secretary derives from the work of the servant are independent parts of the real net income of the country; and therefore the £10,000 and the £500 and the £50 which are their money measures, must aU be counted in when we are estimating the income of the country. But if the landlord makes an allowance of £500 a year to his son, that must not be counted as an independent income ; because no services are rendered for it. And it would not be assessed to the Income-tax.
BOOK III.
DEMAND AND CONSUMPTION. CHAPTER I.
INTRODUCTORY.
The older definitions of economics described it as the science which is concerned with the Pi;o^uction, the Dis- tribution, the Exchange, and the Cgnsumption of Wealth. Later experience has shown that the problems of Distribu- tion and Exchange are so closely connected, that it is doubtful whether anything is to be gained by the attempt to keep them separate. There is however a good deal of general reasoning with regard to the relation of Demand and Supply which is required as a basis for the practical problems of Value, and which acts as an underlying backbone giving unity and con- sistency to the main body of economic reasoning. It is the subject of a separate Book on "The volume*^^ General Theory of Demand and Supply," which prepares the way for the more concrete problems of " Distribu- tion and Exchange, or Value." But first of all come " Demand and Consumption," i.e. the Theory of Wants ; and " Produc- tion and Supply," i.e. the Theory of the Efibrts and Sacrifices devoted to the satisfaction of Wants V ^
1 Several causes have combined to induce contemporary economists to pay I more attention to Demand and Consumption than was done by Ricardo and > his immediate followers. Compare Principles III, i. \
CHAPTER II.
WANTS IN RELATION TO ACTIVITIES.
§ 1. Human wants and desires are countless in number and very various in kind. The uncivilized man indeed has
not many more than the brute animal ; but every Wants are g^^p • ^^ j^-g progj-ggs upwards increases the variety
of his needs together with the variety in his methods of satisfying them. Thus though the brute and the savage alike have their preferences for choice morsels, neither of them cares much for variety for its own sake. As, however, man rises in civilization, as his mind becomes developed, and even his animal passions begin to associate themselves with mental activities, his wants become rapidly more subtle and more various; and in the minor details of life he begins to desire change for the sake of change, long before he has con- sciously escaped from the yoke of custom. The first great step in this direction comes with the art of making a fire: gradually he gets to accustom himself to many different kinds I of food and drink cooked in many different ways ; and before long monotony begins to become irksome to him, and he finds it a great Hardship when accident compels him to live for a long time exclusively on one or two kinds of food. \ As a man's riches increase his food and drink becomes
more various and costly ; but his ^^ppetite is food^^ °^ limited by nature, and when his expenditure on
food is extravagant it is more often to gratify the desires of hospitality and display than to indulge his own senses.
WANTS IN RELATION TO ACTIVITIES. 77
But, as Senior says : — " Strpng as is the desire for variety,* it is weak compared with the desire for distinc- , ,. .
-_,;^ . si^^, for distinction;
tion:\a feeling which if we consider its univer- sality and its constancy, that it affects all men and at all times, that it comes with us from the cradle and never leaves us till we go into the grave, may be pronounced to be the most powerful of human passions." This great half-truth is well illustrated by a comparison of the desire for choice and various food with that for choice and various dress.
§ 2. That need for dress which is the result of natural causes varies with the climate and the season of year, and a little with the nature of a person's jrets!"^ ''°^*^^ occupations. But in dress conventional wants overshadow those which are natural. For instance in England now a well-to-do labourer is expected to appear on Sunday in a black coat and, in some places, in a silk hat ; though these would have subjected him to ridicule but a short time ago; and in all the lower ranks of life there is a constant increase both in that variety and expensiveness which custom requires as a minimum, and in that which it tolerates as a maximum ; and the efforts to obtain distinction by dress are extending themselves throughout the lower grades of English Society.
But in the upper grades, though the dress of women is still various and costly, that of men is simple and inexpensive as compared with what it was in Europe not long ago, and is to-day in the East. For those men who are most truly dis- tinguished on their own account, have a natural dislike to seem to claim attention by their dress ; and they have set the fashion \
1 A woman may display wealth, but vslie may not display or.ly her wealth, by her dress ; or else she defeats her ends. She must also suggest some dis- tinction of character as well as of wealth : for though her dress may owe more to her dressmaker than to herself, yet there is a traditional assumption that, being less busy than man with external affairs, she can give more time to taking thought as to her dress. Even under the sway of modem fashions, to be "well dressed" — not "expensively dressed" — is a reasonable minor aim
78 BOOK III. CH. II. §§ 8, 4.
§ 3. House-room satisfies the imperative need for shelter „ from the weather : but that need plays very little
House-room. , , j: ^ j
part in the effective demand for house-room. For though a small but well-built cabin gives excellent shelter, its stifling atmosphere, its necessary uncleanliness, and its want of the decencies and the quiet of life are great evils. It is not so much that they cause physical discomfort as that they tend to stunt the faculties, and limit people's higher activities. With every increase in these activities the demand for larger house- room becomes more urgent \
And therefore relatively large and well appointed house- room is, even in the lowest social ranks, at once a " necessary for efficiency V' and the most convenient and obvious way of advancing a material claim to social distinction. And even in those grades in which everyone has house-room sufficient for the higher activities of himself and his family, a yet further and almost unlimited increase is desired as a requisite for the exercise of many of the higher social activities.
§ 4. It is again the desire for the exercise and develop- , . , ment of activities, spreading throuofh every rank
Wants which - ..- ^ ' r o & J ^
develop activi- of Society, which leads not only to the pursuit of science, literature and art for their own sake, but to the rapidly increasing demand for the work of those who pursue them as professions. This is one of the most marked characteristics of our age ; and the same may be said of the growing desire for those amusements, such as athletic games
for those who desire to be distinguished for their faculties and abihties ; and this will be still more the case if the evil dominion of the wanton vagaries of fashion should pass away. For to arrange costumes beautiful in themselves, various and well-adapted to their purposes is an object worthy of high en- deavour ; it belongs to the same class, though not to the same rank in that class, as the painting of a good picture.
1 It is true that many active minded working men prefer cramped lodgings in a town to a roomy cottage in the country ; but that is because they have a strong taste for those activities for which a country life offers little scope.
2 See above Book II. ch. iii. § 3.
WANTS IN RELATION TO ACTIVITIES. 79
and travelling, which develop activities, rather than indulge any sensuous craving \
For indeed thef desire for excellenceyor its own sake, is almost as wide m its range as the lower i^desire Desire for for distinction.^ As that graduates down from excellence, the ambition of those who may hope that their names will be in men's mouths in distant lands and in distant times, to the hope of the country lass that the new ribbon she puts on for Easter may not pass unnoticed by her neighbours; so the desire for excellence for its own sake graduates down from that of a Newton, or a Stradivarius, to that of the fisherman who, even when no one is looking and he is not in a hurry, delights in handling his craft well, and in the fact ±hat she is well built and responds promptly to his guicknce. Vgesires of this kind exert a great influence on the\Supply|5of the highest faculties and the greatest inventions; and tney are not unimportant on the side of Demand. For a large part of the demand for the most highly skilled professional services and the best work of the mechanical artisan, arises from the delight that people have in the training of their own faculties, and in exercising them by aid of the most delicately ad- justed and responsive implements.
Speaking broadly therefore, although it is man's wants in the earliest stages of his development that" Relation of gi\'(; rise to his activities, yet afterwards each Wants to new step upwards is to be regarded rather as the development of new activities giving rise to new wants, than that of new wants giving rise to new activities.
We see this clearly if we look away from healthy con- ditions of life, where new activities are constantly being developed, and watch the West Indian negro using his new
ki As a minor point it may be noticed that those drinks which stimulate the mental activities are largely displacing those which merely gratify the senses. The consumption of tea is increasing very fast while that of alcohol is station- ary; and there is in all ranks of society a diminishing demand for the grosser and more immediately stupefying forms of alcohol.
80 BOOK III. CH. IT. § 4.
freedom and wealth not to get the means of satisfying new- wants, but in idle stagnation that is not rest; or again look at that rapidly lessening part of the English working classes, who have no ambition and no pride or delight in the growth of their faculties and activities, and spend on drink whatever surplus their wages aJBFord over the bare necessaries of a squalid life^
1 The Theory of Wants owes much to Jevons' brilliant and suggestive Tlieory of Political Economy. Hearn's Plutology or Theory of the Efforts to satisfy Human Wants affords an admirable example of the way in which detailed analysis may be applied to afford a training of a very high order for the young, and to give them an intelligent acquaintance with the economic conditions of life, without forcing upon them any particular solution of those more diflScult problems on which they are not yet able to form an independent judgment-
Jevons would however appear to be wrong in adopting Banfield's dictum that "the Theory of Consumption is the scientific basis of economics." Comp. Principles III. ii. 4.
Banfield was the first English economist who owed much to German thought: he had been greatly influenced by Hermann's excellent studies of the varieties of human wants and their relation to production. Hermann on the other hand owed something to the Englishman Bentham, who had also largely influenced Jevons as well as earlier writers. The Austrian Prof. Carl Menger, and the Swiss Walras wrote at about the same time as Jevons and iu the same direction.
CHAPTER III.
THE LAW OF DEMAND.
§ 1. We have seen that each several want is limited, and that with every increase in the amount of a ^j^^ ^^^ ^f thins: which a man has, the eagerness of his Satiable
° , . '.,..., ., . Wants or
desire to obtain more of it diminishes; until it Diminishing yields place to the desire for some other thing, of ^^^^^^y- which perhaps he hardly thought, so long as his more urgent wants were still unsatisfied. There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental law of human nature may pass by the name of the law op satiable wants or the law op
DIMINISHING UTILITY.
It may be written thus : —
The Total Utility of a thing to any one (that is, the total pleasure and other benefit it yields him) ^ ^ increases with every increase in his stock of it, but does not increase as fast as his stock increases. If his stock of it increases at a uniform rate the pleasure derived from it increases at a diminishing rate.
In other words, the additional benefit which a person de- rives from a given increase of his stock of anything, diminishes with every increase in the stock that he already has.
That part of the commodity which he is only just induced to urchase may be called his marginal purchase ; Marginal cause he is on the margin of doubt whether it Purchase, worth his while to incur the outlay required to obtain it.
d the Utility of his marginal purchase may be called the
M, 6
82 BOOK III. OH. III. §§ 1 — 4.
Marginal Utility' of the commodity to him. Or, if instead
Marginal of buying it, he makes the thing himself, then
utility. j^g marginal utility is the utility of that part
which he thinks it only just worth his while to make. And
, thus the Law just given may be worded : —
The Marginal Utility of a commodity to any one dimin- ishes with every increase in the amount of it he already has^
§ 2. Now let us translate this Law of Diminishing Utility „ , . into terms of price. Let us take an illustration
Translation ^
ofthe Law into from the case of a commodity such as tea, which terms o price. -^ .^ constant demand and which can be pur- chased in small quantities. Suppose, for instance, that tea of a certain quality is to be had at 2s. per lb. A person might be willing to give 10s. for a single pound once a year rather than go without it altogether ; while if he could have any amount of it for nothing he would perhaps not care to use more than 30 lbs. in the year. But as it is, he buys perhaps 10 lbs. in the year; that is to say, the difference between the happiness which he gets from buying 9 lbs. and 10 lbs. is just enough for him to be willing to pay 2s. for it: while the fact that he does not buy an eleventh pound, shows that he does not think that it would be quite worth an extra 2s. to him. That is, 2s. a pound measures the utility to him of the tea which lies at the margin or terminus or end of his purchases; it measures the marginal utility to him. If the price which he is just willing to pay for any pound be called his Demand- Marginai PRICE, then 2s. is his Marginal Demand-price.
demand-price, ^^d our law may be worded: —
An increase in the amount of a thing that a person has will, other things being equal, diminish his Marginal Demand- price for it.
1 The term Marginal {Orenz-nutzen) tv^as first used in this connection by the Austrian Prof. Wieser. It has been adopted by Prof. Wicksteed. It cor- responds to Jevons' term Final.
2 For some qualifications of this statement, and for some remarks on the analogy between the Law of Diminishing Utility and that of Diminishing Return in agi'iculture, see Principles III. iii. 1.
THE LAW OF DEMAND. 83
§ 3. But of course a greater utility will be required to induce him to buy a thing if he is poor than if ^^^ ^^^ .^^^ he is rich. A shilling is the measure of less utility of pleasure to a rich man, than to a poor one. We "™°"*=y ^^"^s- have already^ noticed, for instance, that a clerk with XI 00 a-year will walk into business in a much heavier rain than the clerk with £300 a-year ; for a sixpenny omnibus fare measures a greater utility to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The utility, or the benefit, that is measured in the poorer man's mind by six- pence is greater than that measured by it in the richer man's mind. If the richer man rides a hundred times in the year and the poorer man twenty times, then the utility of the hundredth ride which the richer man is only just induced to take is measured to him by sixpence ; and the utility of the twentieth ride which the poorer man is only just induced to take is measured to him by sixpence, ^^or each of them the marginal utility is measured by sixpence; but this marginal utility is greater in the case of the poorer man than in that of the richer, y
In other words the richer a man becomes, the less is thoj marginal utility of money to him; every increase in his re- sources increases the price which he is willing to pay for any given benefit. And in the same way every diminution of his resources increases the marginal utility of money to him, and diminishes the price that he is willing to pay for any benefit.
§ 4. "When then we say that a person's demand for any-p| hing increases, we mean that he will buy more ^ erson's '
it than he would before at the same price, and Demand for
hat he will buy as much of it as before at a ^"^ *"^'
higher price. To complete our knowledge of his demand for
it, we should have to ascertain how much of it he would be
willing to purchase at each of the prices at which it is likely
1 Book I. ch. V. § 3.
6—2
<
84
BOOK III. CH. III.
4, 6.
to be offered ; and the complete circumstances of his demand for, say, tea can be expressed by a list, or schedule of the prices which he is willing to pay; that is, by his several Demand-Prices for different amounts of it.
Thus for instance we may find that he would buy
6 lb. at the price of 50d. per lb.
7 8 9
10 11 12 13
40 33 28 24 21 19 18
If corresponding prices were diate amounts we should have an demand \
filled in for all interme- exact statement of his
1 We may here introduce the first of a series of simple diagrams designed to illustrate economic theory. Those who wish may omit them; for the reasoning in the text is always complete in itself and does not depend on them. They do but express familiar facts in a new language which is terse and precise, and will be found helpful by those readers who are inclined towards it. Such a demand schedule may be translated, on a plan now coming into familiar use, into a curve that may be called his demand curve. Let Ox and Oy be drawn the one horizontally, the other vertically. Let an inch measured along Ox represent 10 lb. of tea, and an inch measured along Oy represent 40d.
y D
Take
|
Tenths of |
Fortieths of |
|
an inch. |
an inch. |
|
Omi = 6, and draw miPi = 50 |
|
|
Om2 = 7 , |
„ «?2JP2 = 40 |
|
0^3 = 8 , |
„ msPs = S3 |
|
0»i4 = 9 , |
„ m4i>4 = 28 |
|
0ms = 10 , |
„ ^5^^5 = 24 |
|
0^6 = 11 , |
„ OT6i?6 = 21 |
|
0^7 = 12 , |
„ W7i>7=19 |
|
0^8 = 13 , |
. „ W8i>8 = 18 |
Fig. (1).
9 $: 9 S: $ S S
THE LAW OF DEMAND. 85
We see then that a person's demand for a thing dependsX on the price at which the thing is to be had ; and an increase 1 in his demand means generally an increase throughout the I whole list of prices at which he is willing to purchase different r amounts of it ; and not merely that he is willing to buy more of it at the current priced
§ 5. So far we have looked at the demand of a single individual. And in the particular case of such a Demand of a thing as tea, the demand of a single person is "market, fairly representative of the general demand of a whole market : for the demand for tea is a constant one; and, since it can be purchased in small quantities, every variation in its price is likely to affect the amount which he will buy. But even among those things which are in constant use, there are many for which the demand on the part of any single in- dividual cannot vary continuously with every small change in price, but can move only by great leaps. For instance a small fall in the price of hats or watches will not affect the action of everyone, but it will induce a few persons, who were in doubt whether or not to get a new hat or a new watch, to decide in favour of doing so.
In large markets, however, where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together, every fall, however slight, in the price of a commodity in general use, will, other things being equal, increase the total sales of
»?, being on Ox and viypi being drawn vertically from nii; and so for the
others. Then jy^p^ pg are points on his Demand Curve for tea; or as we
may say Demand Points. If we could find demand points in the same manner for every possible quantity of tea we should get the whole continuous curve DD' as shown in the figure.
1 Geometrically it is represented by raising his demand curve, or, what comes to the same thing, moving it to the right, with perhaps some modifica- tion of its shape ; or in other words by raising his demand schedule.
For some discussion of the uses of the term Demand by Mill and Cairnes, see Principles III. iii. 4.
86 BOOK III. CH. III. § 5.
it; just as an unhealthy autumn increases the mortality of a large town, though many persons are uninjured by it.
Let us however return to the demand for tea. The aggregate demand in the place is the sum of the demands of all the individuals there. Some will be richer and some poorer than the individual consumer whose demand schedule we have just written down; some will have a greater and others a smaller liking for tea than he has. Let us suppose that there are in the place a million purchasers of tea, and that their average consumption is equal to his at each several price. Then the demand of that place is represented by the same schedule as before, if we write a million pounds of tea instead of one pound'.
There is then one Law of Dj-^mand, which is common to
all demand schedules, viz. that the greater the
^^^/^^^ amount to be sold, the smaller will be the price
at which it will find purchasers ; or in other
words,! that the amount demanded increases with a fall in
price, 'and diminishes with a rise in price.
There will not be any exact relation betw^een the fall in price and the increase of demand. A fall of one-tenth in the price may increase the sales by a twentieth or by a quarter, or it may double them. But as the numbers in the left- hand column of the demand schedule increase, those in the right-hand column will always diminish.
1 The demaud is represented by the same curve as before, only an inch measured along Ox now represents ten million pounds instead of ten pounds. And a formal definition of the Demand curve for a market Y\o (2). may be given thus : — The demand curve for any
commodity in a market during any given unit of time is the locus of demand points for it. That is to say, it is a curve such that if from any point P on it, a straight line PM be drawn perpendicular to Ox, PM represents the price at which purchasers will be forthcoming for an amount of the commodity represented by OM,
THE LAW OF DEMAND. 87
The price will measure the Marginal Utility of the com- modity to each purchaser : but as the purchasers are likely to be some rich ajid others poor, we cannot speak of price as measuring Marginal Utility in general, but only with reference to some individual purchaser \
1 It must be remembered that the demand schedule gives the prices at which various quantities of a thing can be sold in a market during a given time and under given conditions. If the conditions vary in any respect the figures of the schedule will probably require to be changed ; and this has con- stantly to be done when the desire for anything is materially altered by a variation of custom, or by a cheapening of the supply of a rival commodity, or by the invention of a new one. For instance, the demand schedule for tea is drawn out on the assumption that the price of coffee is known ; but a failure of the coffee harvest would raise the prices throughout the demand schedule for tea, and again the demand for gas is liable to be reduced by an improve- ment in electric lighting.
It is even conceivable, though not probable, that a simultaneous and pro- portionate fall in the price of all teas may diminish the demand for some par- ticular kind of it ; if it happens that those whom the increased cheapness of tea leads to substitute a superior kind for it are more numerous than those who are led to take it in the place of an inferior kind. The question where the lines of division between different commodities should be drawn must be settled by the convenience of the particular question under discussion. For some purposes it may be best to regard Chinese and Indian teas, or even Souchong and Pekoe teas, as different commodities; and to have a separate list of demand prices (or demajid schedule) for each of them. While for other piu:poses it may be best to group together commodities as distinct as beef and mutton, or even as tea and coffee, and to have a single Ust of prices to repre- sent the demand for the two combined; but in such a case of course some convention must be made as to the number of ounces of tea which are taken as equivalent to a pound of coffee.
These and some similar points are further discussed in Principles III. m. 6.
CHAPTER IV.
LAW OF DEMAND, CONTINUED. ELASTICITY OF DEMAND.
§ 1. We have seen that the only universal law as to a person's desire for a commodity is that it dimi- demand ^ ° nishes, other things being equal, with every in- crease in his supply of that commodity. But this diminution may be slow or rapid. If it is slow the price that he will give for the commodity will not fall much in conse- quence of a considerable increase in his supply of it; and a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case his willingness to purchase the thing stretches itself out a great deal under the action of a small inducement : the elasticity of his demand, we may say, is great. In the latter case the extra inducement given by the fall in price causes hardly any extension of his desire to purchase : the elasticity of his demand is small.
And as with the demand of one person so with that of a whole market. The elasticity op demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in priced
§ 2. The price which is so high relatively to the poor man .^. as to be almost prohibitive, may be scarcely felt
vanes with ^ ^ .
different by the rich; the poor man for instance never
tastes wine, but the very rich man may drink as
incomes.
1 A mathematical device for measuring elasticity is given in Princixdes III. IV. 1.
THE LAW OF DEMAND. 89
much of it as he has a fancy for, without giving himself a thought of its cost. "We shall therefore get the clearest notion of the law of the elasticity of demand, by considering one class of society at a time. Of course there are many degrees of richness among the rich, and of poverty among the poor ; but for the present we may neglect these minor subdivisions.
When the price of a thing is very high relatively to any class, they will buy but little of it ; and in some cases custom and habit may prevent them from using it freely even after its price has fallen a good deal. It may still remain set apart for a limited number of special occasions, or for use in extreme illness, &c. But such cases, though not infrequent, will not form the general rule, and anyhow