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• Preface to the Third Edition (1928)
• Note to the Fourth Edition (1932)
• Part I: Welfare and the National Dividend
• Chapter I: Welfare and Economic Welfare
• Chapter II: Desires and Satisfactions
• Chapter III: The National Dividend
• Chapter IV: What Is Meant By Maintaining Capital Intact
• Chapter V: Changes In the Size of the National Dividend
• Chapter VI: The Measurement of Changes In the Size of the National Dividend
• Chapter VII: Economic Welfare and Changes In the Size of the National Dividend
• Chapter VIII: Economic Welfare and Changes In the Distribution of the National Dividend
• Chapter IX: Reactions Through the Numbers of the Population
• Chapter X: The National Dividend and the Quality of the People
• Chapter XI: The Method of Discussion to Be Followed
• Part II: The Size of the National Dividend and the Distribution of Resources Among Different Uses
• Chapter I: Introductory
• Chapter II: The Definition of Marginal Social and Private Net Products
• Chapter III: The Values of Marginal Social Net Products and the Size of the National Dividend
• Chapter IV: Rates of Return and the Values of Marginal Private Net Products
• Chapter V: The Effects of Eliminating Obstacles to Movement
• Chapter VI: Hindrances to Equality of Returns Due to Imperfect Knowledge
• Chapter VII: Hindrances to Equality of Returns Due to Imperfect Divisibility of the Units In Terms of Which Transactions Are Conducted
• Chapter VIII: Hindrances to Equality of Returns Due to Relative Variations of Demand In Different Occupations and Places
• Chapter IX: Divergences Between Marginal Social Net Product and Marginal Private Net Product
• Chapter X: Marginal Private and Social Net Products In Relation to Industrial Forms
• Chapter XI: Increasing and Decreasing Supply Price
• Chapter XII: State Regulation of Competitive Prices
• Chapter XIII: State Regulation of Supplies
• Chapter XIV: The Conditions of Monopolisation
• Chapter XV: Monopolistic Competition
• Chapter XVI: Simple Monopoly
• Chapter XVII: Discriminating Monopoly
• Chapter XVIII: The Special Problem of Railway Rates
• Chapter XIX: Purchasers' Associations
• Chapter XX: Intervention By Public Authorities
• Chapter XXI: Public Control of Monopoly
• Chapter XXII: Public Operation of Industries
• Part III: The National Dividend and Labour
• Chapter I: Industrial Peace
• Chapter II: The Classification of Industrial Differences
• Chapter III: Voluntary Arrangements For Conciliation and Arbitration
• Chapter IV: Mediation
• Chapter V: Coercive Intervention
• Chapter VI: An Analytical View of Industrial Peace
• Chapter VII: Hours of Labour
• Chapter VIII: The Methods of Industrial Remuneration
• Chapter IX: The Distribution of Labour Among Occupations and Places
• Chapter X: Employment Exchanges
• Chapter XI: Unemployment Versus Short Time
• Chapter XII: The Practicability of Interference to Raise Wages
• Chapter XIII: Methods of Engaging Labour
• Chapter XIV: Interference to Raise Wages In Places and Occupations Where They Are Unfair
• Chapter XV: Fair Wages Inside Particular Industries
• Chapter XVI: Fairness As a Variable Relation
• Chapter XVII: Interference to Raise Wages In Places and Occupations Where They Are Already Fair
• Chapter XVIII: Wage Rates and Capacity
• Chapter XIX: A National Minimum Time-wage
• Chapter XX: Fixed and Fluctuating Wage Rates In Particular Industries
• Part IV: The Distribution of the National Dividend
• Chapter I: The General Problem of Disharmony
• Chapter II: Pareto's Law
• Chapter III: The Supply of Capital and Labour
• Chapter IV: Inventions and Improvements
• Chapter V: The Manipulation of Wages
• Chapter VI: Rationing
• Chapter VII: Subsidies to Wages
• Chapter VIII: Direct Transferences From the Relatively Rich to the Relatively Poor
• Chapter IX: The Effect On the National Dividend of the Expectation of Transferences From the Relatively Rich
• Chapter X: The Effect On the National Dividend of the Expectation of Transferences to the Poor
• Chapter XI: Bounties On Things Purchased By the Poor
• Chapter XII: The Effect On the National Dividend of the Fact of Transference From the Relatively Rich to the Poor
• Chapter XIII: A National Minimum Standard of Real Income
• Appendix I Uncertainty-bearing As a Factor of Production
• Appendix Ii the Measurement of Elasticities of Demand
• Appendix Iii a Diagrammatic and Mathematical Treatment of Certain Problems of Competition and Monopoly

PART I

WELFARE AND THE NATIONAL DIVIDEND

Chapter I

WELFARE AND ECONOMIC WELFARE

§ 1. WHEN a man sets out upon any course of inquiry, the object of his search may be either light or fruit—either knowledge for its own sake or knowledge for the sake of good things to which it leads. In various fields of study these two ideals play parts of varying importance. In the appeal made to our interest by nearly all the great modern sciences some stress is laid both upon the light-bearing and upon the fruit-bearing quality, but the proportions of the blend are different in different sciences. At one end of the scale stands the most general science of all, metaphysics, the science of reality. Of the student of that science it is, indeed, true that "he yet may bring some worthy thing for waiting souls to see"; but it must be light alone, it can hardly be fruit that he brings. Most nearly akin to the metaphysician is the student of the ultimate problems of physics. The corpuscular theory of matter is, hitherto, a bearer of light alone. Here, however, the other aspect is present in promise; for speculations about the structure of the atom may lead one day to the discovery of practical means for dissociating matter and for rendering available to human use the overwhelming resources of intra-atomic energy. In the science of biology the fruit-bearing aspect is more prominent. Recent studies upon heredity have, indeed, the highest theoretical interest; but no one can reflect upon that without at the same time reflecting upon the striking practical results to which they have already led in the culture of wheat, and upon the far-reaching, if hesitating, promise that they are beginning to offer for the better culture of mankind. In the sciences whose subject-matter is man as an individual there is the same variation of blending as in the natural sciences proper. In psychology the theoretic interest is dominant—particularly on that side of it which gives data to metaphysics; but psychology is also valued in some measure as a basis for the practical art of education. In human physiology, on the other hand, the theoretic interest, though present, is subordinate, and the science has long been valued mainly as a basis for the art of medicine. Last of all we come to those sciences that deal, not with individual men, but with groups of men; that body of infant sciences which some writers call sociology. Light on the laws that lie behind development in history, even light upon particular facts, has, in the opinion of many, high value for its own sake. But there will, I think, be general agreement that in the sciences of human society, be their appeal as bearers of light never so high, it is the promise of fruit and not of light that chiefly merits our regard. There is a celebrated, if somewhat too strenuous, passage in Macaulay's Essay on History: "No past event has any intrinsic importance. The knowledge of it is valuable, only as it leads us to form just calculations with regard to the future. A history which does not serve this purpose, though it may be filled with battles, treaties and commotions, is as useless as the series of turnpike tickets collected by Sir Matthew Mite." That paradox is partly true. If it were not for the hope that a scientific study of men's social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspent. That is true of all social sciences, but especially true of economics. For economics "is a study of mankind in the ordinary business of life"; and it is not in the ordinary business of life that mankind is most interesting or inspiring. One who desired knowledge of man apart from the fruits of knowledge would seek it in the history of religious enthusiasm, of martyrdom, or of love; he would not seek it in the market-place. When we elect to watch the play of human motives that are ordinary—that are sometimes mean and dismal and ignoble—our impulse is not the philosopher's impulse, knowledge for the sake of knowledge, but rather the physiologist's, knowledge for the healing that knowledge may help to bring. Wonder, Carlyle declared, is the beginning of philosophy. It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science. Here, if in no other field, Comte's great phrase holds good: "It is for the heart to suggest our problems; it is for the intellect to solve them.... The only position for which the intellect is primarily adapted is to be the servant of the social sympathies."

§ 2. If this conception of the motive behind economic study is accepted, it follows that the type of science that the economist will endeavour to develop must be one adapted to form the basis of an art. It will not, indeed, itself be an art, or directly enunciate precepts of government. It is a positive science of what is and tends to be, not a normative science of what ought to be. Nor will it limit itself to those fields of positive scientific inquiry which have an obvious relevance to immediate practical problems. This course would hamper thorough investigation and shut out inquiries that might ultimately bear fruit. For, as has been well said, "in our most theoretical moods we may be nearest to our most practical applications."1 But, though wholly independent in its tactics and its strategy, it will be guided in general direction by practical interest. This decides its choice of essential form. For there are two main types of positive science. One the one side are the sciences of formal logic and pure mathematics, whose function it is to discover implications. On the other side are the realistic sciences, such as physics, chemistry and biology, which are concerned with actualities. The distinction is drawn out in Mr. Russell's Principles of Mathematics. "Since the growth of non-Euclidean Geometry, it has appeared that pure mathematics has no concern with the question whether the axioms and propositions of Euclid hold of actual space or not: this is a question for realistic mathematics, to be decided, so far as any decision is possible, by experiment and observation. What pure mathematics asserts is merely that the Euclidean propositions follow from the Euclidean axioms, i.e. it asserts an implication: any space which has such and such properties has also such and such other properties. Thus, as dealt with in pure mathematics, the Euclidean and non-Euclidean Geometries are equally true: in each nothing is affirmed except implications. All propositions as to what actually exists, like the space we live in belong to experimental or empirical science, not to mathematics."2 This distinction is applicable to the field of economic investigation. It is open to us to construct an economic science either of the pure type represented by pure mathematics or of the realistic type represented by experimental physics. Pure economics in this sense—an unaccustomed sense, no doubt—would study equilibria and disturbances of equilibria among groups of persons actuated by any set of motives x Under it, among innumerable other subdivisions, would be included at once an Adam-Smithian political economy, in which x is given the value of the motives assigned to the economic man—or to the normal man—and a non-Adam- Smithian political economy, corresponding to the geometry of Lobatschewsky, under which x consists of love of work and hatred of earnings. For pure economics both these political economies would be equally true; it would not be relevant to inquire what the value of x is among the actual men who are living in the world now. Contrasted with this pure science stands realistic economies, the interest of which is concentrated upon the world known in experience, and in nowise extends to the commercial doings of a community of angels. Now, if our end is practice, it is obvious that a political economy that did so extend would be for us merely an amusing toy. Hence it must be the realistic, and not the pure, type of science that constitutes the object of our search. We shall endeavour to elucidate, not any generalised system of possible worlds, but the actual world of men and women as they are found in experience to be.

§ 3. But, if it is plain that a science of the pure type will not serve our purpose, it is equally plain that realism, in the sense of a mere descriptive catalogue of observed facts, will not serve it either. Infinite narration by itself can never enable forecasts to be made, and it is, of course, capacity to make forecasts that practice requires. Before this capacity can be obtained facts must be passed upon by reason. Besides the brute facts, there must be what Browning calls, "something of mine, which, mixed up with the mass, made it bear hammer and be firm to file." It is just the presence of this something which is essential to a realistic science as distinguished from mere description. In realistic science facts are not simply brought together; they are compelled by thought to speak. As M. Poincaré well writes: "Science is built up of facts as a house is built of stones; but an accumulation of facts is no more a science than a heap of stones is a house."3 Astronomical physics is not merely a catalogue of the positions which certain stars have been observed to occupy on various occasions. Biology is not merely a list of the results of a number of experiments in breeding. Rather, every science, through examination and cross-examination of the particular facts which it is able to ascertain, seeks to discover the general laws of whose operation these particular facts are instances. The motions of the heavenly bodies are exhibited in the light of the laws of Newton; the breeding of the blue Andalusian fowl in the light of that of Mendel. These laws, furthermore, are not merely summaries of the observed facts re-stated in a shorthand form. They are generalisations, and, as such, extend our knowledge to facts that have not been observed, maybe, that have not as yet even occurred. On what philosophical basis generalisations of this sort rest we are not here concerned to inquire. It is enough that in every realistic science they are made. As Mr. Whetham, speaking of physics, puts it, any such science "seeks to establish general rules which describe the sequence of phenomena in all cases."4 It is only by reference to these general rules that the forecasts, which practice needs, are rendered possible. It is in their fundamental aspect as an organon of laws, and not in their superficial aspect as a description of facts, that the realistic sciences have bearing upon the conduct of affairs. The establishment of such an organon adapted and ready for application to particular problems is the ideal at which they aim.

§4. To say this without saying something more would, however, by very misleading. It is not pretended that, at the present stage of its development, economic science is able to provide an organon even remotely approaching to what it imagines for itself as its ideal. Full guidance for practice requires, to borrow Marshall's phrase, capacity to carry out quantitative, not merely qualitative, analysis. "Qualitative analysis tells the ironmaster that there is some sulphur in his ore, but it does not enable him to decide whether it is worth while to smelt the ore at all, and, if it is, then by what process. For that purpose he needs quantitative analysis, which will tell him how much sulphur there is in the ore."5 Capacity to provide information of this kind economic science at present almost entirely lacks. Before the application of general laws to particular problems can yield quantitative results, these laws themselves must be susceptible of quantitative statement. The law is the major premises and the particular facts of any problem the minor. When the statement of the law lacks precision, the conclusion must generally suffer from the same defect; and, unfortunately, the task of setting out economic laws in precise form has scarcely been begun. For this there are three reasons. First, the relations which have to be determined are extremely numerous. In physics the fundamental thing, the gravitation constant, expressing the relation between distance and attractive force, is the same for all sorts of matter. But the fundamental thing, in the economic world—the schedules expressing the desires or aversions of groups of people for different sorts of commodities and services—are not thus simple and uniform. We are in the position in which the physicist would be if tin attracted iron in the inverse ratio of the cube of its distance, lead in that of the square of its distance, and copper in some other ratio. We cannot say, as he can of his attractions, that the amount offered or required of every several commodity is one and the same specified function of the price. All that we can say in this general way is that it is some one of a specified large family of functions of the price. Hence, in economics there is not, as in dynamics, one fundamental law of general application, but a great number of laws, all expressible, as it were, in equations of similar form but with different constants. On account of this multiplicity, the determination of those constants, or to put the matter broadly, the measurement of the elasticities of demand and supply of the various commodities in which economics is interested, is a very large task. Secondly, this task is one in attacking which the principal weapon employed by other sciences in their inquiries cannot be fully used. "Theory," said Leonardo da Vinci, "is the general; experiments are the soldiers." Economic science has already well-trained generals, but, because of the nature of the material in which it works, the soldiers are hard to obtain. "The surgeon dissects a dead body before he operates on a living one, and operates upon an animal before he operates upon a human being; the mechanic makes a working model and tests it before he builds the full-sized machine. Every step is, whenever possible, tested by experiments in these matters before risks are run. In this way the unknown is robbed of most of its terrors."6 In economics, for the simple reason that its subject-matter is living and free men, direct experiment under conditions adequately controlled is hardly ever feasible. But there is a third and even more serious difficulty. Even if the constants which economists wish to determine were less numerous, and the method of experiment more accessible, we should still be faced with the fact that the constants themselves are different at different times. The gravitation constant is the same always. But the economic constants—these elasticities of demand and supply—depending, as they do, upon human consciousness, are liable to vary. The constitution of the atom, as it were, and not merely its position, changes under the influence of environment. Thus the real injury done to Ireland by the earlier English administration of that country was not the destruction of specific industries or even the sweeping of its commerce from the seas. "The real grievance lies in the fact that something had been taken from our industrial character which could not be remedied by the mere removal of the restrictions. Not only had the tree been stripped, but the roots had been destroyed."7 This malleability in the actual substance with which economic study deals means that the goal sought is itself perpetually shifting, so that, even if it were possible by experiment exactly to determine the values of the economic constants to-day, we could not say with confidence that this determination would hold good also of to-morrow. Hence the inevitable shortcomings of our science. We can, indeed, by a careful study of all relevant facts, learn something about the elasticities of demand and supply for a good number of things, but we cannot ascertain their magnitude with any degree of exactness. In other words, our fundamental laws, and, therefore, inferences from these laws in particular conditions, cannot at present be thrown into any quantitatively precise form. The result is that, when, as often happens, a practical issue turns upon the balancing of opposing considerations, even though these considerations are wholly economic, economic science must almost always speak with an uncertain voice.

§ 5. The preceding paragraph has been somewhat of a digression. It has now to be added that, just as the motive and purpose of our inquiry govern its form, so also they control its scope. The goal sought is to make more easy practical measures to promote welfare—practical measures which statesmen may build upon the work of the economist, just as Marconi, the inventor, built upon the discoveries of Hertz. Welfare, however, is a thing of very wide range. There is no need here to enter upon a general discussion of its content. It will be sufficient to lay down more or less dogmatically two propositions; first, that the elements of welfare are states of consciousness and, perhaps, their relations; secondly, that welfare can be brought under the category of greater and less. A general investigation of all the groups of causes by which welfare thus conceived may be affected would constitute a task so enormous and complicated as to be quite impracticable. It is, therefore, necessary to limit our subject-matter. In doing this we are naturally attracted towards that portion of the field in which the methods of science seem likely to work at best advantage. This they can clearly do when there is present something measurable, on which analytical machinery can get a firm grip. The one obvious instrument of measurement available in social life is money. Hence, the range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring-rod of money. This part of welfare may be called economic welfare. It is not, indeed, possible to separate it in any rigid way from other parts, for the part which can be brought into relation with a money measure will be different according as we mean by can, "can easily" or "can with mild straining" or "can with violent straining." The outline of our territory is, therefore, necessarily vague. Professor Cannan has well observed: "We must face, and face boldly, the fact that there is no precise line between economic and non-economic satisfactions, and, therefore, the province of economics cannot be marked out by a row of posts or a fence, like a political territory or a landed property. We can proceed from the undoubtedly economic at the other end without finding anywhere a fence to climb or a ditch to cross."8 Nevertheless, though no precise boundary between economic and non-economic welfare exists, yet the test of accessibility to a money measure serves well enough to set up a rough distinction. Economic welfare, as loosely defined by this test, is the subject-matter of economic science. The purpose of this volume is to study certain important groups of causes that affect economic welfare in actual modern societies.

§6. At first glance this programme, if somewhat ambitious, appears, at all events, a legitimate one. But reflection soon shows that the proposal to treat in isolation the causes affecting one part of welfare only is open to a serious objection. Our ultimate interest is, of course, in the effects which the various causes investigated are likely to have upon welfare as a whole. But there is no guarantee that the effects produced on the part of welfare that can be brought into relation with the measuring-rod of money may not be cancelled by effects of a contrary kind brought about in other parts, or aspects, of welfare; and, if this happens, the practical usefulness of our conclusions is wholly destroyed. The difficulty, it must be carefully observed, is not that, since economic welfare is only a part of welfare as a whole, welfare will often change while economic welfare remains the same, so that a given change in economic welfare will seldom synchronise with an equal change in welfare as a whole. All that this means is that economic welfare will not serve for a barometer or index of total welfare. But that, for our purpose, is of no importance. What we wish to learn is, not how large welfare is, or has been, but how its magnitude would be affected by the introduction of causes which it is in the power of statesmen or private persons to call into being. The failure of economic welfare to serve as an index of total welfare is no evidence that the study of it will fail to afford this latter information: for, though a whole may consist of many varying parts, so that a change in one part never measures the change in the whole, yet the change in the part may always affect the change in the whole by its full amount. If this condition is satisfied, the practical importance of economic study is fully established. It will not, indeed, tell us how total welfare, after the introduction of an economic cause, will differ from what it was before; but it will tell us how total welfare will differ from what it would have been if that cause had not been introduced: and this, and not the other, is the information of which we are in search. The real objection then is, not that economic welfare is a bad index of total welfare, but that an economic cause may affect non-economic welfare in ways that cancel its effect on economic welfare. This objection requires careful consideration.

§7. One very important aspect of it is as follows. Human beings are both "ends in themselves" and instruments of production. On the one hand, a man who is attuned to the beautiful in nature or in art, whose character is simple and sincere, whose passions are controlled and sympathies developed, is in himself an important element in the ethical value of the world; the way in which he feels and thinks actually constitutes a part of welfare. On the other hand, a man who can perform complicated industrial operations, sift difficult evidence, or advance some branch of practical activity, is an instrument well fitted to produce things whose use yields welfare. The welfare to which the former of these men contributes directly is non-economic; that to which the latter contributes indirectly is economic. The fact we have to face is that, in some measure, it is open to the community to choose between these two sorts of men, and that, by concentrating its effort upon the economic welfare embodied in the second, it may unconsciously sacrifice the non-economic welfare embodied in the first. The point is easy of illustration. The weak and disjointed Germany of a century ago was the home of Goethe and Schiller, Kant and Fichte. "We know what the old Germany gave the world," says Mr. Dawson in a book published several years before the war, "and for that gift the world will ever be grateful; we do not know what modern Germany, the Germany of the overflowing barns and the full argosies, has to offer, beyond its materialistic science and its merchandise.... The German systems of education, which are incomparable so far as their purpose is the production of scholars and teachers, or of officials and functionaries, to move the cranks, turn the screws, gear the pulleys, and oil the wheels of the complicated national machine, are far from being equally successful in the making of character or individuality."9 In short, the attention of the German people was so concentrated on the idea of learning to do that they did not care, as in former times, for learning to be. Nor does Germany stand alone before this charge; as witness the following description of modern England written by an Englishman from the standpoint of an Oriental spectator. "By your works you may be known. Your triumphs in the mechanical arts are the obverse of your failure in all that calls for spiritual insight. Machines of every kind you can make and use to perfection; but you cannot build a house, or write a poem, or paint a picture; still less can you worship or aspire.... Your outer man as well as your inner is dead; you are blind and deaf. Ratiocination has taken the place of perception; and your whole life is an infinite syllogism from premises you have not examined to conclusions you have not anticipated or willed. Everywhere means, nowhere an end. Society a huge engine and that engine itself out of gear. Such is the picture your civilisation presents to my imagination."10 There is, of course, exaggeration in this indictment; but there is also truth. At all events it brings out vividly the point which is here at issue; that efforts devoted to the production of people who are good instruments may involve a failure to produce people who are good men.

§8. The possibility of conflict between the effects of economic causes upon economic welfare and upon welfare in general, which these considerations emphasise, is easily explained. The only aspects of conscious life which can, as a rule, be brought into relation with a money measure, and which, therefore, fall within economic welfare, are a certain limited group of satisfactions and dissatisfactions. But conscious life is a complex of many elements, and includes, not only these satisfactions and dissatisfactions, but also other satisfactions and dissatisfactions, and, along with them, cognitions, emotions and desires. Environmental causes operating to change economic satisfactions may, therefore, either in the same act or as a consequence of it, alter some of these other elements. The ways in which they do this may be distinguished, for purposes of illustration, into two principal groups.

First, non-economic welfare is liable to be modified by the manner in which income is earned. For the surroundings of work react upon the quality of life. Ethical quality is affected by the occupations—menial service, agricultural labour, artistic creation, independent as against subordinate economic positions,11 monotonous repetition of the same operation,12 and so on—into which the desires of consumers impel the people who work to satisfy them. It is affected, too, by the influence which these people exert on others with whom they may be brought into personal contact. The social aspect of Chinese labour in the Transvaal and of the attempt by Australian pastoralists to maintain the convict system, as a source of labour supply,13 had relevance to welfare. So, too, have the unity of interest and occupation which characterise the farm family as distinguished from the town-dwelling family.14 In the Indian village "the collaboration of the family members not only economises expenses, but sweetens labour. Culture and refinement come easily to the artisan through his work amidst his kith and kin."15 Thus the industrial revolution, when it led the cottager from his home into the factory, had an effect on other things besides production. In like manner, increased efficiency in output was not the only result which the agricultural revolution, with its enclosures and large-scale farming, brought about. There was also a social change in the destruction of the old yeoman class. The human relations that arise out of industrial relations are also relevant. In the great co-operative movement, for example, there is a non-economic side at least as important as the economic. Whereas in the organisation of ordinary competitive industry opposition of interest, both as between competing sellers and as between sellers and buyers, necessarily stands in the forefront, and results at times in trickery and a sense of mutual suspicion, in a co-operative organisation unity of interest is paramount. This circumstance has its influence on the general tone of life. "As a member of a society with interests in common with others, the individual consciously and unconsciously develops the social virtues. Honesty becomes imperative, and is enforced by the whole group on the individual, loyalty to the whole group is made an essential for the better development of individual powers. To cheat the society is to injure a neighbour."16 In the relations between employers and workpeople in ordinary industry the non-economic element is fully as significant. The esprit de corps and interest in the fortunes of the firm, which animate the workpeople in establishments where the personal intercourse of employers and employed is cordial, besides leading to increased production of wealth, is in itself an addition to welfare. As large-scale industry extended during the eighteenth and nineteenth centuries, employers and employed became more distant in station, and their opportunities of meeting one another diminished. In the wake of this inevitable physical separation there followed a moral separation—"the personal alienation of the employer from his fellow-men whom he engages to work for him in large numbers."17 This spirit of hostility was an obvious negative element in non-economic welfare due to an economic cause; and the partial suppression of it through Boards of Conciliation, Whitley Councils and Copartnership arrangements is an equally obvious positive element. Nor is this all. It is more and more coming to be recognised that, if one root of "labour unrest" has been dissatisfaction with rates of wages, a second root, also of great importance, has been dissatisfaction with the general status of wage-labour—the feeling that the industrial system, as it is to-day, deprives the workpeople of the liberties and responsibilities proper to free men, and renders them mere tools to be used or dispensed with at the convenience of others: the sense, in short, as Mazzini put it long ago, that capital is the despot of labour.18 Changes in industrial organisation that tend to give greater control over their own lives to workpeople, whether through workmen's councils to overlook matters of discipline and workshop organisation in conjunction with the employer, or through a democratically elected Parliament directly responsible for nationalised industries, or, if this should prove feasible, through some form of State-recognised and State-controlled national guilds,19 might increase welfare as a whole, even though they were to leave unchanged, or actually to damage, economic welfare.

Secondly, non-economic welfare is liable to be modified by the manner in which income is spent. Of different acts of consumption that yield equal satisfactions, one may exercise a debasing, and another an elevating, influence.20 The reflex effect upon the quality of people produced by public museums, or even by municipal baths,21 is very different from the reflex effect of equal satisfactions in a public bar. The coarsening and brutalising influence of bad housing accommodation is an incident not less important than the direct dissatisfaction involved in it. Instances of the same kind could be multiplied. The point that they would illustrate is obviously of large practical importance. Imagine, for example, that a statesman is considering how far inequality in the distribution of wealth influences welfare as a whole, and not merely in its economic aspects. He will reflect that the satisfaction of some of the desires of the rich, such as gambling excitement or luxurious sensual enjoyment, or perhaps, in Eastern countries, opium-eating, involves reacitons on character ethically inferior to those involved in the satisfaction of primary physical needs, to the securing of which the capital and labour controlled by the demand of the rich would, if transferred to the poor, probably be devoted. On the other hand, he will reflect that other satisfactions purchased by the rich—those, for example, connected with literature and art22 —involve reactions that are ethically superior to those connected with the primary needs, and still more to those derived from excessive indulgence in stimulants. These very real elements in welfare will, indeed, enter into relation with the measuring rod of money, and so be counted in economic welfare, in so far as one group of people devote income to purchasing things for other people. When they do this, they are likely to take account of the total effect, and not merely of the effect on the satisfactions of those people—especially if the said people are their own children. For, as Sidgwick acutely observes: "A genuine regard for our neighbour, when not hampered by the tyranny of custom, prompts us to give him what we think really good for him, whereas natural self-regard prompts us to give ourselves what we like."23 In these special circumstances, therefore, the gap between the effect on economic welfare and the effect on total welfare is partially bridged. Generally, however, it is not so bridged.

§9. There is one further consideration, of the great importance of which recent events can leave no doubt. It has to do with the possible conflict, long ago emphasised by Adam Smith, between opulence and defence. Lack of security against successful hostile attack may involve "dissatisfactions" of a very terrible kind. These things lie outside the economic sphere, but the risk of them may easily be affected by economic policy. It is true, no doubt, that between economic strength and capacity for war there is a certain rough agreement. As Adam Smith wrote: "The nation which, from the annual produce of its domestic industry, from the annual revenue arising out of its lands, labour and consumable stock, has wherewithal to purchase those consumable goods in distant countries, can maintain foreign wars there."24 But agreement between economic and military strength is ultimate and general, not immediate and detailed. It must, therefore, be clearly recognised that the effect upon economic welfare of the policy which a State adopts towards agriculture, shipping and industries producing war material is often a very subordinate part of its whole effect. Injury to economic welfare may need to be accepted for the sake of defensive strategy. Economically it is probably to the advantage of this country to purchase the greater part of its food supplies from abroad in exchange for manufactured goods, and to keep more than two-thirds of its cultivated land under grass—in which state comparatively little capital and labour is employed upon it and correspondingly little human food produced.25 In a world of perpetual peace this policy would also probably be advantageous on the whole; for a small proportion of the population engaged in agriculture does not necessarily imply a small proportion living under rural conditions. But, when account is taken of the possibility that imports may be cut off by blockade in war, that inference need not follow. There can be little doubt that Germany's policy of conserving and developing agriculture for many years at an economic loss enabled her to resist the British blockade in the Great War for a much longer period than would otherwise have been possible; and, though there are, of course, alternative means of defence, such as the establishment of large national grain stores, it is, from a general political point of view, a debatable question whether in this country some form of artificial encouragement should be given to agriculture as a partial insurance against the danger of food difficulties in the event of war. This issue, and the kindred issue concerning materials and industries essential for the conduct of war, cannot be decided by reference to economic considerations alone.

§10. The preceding discussion makes it plain that any rigid inference from effects on economic welfare to effects on total welfare is out of the question. In some fields the divergence between the two effects will be insignificant, but in others it will be very wide. Nevertheless, I submit that, in the absence of special knowledge, there is room for a judgment of probability. When we have ascertained the effect of any cause on economic welfare, we may, unless, of course, there is specific evidence to the contrary, regard this effect as probably equivalent in direction, though not in magnitude, to the effect on total welfare; and, when we have ascertained that the effect of one cause is more favourable than that of another cause to economic welfare, we may, on the same terms, conclude that the effect of this cause on total welfare is probably more favourable. In short, there is a presumption—what Edgeworth calls an "unverified probability"—that qualitative conclusions about the effect of an economic cause upon economic welfare will hold good also of the effect on total welfare. This presumption is especially strong where experience suggests that the non-economic effects produced are likely to be small. But in all circumstances the burden of proof lies upon those who hold that the presumption should be overruled.

§11. The above result suggests prima facie that economic science, when it shall have come to full development, is likely to furnish a powerful guide to practice. Against this suggestion there remains, however, one considerable obstacle. When the conclusion set out in the preceding section is admitted to be valid, a question may still be raised as to its practical utility. Granted, it may be said, that the effects produced by economic causes upon economic welfare are probably, in some measure, representative of those produced on total welfare, we have really gained nothing. For the effects produced upon economic welfare itself cannot, the argument runs, be ascertained beforehand by those partial and limited investigations which alone fall within the scope of economic science. The reason for this is that the effects upon economic welfare produced by any economic cause are likely to be modified by the non-economic conditions, which, in one form or another, are always present, but which economic science is not adapted to investigate. The difficulty is stated very clearly by J.S. Mill in his Logic. The study of a part of things, he points out, cannot in any circumstances be expected to yield more than approximate results: "Whatever affects, in an appreciable degree, any one element of the social state, affects through it all the other elements.... We can never either understand in theory or command in practice the condition of a society in any one respect, without taking into consideration its condition in all other respects. There is no social phenomenon which is not more or less influenced by every other part of the condition of the same society, and, therefore, by every cause which is influencing any other of the contemporaneous social phenomena."26 In other words, the effects of economic causes are certain to be partially dependent on non-economic circumstances, in such wise that the same cause will produce somewhat different economic effects according to the general character of, say, the political or religious conditions that prevail. So far as this kind of dependence exists, it is obvious that casual propositions in economics can only be laid down subject to the condition that things outside the economic sphere either remain constant or, at least, do not vary beyond certain defined limits. Does this condition destroy the practical utility of our science? I hold that, among nations with a stable general culture, like those inhabiting Western Europe, the condition is fulfilled nearly enough to render the results reached by economic inquiry reasonably good approximations to truth. This is the view taken by Mill. While fully recognising "the paramount ascendancy which the general state of civilisation and social progress in any given society must exercise over all the partial and subordinate phenomena," he concludes that the portion of social phenomena, in which the immediately determining causes are principally those that act through the desire for wealth, "do mainly depend, at least in the first resort, on one class of circumstances only." He adds that, "even when other circumstances interfere, the ascertainment of the effect due to the one class of circumstances alone is a sufficiently intricate and difficult business to make it expedient to perform it once for all, and then allow for the effect of the modifying circumstances; especially as certain fixed combinations of the former are apt to recur often, in conjunction with ever-varying circumstances of the latter class."27 I have nothing to add to this statement. If it is accepted, the difficulty discussed in this section need no longer give us pause. It is not necessarily impracticable to ascertain by means of economic science the approximate effects of economic causes upon economic welfare. The bridge that has been built in earlier sections between economic welfare and total welfare need not, therefore, rust unused.

Chapter II

DESIRES AND SATISFACTIONS

§1. IN the preceding chapter economic welfare was taken broadly to consist in that group of satisfactions and dissatisfactions which can be brought into relation with a money measure. We have now to observe that this relation is not a direct one, but is mediated through desires and aversions. That is to say, the money which a person is prepared to offer for a thing measures directly, not the satisfaction he will get from the thing, but the intensity of his desire for it. This distinction, obvious when stated, has been somewhat obscured for English speaking students by the employment of the term utility—which naturally carries an association with satisfaction—to represent intensity of desire. Thus, when one thing is desired by a person more keenly than another, it is said to possess a greater utility to that person. Several writers have endeavoured to get rid of the confusion which this use of words generates by substituting for "utility" in the above sense some other term, such, for example, as "desirability." The term "desiredness" seems, however, to be preferable, because, since it cannot be taken to have any ethical implication, it is less ambiguous. I shall myself employ that term. The verbal issue is, however, a subordinate one. The substantial point is that we are entitled to use the comparative amounts of money which a person is prepared to offer for two different things as a test of the comparative satisfactions which these things will yield to him, only on condition that the ratio between the intensities of desire that he feels for the two is equal to the ratio between the amounts of satisfaction which their possession will yield to him. This condition, however, is not always fulfilled. By this statement I do not, of course, merely mean that people's expectations as to the satisfaction they will derive from different commodities are often erroneous. The point is that, even apart from this, the condition sometimes breaks down. Thus Sidgwick observes: "I do not judge pleasures [and the same thing obviously holds of satisfactions other than pleasures] to be greater and less exactly in proportion as they exercise more or less influence in stimulating the will to actions tending to sustain or produce them":28 and again, "I do not think it ought to be assumed that intensity of immediate gratification is always in proportion to intensity of pre-existing desire."29 This consideration obviously has great theoretical importance. When it is recollected that all comparisons between different taxes and different monopolies, which proceed by an analysis of their effects upon consumer's surplus, tacitly assume that demand price (the money measure of desire) is also the money measure of satisfaction, it is apparent that it may have great practical importance also. The question whether it has in actual fact great practical importance has, therefore, to be examined.

§2. In a broad general way we may, I think, safely answer this question in the negative. It is fair to suppose that most commodities, especially those of wide consumption that are required, as articles of food and clothing are, for direct personal use, will be wanted as a means to satisfaction, and will, consequently, be desired with intensities proportioned to the satisfactions they are expected to yield.30 For the most general purposes of economic analysis, therefore, not much harm is likely to be done by the current practice of regarding money demand price indifferently as the measure of a desire and as the measure of the satisfaction felt when the desired thing is obtained. To this general conclusion, however, there is one very important exception.

§3. This exception has to do with people's attitude toward the future. Generally speaking, everybody prefers present pleasures or satisfactions of given magnitude to future pleasures or satisfactions of equal magnitude, even when the latter are perfectly certain to occur. But this preference for present pleasures does not—the idea is self-contradictory—imply that a present pleasure of given magnitude is any greater than a future pleasure of the same magnitude. It implies only that outer telescopic faculty is defective, and that we, therefore, see future pleasures, as it were, on a diminished scale. That this is the right explanation is proved by the fact that exactly the same diminution is experienced when, apart from our tendency to forget ungratifying incidents, we contemplate the past. Hence the existence of preference for present over equally certain future pleasures does not imply that any economic dissatisfaction would be suffered if future pleasures were substituted at full value for present ones. The non-satisfaction this year of a man's preference to consume this year rather than next year is balanced by the satisfaction of his preference next year to consume next year rather than to have consumed this year. Hence, there is nothing to set against the fact that, if we set out a series of exactly equal satisfactions—satisfactions, not objects that yield satisfactions—all of them absolutely certain to occur over a series of years beginning now, the desires which a man will entertain for these several satisfactions will not be equal, but will be represented by a scale of magnitudes continually diminishing as the years to which the satisfactions are allocated become more remote. This reveals a far-reaching economic disharmony. For it implies that people distribute their resources between the present, the near future and the remote future on the basis of a wholly irrational preference. When they have a choice between two satisfactions, they will not necessarily choose the larger of the two, but will often devote themselves to producing or obtaining a small one now in preference to a much larger one some years hence. The inevitable result is that efforts directed towards the remote future are starved relatively to those directed to the near future, while these in turn are starved relatively to efforts directed towards the present. Suppose, for example, that a person's telescopic faculty is such that he discounts future satisfactions, which are perfectly certain to occur, at the rate of 5 per cent per annum. Then, instead of being ready to work for next year, or a year ten years hence, so long as a given increment of effort will yield as much satisfaction as an equal increment devoted to work for the present, he will only work for next year so long as the yield of an increment of effort employed for that year is 1.05 times, and for ten years hence so long as it is (1.05)10 times, the yield of an increment employed for the present. It follows that the aggregate amount of economic satisfaction which people in fact enjoy is much less than it would be if their telescopic faculty were not perverted, but equal (certain) satisfactions were desired with equal intensity whatever the period at which they are destined to emerge.

§4. This, however, is not all. Since human life is limited, such fruits of work or saving as accrue after a considerable interval are not enjoyed by the person to whose efforts they are due. This means that the satisfaction with which his desire is connected is not his own satisfaction, but the satisfaction of somebody else, possibly an immediate successor whose interest he regards as nearly equivalent to his own, possibly somebody quite remote in blood or in time, about whom he scarcely cares at all. It follows that, even though our desires for equal satisfactions of our own occurring at different times were equal, our desire for future satisfaction would often be less intense than for present satisfaction, because it is very likely that the future satisfaction will not be our own. This discrepancy will be more important the more distant is the time at which the source of future satisfaction is likely to come into being; for every addition to the interval increases the chance of death, not merely to oneself, but also to children and near relatives and friends in whom one's interest is likely to be most keen.31 No doubt, this obstacle to investment for distant returns is partly overcome by stock-exchange devices. If £100 invested now is expected to reappear after 50 years expanded at, say, 5 per cent compound interest, the man who originally provides the £100 may be able, after a year, to sell his title in the eventual fruit for £105; the man who buys from him may be able similarly to get his capital of £105 back with 5 per cent interest after one year; and so on. In these circumstances the fact that any one man would require a higher rate of interest per annum to induce him to lock up £100 for 50 years than he would to induce him to lock up the same sum for one year makes no difference. But, of course, in actual fact this device is of very narrow application. As regards investments, such as planting a forest or undertaking drainage development on one's own estate, which can only be accomplished privately, it is not applicable at all; and, even when investment is undertaken by a company, investors cannot seriously expect to find a smooth and continuous market for non-dividend paying securities.

§ 5. The practical way in which these discrepancies between desire and satisfaction work themselves out to the injury of economic welfare is by checking the creation of new capital and encouraging people to use up existing capital to such a degree that larger future advantages are sacrificed for smaller present ones. Always the chief effect is felt when the interval of time between action and consequence is long. Thus, of the check to investment, Giffen wrote: "Probably there are no works more beneficial to a community in the long run than those, like a tunnel between Ireland and Great Britain, which open an entirely new means of communication of strategical as well as of commercial value, but are not likely to pay the individual enterpriser in any short period of time." A number of other large undertakings, such as works of afforestation or water supply, the return to which is distant, are similarly handicapped by the slackness of desire towards distant satisfactions.32 This same slackness of desire towards the future is also responsible for a tendency to wasteful exploitation of Nature's gifts. Sometimes people will win what they require by methods that destroy, as against the future, much more than they themselves obtain. Over-hasty exploitation of the best coal seams by methods that cover up and render unworkable for ever worse, but still valuable, seams;33 fishing operations so conducted as to disregard breeding seasons, thus threatening certain species of fish with extinction;34 farming operations so conducted as to exhaust the fertility of the soil, are all instances in point. There is also waste, in the sense of injury to the sum total of economic satisfaction, when one generation, though not destroying more actual stuff than it itself obtains, uses up for trivial purposes a natural product which is abundant now but which is likely to become scarce and not readily available, even for every important purposes, to future generations. This sort of waste is illustrated when enormous quantities of coal are employed in high-speed vessels in order to shorten in a small degree the time of a journey that is already short. We cut an hour off the time of our passage to New York at the cost of preventing, perhaps, one of our descendants from making the passage at all.

§ 6. In view of this "natural" tendency of people to devote too much of their resources to present service and too little to future service, any artificial interference on the part of Government in favour of that tendency is bound, unless it has compensating advantages on the side of distribution, to diminish economic welfare. Subject to that condition, therefore, all taxes which differentiate against saving, as compared with spending, must diminish economic welfare. Even without differentiation there will be too little saving: with it there will be much too little saving. Property taxes, where they exist, and death duties, obviously differentiate against saving. The English income tax, though it appears to be neutral, in fact, as is shown elsewhere, also does this35 The foregoing analysis shows that there is a prima facie case for softening the differential element in these taxes. Proposals, therefore, for exempting saved income from income tax, balancing property taxes by heavy "indirect" taxes upon important objects of expenditure, exempting from local rates improvements contributed during the preceding twenty years, and so on, deserve to be carefully weighed. In the construction of a practical tax-system, however, considerations as to what is "fair" between people of different degrees of wealth and as to what is administratively feasible may compel us to accept arrangements which differentiate against savings in spite of our knowledge that such differentiation is in itself undesirable.36

§ 7. Our analysis also suggests that economic welfare could be increased by some rightly chosen degree of differentiation in favour of saving. Nobody, of course, holds that the State should force its citizens to act as though so much objective wealth now and in the future were of exactly equal importance. In view of the uncertainty of productive developments, to say nothing of the mortality of nations and eventually of the human race itself, this would not, even in extremest theory, be sound policy. But there is wide agreement that the State should protect the interests of the future in some degree against the effects of our irrational discounting and of our preference for ourselves over our descendants. The whole movement for "conservation" in the United States is based on this conviction. It is the clear duty of Government, which is the trustee for unborn generations as well as for its present citizens, to watch over, and, if need be, by legislative enactment, to defend, the exhaustible natural resources of the country from rash and reckless spoliation. How far it should itself, either out of taxes, or out of State loans, or by the device of guaranteed interest, press resources into undertakings from which the business community, if left to itself, would hold aloof, is a more difficult problem. Plainly, if we assume adequate competence on the part of governments, there is a valid case for some artificial encouragement to investment, particularly to investments the return from which will only begin to appear after the lapse of many years. It must, however, be remembered that, so long as people are left free to decide for themselves how much work they will do, interference, by fiscal or any other means, with the way in which they employ the resources that their work yields to them may react to diminish the aggregate amount of this work and so of those resources. It does not follow, in short, that, because economic welfare would be increased if a man who now invests, say, one-tenth of his income, chose to invest one-half, therefore it would be increased if he were compelled by legislative decree, or induced by taxes and bounties, to make this change.

Chapter III

THE NATIONAL DIVIDEND

§ 1. GENERALLY speaking, economic causes act upon the economic welfare of any country, not directly, but through the making and using of that objective counterpart of economic welfare which economists call the national dividend or national income. Just as economic welfare is that part of total welfare which can be brought directly or indirectly into relation with a money measure, so the national dividend is that part of the objective income of the community, including, of course, income derived from abroad, which can be measured in money. The two concepts, economic welfare and the national dividend, are thus co-ordinate, in such wise that any description of the content of one of them implies a corresponding description of the content of the other. In the preceding chapter it was shown that the concept of economic welfare is essentially elastic. The same measure of elasticity belongs to the concept of the national dividend. It is only possible to define this concept precisely by introducing an arbitrary line into the continuum presented by nature. It is entirely plain that the national dividend is composed in the last resort of a number of objective services, some of which are embodied in commodities, while others are rendered direct. These things are most conveniently described as goods—whether immediately perishable or durable—and services, it being, of course, understood that a service that has already been counted in the form of the piano or loaf of bread, which it has helped to make, must not be counted again in its own right as a service. It is not, however, entirely plain which part of the stream of services, or goods and services, that flows annually into being can usefully be included under the title of the national dividend. That is the question which has now to be discussed.

§ 2. The answer which first suggests itself is that those goods and services should be included (double-counting, of course, being avoided), and only those, that are actually sold for money. This plan, it would seem, must place us in the best possible position for making use of the monetary measuring rod. Unfortunately, however, for the symmetry of this arrangement, some of the services which would be excluded under it are intimately connected, and even interwoven, with some of the included services. The bought and the unbought kinds do not differ from one another in any fundamental respect, and frequently an unbought service is transformed into a bought one, and vice versa. This leads to a number of violent paradoxes. Thus, if a man hires a house and furniture belonging to somebody else, the services he obtains from them enter into the national dividend, as we are here provisionally defining it, but, if he receives the house and furniture as a gift and continues to occupy it, they do so no longer. Again, if a farmer sells the produce of his farm and buys the food he needs for his family in the market, a considerable amount of produce enters into the national dividend which would cease to enter into it if, instead of buying things in the market, he held back part of his own meat and vegetables and consumed them on the farm. Again, the philanthropic work done by unpaid organiser, Church workers and Sunday school teachers, the scientific work of disinterested experimenters, and the political work of many among the leisured classes, which at present do not enter or, when there is a nominal payment, enter at much less than their real worth, into the national dividend, would enter into it if those people undertook to pay salaries to one another. Thus, for example, the Act providing for the payment of members of Parliament increased the national dividend by services valued at some £250,000. Yet again, the services rendered by women enter into the dividend when they are rendered in exchange for wages, whether in the factory or in the home, but do not enter into it when they are rendered by mothers and wives gratuitously to their own families. Thus, if a man marries his housekeeper or his cook, the national dividend is diminished. These things are paradoxes. It is a paradox also that, when Poor Law or Factory Regulations divert women workers from factory work or paid home-work to unpaid home-work, in attendance on their children, preparation of the family meals, repair of the family clothes, thoughtful expenditure of housekeeping money, and so on, the national dividend, on our definition, suffers a loss against which there is to be set no compensating gain.37 It is a paradox, lastly, that the frequent desecration of natural beauty through the hunt for coal or gold, or through the more blatant forms of commercial advertisement, must, on our definition, leave the national dividend intact, though, if it had been practicable, as it is in some exceptional circumstances, to make a charge for viewing scenery, it would not have done so.38

§ 3. Reflection upon these objections makes it plain that they are of a type that could be urged in some degree against any definition of the national dividend except one that coincided in range with the whole annual flow of goods and services. But to adopt a definition so wide as that would be tantamount to abandoning dependence upon the measuring rod of money. We are bound, therefore, either to dispense altogether with any formal definition or to fall back upon a compromise. The former policy, though there is more to be said for it than is sometimes allowed, would certainly arouse distrust, even though it led to no confusion. The latter, therefore, seems on the whole to be preferable. The method I propose to adopt is as follows. First, in accordance with the precedent set by Marshall, I shall take, as the standard meaning of the term national dividend, that suggested by the practice of the British Income Tax Commissioners. I, therefore, include everything that people buy with money income, together with the services that a man obtains from a house owned and inhabited by himself. But "the services which a person renders to himself and those which he renders gratuitously to members of his family or friends; the benefits which he derives from using his own personal goods [such as furniture and clothes], or public property such as toll-free bridges, are not reckoned as parts of the national dividend, but are left to be accounted for separately."39 Secondly, while constructing in this way my standard definition of the national dividend, I reserve full liberty, with proper warning, to use the term in a wider sense on all occasions when the discussion of any problem would be impeded or injured by a pedantic adherence to the standard use. There is, no doubt, a good deal that is unsatisfactory about this compromise. Unfortunately, however, the conditions are such that nothing better appears to be available.

§4. The above conclusion does not complete the solution of our problem. Given the general class of things which are relevant to the national dividend, a further issue has to be faced. For the dividend may be conceived in two sharply contrasted ways: as the flow of goods and services which is produced during the year, or as the flow which passes during the year into the hands of ultimate consumers. Marshall adopts the former of these alternatives. He writes: "The labour and capital of the country, acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is the true net annual income or revenue of the country, or the national dividend."40 Naturally, since in every year plant and equipment wear out and decay, what is produced must mean what is produced on the whole when allowance has been made for this process of attrition. To make this clear, Marshall adds elsewhere: "If we look chiefly at the income of a country, we must allow for the depreciation of the sources from which it is derived."41 In concrete terms, his conception of the dividend includes an inventory of all the new things that are made, and of all the services not embodied in things that are rendered, accompanied, as a negative element, by an inventory of all the decay and demolition that the stock of capital undergoes. Anyone, on the other hand, who had been so far convinced by Professor Fisher42 as to hold with him that savings are, in no circumstances, income, would identify the national dividend with those goods and services, and those only, that come into the hands of ultimate consumers.43 According to this view, Marshall's national dividend represents, not the dividend that actually is realised, but the dividend that would be realised if the country's capital were maintained and no more than maintained. In a stationary state, where the creation of new machinery and plant in any industry exactly balances, and no more than balances, loss by wear and tear, these two things would be materially equivalent. The dividend on either definition would consist simply of the flow of goods and services entering into the hands of ultimate consumers; for all new materials at earlier stages in the productive process that came into factories and shops would be exactly balanced by the corresponding materials that left them in worked-up products; and all newly created machinery and plant would exactly take the place, and no more than take the place, of corresponding machinery and plant that became worn out during the year. In practice, however, the industry of a country is hardly ever in this kind of stationary state. Hence it is extremely rare for the two versions of the national dividend to be materially equivalent, and it is impossible for them to be analytically equivalent. The question how the choice between them should fall is, therefore, an important one.

§ 5. The answer to it, as I conceive the matter, turns upon the purpose for which we intend the conception to be used. If we are interested in the comparative amounts of economic welfare which a community obtains over a long series of years, and are looking for an objective index with which this series of amounts can be suitably correlated, then, no doubt, the conception which I have attributed to Professor Fisher's hypothetical follower is the proper one. It is also much more relevant than the other when we are considering how much a country is able to provide over a limited number of years for the conduct of a war; because, for this purpose, we want to know what is the utmost amount that can be squeezed out and "consumed," and we do not premise that capital must be maintained intact. The major part of this volume, however, is concerned, not with war, but with peace, and not with measurement, but with causation. The general form of our questions will be: "What effect on economic welfare as a whole is produced by such and such a cause operating on the economic circumstances of 1920?" Now it is agreed that the cause operates through the dividend, and that direct statements of its effects must refer to the dividend. Let us consider, therefore, the results that follow from the adoption of those two conceptions respectively. On Fisher's follower's plan, we have to set down the difference made by the cause to the dividend, not merely of 1920, but of every year following 1920; for, if the cause induces new savings, it is only through a statement covering all subsequent years that its effect on the dividend, as conceived by Fisher's follower, can be properly estimated. Thus, on his showing, if a large new factory is built in 1920, not the capital establishment of that factory, but only the flow of services rendered by it in 1920, should be reckoned in the dividend of 1920; and the aggregate effects of the creation of the factory cannot be measured without reference to the national dividend of a long series of years. On Marshall's plan this inconvenient elaboration is dispensed with. When we have stated the effect produced on the dividend, in his sense, for the year 1920, we have implicitly included the effects, so far as they can be anticipated, on the consumption both of 1920 and of all subsequent years; for these effects are reflected back in the capital establishment provided for the factory. The immediate effect on consumption is measured by the alteration in the 1920 dividend as conceived by Fisher's follower. But it is through total consumption, and not through immediate consumption, that economic welfare and economic causes are linked together. Consequently, Marshall's definition of the national dividend is likely, on the whole, to prove more useful than the other, and I propose in what follows to adopt it. The entity—also, of course, an important one—which Fisher's follower calls by that name, we may speak of as the national income of consumption goods, or, more briefly, consumption income.

§ 6. We have thus achieved a definition which, unsatisfactory as it is, is still reasonably precise, of the concrete content of the national dividend. This definition carries with it certain plain implications as to the way in which that dividend must be evaluated. The first and most obvious of these is that, when the value of a finished product is counted, the value of materials employed in making that product must not be counted also. In the British Census of production of 1907 this form of double counting was carefully avoided. The Director described his method as follows: The result of deducting the total cost of materials used, and the amount paid to other firms for work given out, from the value of the gross output for any one industry or group of industries is to give a figure which may, for convenience, be called the "net output" of the industry or the group. This figure "expresses completely and without duplication the total amount by which the value (at works) of the products of the industry or the group, taken as a whole, exceeded the value (at works) of the materials purchased from outside, i.e. it represents the value added to the materials in the course of manufacture. This sum constitutes for any industry the fund from which wages, salaries, rent, royalties, rates, taxes, depreciation, and all other similar charges, have to be defrayed, as well as profits."44 When, however, it is desired to evaluate the national dividend as a whole, these allowances are not sufficient. There is no real difference between the flour, which is used up in making bread, and bread-making machinery, which is used up and worn out in the process of effecting the conversion. If adding together the flour and the bread in summing the national dividend involves double counting, so also does adding together the machinery and the bread. "Logically," as Marshall observes, "we ought to deduct the looms which a weaving factory buys as well as its yarn. Again, if the factory itself was reckoned as a product of the building trade, its value should be deducted from the output (over a term of years) of the weaving trade. Similarly with regard to farm buildings. Farm houses ought certainly not to be counted, nor for some purposes any houses used in trade."45 In a broad general way these considerations can be taken into account by subtracting from the sum of the values of the net products of various industries, as defined in the Census of Production, the value of the annual depreciation, which signifies the annual cost of renewal and repair of all kinds of machinery and plant.46 Thus, if a particular sort of machinery wears out in ten years—Professor Taussig's estimate for the average life of machinery in a cotton mill47 —the value of the national dividend over ten years will fall short of the value of the aggregated net product by the value of this machinery.48 Again in so far as any sort of crop wastes the productive powers of the soil, the value of the dividend will fall short of the value of the aggregated net product by the cost of returning to the soil those chemical ingredients that it removes.49 Yet again, when minerals are dug out of the ground, a deduction should be made equal to the excess of the value which the minerals used during the year had in their original situation—theoretically represented by the royalties paid on their working—over the value which whatever is left of them possesses to the country after they have been used. If "using" means exporting in exchange for imports that are not used as capital, this latter value is zero. If, on the other hand, it means inducing Nature miraculously to transmute the mineral into something possessing greater value than it had in the mine, then, in order to obtain the value of the national dividend from the value of the aggregated net product, we shall need to add, and not to subtract, something. This is sufficient for our present purpose. More delicate issues concerning the precise significance of the notion "maintaining capital intact" are treated in detail in the next chapter.

§ 7. It remains to consider the relation between the national dividend as thus evaluated—an addition, of course, being made for the value of income received from abroad—and the money income accruing to the community. On the face of things we should expect these two sums to be substantially equal, just as we should expect a man's receipts and his expenditure (including investments) to be equal. With proper account-keeping this clearly ought to be so. In order that it may be so, however, it is necessary for the money income of the community to be so defined as to exclude all income that is obtained by one person as a gift against which no service entering into the inventory of the national dividend is rendered—all allowances, for example, received by children from their parents. In like manner, if A sells existing property or property rights to B for £1000, the £1000, if already counted as a part of B's income, must not be counted as a part of A's income also. These points are, of course, well understood. But certain further implications are less fully realised. Thus the incomes constituted by old-age pensions and special war pensions must be excluded; though ordinary civil service pensions are properly included, "because these may be said to be equivalent to salaries, and the pension system is only an alternative to paying a higher salary to those rendering existing services and leaving them to look after their own superannuation allowance."50 There must also be excluded all income received by native creditors of the State in interest on loans that have been employed "unproductively," i.e. in such a way that they do not, as loans to build railways would do, themselves lead to the production of services which are sold for money and thus enter into the national dividend as evaluated in money. This means that the income received as interest on war loan must be excluded. Nor is it possible to overthrow this conclusion by suggesting that the money spent on the war has really been "productive," because it indirectly prevented invasion and the destruction of material capital that is now producing goods sold for money; for whatever product war expenditure may have been responsible for in this way—and a similar argument applies to expenditure on school buildings—is already counted in the income earned by the material capital. Yet again, it would seem that income obtained by force or fraud, against which no real service has been rendered, ought not to be counted. There are, furthermore, certain difficulties about payments made to Government. The moneys that governing authorities, whether central or local, receive in net profits on services rendered by them, e.g. the profits of the Post Office or of a municipal tramway service, should clearly be counted. What the Treasury receives in income tax or death duties should, on the other hand, clearly not be counted, because this income, which has already been reckoned as such in private hands, is not passed to the Treasury in payment for any services rendered by it, but is merely transferred to it as an agent for the tax-payers. What the Treasury receives in (the now abolished) excess-profit duty and corporation tax, as operated in England, stands, however, on a different footing. It should be counted, because the incomes of companies and individuals were reckoned as what was left after these taxes had been paid, so that, if the income represented by them had not been counted when in the hands of the Treasury, it would not have been counted at all.51 Finally, the main part of what the Treasury receives in customs and excise duties ought, paradoxical as it may seem, to be counted, in spite of the fact that it is already counted when in the hands of the tax-payers and that it is not paid against any service. The reason is that the prices of the taxed articles are pushed up (we may suppose) by nearly the amount of the duties, and that, therefore, unless the aggregate money income of the country is reckoned in such a way that it is pushed up correspondingly, this aggregate money income dividend by prices, that is to say, the real income of the country, would necessarily appear to be diminished by the imposition of these duties even though it were in fact the same as before.52 When the nominal money income of the country has been "corrected" in these various ways, what is left should approximate fairly closely to the value of the national dividend (inclusive of incomes from abroad) estimated on the plan set out above.53

Chapter IV

WHAT IS MEANT BY MAINTAINING CAPITAL INTACT

§ 1. THE issue, deferred from § 6 of the preceding chapter, as to the precise significance of "maintaining capital intact" has now to be taken up. We are debarred by the conventions we have adopted from counting as capital durable goods—other than houses—in consumers' hands, in spite of the fact that, so far as giving employment to labour is concerned, a motor car, for example, belonging to anybody other than an owner-driver, is indistinguishable from one belonging to a hiring establishment. This, however, is a secondary matter. For the present purpose the precise content of capital is immaterial. However we define it, it may be likened to a lake into which a great variety of things, which are the fruit of savings, are continually being projected. These things, having once entered the lake, survive there for various periods, according to their several natures and the fortunes that befall them. Among them are things of long life, like elaborately built factories, things of moderate life, like machinery, and things of very short life, like material designed to be worked up into finished goods for consumption or coal destined to be burned. Length of life in this connection means, of course, length of life as capital in the industrial machine functioning as a going concern, not the length of life which a thing would enjoy if nobody interfered with it. Coal, for example, if left alone, will last without change of form for an indefinite number of years; but, none the less, the "life" enjoyed by coal in the lake of capital, i.e. the period covered between its entrance and its exit, is almost always very short. All things that enter the lake eventually pass out of it again. Some of them pass, so to speak, in their own persons, embodied as material in some finished product, as when cotton yarn emerges as a cloth garment. But exits are not always, or indeed generally, made in the form of a passage outward of the actual elements that originally came in. When coal is burnt in the process of smelting iron, which is to be used eventually in making cutlery, it is the cutlery, embodying the "virtue" of the coal, and not the coal itself, which passes in person out of the lake. In like manner it is, of course, the "virtue" of machines that are worn out in making finished goods, and not the machines themselves, which passes out in person. In one form or another, however, whatever enters also leaves. There is then of necessity always a stream flowing out of the lake so long as it has any contents at all, and in practice there is also always a stream flowing into it. Its contents at any moment consist of everything that has flowed into it in the past minus anything that has flowed out. It is theoretically possible to make an inventory of them and also to evaluate them from day to day. When we speak, in connection with our definition of the national dividend, of the need for "maintaining capital intact," something is implied about the relation between successive inventories or successive evaluations of the contents of the lake we have been describing. It is the task of the present chapter to make clear what precisely that something is.

§2. For our present purpose it is plain that maintenance of capital intact does not require that the money valuation of the contents of the lake shall be held constant. There are certain sorts of change in this valuation to which everybody will agree that, in our reckoning of the national dividend, no attention whatever should be paid. Thus, if in consequence of a contraction in the supply of money in any year, money values all round are substantially reduced, the money value of the stock of capital will contract along with the rest; but nobody would suggest that this should be reckoned when the national dividend is being estimated. Again, Marshall has observed: "The value of the capital already involved in improving land or erecting a building; in making a railway or a machine; is the aggregate discounted value of its estimated future net income."54 This implies that, if the general rate of interest rises, the money value of the stock of capital will, other things remaining equal, be reduced. Such reductions are irrelevant to the magnitude of the national dividend. When the value of particular items in the capital stock falls because people's taste for the things they help to produce has declined or because foreign competitors offer these things at a diminished price, that fall also ought not, I think, to be deemed relevant; and the same conclusion holds when the creation of a new item of capital equipment diminishes the value of an existing item; e.g. when the construction of an electric lighting plant depreciates a neighbouring gas plant, or when the introduction of a new type of battleship or bootmaking machine renders existing battleships or bootmaking machines obsolete. In fact we may, I think, say quite generally that all contractions in the money value of any parts of the capital stock that remain physically unaltered are irrelevant to the national dividend; and that their occurrence is perfectly compatible with the maintenance of capital intact.

§ 3. It might seem at first sight to follow from what has been said that the maintenance of capital intact must mean the maintenance in an unaltered physical state of the inventory of things lying in the capital lake. Plainly, if this inventory is in no way modified, capital is maintained intact in an absolute sense; and, if somethings fall out of the inventory, it is not maintained intact in an absolute sense. But, for the special purpose of this analysis, maintenance of capital intact does not mean maintenance in an absolute sense. Certain contractions in the physical stock of capital will have to be held compatible with its maintenance intact, as the phrase is here understood. For, it must always be remembered, our concern is to define the national dividend without parting from the phraseology made familiar by Marshall. Thus, suppose that an earthquake or the onslaught of a hostile nation destroys in one year half this country's accumulated stock of wealth. It would be paradoxical and inconvenient to conclude that our national dividend was thereby automatically rendered negative. We must say rather that the loss is a loss on capital account, not on income account. In other words, this sort of loss, though, of course, it is incompatible with the maintenance of capital intact in any literal sense, is not relevant to estimates of the national dividend. Hence for our purpose maintenance of capital intact must be defined to mean maintenance of it intact, not absolutely, but only when this particular type of loss does not occur.

§4. It may perhaps be thought that this opens the way for an endless string of further prevarications; that, for example, the loss of houses by fire or of ships by storm should be put on the same footing as the losses just discussed. That, however, is not so. All disintegrations of capital goods other than catastrophic destructions of the type described in the preceding section are really incidental to the use of them, and are involved in the production of the dividend. This is most obviously true of the ordinary wear and tear which machinery and plant undergo when carrying out their functions. Weathering by lapse of time apart from use is in like case; for a necessary condition of use is subjection to the passage of time. Even the accidents of fire and storm are in like case; for the use of houses implies their subjection to the risk of fire and the use of ships their subjection to that of storm. The national dividend is not truly reckoned until allowance has been made for the replacement of all these types of capital loss. Maintenance of capital intact in our sense is thus equivalent to maintenance in an absolute sense save only that provision must not be made against destruction by "act of God or the King's enemies."

§ 5. We have now reached the conclusion that the maintenance of capital intact for our purpose requires that all ordinary physical deteriorations in the capital stock should be made good. But what exactly do we mean by making good? When a capital stock deteriorates, e.g. through wear and tear, its material components do not disappear from the world, but merely become rearranged in a way that renders them less useful to mankind. Thus what has really disappeared is a physical arrangement embodying a certain sum of values, which we may for convenience measure in money. To make this good there must be added to the capital stock new arrangements of matter embodying a sum of values equal to this sum. Thus, if a machine becomes worn out and has no value at all, we require to add to the capital stock something whose value is equal to that which the machine, had it remained physically intact, would have now. The original cost of the machine, whether in real terms or in money terms, is not relevant. Thus it may have cost a thousand pounds to make; but, if its wearing out reduces its sum of values below what it would otherwise have been, not by £1000 but by £500 or by £1500, the replacing machine must have one or other of these values, not the value of £1000. It follows, inter alia, that if any piece of capital stock, e.g. the equipment of a steel works, has fallen in value in consequence, say, of intensified foreign competition, and if wear and tear depreciates the equipment 10 per cent per annum, to maintain capital intact we need 10 per cent, not of the original cost of the equipment nor of its present replacement cost, but of its present value. If the foreign competition is so strong or if popular taste has turned away from the product made by the equipment so completely that its value has become nil, physical deterioration in it by wear and tear or lapse of time involves no loss of value, and so calls for no replacement. Maintenance of capital intact for our purpose means then, not replacement of all value losses nor yet replacement of all physical losses (not due to acts of God and the King's enemies), but replacement of such value losses as are caused by physical losses other than the above.

§ 6. It is easy to see that different sorts of capital stock undergo losses of this sort—flow out of the capital lake—at different rates. Working capital—materials, coal and so on—usually only has a few months of life in the lake; and fixed capital a life of a number of years, greater or less according to its nature. Hence the annual amount of replacement that is needed to keep £1's worth of working capital intact is much larger than the amount required in respect of a £1's worth of fixed capital. Professor Mitchell quotes some figures which suggest that in the United States the part of fixed capital represented by "movable equipment"—machinery and so on—engaged in industry and agriculture is about equal to the stock of working capital, each being valued at 9000 million pounds.55 If the normal life of movable equipment be put at ten years and that of working capital at one year, this implies that the annual replacement of fixed capital must, to maintain it intact, amount to 900 and the annual replacement of working capital to 9000 millions—ten times as much. Hence if, in any year, a £100 millions worth of deterioration in fixed capital is made good by adding to the capital stock a new 100 millions worth, not of fixed but of working capital, the value of annual replacement needed in future years to keep the aggregate stock of capital intact will be pro tanto increased. In converse conditions it will be diminished.

§ 7. In conclusion a word may be said about the effect of failure to provide sufficient replacement to maintain capital intact. Let us suppose that we start from a condition of stability; that continually for a long time past savings at the rate of 2 million £ per day have been required for maintenance, and have in fact been forthcoming. Something occurs, as a result of which henceforward only 1 million £ will be forthcoming. It is obvious that the level of the lake must fall. But it will not continue to fall indefinitely. For, as a result of the decline in the inflow, the outflow also must diminish, since the progressive fall in the stock of capital involves at the same time a progressive fall in the daily wastage. Presently the outflow will so far decrease that the reduced inflow of 1 million a day suffices to replace it. The contraction in the capital stock thereupon comes to an end and a new equilibrium is established. The period of time that will need to elapse before this happens will depend on the proportions existing initially between capital items of various lengths of life and on such changes as may take place in these proportions during the course of the decline. If the failure to provide replacements is carried to the point that henceforward none whatever are forthcoming, the stock of capital must, of course, eventually disappear altogether. Items with a short remainder of life will become extinct first; then others and yet others. The out-flowing stream will diminish to a smaller and smaller trickle, until, with the demise of the longest-lived item, it and the lake from which it came alike go dry. In this event, however, humanity will take no interest, for the demise of the last capital item will certainly have been preceded by that of the "last man."

Chapter V

CHANGES IN THE SIZE OF THE NATIONAL DIVIDEND

§ 1. THE economic welfare of the country is intimately associated with the size of the national dividend, and changes in economic welfare with changes in the size of the dividend. We are concerned to understand, so far as may be, the nature of these associations. To this end an essential preliminary is to form clear ideas as to what precisely changes in the size of the dividend mean. It will be convenient, in the first instance, to postulate that the size of that group whose dividend we are studying remains unchanged.

§ 2. The dividend is an objective thing, consisting in any period of such and such a collection of goods and services that flow into being during the period. Since it is an objective thing, we should naturally wish, if we were able, to define changes in the size of it by reference to some objective physical unit, and without any regard to people's attitude of mind towards the several items contained in it. I do not mean that changes in public tastes would be thought of as incapable of affecting the size of the national dividend. They are obviously capable of affecting it by causing changes in the objective constituents of the dividend. I mean that, given those objective constituents, the size of the dividend should depend on them alone, and not at all on the state of people's tastes. This is the point of view which everybody intuitively wishes to take.

§ 3. If the national dividend consisted of one single sort of commodity only, there would be no difficulty about this. Everybody would agree that an increase in the size of the dividend should mean an increase, and a decrease a decrease, in the number of units of this commodity. In like manner, if the dividend consisted of a number of different commodities, but the quantities of all of them always varied in equal proportions, there would be no difficulty. The dividend would at any time consist of a certain number of complex units, each of them made up of so much of each commodity, and increases and decreases in the dividend would mean increases and decreases in the number of these complex units.

§ 4. If the national dividend consisted of a number of different sorts of things, the proportion between which was not fixed, but some pre-established harmony made it impossible for the quantity of any one of them to diminish when the quantity of any other was increasing, we should no longer be able to say that the dividend at any moment consisted of such a number of units and at another moment of such another number of units. But we should still always be able to determine by a physical reference whether the dividend of one moment was greater or less than the dividend of another moment: and this, for many purposes, would be all that anybody would need.

§ 5. In actual life, however, the national dividend consists of a number of different sorts of things, the quantities of some of which are liable to increase at the same time that the quantities of others are decreasing. In these circumstances there is no direct means of determining by a physical reference whether the dividend of one period is greater or less than that of another; and it becomes necessary to seek for a definition along other lines. Plainly the definition chosen must be such that, supposing the dividend consisted of one sort of thing only, we should always be able to say that an increase in the quantity of this thing constituted an increase in the size of the dividend. A definition that did not admit of this would be paradoxical. From this starting-point we are led forward as follows. Considering a single individual whose tastes are taken as fixed, we say that his dividend in period II. is greater than in period I. if the items that are added to it in period II. are items that he wants more than the items that are taken away from it in period II. Passing to a group of persons (of given numbers), whose tastes are taken as fixed and among whom the distribution of purchasing power is also taken as fixed, we say that the dividend in period II. is greater than in period I. if the items that are added to it in period II. are items to conserve which they would be willing to give more money than they would be willing to give to conserve the items that are taken away from it in period II. This definition is free from ambiguity. However the technique of production has altered,—though it has become more costly to make one thing and less costly to make another, though it has become possible to make some entirely new things and at the same time impossible to make some things that used to be made before,—it can yield one conclusion, and one only, as to the effect on the size of the national dividend of any change in its content that may have taken place. If, then, tastes and the distribution of purchasing power were really fixed, there would be nothing to set against the advantages of this method of definition. It would be the natural and obvious one to adopt.

§ 6. As a matter of fact, however, tastes and the distribution of purchasing power both vary. The consequence of this is that our definition leads in certain circumstances to results which, in appearance at least, are highly paradoxical. Thus in period I. tastes are such and such, and in period II. they are something different; in period I. the dividend is a collection C₁ and in period II. a collection C₂. It may happen both that the group with period I. tastes would give less money for the items added in period II. than for the items subtracted in that period, and also that the group (of equal numbers) with period II. tastes would give more money for the items added in period II. than for the items subtracted in that period. In this case our definition makes C₂ both less than C₁ and also greater than C₁; which is a violent paradox. The only escape from this is to admit that, in these circumstances, there is no meaning in speaking of an increase or decrease in the national dividend in an absolute sense. The dividend decreases from the point of view of period I. tastes, and increases from the point of view of period II. tastes; and there is nothing more to say.56 It is easy to see that the same paradox may arise, and the same solution be forced upon us, when the distribution of purchasing power alters between period I. and period II. Here again we can only speak of an increase (or decrease) in the size of the dividend from the point of view of period I. distribution or from the point of view of period II. distribution: we cannot speak of an increase or decrease in any absolute sense.57

§ 7. We are thus confronted with the awkward fact that there are likely to be certain changes in the constitution of the national dividend, of which it is not possible to say that they are either increases or decreases in an absolute sense. Plainly there is serious objection to a definition which leads to this result. On the other hand, though it will rarely happen that a modification of the dividend, which constitutes an upward (or downward) change of so much per cent from the point of view of period I., will constitute an equal percentage change from the point of view of period II., if between these two periods tastes or distribution have altered, yet it will, we may reasonably expect, usually constitute a change in the same direction from the point of view of period II. Most causes, in short, will increase the dividend from both points of view or diminish it from both points of view. Usually, therefore, we can say, without circumlocution or complicated reference to two points of view, that a given cause either has or has not increased the size of the national dividend. The defect in our definition is thus not a fatal defect. Moreover, continued reflection fails to reveal any other definition that is not even more defective. In spite, therefore, of all that has been said, I propose, for the purposes of this volume, to define an increase in the size of the dividend for a group of given numbers as follows. From the point of view of period I. an increase in the size of the dividend is a change in its content such that, if tastes in period II. were the same as those prevailing in period I. and if the distribution of purchasing power were also the same as prevailed in period I., the group would be willing to give more money to conserve the items added in period II. than they would be willing to give to conserve the items that are taken away in period II. Waiving the distinction, discussed in Chapter II., between desire and the satisfaction that results when a desired thing is obtained, we may state the above definition alternatively thus. From the point of view of period I. an increase in the size of the dividend for a group of given numbers is a change in its content such that, if tastes in period II. were the same as those prevailing in period I., and if the distribution of purchasing power were also the same as prevailed in period I., the economic satisfaction (as measured in money) due to the items added in period II. From the point of view of period II. an increase in the dividend is defined in exactly analogous ways. From an absolute point of view an increase in the size of the dividend is a change which constitutes an increase from both the above two points of view. When, of two dividends, one is larger from the point of view of one period and the other from that of the other, the two are, from an absolute point of view, incommensurable.

§ 8. Hitherto we have been concerned with groups containing equal numbers. As between groups of different sizes a direct comparison of dividends would be of little service. We may, however, in imagination reduce the numbers—all classes of persons being treated equally—in the larger group in the proportion required to make it equal to the smaller group, and reduce its money income in an equal proportion. The dividend of the group so obtained may then be compared, on the lines of the preceding analysis, with that of the smaller group. The result is roughly a comparison of the per capita dividends of the two original groups.

Chapter VI

THE MEASUREMENT OF CHANGES IN THE SIZE OF THE NATIONAL DIVIDEND

§ 1. THE discussion of the preceding chapter has provided us with a criterion by which to decide whether the national dividend of one period is larger or smaller than the national dividend of another period from the point of view of one or other of the periods. But to provide a criterion of increases and decreases in the size of anything is not to provide a measure of these changes. We have now to study the problem of devising an appropriate measure.

§ 2. Our criterion of increase from the point of view of any period being that, with the tastes and distribution of that period, the money demand for the things that have been added to the dividend exceeds the money demand for the things taken away from it, it is natural to suggest that we should employ as a measure of increase, from the point of view of the period, the proportion in which the aggregate money demand for the things contained in the dividend of that period (in the sense of the amount of money that people would be willing to give rather than do without those things) exceeds the aggregate money demand for the things contained in the dividend of the other period. A measure of this kind would conform exactly to our criterion. We should have two figures, one giving the change from the point of view of the tastes and distribution of period I. and the other that from the point of view of the tastes and distribution of period II. Plainly, given the criterion decided upon in the last chapter, this is the measure that we should adopt if we were able to do so.

§ 3. Unfortunately, however, this type of measure is altogether impracticable. In the way of it there stands, as a final obstacle, the fact that the aggregate money demand for the things contained in the dividend of any period, in the sense explained above, is an unworkable conception. It involves the money figure that would be obtained by adding together the consumers' surpluses, as measured in money, derived from each several sort of commodity contained in the dividend. As Marshall has shown, however, the task of adding together consumers' surpluses in this way, partly on account of the presence of complementary and rival commodities, presents difficulties which, even if they are capable of being overcome in theory by means of elaborate mathematical formulae, are certainly insuperable in practice.58 Even apart from these remoter complications, it is evident that no measure of the kind contemplated could be built up which did not embrace among its terms the elasticities of demand for the various elements contained in the dividend, or, more exactly, the forms of the various demand functions that are involved. These data are not, and are not likely, within any reasonable period of time, to become, accessible to us. Any type of measure which involves the use of them must, therefore, be ruled out of court.

§ 4. Continuing along the line of thought which this consideration suggests, we are soon led to the conclusion that the only data which there is any serious hope of organising on a scale adequate to yield a measure of dividend changes are the quantities and prices of various sorts of commodities. There is nothing else available, and, therefore, if we are to construct any measure at all, we must use these data. Our problem then becomes: in what way, if at all, is it possible, out of them, to construct a measure that will conform to the definition of changes in the size of the dividend that was reached in the last chapter? An attempt to solve this problem falls naturally into three parts: first, a general inquiry as to what measure would conform most nearly to that definition if all relevant information about quantities and prices were accessible; secondly, a mathematical inquiry as to what practicable measure built up from the sample information about quantities and prices that we can in fact obtain would approximate most closely to the above measure; thirdly, a mixed general and mathematical inquiry as to how reliable the practicable measure, as an index of the above measure, is likely to be.

§ 5. In attacking the first and most fundamental of these issues we have to admit at once that complete success is unattainable. According to the definition of the last chapter, the national dividend will change in one way from the point of view of a period in which tastes and distribution are of one sort, and in a different way from that of a period in which they are of another sort. In order to conform with this, our measure of change would need to be double, being expressed in one figure from the point of view of the first period, and, if tastes and distribution were different in the two periods, in another figure from the point of view of the second period. A measure built up on quantities and prices only cannot possibly answer to this requirement. For, though we may know the quantities and prices that actually ruled in period I., when tastes and distribution were of sort A, and the quantities and prices that ruled in period II., when tastes and distribution were of sort B, we cannot possibly know either the quantities and prices which would have ruled in period I., if tastes and distribution had then been of sort B, or those which would have ruled in period II., if tastes and distribution had then been of sort A. Hence, the utmost we can hope for is a measure which will be independent of what the state of tastes and distribution actually is in either of the periods to be compared, but which will always increase when the content of the dividend has changed in such a way that economic welfare (as measured in money) would be increased whatever the state of tastes and distribution, provided only that this was the same in both periods. Even if the whole of the data about quantities and prices were accessible to us, it would be impossible to construct a measure, based on these data alone, conforming more closely than this to our definition; and, plainly, this degree of conformity is very incomplete.

§ 6. So much being understood, let us turn to the problem of constructing from full data a measure—we may call it from henceforth the full-data measure—that will conform as closely as possible to the modest ideal specified in the preceding section. What is required is a measure which will show increases in the size of the dividend whenever its content is changed in such a way that, in terms of the money of either period,59 for a group of given size with constant tastes and distribution, the money demand for the items that have been added is greater than the money demand for those that have been subtracted;60 or, in other words, that the economic satisfaction (as measured in money) obtained by the group in the second period is greater than it was in the first period. It is not, of course, required that, if, when the excess of economic satisfaction (as measured in money) is E, our measure shows an increase of 1 per cent, it shall, when the excess of economic satisfaction (as measured in money) is 2E, show an increase of 2 per cent. This is not only not necessary, but, in the special case of a dividend consisting of one sort of commodity only, it would even lead to paradoxical results. It is required, however, that, when the excess of economic satisfaction (as measured in money) is E, our measure shall show some increase, and that, when the excess of economic satisfaction (as measured in money) is more than E, it shall show a greater increase than it does when the excess is E. This is the framework within which our construction must be made. The problem is to discover what construction will best fulfil the purpose that has been specified.61

§ 7. In the first of any two periods that we wish to compare any group of given size expends its purchasing power upon one collection of commodities, and in the second on a different collection. Each collection must, of course, be so estimated that the same thing is not counted twice over, that is to say, it must be taken to include direct services rendered to consumers—e.g. the services of doctors, finished consumable articles, and a portion of the finished durable machines produced during the year,62 but not the raw materials or the services of labour that are embodied in these things, and not, of course, "securities." Let us, at this stage, ignore the fact that in one of the collections there may be some newly invented kinds of commodity which are not represented at all in the other. The first collection, which we may call C₁, then embraces x₁, y₁, z₁,...units of various commodities; and the second collection, C₂, embraces x₂, y₂, z₂,...units of the same commodities. Let the prices per unit of these several commodities be, in the first period, a₁, b₁, c₁,...; and, in the second period, a₂, b₂, c₂,...Let the aggregate money income of our group, in the first period, be I₁, in the second I₂. The following propositions result:

1. If our group in the second period purchased the several commodities in the same proportion in which it purchased them in the first period, that is to say, if it purchased in both periods a collection of the general form C₁, its purchase of each commodity in the second period would be equal to its purchase of each commodity in the first period multiplied by the fraction

2. If our group in the first period purchased the several commodities in the same proportion in which it purchased them in the second period, that is to say, if it purchased in both periods a collection of the general form C₂, its purchase of each commodity in the second period would be equal to its purchase of each commodity in the first period multiplied by the fraction

On the basis of these propositions, provided that a certain assumption is made, our problem can be partially solved.

§ 8. If in period II. a single man who had been purchasing a collection of the form C₂, i.e. made up of elements in the proportions (x₂, y₂, z₂,...), chose instead to purchase a collection of the form C₁, it is certain that his action would leave prices unchanged, so that he could buy the items in his new collection at prices a₂, b₂, c₂,... An analogous proposition holds of a single man in period I. who should choose to shift from a collection of form C₁ to one of form C₂. But, when it is the whole of a group, or, if we prefer it, a representative man, who shifts his consumption in this way, it is no longer certain that prices would be unaffected. If the group in period II. shifted from a collection of form C₂ to one of form C₁, it would have to pay, let us suppose, prices a₁', b₁', c₁' In like manner, if the group in period I. shifted from a collection of form C₁ to one of form C₂, it would have to pay prices a₂', b₂', c₂' The assumption referred to at the end of the preceding section is that {x₁a₁' + y₁b₁' + z₁c₁' +...} is equal to {x₁a₁ + y₁b₁ + z₁c₁ +...} and that {x₂a₂' + y₂b₂' + z₂c₂' +...} is equal to {x₂a₂ + y₂b₂ + z₂c₂ +...}. This means that the group in period II. could then, if it chose, buy as much of a C₁ collection, in spite of the shift of prices caused by its decision to do this, as it would have been able to do had that decision caused no shift of prices; and that an analogous proposition holds of the group in period I. If all the commodities concerned were being produced under conditions of constant supply price, the above assumption would conform exactly to the facts. In real life, with a large number of commodities, it is reasonable to suppose that the upward price movements caused by shifts of consumption would roughly balance the downward movements; so that, in general, our assumption will conform approximately to the facts. It is important to remember, however, throughout the following argument, that this assumption is being made.

§ 9. Let us begin with the case in which both the fractions set out in § 7 lie upon the same side of unity; they are either both greater than unity or both less than unity. If they are both greater than unity, this means that our group, if it wishes, can buy more commodities in the second period than in the first, whether its purchases are arranged in the form of collection C₁ or in that of collection C₂. Hence the fact that in the second period it chooses the form C₂ proves that the economic satisfaction (as measured in money) yielded by what it then purchases in the form C₂ is greater than the economic satisfaction (as measured in money) that would be yielded by a collection of the form C₁ larger than the collection of that form which it purchased in the first period.63A fortiori, therefore, it is greater than the economic satisfaction (as measured in money) that would be yielded by the actual collection of the form C₁ which it purchased in the first period. But, since tastes and distribution are unaltered, the economic satisfaction (as measured in money) that would be yielded by the actual collection C₁ in the second period is equal to the economic satisfaction (as measured in money) that was yielded by the actual collection in the first period. Hence, if both our fractions are greater than unity, it necessarily follows that the economic satisfaction (as measured in money) yielded by the collection C₂ bought in the second period is greater than the economic satisfaction (as measured in money) yielded by the collection C₁ bought in the first period. By analogous reasoning it can be shown that, if both the above fractions are less than unity, the converse result holds good. In these circumstances, therefore, either of the two fractions

or any expression intermediate between them, will satisfy the condition, set out in § 6, which our measure is required to fulfil as a criterion of changes in the volume of the dividend.

§ 10. In the above circumstances, therefore, the condition we have laid down does not determine the choice of a measure, but merely fixes the limits within which that choice must lie. The width of these limits depends upon the extent to which the two fractions differ from one another. In some conditions there exists between them a relation of approximate equality. Thus, during the later nineteenth century, the dominant factor in the Englishman's increased capacity to obtain almost every important commodity was one and the same, namely, improved transport; for a main part of what improvements in manufacture accomplished was to cheapen means of transport. In other conditions the difference between the two fractions is considerable. Illustrations that would be directly applicable might perhaps be found. I must content myself, however, with one drawn, not from an inter-temporary comparison of two states of the same group, but from a contemporary comparison of the states of two groups. This illustration is only relevant to the present purpose on the unreal assumption that English and German workmen's tastes are the same and that their purchases differ solely on account of differences in their income and in the prices charged to them. It is taken from the Board of Trade's Report on the Cost of Living in German Towns. The Report shows that, at the time when it was made, what an English workman customarily consumed cost about one-fifth more in Germany than in England, while what a German workman customarily consumed cost about one-tenth more in Germany than in England.64 If, then, the letters with the suffix 1 be referred to English consumption and prices, and those with the suffix 2 to German consumption and prices,

§ 11. Though our condition, in the class of problem so far considered, only fixes these two limits within which the measure of dividend changes should lie, considerations of convenience suggest even here the wisdom of selecting, though it be in an arbitrary manner, some one among the indefinite number of possible measures. When we proceed from this class of problem to another more difficult class, the need for purely arbitrary choice is narrower in range. It sometimes happens that one of the above two fractions is greater than unity and the other less than unity. Then it is clear that both of them cannot indicate the direction in which the economic satisfaction (as measured in money) enjoyed by the group has changed. In the second period, let us suppose, the group's later income commands a larger amount of the collection of form C₂ than its earlier income commanded; but it commands a smaller amount of the collection of form C₁ than its earlier income commanded. In these circumstances common sense suggests that, if the fraction falls short of unity by a large proportion, while the fraction exceeds unity only by a small proportion, the economic satisfaction (as measured in money) enjoyed by our group has probably diminished; and that, if conditions of an opposite character are realised, it has probably increased. A like inference, it would seem, may be drawn, though with less confidence, when one fraction differs from unity in only a slightly greater proportion than the other. If this be so, the economic satisfaction—it will be understood that we are speaking of satisfaction as measured in money—obtained by our group probably decreases or increases in the second period according as either or any power of this expression, or any other formula which moves more or less as it does, is greater or less than unity. Any fraction constructed on these lines will, therefore, probably satisfy the conditions required of our measure.

§ 12. In former editions of this work the above commonsense view was defended by direct analysis as follows. If is less than unity by a large fraction, this means that, were our group to purchase in the second year a collection of the form C₁, its purchases of each item would be less by a large percentage than they were in the first year, and therefore—tastes and distribution being unchanged—it would probably enjoy an amount of satisfaction less than in the first year by a large amount, say by K₁. The fact that, instead of doing this, it purchases in the second year a collection of the form C₂ proves that the satisfaction yielded by its purchase of this collection in the second year does not fall short of that yielded by its purchase of the other collection in the first year by more than K₁. In like manner, if is greater than unity by only a small fraction, this means that, were our group to purchase a collection of the form C₂ in the first year, its purchases of each item would be less by only a small percentage than they are in the second year, and—tastes and distribution being unchanged—it would probably enjoy an amount of satisfaction less than in the second year by only a small amount, say K₂. Hence, the satisfaction yielded by the collection actually purchased in the second year does not exceed that yielded by the collection actually purchased in the first year by more than K₂. Since, therefore, in view of the largeness of K₁ relatively to K₂, there are more ways in which the satisfaction from the second year's purchase can be less, than there are ways in which it can be more, than the satisfaction from the first year's purchase, and since, further, the probability of any one of these different ways is prima facie equal to that of any other, it is probable that the satisfaction from the second year's purchase is less than that from the first year's. This line of reasoning now seems to me to depend on a priori probabilities in a manner that is not correct. It is necessary to look at the matter more closely. To this end let us write

• q₁ for the quantity of collection C₁ obtainable (and obtained) with the then income in period I.:
• q₂ for the quantity of collection C₁ obtainable with the then income in period II.:
• r₁ for the quantity of collection C₂ obtainable with the then income in period I.:
• r₂ for the quantity of collection C₂ obtainable (and obtained) with the then income in period II.: and φ(q₁), φ(q₂), F(r₁) and F(r₂) for the quantities of satisfaction (as measured in money) associated with these several actual and potential purchases.

We are given that Then, since q₁ of C₁ is preferred in period I. to r₁ of C₂, we know that φ(q₁)>F(r₁). In like manner we know that F(r₂)>φ(q₂). Further, from (1) φ(q₁)>φ(q₂; and from (2) F(r₂)>F(r₁).

Write Thus A, B, H and K are all positive, and, by simple transposition, φ(q₁) - F(r₂) = ½(A-B+H-K). The inequality (3), at all events if the excess of q₁/q₂ over r₂/r₁ is considerable, permits us to say that probably H>K. But we know nothing about the values of A and B. The so-called principle of non-sufficient reason does not entitle us to educe out of this nescience the proposition that probably (B-A)<(H-K). It is only, however, with the help of some such proposition that we can infer that φ(q₁) is probably > F(r₂). Hence no general proof of our common-sense view is possible. It is true that, the larger the excess of q₁/q₂ above r₂/r₁, the more likely it is that satisfaction in the second period will be less than satisfaction in the first; but we cannot specify any values for these quantities in respect of which satisfaction in the second period is more likely than not to be less than satisfaction in the first. As Mr. Keynes puts it, "We are faced with a problem in probability, for which in any particular case we may have relevant data, but which, in the absence of such data, is simply indeterminate."65

§ 13. If this conclusion is correct it follows that, when of the expressions and one is greater and the other less than unity, there is no intermediate expression of which we can say in general terms that the economic satisfaction obtained by our group probably increases or decreases in the second period according as the expression is greater or less than unity. Nevertheless, when both our limiting expressions are on the same side of unity, so that there is no doubt as to whether economic satisfaction, as between the two periods, has increased or diminished, it is practically much more convenient to write down some single expression intermediate between the two limiting expressions rather than both of these. There are an infinite number of intermediate expressions available. In making our choice among them, since there is no deeper ground of preference, we may, as Mr. Keynes writes, "legitimately be influenced by considerations of algebraical elegance, of arithmetical simplicity, of labour-saving, and of internal consistency between different occasions of using a particular system of short-hand."66 It is thus, I suggest, proper to make use of the two fundamental tests of technical excellence in price index numbers—for, of course, the measure we are seeking is simply the reciprocal of a price index number multiplied by the proportionate change that has taken place in money incomes—which Professor Irving Fisher has brought into prominence. First, the formula chosen should be such that "it will give the same ratio between one point of comparison and the other point, no matter which of the two is taken as base."67 If, calculated forward, it shows that in 1910 prices were double what they were in 1900, it must not, as a so-called unweighted arithmetical index number of the Sauerbeck type would do, show, when calculated backwards, that in 1900 prices were something other than half what they were in 1910. Secondly, the formula chosen should obey what Professor Fisher calls the factor-reversal test. "Whenever there is a price of anything exchanged, there is implied a quantity of it exchanged, or produced, or consumed, or otherwise involved, so that the problem of an index number of prices implies the twin problem of an index number of quantities.... No reason can be given for employing a given formula for one of the two factors which does not apply to the other."68 Hence, the formula chosen should be such that, assuming the aggregate money values of all the commodities we are studying to have moved between two years from E to (E+e), then, if the formula, as applied to prices, gives an upward movement from P to (P+p) and, as applied to quantities, an upward movement from Q to (Q+q), is equals to

Besides conformity with these tests we may also properly require in our measure simplicity of structure and convenience of handling. These various considerations taken together point, on the whole, to the formula as the measure of change most satisfactory for our purpose. The portion of this expression to the right of I₂/I₁ is the reciprocal of that form of price index number to which Professor Fisher assigns the first prize for general merit, and which he proposes to call "the ideal index number."69

§ 14. The formulae discussed so far, alike the limiting formulae and the intermediate formula, have been built up on the tacit assumption that no commodities are included in either of the collections C₁ and C₂, which are not included in both. If, therefore, a commodity is available for purchase in one of any two years but not in the other, the satisfaction yielded by this commodity in the year in which it is purchased is wholly ignored by these measures. So far then as "new commodities" are introduced between two periods which are being compared, the measures are imperfect. This matter is important, because new commodities, in the sense here relevant, embrace, not merely commodities that are new physically, but also old commodities that have become obtainable at new times or places, such as strawberries in December, or the wheat which railways have introduced into parts of India where it was formerly unknown. Obviously, we must not count December strawberries along with ordinary strawberries, and so make inventions for strawberry forcing raise the price of strawberries, but must reckon December strawberries as a new and distinct commodity. Since, however, new commodities seldom play an important part in the consumption of any group till some little while after they are first introduced, the imperfection due to this is not likely to be very serious for comparisons between two years that are fairly close together. We can ignore the existence of the new commodities and confine our calculations to the old ones without serious risk of invalidating our results. As between distant years, however, in the later of which a great number of important commodities may be available that did not exist at all in the earlier ones, a measure that ignored new commodities would be almost worthless as a gauge of changes (as defined in the preceding chapter) in the size of the national dividend.70 Unless, therefore, some way can be found of bringing these things into account, the hope of making comparisons over other than very short intervals must, it would seem, be abandoned. A way out of this impasse is, however, available in the chain method devised by Marshall.71 On this method, the price level of 1900 is compared with that of 1901 on the basis of the commodities available in both those years, new commodities introduced and old commodities dropped out during 1901 being ignored; the price level of 1901 is then compared with that of 1902, the new commodities of 1901 this time being counted, but those of 1902 ignored; and so on. Thus we may suppose prices in 1901 to be 95 per cent of prices of 1900; those of 1902, 87 per cent of those of 1901; those of 1903, 103 per cent of those of 1902. On this basis we construct a chain, the price level of 1900 being put at 100. With the above figures the chain will be: When the reciprocals of these price indices, which obviously constitute indices of the purchasing power of £1, are put into our measure of the national dividend, we obtain an instrument by which years, too distant from one another to be effectively compared by any direct process, can be compared by a chain of successive stages. It is as though we were unable to construct any measuring rod capable of maintaining its shape if carried more than 100 miles. It would then be impossible to make any direct comparison between the height of the trees in places 1000 miles apart. But, by comparing the trees at the first mile with those at the 100th mile, these with those at the 199th mile, and so on continually, it would be possible to make an indirect comparison.72 It must, indeed, be conceded that, if the successive individual comparisons embodied in the chain method, each of which admittedly suffers from a small error, are likely for the most part to suffer from errors in the same direction, the cumulative error as between distant years may be large. Were people equally likely to forget how to make things now in use as to invent new things, a large cumulative error would be unlikely. But, in fact, we know that the great march of inventive progress is not offset in this way. Hence the errors introduced by the chain method are likely to be predominantly in one direction, in such wise that, if the method, as between two distant years, gives equal purchasing power for the £, it is probable that the £ really brings more satisfaction to the representative man of given tastes in the later year that in the earlier. Consequently, if our chain measure in 1900 gave 90 as the index of a £'s purchasing power, and gave 100 as the index in 1920, even though meanwhile a large number of new commodities had been introduced and old commodities abandoned, we might confidently infer that, in the conditions postulated in § 5, the amount of economic satisfaction carried to our group by a £ was larger in 1920 than it had been in 1900. But, if these indices were reversed, we could not infer with equal confidence—indeed, unless the fall of the index were very great, we could not infer with any confidence—that the sum of economic satisfaction carried by a £ was smaller in 1920 than in 1900.

§ 15. We now turn to the second main problem of this chapter. The formula of § 13 is the one we should select if our choice was completely free. But it cannot be employed in practice because, in order to construct it, a great deal of information would be necessary which is never in fact available. It is, therefore, necessary to construct, from such information as we can obtain, a model, or representative, measure that shall approximate to it as closely as possible. Our full-data measure, apart from its multiplier I₂/I₁ representing change of income, is built up of two parts: the reciprocal of the price change of the collection C₁ (containing quantities of different commodities equal to x₁, y₁, z₁,...) and the reciprocal of the price change of the collection C₂ (containing quantities equal to x₂, y₂, z₂,...). Our approximate measure will, therefore, also be built up of two parts constituting approximations to the price changes of C₁ and of C₂ respectively. By what use of the method of sampling can these approximations best be made?

§16. Whatever be the collection of commodities with which we are concerned, whether it be that purchased at any time by people in general, or by artisans, or by labourers, or by any other body of persons, it is likely to contain commodities drawn from several different groups, the broad characteristics of whose price movements are different. A good sample collection should contain representatives of all the groups with different characteristics that enter into the national dividend, or of that part of it which we are trying to measure.73 Unfortunately, however, practical considerations make it impossible that this requirement should be satisfied, and even make it necessary that resort should be had to commodities that do not themselves enter into the purchases of ordinary people, but are, like wheat and barley, raw materials of commodities that do. For the range of things whose prices we are able to observe and bring into our sample collection is limited in two directions.

First, except for certain articles of large popular consumption, the retail prices charged to consumers are difficult to ascertain. Giffen once went so far as to say: "Practically it is found that only the prices of leading commodities capable of being dealt with in large wholesale markets can be made use of." This statement must now be qualified, in view of the studies of retail prices of food that have been made by the Board of Trade and the late Ministry of Food, but it still holds good over a considerable field. Even, however, when the difficulty of ascertaining retail prices can be overcome, these prices are unsuitable for comparison over a series of years, because the thing priced is apt to contain a different proportion of the services of the retailer and of the transporter, and, therefore, to be a different thing at one time from what it is at another. "When fresh sea fish could be had only at the seaside, its average price was low. Now that railways enable it to be sold inland, its average retail price includes much higher charges for distribution than it used to do. The simplest plan for dealing with this difficulty is to take, as a rule, the wholesale price of a thing at its place of production, and to allow full weight to the cheapening of the transport of goods, of persons, and of news as separate and most weighty items."74

Secondly, it is very difficult to take account even of the wholesale prices of manufactured articles, because, while still called by the same name, they are continually undergoing changes in character and quality. Stilton cheese, once a double-cream, is now a single-cream cheese. Clarets of different vintages are not equivalent. A third-class seat in a railway carriage is not the same thing now as it was forty years ago. "An average ten-roomed house is, perhaps, twice as large in volume as it used to be; and a great part of its cost goes for water, gas, and other appliances which were not in the older house."75 "During the past twelve years, owing to more scientific methods of thawing and freezing, the quality of the foreign mutton sold in this country has steadily improved; on the other hand, that of foreign beef has gone down, owing to the fact that the supply from North America has practically ceased, and its place has been taken by a poorer quality coming from the Argentine."76 The same class of difficulty is met with in attempts to evaluate many direct services—the services of doctors, for example, which as Pareto pointedly observes, absorb more expenditure than the cotton industry77 —for these, while retaining their name, often vary their nature.

It would thus seem that the principal things available for observation—though it must be admitted that the official Canadian Index Number and more than one index number employed in United States have attempted a wider survey—are raw materials in the wholesale markets, particularly in the large world markets. These things—apart, of course, from the war—have probably of late years fallen in price relatively to minor articles, in which the cost of transport generally plays a smaller part; they have certainly fallen relatively to personal services; and they have probably risen relatively to manufactured articles, because the actual processes of manufacture have been improving. The probable tendency to mutual compensation in the movements of items omitted from our samples makes the omission a less serious evil than it would otherwise be. But, of course, the approximation to a true measure is protanto worsened; and it is almost certain, since the value of raw materials is often only a small proportion of the value of finished products, so that a 50 per cent change in the former might involve only a 5 per cent change in the latter, that it will give an exaggerated impression of the fluctuations that occur.

Nor does what has just been said exhaust the list of our disabilities. For the samples wanted to represent the several "collections" is a list, not merely of prices, but of prices multiplied by quantities purchased: and our information about quantities is even more limited than our information about prices. There are very few records of annual output—still less of annual purchases—of commodities produced at home. Quantities of imports are, indeed, recorded, but there are not very many important things that are wholly obtained by importation. The difficulty can, indeed, be turned, for some purposes, by resort to typical budgets of expenditure. These make it possible to get a rough idea of the average purchases of certain principal articles that are made by particular classes of people. But this method can scarcely as yet provide more than rough averages. It will seldom enable us to distinguish between the quantities of various things which are embodied in the collections representative of different years fairly close together.

§17. Let us next suppose that these difficulties have been so far overcome that a sample embracing both prices and quantities at all relevant periods is available. The next problem is to determine the way in which the prices ought to be "weighted." At first sight it seems natural that the weights should be proportioned to the quantities of the several commodities that are contained in the collection from which the sample is drawn, But, in theory at all events, it is sometimes possible to improve upon this arrangement. For some of the commodities about which we have information may be connected with some excluded commodities in such a way that their prices generally vary in the same sense. These commodities, being representative of the others as well as of themselves, may properly be given weights in excess of what they are entitled to in their own right. Thus, ideally, if we had statistics for a few commodities, each drawn from a different broad group of commodities with similar characteristics, it would be proper to "weight" the prices of our several sample commodities in proportion, not to their own importance, but to that of the groups which they represent. This, however, is scarcely practicable. There may be certain commodities whose representative character is so obvious that a doctored weight may rightly be given to them, but we shall seldom have enough knowledge to attempt this kind of discrimination. To use our sample as it stands is, in general, the best plan that is practically available.78 Hence, the full-data measure of the price change of the collection C₁ being the best available approximation to this will be where the number of terms is limited to the number of articles contained in the sample. It follows that the best approximation to the full-data measure of dividend change set out at the end of § 13 is

§ 18. In practice, as has already been hinted, we cannot usually find a reasonable sample set of articles, in regard to which the quantities of the same articles purchased in each of the two periods (or places) we are comparing are known. In these circumstances we may have to content ourselves with a sample in which quantities are given only for one of the years in our comparison. In this case we are forced to truncate our formula and adopt the form This is the type of formula (inverted) employed by the British Board of Trade in the cost of living index number. Obviously a sample of this truncated sort is inferior to a full sample. But Professor Fisher's investigations show that it does not usually yield results very widely divergent from those given by the full sample. We need not, therefore, attack the very difficult question whether there may not be some other formula founded on the same data that would give a closer approximation to the full sample.

§ 19. It is, however, desirable at this point to make plain the exact relation between the above formula and that implicit in a so-called "unweighted" index number such as Sauerbeck's. In that type of index number a certain year or average of years is taken as base, the prices of all commodities for this base year or base-period are put at 100, and the prices for other years at the appropriate fractions of 100. If a₁, b₁, c₁, are the actual prices in the base-year, and a₂, b₂, c₂, the actual prices in the other year, the index of a £'s purchasing power for this other year will be This is equivalent to the formula given in the preceding section if and only if x₁, y₁, z₁,... in that formula have values proportioned to ...

That is to say, the Sauerbeck formula measures the changes that take place in the aggregate price of a collection made up of such quantities of each sort of commodity as would, in the base-year or base-period, have sold for equal multiples of £100. It is extremely improbable that, as a matter of fact, those quantities were the quantities actually sold in the base-year or base-period. Therefore, it is only by an extraordinary accident that a formula constructed on the Sauerbeck plan with any given year or period as base will coincide with a formula modelled on the plan of the preceding section and designed to display the changes that occur in the aggregate price of the collection that was actually sold in the base-year or base-period.

§20. To what has just been said an obvious corollary attaches. We have seen that an index number on the Sauerbeck plan is built up with any year or period R as base; it measures changes in the aggregate price of a collection made up of such quantities of each commodity as in the year R would have sold for £100. It follows that, when the base is shifted from the year R₁ to the year R₂, the collection whose aggregate price movements are being measured is, in general, altered. Since, then, a different thing is being measured, it is to be expected that a different result will be attained; and there is no reason why the results should not differ so far that an index number on base R₁ shows a rise in the purchasing power of money, while a similar number (of the Sauerbeck type) on the base R₂ shows a fall. Thus, if we have to do with two commodities only, one of which doubles in price while the other halves, this type of index number will show a 25 per cent rise in the price of the two together if the first year is taken as base and a 20 per cent fall if the second year is taken. An excellent practical illustration of this type of discrepancy is afforded by certain tables in the Board of Trade publications concerning the cost of living in English and German towns respectively. In the Blue-book dealing with England the real wages of London, the Midlands and Ireland are calculated by means of index numbers, in which London (corresponding in our time index, say, to the year 1890) is taken as base, and the price of consumables and the rents prevailing there are both represented by 100. On this plan, prices of consumables and rents being given weights of 4 and 1 respectively, the Board of Trade found real wages in London to be equal to those of the Midlands, and 3 per cent higher than those of Irelands. If, however, Ireland had been take as base, the indices of real wages would have been in London 98, in the Midlands 104, in Ireland 100. A similar difficulty emerges in the Blue-book on German towns. The Board of Trade, taking Berlin as base, found real wages higher in that city than in any place save one on their list.79 "If the North Sea ports, instead of Berlin, had been taken as base, Berlin would have appeared fourth on the list instead of second, and the order of the other districts would have been changed; and, by taking Central Germany as base, even greater changes in the order would have been effected."80 It is true, no doubt, that large discrepancies of this sort are not likely to occur, except when there are large differences, or, as between different times, large fluctuations, in the prices of commodities that are heavily weighted. But that fact, though practically interesting, is not relevant to my present point.

§21. It may happen in some circumstances that we have no knowledge of, and no data for guessing, quantities for any of the years we wish to compare, and are, therefore, forced back, for the price index number involved in our measure, on a sample of price relatives alone without any weights at all. In these circumstances the preceding discussions make one thing quite clear. We must not construct our index by combining the price relatives in a simple arithmetical average, after the manner of Sauerbeck. The paradoxes to which that method leads are avoided if either the simple geometric mean—this will not work if the price of any of our commodities is liable to become nothing!—or the median of the price relatives is taken. Professor Fisher has an interesting discussion of the comparative advantages of these two forms.81 Both are plainly inferior to the weighted formula of § 18, where the data required for that formula are available.

§ 22. In conclusion we have to consider the reliability of the various practicable measures which are available as representatives of the full-data measure. Let us first suppose that we can obtain a sample of the same general form as the full-data measure, quantities as well as prices being available for both (or all) of the periods that we wish to compare. Five general observations may then be made. First, when the sample is drawn from most of the principal sets of commodities included in the full-data collection, which have characteristic price movements, the probable error of our measure will be less than it is when a less representative field is covered. Secondly, when the sample is large, in the sense that the expenditure upon the items included in it comprises a large part of the aggregate expenditure of our group upon the whole collection, the probable error is less than it is when the sample is small. With random sampling in the strict technical sense, the reliability increases as the square root of the number of items contained in the sample. Thirdly, when each of the items constituting the full-data collection absorbs individually a small part of the aggregate expenditure upon that collection, the probable error is less than when some of the items absorb individually a large part of the total expenditure. Fourthly, when the items included in the sample exhibit a small "scatter," the various prices changing as between the years we are comparing in very similar degrees, the probable error is less than it is when the items exhibit a wide scatter. From this consideration it follows that the magnitude of the error to which our measure is liable is greater—apart altogether from the difficulty of "new commodities" referred to in § 14—as between distant years than as between years that are close together. The reason is, as Professor Mitchell, on the basis of a wide survey of facts, has shown, that the distribution of the variations in wholesale prices as between one year and the next is highly concentrated,—more concentrated than the distribution proper to the normal law of error,—but the distribution of variations as between one year and a somewhat distant year is highly scattered. "With some commodities the trend of successive price changes continues distinctly upwards for years at a time; with other commodities there is a constant downward trend; with still others no definite long-period trend appears."82 Finally, if we are unable to obtain a sample of the same general form as our full-data measure, and have to be content with one of the truncated form described in § 18, our measure will, of course, be less reliable than one of equal range of the better type. If we have to do without quantities altogether, and must use the simple geometric mean or the median of price relatives, the measure will be less reliable still. But, it is important to notice, the damage done to reliability by the use of an inferior index formula, like the damage done by the use of a small sample, is not very great when the scatter of price movements between the years we are comparing is small or moderate, but may be very great when the scatter is large.

Chapter VII

ECONOMIC WELFARE AND CHANGES IN THE SIZE OF THE NATIONAL DIVIDEND

§ 1. IT is evident that, provided the dividend accruing to the poor is not diminished, increases in the size of the aggregate national dividend, if they occur in isolation without anything else whatever happening, must involve increases in economic welfare. For, though, no doubt, economic welfare as measured in money, and, therefore, the national dividend as here defined, might be increased and economic welfare in itself—not as measured in money—at the same time diminished, if an addition to the supply of rich men's goods was accompanied by a contraction in the supply of poor men's goods, this sort of double change is ruled out by the proviso that the dividend accruing to the poor shall not be diminished. But it does not follow that every cause, which, while leaving the dividend of the poor unharmed, increases the size of the aggregate dividend, must bring about an increase in economic welfare; because it is possible that a cause which increases the size of the dividend may at the same time produce other effects adverse to economic welfare. It is desirable, therefore, to inquire how far this possibility needs to be reckoned with in practice.

§ 2. Changes in consumption that come about in consequence of an increase in facilities for obtaining some of the items contained in the dividend are liable to bring about changes in taste. But, when any particular kind of commodity becomes more readily available the resultant change of taste is usually an enhancement. Thus, when machines are sent out on trial, or articles presented in sample-packets, or pictures exhibited free to the public, the popular desire for these objects tends to be augmented. When public-houses, or lotteries, or libraries are easily accessible, the taste for drink, or gambling, or literature is not merely gratified, but is also stimulated. When cleanliness, or light,83 or model dwellings, or model plots of agricultural land are set up, though it is only to be seen, and not owned, by the neighbours, the object lesson may still succeed and make plain superiorities hitherto unrecognised.84 Thus, "free libraries are engines for creating the habitual power of enjoying high-class literature," and a savings bank, if confined to the poor, is an "engine for teaching thrift."85 In like manner the policy of many German cities, in subsidising theatres and opera-houses and in providing symphony concerts two or three evenings a week at a very small admission fee, is an educational policy that bears fruit in increased capacity for enjoyment. It is true that an increase in taste for one thing is generally associated with a decline in taste for any other things that fulfil the same or a similar purpose, e.g. wool as against cotton or a new "best type" of motor car as against what used to be the best type, and sometimes with a decline in taste for other quite disconnected means of enjoyment. But it is reasonable, in these circumstances, to hold that the provision made for the new taste is likely to yield some excess of satisfaction over that made for the old; so that the net result of an increase in facilities for obtaining some of the items contained in the dividend will be to increase economic welfare.

§ 3. The above argument does not, however, go to the root of things. It is relevant to immediate short-period effects rather than to ultimate effects. When a group of people have passed from a state of relative poverty, to which they were accustomed and adapted, to a state of relative wealth, to which they have become adapted, will they really derive more satisfaction from the last state of their environment than they did from the first? With the changed conditions the whole scheme of their desires and habits and expectations will also be changed. If a man who had all his life slept in a soft bed was suddenly compelled to sleep on the ground under the sky, he would suffer greatly; but does a man who has always slept on a soft bed enjoy his nights more than one who has always slept under the sky? Is it certain that a hundred Rolls-Royce cars in a Rolls-Royce world would yield a greater sum of satisfaction than a hundred dog-carts in a world of dog-carts? In the chapter that follows some reasons will be given for doubting whether a substantial reduction in the real consumable income of rich people, provided it were general, would, after time had been allowed for adaptation to it, appreciably diminish their economic welfare. Analogous considerations hold good of an increase in their real consumable income. The point is a very important one. If the per capita income of this country were, say, twenty times what it actually is, it may well be that a further increase in it would not ultimately—the population being supposed constant—add anything at all to economic welfare. As things are, however, in view of low level of average real income, we may, I think, safely conclude that an increase in the dividend—apart from the fantastic hypothesis that the whole increase goes to persons already very rich—would carry with it, ultimately and not merely immediately, an increase in economic welfare. The goal of economic betterment is not a mere illusion.86

§ 4. There is, however, a further point to be considered. The economic welfare of a community consists in the balance of satisfactions derived from the use of the national dividend over the dissatisfactions involved in the making of it. Consequently, when an increase in the national dividend comes about in association with an increase in the quantity of work done to produce it, the question may be raised whether the increase in work done may not involve dissatisfaction in excess of the satisfaction which its product yields. Now, in so far as extra work is called out because, through inventions and so on, new and more advantageous means of employing it have been opened up, there is no fear of this. Nor is there any fear of it if the extra work is called out because obstacles, such as quarrels between employers and employed, which used to prevent people who wanted to work from doing so, have been removed. Nor again is there any fear of it if the extra work is called out because methods of remunerating work-people, which reward extra work with equivalent extra pay, have been introduced. It is possible, however, that extra work may be called out in other ways than these. Suppose, for example, that the whole community was compelled by law to work for eighteen hours a day, and—which is in fact improbable—that this policy made the national dividend larger. It is practically certain that the satisfaction yielded by the extra product would be enormously less than the dissatisfaction caused by the extra labour. There is here a cause which has increased the size of the national dividend while lessening, and not increasing, the sum of economic welfare. This type of cause is not, in the modern world, practically important, because, apart from military conscription, we have to do with voluntary, not with compulsory, labour. It is, however, conceivable that, even under a voluntary system, something analogous may emerge. From a mistaken view of their own real interest, workpeople may welcome an addition to the hours of labour of a sort which augments the dividend but damages economic welfare. Again, under the exploitation of employers, workpeople may be forced to assent to an increase of work as a less evil than reduced earnings. There are here a number of possible causes of additions to the dividend associated with damage to economic welfare. Plainly, however, among the general body of causes relevant to our discussion the part they play will be small. In general, causes which increases the size of the national dividend while involving an increase in work, as well as causes which increase it without involving this, will, the conditions of distribution being assumed, increase economic welfare.

Chapter VIII

ECONOMIC WELFARE AND CHANGES IN THE DISTRIBUTION OF THE NATIONAL DIVIDEND

§ 1. IF income is transferred from rich persons to poor persons the proportion in which different sorts of goods and services are provided will be changed. Expensive luxuries will give place to more necessary articles, rare wines to meat and bread, new machines and factories to clothes and improved small dwellings; and there will be other changes of a like sort.87 In view of this fact, it is inexact to speak of a change in the distribution of the dividend in favour of, or adverse to, the poor. There is not a single definitely constituted heap of things coming into being each year and distributed now in one way, now in another. In fact, there is no such thing as the dividend from the point of view of both of two years, and, therefore, there can be no such thing as a change in its distribution.

§ 2. This, however, is a point of words rather than of substance. What I mean when I say that the distribution of the dividend has changed in favour of the poor is that, the general productive power of the community being given, poor people are getting more of the things they want at the expense of rich people getting less of the things they want. It might be thought at first sight that the only way in which this could happen would be through a transference of purchasing power from the rich to the poor. That, however, is not so. It is possible for the poor to be advantaged and the rich damaged, even though the quantity of purchasing power, i.e. of command over productive resources, held by both groups remains unaltered. This might happen if the technical methods of producing something predominatingly consumed by the poor were improved and at the same time those of producing something predominatingly consumed by the rich were worsened, and if the net result was to leave the size of the national dividend as defined in Chapter V. unchanged. It might also happen if, by a system of rationing or some other device, the rich were forced to transfer their demand away from things which are important to the poor and which are produced under such conditions that diminished demand leads to lowered prices. Per contra—and this point will be seen in Part IV. to be very important practically—the share, both proportionate and absolute of command over the country's productive resources held by the poor may be increased, and yet, if the process by which they acquire this greater share involves an increase in the cost of things that play a large part in their own consumption, they may not really gain. Thus a change in distribution favourable to the poor may be brought about otherwise than by a transference of purchasing power, or command over productive resources, to them, and it does not mean a transference of these things to them. None the less, this sort of transference is the most important, and may be regarded as the typical, means by which changes in distribution favourable to the poor come about.

§ 3. On this basis it is desired, if possible, to establish some connection between changes in the distribution of the national dividend and changes in economic welfare, corresponding to the connection established in the preceding chapter between changes in the size of the national dividend and changes in economic welfare. In considering this matter we must not forget that the economic welfare enjoyed by anybody in any period depends on the income that he consumes rather than on the income that he receives; and that, the richer a man is, the smaller proportion of his total income he is likely to consume, so that, if his total income is, say, twenty times as large as that of a poorer man, his consumed income may be only, say, five times as large. Nevertheless, it is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants, to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfaction. The old "law of diminishing utility" thus leads securely to the proposition: Any cause which increases the absolute share of real income in the hands of the poor, provided that it does not lead to a contraction in the size of the national dividend from any point of view, will, in general, increase economic welfare.88 This conclusion is further fortified by another consideration. Mill wrote: "Men do not desire to be rich, but to be richer than other men. The avaricious or covetous man would find little or no satisfaction in the possesion of any amount of wealth, if he were the poorest amongst all his neighbours or fellow-countrymen."89 More elaborately, Signor Rignano writes: "As for the needs which vanity creates, they can be satisfied equally well by a small as by a large expenditure of energy. It is only the existence of great riches which makes necessary for such satisfaction a very large, instead of a very small, expenditure. In reality a man's desire to appear 'worth' double what another man is worth, that is to say, to possess goods (jewels, clothes, horses, parks, luxuries, houses, etc.) twice as valuable as those possessed by another man, is satisfied just as fully, if the first has ten things and the second five, as it would be if the first had a hundred and the second fifty."90 Now the part played by comparative, as distinguished from absolute, income is likely to be small for incomes that only suffice to provide the necesaries and primary comforts of life, but to be large with large incomes. In other words, a larger proportion of the satisfaction yielded by the incomes of rich people comes from their relative, rather than from their absolute, amount. This part of it will not be destroyed if the incomes of all rich people are diminished together. The loss of economic welfare suffered by the rich when command over resources is transferred from them to the poor will, therefore, be substantially smaller relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests.

§ 4. It must be conceded, of course, that, if the rich and the poor were two races with different mental constitutions, such that the rich were inherently capable of securing a greater amount of economic satisfaction from any given income than the poor, the possibility of increasing welfare by this type of change would be seriously doubtful. Further-more, even without any assumption about inherent racial difference, it may be maintained that a rich man, from the nature of his upbringing and training, is capable of obtaining considerably more satisfaction from a given income—say a thousand pounds—than a poor man would be. For,if anybody accustomed to a given standard of living suddenly finds his income enlarged, he is apt to dissipate the extra income in forms of exciting pleasure, which, when their indirect, as well as their direct, effects are taken into account, may even lead to a positive loss of satisfaction. To this argument, however, there is a sufficient answer. It is true that at any given moment the tastes and temperament of persons who have long been poor are more or less adjusted to their environment, and that a sudden and sharp rise of income is likely to be followed by a good deal of foolish expenditure which involves little or no addition to economic welfare. If, however, the higher income is maintained for any length of time, this phase will pass; whereas, if the increase is gradual or, still better, if it comes about in such a way as not to be directly perceived&madash;through a fall in prices, for example—the period of foolishness need not occur at all. In any case, to contend that the folly of poor persons is so great that a rise of income among them will not promote economic welfare in any degree is to press paradox beyond the point up to which discussion can reasonably be called upon to follow. The true view, as I conceive it, is admirably stated by Messrs. Pringle and Jackson in their special report to the Poor Law Commissioners: "It is in the unskilled and least educated part of the population that drink continues to hold its ground; as greater regularity of employment and higher wages are achieved by sections of the working-classes, the men rise in respectability and character. That the drink bill is diminishing, while wages are rising throughout the country, is one of the most hopeful indications of progres we possess."91 The root of the matter is that, even when, under existing conditions, the mental constitution of poor persons is such that an enlarged income will at the moment yield them little benefit, yet, after a time—more especially if the time is long enough to allow a new generation to grow up—the possession of such an incomoe will make possible the development in them, through education and otherwise, of capacities and facilities adapted for the enjoyment of the enlarged income. Thus in the long run differences of temperament and taste between rich and poor are overcome by the very fact of a shifting of income between them. Plainly, therefore, they cannot be used as an argument to disprove the benefits of a transference.92

§5. After all, however, general reasoning of the above type, though perhaps necessary to provide formal justification for our thesis, is not necessary to convince us practically that it is valid. For that purpose it is sufficient to reflect on the way in which, in this country, income has in fact been distributed in recent times. There are not sufficient data to enable this to be calculated with any degree of accuracy. On the basis, however, of work done by Dr. Bowley,93 we may hazard the following rough estimate for the period immediately prior to the war. The 12,000 richest families in the country received about one-fifteenth of the total national income; the richest fiftieth of the population received about one-quarter, and the richest ninth of the population received nearly one-half of that total income. The remainder of it, a little more than a half, was left to be shared among small independent workers and salary-receivers earning less than £160 a year and practically the whole body of wage-earners. The table below, giving Dr. Bowley's estimate of distribution among a portion of this last group in 1911, carries the matter a little farther.

In studying these figures we must, indeed, remember that in families where the man has a small income the wife and children are more likely to be earning wages than they are in families headed by richer men; so that distribution among families was probably more satisfactory than distribution among individuals. This, however, is comparatively a small matter. What the figures cited meant in the concrete is brought out very clearly in the same author's pre-war study of the conditions of life in four industrial towns. Together these towns embrace "about 2150 working - class households and 9720 persons. Of these households 293 or 13½ per cent, of these persons 1567 or 16 per cent, are living in a condition of primary poverty," i.e. with incomes so low that, even if expended with perfect wisdom, they could not have provided an adequate subsistence. "Out of 3287 children who appear in our tables, 897, or 27 per cent, are living in families which fail to reach the low standard taken as necessary for healthy existence."95 The excess incomes of the richer classes did not, of course, represent corresponding excess consumption. The dominant part of the annual new investments of the country—before the war perhaps 350 millions—and a large part of the expenses of central and local government—over 200 millions—had to be provided out of them; so that not more than 300 millions annually can have been spent by the rich and moderately well-off on any form of luxury. Moreover, estimates of money income tend to exaggerate the relative real income of wealthy persons, because these persons are often charged higher prices than poor persons pay for the same services. A number of London shops, for example, discriminate against "good addresses," and hotel charges are also of ten discriminatory. It has even been suggested that as much as 25 per cent of the money income of the rich, as spent by them, represents no equivalent in real income.96 In like manner, estimates of money income sometimes make it appear that the real incomes of poor persons are less than they really are, by ignoring discriminations in their favour. Thus Dr. Bowley points out: "A butcher can perhaps raise his prices to his day customers without much affecting the sale, but not to those in the evening. In this case the working class would suffer a smaller rise than the richer class. This consideration applies especially to the very large volume of purchases made late on Saturday night." But, when all qualifications have been made, the figures cited above leave no room for doubt that there was before the war, and is still, a substantial excess income in the hands of the richer classes available, in Dr. Bowley's phrase, "for attack" by way of transference.

§6. Some study of the post-war distribution of income in Great Britian and Northern Ireland has been made by Dr. Bowley and Sir Josiah Stamp with special reference to the year 1924. From this it appears that the proportion of the total accruing, pre-tax, to the richest classes, i.e. those with incomes in excess of £9400, which roughly corresponds to &pounds;5000 at the pre-war price-level, has somewhat diminished.97 In general these writers conclude as follows. The distribution of income between wage-earners, other earners and unearned incomes was changed slightly in favour of the earning classes. Manual workers on the average make slightly increased real earnings, and there have also been transfers for their benefit in insurance schemes and other public expenditure. In addition they have the advantage of a reduction of about one-tenth of the working week. This change can be connected with the reduction in the real income derived from house property and investments bearing fixed rates of interest. The indications are that profits as a whole, reckoned before tax is paid, form nearly the same proportion of total income at the two dates (i.e. 1911 and 1924). Within the wage-earning classes women and unskilled workers have received a substantial real advance in wages; the great majority of skilled workers made at least as much (after allowing for the rise of prices) in 1924 as in 1911.98 That these changes have meant a great deal to the lives of the very poor is well brought out by Dr. Bowley's second investigation, made after the war, into the conditions of the four towns referred to in the preceding section. "Even," he writes, "on the assumption that all the families suffering from unemployment in a particular week had no adequate resources, and that their unemployment was chronic, the proportion in poverty in 1924 was little more than half that in 1913. If there had been no unemployment the proportion of families in poverty in the towns taken together would have fallen to one-third (3·6 per cent as against 11 per cent), and of persons to little over a quarter(3·5 per cent against 12·6 per cent) of the proportion in 1913."99 Again: "The proportion of families, in which a man is normally earning, found to be in poverty, was in 1924 only one-fifth of the proportion in 1913, if full employment is asumed; while, if the maximum effect of unemployment is reckoned, it is little over one-half."100 This large improvement is partly due (to the extent of about one-third of the whole) to a decrease in the average number of children per family; but chiefly (to the extent of the remaining two-thirds) to a rise in the rate of real wages of unskilled labourers. In spite of this improvement, however, and in spite of the fact that, "when the full effects of taxation are taken into account, the real income available for saving or expenditure in the hands of the rich is definitely less than before the war,"101 the distribution, not merely of incomes prior to taxation, but of what is left over after taxes have been taken away, is still very uneven. It was still true, for example, in 1924, that something like 100 millions a year net, i.e. about 2½ per cent of the total income of the country, was enjoyed by 3000 families. We must not hesitate, therefore, to conclude that, so long as the dividend as a whole is not diminished, any increase, within wide limits, in the real income enjoyed by the poorer classes, at the expense of an equal decrease in that enjoyed by the richer classes, is practically certain to involve an addition to economic welfare.

§ 7. It should be noticed that the conclusion set out above is not exactly equivalent to the proposition that economic welfare will be increased by anything that, ceteris paribus, renders the distribution of the national dividend less unequal. If the community consisted of two members only, it would, indeed, coincide with this. But, in a community consisting of more than two members, the meaning of "rendering the distribution of the dividend less unequal" is ambiguous. Pareto measures inequality of distribution by dividing the logarithm of the number of incomes in excess of any amount x into the logarithm of x. This measure is very difficult to apply unless we accept Pareto's view that, in any given income distribution, the ratio between his two logarithms is approximately the same for all values of x; and, even so, it is a matter of dispute whether the reciprocal of his measure,—which, of course, would indicate less equality when the measure itself indicates greater equality,—is not to be preferred to that measure.102 Among other measures of inequality the most familiar is the mean square deviation from the mean. With that criterion it can be proved that, assuming similarity of temperament among the members of the community, a diminution in the inequality of distribution probably, though not necessarily, increases the aggregate sum of satisfaction.103

Chapter IX

REACTIONS THROUGH THE NUMBERS OF THE POPULATION

§1. IN the two preceding chapters nothing was said about the possible reactions which the changes we have been contemplating may have on the numbers of the population. This omission must now be remedied. To the broad conclusions which were reached relating respectively to the size and distribution of the national dividend, it may be objected that an increase in the income per head is again reduced to its old amount, and, therefore, that it leads to no lasting benefit. In practice this argument is most often used about the effects of an increase in the income of manual workers; and it is, of course, much more plausible in this field than in any other. It will, therefore, be enough to examine this aspect of it. I shall consider it first from the point of view of the whole world, or of a single country imagined, for the purposes of the argument, to be isolated, and afterwards shall inquire how far the results achieved need to be modified for a single country constituting one among the associated family of modern nations. In the argument to be developed under these two heads it must be understood that the additions to the income of wage-earners that we have in mind do not include additions brought about by the offer, on behalf of the State, of deliberate and overt bounties upon the acquisition of large families. Under the old Poor Law in the United Kingdom bounties were, in effect, given; our present income-tax law acts in a slight degree in the same sense; and in a law passed in France104 shortly before the war a similar policy was adopted. This class of addition to the income of the poor has, of course, a tendency to augment population, and, in some practical problems, the point is of importance. For the present, however, we are concerned with additions that do not offer a special differential inducement to the begetting of children.

§2. If we provisionally ignore the deeper-seated reactions which increased income may exert upon wants and tastes, our discussion virtually resolves itself into an inquiry into the validity of the celebrated "iron law of wages." According to this "law," expanding numbers continually press the earnings of the workpeople down to "subsistence level," thus making it impossible for their real income per head in any circumstances to increase. It should be noted in passing that, even if there really were such a law, the proposition that better fortune for the workers increases economic welfare would not be definitely disproved. For it might still be urged that, provided the average working family attains in the whole period of life any surplus of satisfaction over dissatisfaction, an increase of numbers implies by itself an addition to economic welfare.105 But, for my present purpose, there is no need to press this doubtful point. Population does not tend to expand in such a manner as to hold down income per head to a predetermined "subsistence level." It is true, no doubt, that the direct and immediate result of an increase in the dividend accruing to any group is likely to be some increase of population. It is well known that the English marriage rate was negatively correlated with wheat prices in the earlier part of the nineteenth century and was positively correlated with exports, clearing-house returns and so on in the latter part:106 and that the rate of mortality falls with growing wealth, and vice versa. But it is contrary to experience to assert that increased income stimulates population to so large an extent that the individual earnings of workpeople are brought down again to the level they occupied before the improvement. There are two ways in which the manual workers can use their increased claims over material things, namely, to increase their numbers and to increase their standard of comfort. The distinction between these two ways is well illustrated by the following contrasted passages from Malthus's Principles of Political Economy. On the one hand, he found that the greater wealth resulting from the introduction of the potato into Ireland in the eighteenth century was "spent almost exclusively in the maintenance of large and frequent families." On the other hand, when the price of corn in England fell between 1660 and 1720, a considerable portion of the workpeople's "increased real wages was expended in a marked improvement of the quality of the food consumed and a decided elevation in the standard of their comforts and conveniences."107 It is not possible to prophesy a priori the proportion in which increased resources will be devoted to these two uses. The proportion will vary at different times and in different places. Leroy-Beaulieu, for example, suggests that the population use has been predominantly followed in recent times in Belgium and Germany, and the standard-of-comfort use in other European countries.108 But—and this is the point—it is practically certain that the population use will not be allowed to absorb the whole fruits of increased command over nature.

§ 3. The preceding argument, as was indicated at the outset, leaves out of account the deeper-seated reactions that may be set up by expanded earnings. An important school of writers, headed by Professor Brentano, admits that the direct and immediate effect of enhanced material prosperity in any class will, in general, be to increase the marriage rate and, therewith, the birth rate. They maintain, however, that the enhanced prosperity will, in the long run, bring about the development of a higher spiritual and cultural level, in which more forethought is exercised about children and more satisfactions rival to that of having children come to the front. Hence, they urge, in the long run an increase in the income of any class is likely to lead to no increase at all, but actually to a decrease, in their birth rate and their numbers.109 Thus Professor Brentano declares that a permanent improvement in wealth and culture, "as a comparison of different ranks, as well as of the same ranks and the same people at different stages of development, has shown us, results in a diminution of births.... As prosperity increases, so do the pleasures which compete with marriage, while the feeling towards children takes on a new character of refinement, and both these facts tend to diminish the desire to beget and to bear children."110 Those persons, for instance, who have something to leave to their children are more affected by the fact that, if their family is large, what is left at their death must be divided into a number of small parts, than those who have nothing to leave and act apart from economic motives. Detailed confirmation of this view is afforded by Dr. Heron's statistical study of London in 1906. In certain selected districts he found the correlation co-efficients between the number of births per 100 wives and various indices of social status. The indices chosen were the proportion of occupied males engaged in professional occupations, the number of female domestic servants per 100 families, the number of general labourers per 1000 males, the proportion of the population living more than two in a room, and the number of paupers and of lunatics per 1000 of the population. A low index of prosperity and a high birth rate were found to go together. Against this result there had to be set the fact that a low index of prosperity was also accompanied by a high rate of infant mortality. Investigation, however, showed that the excess of mortality was not sufficient to balance the excess of births; and the conclusion emerged, that "the wives in the districts of least prosperity and culture (and, of course, these poor wives were married to poor husbands) have the largest families."111 Furthermore, a comparison between the conditions of 1851 and 1901 brought out the startling fact "that the intensity of this relationship has almost doubled in the last fifty years."112 Heron's results have been amply confirmed by later investigations over a wider field. Thus Mr. Yule writes: "At the present date (1920) there is no doubt that marriage fertility is, on the whole, broadly speaking, graduated continuously from a very low figure for the upper and professional classes to a very much higher figure for unskilled labour."113 In like manner Dr. Stevenson, as the result of an elaborate study, concludes: "The difference in fertility between the social classes is small from marriages contracted before 1861, and rapidly increases to a maximum for those of 1891-96. The slight subsequent approximation between the classes may be apparent rather than real. The difference in fertility between the social classes is, broadly speaking, a new phenomenon."114 Up till the middle of last century, though the upper classes, whose full earning capacity develops later than that of manual workers, tended to marry later, and so to have somewhat fewer children, this tendency was nearly balanced by the lower mortality among them. Their fertility after marriage was not much less, and the survival rate among them only a little lower. Now, in consequence of the relatively large fall in their fertility, the survival rate among them is very much lower.115 The inferences suggested by these statistical facts are, indeed, less firmly based than they appear to be at first sight. The correlation between high prosperity and low birth rate may be partly due to the fact that a man with a small family is in a better position to accumulate a fortune, and that between rich districts and low birth rate may be partly due to the accumulation of domestic servants and other dependants—a particularly infertile class—in these districts.116 Moreover, a part of the correlation between wealth and small families is probably due to the fact that physiologically infertile stocks, having their property divided among fewer persons on inheritance, tend, on the average, to be more than ordinarily rich.117 But these considerations, important as they are, do not, there is reason to believe, completely account for the observed facts. What has been said of the deeper-seated reactions of prosperity appreciably strengthens our conclusion that an improvement in the fortunes of the poor is not likely, in an isolated community, to cancel itself by causing a large expansion of population.

§ 4. When account is taken of the fact that, in the modern world, no country is isolated from the rest, the issue becomes less plain. Of course, if the real income of the manual working class anywhere is increased because the average level of capacity among that class has been raised, no inducement is thereby offered to immigration from elsewhere. But, if their real income is increased through some discovery, or invention, or stroke of policy that improves the economic position of one country considerably more than it improves that of others, an inducement is offered. The same thing happens if legislative or other measures bring about a transference of income from the richer to the poorer members of some one community—provided, of course, that poor persons who have immigrated are not excluded from the benefits of these measures.118 These considerations are very important; for they show that many causes tending to increase the real income per head of the wage-earners in a single country will ultimately exercise a smaller influence in that direction than they appear likely to do at first sight. It should not be forgotten, however, that that very immigration, which lessens their effect at the point of primary impact, involves indirectly an improvement in the fortunes of labour elsewhere. Hence, in any event, the beneficial influence of the changed conditions is not destroyed, but is merely spread over a wider area. In the country primarily affected some addition to economic welfare is necessarily secured.

§ 5. The above discussion disproves the suggestion that the beneficial effect on economic welfare of an increase in the real income of wage-earners will be neutralised by an expansion of population. It does not, however, disprove the suggestion that the beneficial effect on economic welfare of transferences of income from the rich to the poor will be so neutralised. For, in order to that result, it is not necessary that the gain of economic welfare to the poor should be destroyed—only that it should be made smaller than the loss of economic welfare to the rich. It cannot be denied that this might happen. But, in a country where the distribution of wealth is as uneven as it is in the United Kingdom; and where, therefore, there are many high incomes which could be largely cut down with very little injury to economic welfare, the chance that it will happen may reasonably be regarded as small.

Chapter X

THE NATIONAL DIVIDEND AND THE QUALITY OF THE PEOPLE

§ 1. THE general conclusions of Chapters VII.-VIII. might, until quite recently, have been stated as they are there stated, without evoking quarrel or dispute. But of late years a great advance has occurred in biological knowledge. In former times economists had, indeed, to take some account of the reactions of economic causes upon the quantity of the population, and upon its quality so far as that was determined by environment: but questions about the reaction of economic causes upon the quality of the population, as determined by fundamental biological attributes, were not raised. Now, the situation is different. Biometricians and Mendelians alike have turned their attention to sociology, and are insisting upon the fundamental importance for our science of a proper understanding of the laws of heredity. Economists, it is said, in discussing, as I have done, the direct effect of the state of the national dividend upon welfare, are wasting their energies. The direct effect is of no significance; it is only the indirect effect on the size of the families of good and bad stocks respectively that really matters. For every form of welfare depends ultimately on something much more fundamental than economic arrangements, namely, the general forces governing biological selection. I have intentionally stated these claims in a somewhat indefinite form, because I am anxious to investigate the problem thus raised in a constructive rather than in a critical spirit. I shall endeavour, in the following sections, to indicate, as precisely as possible, how far the recent advance in biological knowledge really affects our science. To this end, I shall distinguish, first, certain results of that knowledge, which, though of great value, are not strictly relevant to economics; secondly, the general claim that the method of economic study indicated in the preceding chapters is rendered by the new knowledge trivial and unimportant; and, thirdly, certain points, in respect of which the new knowledge comes directly into contact with the problems I have undertaken to investigate, and makes it necessary to qualify the conclusions that have been reached.

§ 2. By far the most important contribution of modern biological study to sociology is the assurance, which it affords, of the definite heritable character of certain inborn defects. Whatever view be taken of the physiological mechanism of inheritance, the practical result is the same. We know that persons with congenital defects are likely, if they marry, to hand down a defective organisation to some of their children. We do not possess this definite knowledge with regard to general desirable qualities, particularly on the mental side. Bateson issued a wise caution when he wrote: "Whereas our experience of what constitutes the extremes of unfitness is fairly reliable and definite, we have little to guide us in estimating the qualities for which society has or may have a use, or the numerical proportions in which they may be required.... There is as yet nothing in the descent of the higher mental qualities to suggest that they follow any simple system of transmission. It is likely that both they and the more marked developments of physical powers result rather from the coincidence of numerous factors than from the possession of any one genetic element."119 Again, Mr. and Mrs. Whetham rightly observe that desirable qualities, such as ability, moral character, good health, physical strength and grace, beauty and charm, "are, from the point of view of heredity, essentially different from some of the bad qualities hitherto considered, in that they depend on the conjunction of a great many factors. Such a conjunction must be very hard to trace in the hereditary process, where possibly each character may descend independently, or different characters may be linked together, or be incompatible, in far more complicated ways than we have traced in the qualities of plants and auimals. Our present knowledge is quite insufficient to enable us to predict how a complex combination of factors, making up the personality of an able or charming man or woman, will reappear in their offspring."120 We are, in fact, in this region, surrounded by so much ignorance that the utmost caution is essential. Doncaster well observed: "In this direction empirical rules and common sense must still be followed, until the time shall come when science can speak with no uncertain voice."121 More recently, the late Sir Francis Galton lent the weight of his authority to this opinion: "Enough is already known to those who have studied the question to leave no doubt in their minds about the general results, but not enough is quantitatively known to justify legislative or other action, except in extreme cases."122 It is well not to forget that Beethoven's father was an habitual drunkard and that his mother died of consumption.123 About definite defects our ignorance is much less profound. These are the extreme cases of which Galton was thinking. Not a few medical men have long been urging that authoritatively to prevent propagation among those afflicted with imbecility, idiocy, syphilis, or tuberculosis would mean cutting off at its source a long stream of defective humanity. This matter is especially urgent among the mentally defective, on account of the exceptionally high rate at which, if left to themselves, they tend to produce children. Thus, before the Royal Commission on the Feeble-Minded, "Dr. Tredgold, an especially experienced witness, pointed out that the average number of children in the families which now use the public elementary schools is about four; whereas, in the degenerate families, whose children are passed over to the special schools, there is an average of 7.3 children, not including those still-born."124 Furthermore, feeble-minded women often begin child-bearing at an exceptionally early age; and it must be remembered that, even if the size of families is unaffected, early marriage is not a matter of indifference; for, when the normal age of marriage in any group is reduced, "generations succeed one another with greater rapidity," so that the proportion of the whole population embraced among the descendants of the original members of that group is increased.125 The mentally defective are not, however, the only class among which propagation might with advantage be restrained. Some writers suggest that certain forms of criminality and certain qualities conducive to pauperism might be eradicated from the race in the same way. Professor Karl Pearson makes a suggestion, which, if correct, strengthens considerably the probability that this sort of policy would reach its goal. He thinks that imperfections of quite different kinds are correlated, and that "there is something akin to germinal degeneracy, which may show itself in different defects of the same organ or in defects of different organs."126 Bateson, to the same practical, though not to the same theoretical, effect, speaks of the existence of "indications that, in the extreme cases, unfitness is comparatively definite in its genetic causation, and can, not unfrequently, be recognised as due to the presence of a simple genetic factor."127 In sum, as the last-quoted writer states, there is little doubt that "some serious physical and mental defects, almost certainly also some morbid diatheses, and some of the forms of vice and criminality could be eradicated if society so determined."128 This is a conclusion of extreme importance. It is one, too, that seems prima facie susceptible, without great difficulty, of some measure of practical application. Occasions frequently arise when tainted persons, whether on account of crime or of dementia, are compulsorily passed into governmental institutions. When this happens, propagation might be prevented, after careful inquiry had been made, either by permanent segregation, or possibly, as is authorised by law in certain American States, by surgical means.129 The knowledge we possess seems clearly sufficient to warrant us in taking some cautious steps in this direction. There can be no doubt that such a policy would redound both to the general and to the economic welfare of the community. For this conclusion, and for the great step forward which it is hoped may follow from it, we are indebted to modern biology. The conclusion, however, is outside the sphere of economics, and does not in any way disturb the results that were attained in the preceding chapters.

§ 3. I pass, therefore, to something of whose relevance at all events there can be no doubt, the view, namely, that biological science proves all such inquiries as we are pursuing here to be trivial and misdirected. Put broadly, the charge is this. Economic changes, such as alterations in the size, composition, or distribution of the national dividend, affect environment only; and environment is of no importance, because improvements in it cannot react on the quality of the children born to those who enjoy the improvements. This view was crystallised by Professor Punnett, when he declared that hygiene, education and so on are but "fleeting palliatives at best, which, in postponing, but augment the difficulties they profess to solve.... Permanent progress is a question of breeding rather than of pedagogics; a matter of gametes, not of training."130 Mr. Lock131 is even more emphatic in the same sense. The opinions of these writers on the practical side are substantially in agreement with those of Professor Karl Pearson.

The scientific foundation on which all such views rest is, of course, the thesis that acquired characters, which arise out of the influence of environment, are not inherited. It is held, at least as regards the more complicated multicellular organisms, that the germ-cells, which will ultimately form the offspring of a living being, are distinct at the outset from those which will form the body of that being. Thus, Mr. Wilson writes: "It is a reversal of the true point of view to regard inheritance as taking place from the body of the parent to that of the child. The child inherits from the parent germ-cell, not from the parent body, and the germ-cell owes its characteristics, not to the body which bears it, but to its descent from a pre-existing germ-cell of the same kind. Thus, the body is, as it were, an offshoot from the germ-cell. As far as inheritance is concerned, the body is merely the carrier of the germ-cells, which are held in trust for coming generations."132 Doncaster takes up substantially the same position: "In the earlier theories of heredity it was assumed that the germ-cells were produced by the body, and that they must, therefore, be supposed either to contain samples of all parts of it, or at least some kind of units derived from those parts and able to cause their development in the next generation. Gradually, as the study of heredity and of the actual origin of the germ-cells has progressed, biologists have given up this view in favour of a belief in germinal continuity, that is, that the germ-substance is derived from previous germ-substance, the body being a kind of offshoot from it. The child is, thus, like its parent, not because it is produced from the parent, but because both child and parent are produced from the same stock of germ-plasm."133 If this view be sound, it follows that those definite characteristics of an organism, whose appearance is determined by the presence of definite structures or substances in the germ-cells, cannot be directly affected by any quality "acquired" by an ancestor. It is only characteristics of an indefinite quantitative kind, such as may be supposed to arise from the intercommunication of the germ-cells with the other cells of the body and the reception of fluid or easily soluble substances from them, that can be affected in this way. The characteristics thus reserved are not, of course, wholly without significance. The question whether the submission of germ-cells to a poisonous environment reacts permanently upon the descendants of those cells does not seem to be a closed one. Professor J. A. Thomson writes: "There is a great difference between a poisoning of the germ-cells along with the body and the influencing them in a manner so specific that they can, when they develop, reproduce the particular parental modification."134 The germ-cells do not lead "a charmed life, uninfluenced by auy of the accidents or incidents of the daily life of the body which is their bearer."135 On the coutrary, there is some evidence that, not only direct poisons like alcohol, but even injuries to the parent, may, by reacting on the nutrition of the germ-cells, cause general weakness and resultant bad properties in the offspring, though how far the offspring of their offspring would be affected is doubtful. But the general opinion among biologists appears to be that the effect of the acquired characteristics of one generation upon the quality of the succeeding generation is, at all events, very small compared with the effect of the inborn characteristics of the one generation.136 "Education is to man what manure is to the pea. The educated are in themselves the better for it, but their experience will alter not one jot the irrevocable nature of their offspring."137 In like manner "neglect, poverty, and parental ignorance, serious as their results are, (do not) possess auy marked hereditary effect."138

This biological thesis, which, since it is dominant among experts, an outsider has no title to dispute, is, as I have said, the scientific foundation of the view that economic circumstances, because they are environmental, are not, from a long-period standpoint, of any real importance. The biological premise I accept. To the sociological conclusion, however, I demur. Mr. Sidney Webb has uttered a genial protest against a too exclusive attention to the biological aspect of social problems. "After all," he writes, "it would not be of much use to have all babies born from good stocks, if, generation after generation, they were made to grow up into bad men and women. A world of well-born but physically and morally perverted adults is not attractive."139 My criticism, however, goes deeper than this. Professor Punnett and his fellow - workers would accept Mr. Webb's plea. They freely grant that environing circumstances can affect the persons immediately subjected to them, but they, nevertheless, hold that these circumstances are unimportant, because, not being able to influence the inborn quality of succeeding generations, they cannot produce any lasting result. My reply is that the environment of one generation can produce a lasting result, because it can affect the environment of future generations. Environments, in short, as well as people, have children. Though education and so forth cannot influence new births in the physical world, they can influence them in the world of ideas;140 and ideas, once produced or once accepted by a particular generation, whether or not they can be materialised into mechanical inventions, may not only remodel from its very base the environment which succeeding generations enjoy,141 but may also pave the way for further advance. For, whereas each new man must begin where his last ancestor began, each new invention begins where its last aucestor left off.142 In this way a permanent or, rather, a progressive change of environment is brought about, and, since environment is admittedly able to exert an important influence on persons actually subjected to it, such a change may produce enduring consequences. Among animals, indeed, and among the primitive races of men this point is not important. For there what the members of one generation have wrought in the field of ideas is not easily communicated to their successors. "The human race, when widely scattered and incapable of intercommunication, makes the same discovery a hundred times. Its efforts and its triumphs are annihilated with the death of the individual, or of the last member of the family in which the invention has been passed on by oral tradition."143 But among civilised men the arts of writing and of printing have rendered thought viable through time, and have thus extended to each generation power to mould and remodel the ideal environment of its successors. Tarde grasped this point when he wrote: "To facilitate further production is the principal virtue of capital, as that term ought to be understood. But in what is it inherent? In commodities or in particular kinds of commodities? Nay, rather in those fortunate experiments of which the memory has been preserved. Capital is tradition or social memory. It is to societies what heredity or vital memory,—enigmatical term,—is to living beings. As for the products that have been saved and stored up to facilitate the construction of new copies of the models conceived by inventors, they are to these models, which are the true social germs, what the cotyledon, a mere store of food, is to the embryo."144 Bacon had already exclaimed: "The introduction of new inventions seemeth to be the very chief of all human actions. The benefits of new inventions may extend to all mankind universally, but the good of political activities can respect but some particular country of men: these latter do not perdure above a few ages, the former for ever." Marshall writes in the same spirit: "The world's material wealth would quickly be replaced if it were destroyed, but the ideas by which it was made were retained. If, however, the ideas were lost, but not the material wealth, then that would dwindle and the world would go back to poverty. And most of our knowledge of mere facts could quickly be recovered if it were lost, but the constructive ideas of thought remained; while, if the ideas perished, the world would enter again on the Dark Ages."145 Nor is even this a full account of the matter. As Marshall observes in another place: "Any change that awards to the workers of one generation better earnings, together with better opportunities of developing their best qualities, will increase the material and moral advantages which they have the power to offer to their children; while, by increasing their own intelligence, wisdom and forethought, such a change will also, to some extent, increase their willingness to sacrifice their own pleasures for the well-being of their children."146 Those children, in turn, being themselves rendered stronger and more intelligent, will be able, when they grow up, to offer a better environment—and under the term environment I include the physical circumstances of the mother before, and immediately after, child-birth147 —to their children, and so on. The effect goes on piling itself up. Changes in ancestral environment start forces, which modify continuously and cumulatively the conditions of succeeding environments, and, through them, the human qualities for which current environment is in part responsible. Hence, Professor Punnett's assertion is unduly sweeping.148 Progress, not merely permanent but growing, can be brought about by causes with which breeding and gametes have nothing to do. Nor, indeed, must we rest content with the word can. There is strong reason for holding that the enormous development in the mental function of mankind, which has taken place during historic times, has not been associated with any significant germinal change. With growing density of population the machinery of thought has been developed through contact and co-operation among persons of not substantially greater germinal endowment than was possessed by earlier generations. "This is the paradox of the population problem. Change among species in a state of nature is based upon germinal change alone; change among our pre-human ancestors was equally a matter of change in the quality of population; but the explanation of the most outstanding fact in recent history broadly viewed (i.e. the great acceleration of progress in knowledge and power) is to be sought in a change in quantity, rather than in quality, of population."149 We conclude, then, that there is no fundamental difference of the kind sometimes supposed between causes operating on acquired, and causes operating on inborn, qualities. The two are of co-ordinate importance; and the students of neither have a right to belittle the work of those who study the other.

§ 4. I proceed now to the third of the topics indicated for discussion in the first section of this chapter, namely, the extent to which new biological knowledge makes it necessary for us to qualify the conclusions laid down in Chapters VII. and VIII. These conclusions, it will be remembered, were to the effect that, other things being equal, (1) an increase in the size of national dividend—provided that it is not brought about by the exercise of undue pressure upon workpeople,—and (2) a change in the distribution of the dividend favourable to the poor, would be likely to increase economic welfare and, through economic welfare, general welfare. Against these conclusions the biologically trained critic urges an important caution. May it not be, he asks, that advance along the first of these lines, by checking the free play of natural selection and enabling feeble children to survive, will set up a cumulative influence making for national weakness; and that advance along the second line, by differentiating in favour of inferior stocks, will have a similar evil effect? Is there not ground for fear that the brightness of the stream of progress is deceptive that it bears along, as it flows, seeds of disaster, and that the changes we have pronounced to be productive of welfare are, at the best, of doubtful import? The two parts of this thesis must now be examined in turn.

§ 5. The danger to national strength that results from a growth of wealth in general has been emphasised by many writers. In a softened environment children of feeble constitution, who, in harder circumstances, would have died, are enabled to survive and themselves to have children.150 It has even been suggested that in this fact may lie the secret of the eventual decay of nations and of aristocracies which have attained great wealth. There are, indeed, mitigating circumstances, which may be urged in extenuation of this view. First, according to the most recent biological opinion, the survival of weakly children, if their weakness is, as it were, accidental, and not due to inherited defect, is not ultimately harmful to the stock, because the children of the weakly children are quite likely to be strong. Secondly, weakness in infancy is not necessarily a good index of essential inborn weakness; and Mr. Yule, after reviewing the available statistics by mathematical methods, is led to suggest that, perhaps, "the mortality of infancy is selective only as regards the special dangers of infancy, and its influence scarcely extends beyond the second year of life, whilst the weakening effect of a sickly infancy is of greater duration."151 These mitigating circumstances somewhat limit, though they may well fail to overthrow, the thesis that growth in wealth, unaccompanied by any safeguard, is likely to deteriorate the inherent quality of the race. There is also available a further mitigating circumstance, which is less fundamental, though not less important. For, even if the inherent quality of the race is somewhat injured, it does not follow that the finished products, which contain, of course, at once inherent and environmental qualities, are so injured. If increased wealth removes influences that make for the elimination of the unfit, it also removes influences that make for the weakening of the fit. The total effect of this twofold action may well be beneficial rather than injurious. That this is in fact so is suggested by an important report published by the Local Government Board on the relation of infantile mortality to general mortality. In that report Dr. Newsholme directly combats the view that improvements making for a reduction of infant mortality, by enabling more weaklings to survive, must be inimical to the average health of the population. He finds, on the contrary, "that the counties having high infant mortalities continue, in general, to suffer somewhat excessively throughout the first twenty years of human life, and that counties having low infantile mortalities continue to have relatively low death-rates in the first twenty years of life, though the superiority is not so great at the later as at the earlier ages.... It is fair to assume, in accordance with general experience, that the amount of sickness varies approximately with the number of deaths; and there can be no reasonable doubt that, in the counties having a high infant death-rate, there is—apart from migration—more sickness and a lower standard of health in youth and in adult life than in counties in which the toll of infant mortality is less."152 Dr. Newsholme's argument is, indeed, open to the reply that ascertained differences between the several counties in infantile death-rate and later death-rate may both be due to differences in the quality of the inhabitants of the several counties. The argument, therefore, fails to prove that the direct beneficial effect of better environments due to greater wealth outweighs the indirect injurious effect of the impediment they place in the way of natural selection. It may be that the injurious effect is really the stronger, but that it is masked in the statistics because it is exercised upon persons who are ab initio of better physique—as is, indeed, suggested by their ability to earn more and so to live in better conditions—than the average. This criticism lessens the force of Dr. Newsholme's statistical argument.153 Still the directly observed fact that good environment removes influences tending to weaken the fit remains. In company with the considerations set out earlier in this section, that fact militates against the view that a growing dividend and the improvements that naturally accompany it carry seeds of future weakness, and so ultimately make against, rather than in favour of, economic welfare. In any event, the danger that they may have this effect can be readily and completely counteracted, if the policy of segregating the unfit, advocated in the second section, is adopted. As Professor Thomson points out, no biological evil can result from the preservation of weaklings, provided that they are not allowed to have children.154 There is, therefore, no need to surrender our conclusion that causes, which make for an expansion of the dividend, in general make for economic and, through economic, for aggregate, welfare.

§ 6. The danger to national strength and efficiency through an improvement in the distribution of the dividend might seem a priori to be very important. For improved distribution is likely to modify the proportion in which future generations are born from the richer and poorer classes respectively. If, therefore, the poorer classes comprise less efficient stocks than the richer classes—if, in fact, economic status is anything of an index of inborn quality—improved distribution must modify the general level of inborn quality, and so, in the long run, must react with cumulative force upon the magnitude of the national dividend. Now I do not agree with those who hold that poverty and inborn inefficiency are obviously and certainly correlated. Extreme poverty is, no doubt, often the result of feckless character, physical infirmity, and other "bad" qualities of finished persons. But these themselves are generally correlated with bad environment; and it is ridiculous to treat as unworthy of argument the suggestion that the "bad" qualities are mainly the result, not of bad original properties, but of bad original environment.155 Nevertheless, though it is not self-evident, it is, I think, probable, that a considerable measure of correlation exists between poverty and "bad" original properties. For among the relatively rich there are always a number of persons who have risen from a poor environment, which their fellows, who have remained poor, shared with them in childhood; and this sort of movement is probably becoming more marked, as opportunities of education and so forth are being brought more within the reach of the poorer classes. In like manner, of course, among the poor are some persons who have fallen from a superior environment. Among the original properties of these relatively rich there are presumably qualities making for efficiency, which account for their rise; while, among the original properties of these relatively poor, there are, presumably, qualities of an opposite kind.156 Hence, it is probably true that causes affecting the comparative rate of child-bearing among the relatively rich and the relatively poor respectively affect the comparative rate among those with "better" and "worse" original properties (from the point of view of efficiency) in the same direction. If it were true that increased prosperity in a poor class involved a higher rate of reproduction, it would follow that an improved distribution of the dividend would increase the number and, therewith, the proportion, of children born from parents of stock other than the best. Since, however, as is notorious, propagation among the lowest class of all is practically untrammelled by economic considerations, an increase in fortune to the poor as a whole could only increase the number of children born to sections of the poorer classes other than the worst. It would not, therefore, necessarily follow that the average quality of the population as a whole would be lowered. It is not, however, necessary to stop at this point. Professor Brentano's investigations, which were previously noticed, have suggested that increased prosperity in a class tends, on the whole, to diminish rather than to increase the reproduction rate of that class, and reason has been shown for believing that this tendency is not fully offset by accompanying improvements in the mortality rate.157 Hence, it would seem, an improvement in the distribution of the dividend may be expected actually to diminish the proportion of children born from inferior stocks. In short, this biological consideration, so far from reversing the conclusion of Chapter VIII., that improved distribution makes for economic and general welfare, lends, in present conditions, some support to that conclusion. The results of that chapter, along with those of Chapter VII., therefore, remain intact.

Chapter XI

THE METHOD OF DISCUSSION TO BE FOLLOWED

IN the preceding chapters it has been shown that economic welfare is liable to be affected in an important degree (1) through the size of the national dividend and (2) through the way in which it is distributed among the members of the community. If causes affecting the size of the dividend had no influence on its distribution, and causes affecting its distribution no influence on its size, the remaining stages of our inquiry would be simple. Each of these groups of causes would be examined in turn separately. As a fact, however, the same causes will often act along both of these channels, with the result that an entirely satisfactory method of exposition is difficult to devise. After weighing up the comparative advantages of different courses I propose to proceed as follows. In Parts II. and III., I shall study the way in which economic welfare is affected by certain causes that operate upon it through the size of the dividend. I do not propose to examine all the causes that might properly be brought under review in this connection. Inventions and discoveries, the opening up of extensive sources of foreign demand, improvements in the technique of marketing, and the growth of accumulated capital will scarcely be discussed at all. Part II. will be concerned with the way in which the productive resources of the community, looked at generally, are distributed among different uses, and Part III. with the organisation of labour in various aspects. These discussions having been completed, Part IV. is devoted to an inquiry as to how far in actual fact causes that affect economic welfare in one sense through the size of the dividend are liable to affect it in a different sense through the distribution of the dividend, and to a study of the problems that arise when this sort of disharmony is manifested.

[1.][1] Whitehead, Introduction to Mathematics, p. 100.

[2.][2] Principles of Mathematics, p. 5. I have substituted realistic for Mr. Russell's word applied in this passage.

[3.][3] Science and Hypothesis, p. 141.

[4.][4] Recent Developments in Physical Science, p. 30. The italics are mine.

[5.][5] Marshall, The Old Generation of Economists and the New, p. 11.

[6.][6] Lord Hugh Cecil, Conservatism, p. 18.

[7.][7] Plunkett, Ireland in the New Century, p. 19.

[8.][8] Wealth, pp. 17-18.

[9.][9] The Evolution of Modern Germany, pp. 15-16.

[10.][10] Dickinson, Letters of John Chinaman, pp. 25-6.

[11.][11] Thus it is important to notice that machinery, as it comes to be more elaborate and expensive, makes it, pro tanto, more difficult for small men, alike in industry and agriculture, to start independent businesses of their own. Cf. Quaintance, Farm Machinery, p. 58.

[12.][12] Munsterberg writes "that the feeling of monotony depends much less upon the particular kind of work than upon the special disposition of the individual" (Psychology and Industrial Efficiency, p. 198). But, of course, the ethical effect of monotony must be distinguished from the unpleasantness of it. Marshall maintains that monotony of life is the important thing, and argues that variety of life is compatible with monotony of occupation, in so far as machines take over straining forms of work, with the result that "nervous force is not very much exhausted by the ordinary work of a factory" (Principles of Economics, p. 263). Obviously much turns here on the length of the working day. Smart held that "the work of the majority is not only toilsome, monotonous, undeveloping, but takes up the better part of the day, and leaves little energy for other pursuits" (Second Thoughts of an Economist, p. 107).

[13.][13] Cf. V.S. Clark, The Labour Movement in Australia, p. 32.

[14.][14] Cf. Proceedings of the American Economic Association, vol. x. pp. 234-5.

[15.][15] Cf. Mukerjee, The Foundations of Indian Economics, p. 386.

[16.][16] Smith-Gordon and Staples, Rural Reconstruction in Ireland, p. 240. Cf. the enthusiastic picture which Wolff draws of the general social benefits of rural co-operation on the Raiffeisen plan: "How it creates a desire and readiness to receive and assimilate instruction, technical and general, how it helps to raise the character of the people united by it, making for sobriety, strict honesty, good family life, and good living generally." It has been seen, he says, to produce these effects "among the comparatively educated peasantry of Germany, the illiterate country folk of Italy, the primitive cultivators of Serbia, and it is beginning to have something the same effect among the ryots of India" (The Future of Agriculture, p. 481)

[17.][17] Gilman, A Dividend to Labour, p. 15.

[18.][18] Cf. Mazzini, The Duties of Man, p. 99.

[19.][19] Cf. The Meaning of National Guilds, by Beckhover and Reckitt, passim. "The essence of Labour's demand for responsibility is that it should be recognised as responsible to the community, not to the capitalist" (p. 100). The goal of National Guilds "is the control of production by self-governing Guilds of workers sharing with the State the control of the produce of their labour" (p. 285). The fact that schemes of industrial reorganisation on these lines are exposed to serious practical difficulties, which their authors do not as yet seem fully to have faced, does not render any less admirable the spirit of this ideal.

[20.][20] Mr. Hawtrey has criticised my analysis upon the ground that it implicitly makes equal satisfactions embody equal amounts of welfare, whereas, in fact, satisfactions are of various degrees of goodness and badness (The Economic Problem, pp. 184-5). There is, however, no difference in substance between Mr. Hawtrey and myself. We both take account of those variations of quality. Whether it is better to say, of two equal satisfactions, that one may in itself contain more good than the other, or to say that in themselves, qua satisfactions, they are equally good, but that their reactions upon the quality of the people enjoying them may differ in goodness, is chiefly a matter of words. I have substituted in the present text "the quality of people" for my original "people's characters."

[21.][21] Cf. Darwin, Municipal Trade, p. 75.

[22.][22] Thus, Sidgwick observes after a careful discussion: "There seems, therefore, to be a serious danger that a thorough-going equalisation of wealth among the members of a modern civilised community would have a tendency to check the growth of culture in the community" (Principles of Political Economy, p. 523).

[23.][23] Practical Ethics, p. 20. Cf. Effertz: "Ce que les intéressés savent généralement mieux que les non-intéressés, ce sont les moyens propres á réaliser ce qu'ils croient étre leur intérét. Mais, dans Is détermination de I'intérêt le non-interessé voit générslement plus clair" (Antagonismes économiques, pp. 237-8).

[24.][24] Wealth of Nations, p.333.

[25.][25] Cf. The Recent Development of German Agriculture [Cd. 8305], 1916, p. 42 and passim.

[26.][26] Logic, ii. p. 488

[27.][27] Logic, ii. p. 490-91.

[28.][28] Methods of Ethics, p. 126.

[29.][29] The Ethics of T.H. Green, etc., p. 340

[30.][30] Cf. my "Some Remarks on Utility," Economic Journal 1903, p. 58 et seq.

[31.][31] If k be the fraction of importance that I attach to a pound in the hands of my heirs as compared with myself, and ø(t) the probability that I shall be alive t years from now, certain pound to me or my heirs then attracts me now equally with a certain pound multiplied by {ø(t)+k(1-ø(t))} to me then. This obviously increased by anything that increases either ø(t) or k

If, through an anticipated change of fortune or temperament, one pound after t years is expected to be equivalent to (1- a) times one pound now, a certain {ø(t)+k(1-ø(t))} pounds of the then prevailing sort to me then attracts me now equally with a (1-a){ø(t)+k(1-ø(t))} pounds of the now prevailing sort to me then. Therefore, a certain pound to my heirs will be as persuasive to call out investment now as the above sum would be if I were certain to live for ever and always to be equally well off and the same in temperament.

[32.][32] In this connection the following passage from Knoop's Principles and Methods of Municipal Trade is of interest: "To secure an additional supply of water to a town, ten or more years of continuous work may easily be required. This means that for several years a large amount of capital will be unproductive, thus seriously affecting the profits of the undertaking and making boards of directors very chary about entering upon any large scheme.... It is almost inconceivable that a water company would have undertaken the great schemes by which Manchester draws its supply of water from Lake Thirlmere in Cumberland, a distances of some 96 miles; Liverpool its supply from Lake Vyrnwy in North Wales, a distance of some 78 miles; and Brighton its supply from the Elan Valley in Mid Wales, a distance of some 80 miles" (loc. cit. p. 38).

[33.][33] Cf. Chiozza-Money, The Triumph of Nationalisation, p. 199.

[34.][34] Cf. Sidgwick, Principles of Political Economy, p. 410.

[35.][35] Cf. my A Study in Public Finance, Part II. ch. x.

[36.][36] For example, the case against the imposition of equal taxation upon two men, each of whom spends £450 a year, but the first has an income of £1000 and the second an income of £500 a year is, from the point of view of equity, overwhelming.

[37.][37] It would be wrong to infer from the above that the large entry of women into industry during the war was associated with an approximately equal loss of work outside industry. For, first, a great deal of war work was undertaken by women who previously did little work of any kind; secondly, the place of women who entered industry was taken largely by other women who had previously done little—for example, many mistresses in servant-keeping houses themselves took the place of a servant; and, thirdly, owing to the absence of husbands and sons at the war, the domestic work, which women would have had to do if they had not gone into industry, would have been much less than in normal times.

[38.][38] The Advertisement Regulation Act, 1907, allows local authorities to frame by-laws designed to prevent open-air advertising from affecting prejudicially the natural beauty of a landscape or the amenities of a public park or pleasure promenade. It is not, we may note in this connection, a decisive argument against underground, and in favour of overhead, systems of tramway power wires that they are more expensive. The London County Council deliberately chose the more expensive underground variety for aesthetic reasons.

[39.][39] Marshall, Principles of Economics, p. 524.

[40.][40] Ibid, p. 523

[41.][41] Marshall, Principles of Economics, p. 80.

[42.][42] Professor Fisher himself takes the position that the national dividend, or income, consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Thus a piano or an overcoat made for me this year is not a part of this year's income, but an addition to capital. Only the services rendered to me during this year by these things are income (The Nature of Capital and Income, pp. 104 et seq.). This way of looking at the matter is obviously very attractive from a mathematical point of view. But the wide departure which it makes from the ordinary use of language involves disadvantages which seem to outweigh the gain in logical clarity. It is easy to fall into inconsistencies if we refuse to follow Professor Fisher's way; but it is not necessary to do so. So long as we do not do so, the choice of definitions is a matter, not of principles, but of convenience.

[43.][43] For consistency it would be necessary to exempt new houses that are built to be occupied by their owners from the category of income and to place them in that of capital, if a money valuation of their annual rental value is included in income.

[44.][44] [Cd. 6320], p. 8.

[45.][45] Marshall, Principles of Economics, p. 614 n.

[46.][46] CF. Flux, statistical Journal, 1913, p. 559.

[47.][47] Quarterly Journal' of Economics, 1908, p.342. The report of the Census of Production, 1907, sanctions the view that an average life of ten years may reasonably be assigned to buildings and plant in general (Report, p. 35).

[48.][48] In industries where large individual items of assets need replacement at fairly long intervals, it is usual to meet this need by the accumulation of a depreciation fund built up by annual instalments during the life of the wasting asset. For machinery which wears out in about equal quantities every year, Professor Young argues that, provided the renewals and repairs required every year are duly furnished, capital will be maintained intact by that fact alone, and no depreciation fund is necessary (Quarterly Journal of Economics, 1914, pp. 630 et seq.). It is true that by this method, when the plant has been running for some time, the capital is maintained in any one year at the level at which it stood in the preceding year. But Professor Young himself shows that, in static conditions, when a plant has been established for some time, it will normally be about half worn out (loc. cit. p. 632). If half-worn-out plant, that is to say, plant half-way through its normal life—is technically of the same efficiency as new plant, this fact does not injure his conclusion. But, in so far as the efficiency of plant diminishes with age, the case is otherwise. If the capital is to be maintained at the level at which it stood when first invested, it is necessary, not merely to provide renewals and repairs as needed, but also to maintain a permanent depreciation fund, to balance the difference between the values of a wholly new plant and of one the constituents of which are, on the average, half-way through their effective life. (Cf. also a discussion between Professor Young and Mr. J. S. Davis under the title "Depreciation and Rate Control" in the Quarterly Journal of Economics, Feb. 1915.)

[49.][49] Professor Carver writes of the United States: "Taking the country over, it is probable that, other things equal, if the farmers had been compelled to buy fertilisers to maintain the fertility of their soil without depletion, the whole industry would have become bankrupt... The average farmer had never (up to about 1887) counted the partial exhaustion of the soil as a part of the cost of his crop" (Sketch of American Agriculture, p. 70.) Against this capital loss, however, must be set the capital gain due to the settlement of the land.

[50.][50] Stamp, Wealth and Taxable Capacity, p. 57.

[51.][51] Cf. Stamp, Wealth and Taxable Capacity, pp. 55-6.

[52.][52] The reason why it is only claimed that the main part, not the whole, of what the Treasury receives under this head should be counted as income is (1) that commodity taxes may not always raise prices by their full amount, and (2) that they may indirectly cause production to contract.

[53.][53] It should be noticed, however, that one paradox still remains uncorrected by the qualifications set out in the text. If a service, for which hitherto fees have been charged to business men, the fees being of a sort that it is lawful to deduct as a business expense before incomes are reckoned, comes to be provided for and to be paid for by an addition to income tax, the money income of the country is increased, though the real income is unchanged (cf. Stamp, Wealth and Taxable Capacity, pp. 52-3). The only way to get rid of this paradox would be to allow business men to deduct the cost of any services which, if paid for by fees, would count as a business expense, whether in fact they are paid for by fees or not.

[54.][54] Principles of Economics, p. 593.

[55.][55] Business Cycles (1927), p. 93.

[56.][56] An exactly analogous difficulty emerges when we attempt to compare the size of the national dividend, as defined above, in two countries. Thus, if the German population with German tastes were given the national dividend of England, they might get less economic satisfaction than before; while, if the English population with English tastes were given the German national dividend, they also might get less economic satisfaction than before. The proposed definition would, in these circumstances, compel us to say both that the English dividend is larger (from the English point of view) than the German dividend, and also that the German dividend is larger (from the German point of view) than the English dividend. It may be added, though the point is not strictly relevant, that differences in comparative tastes between the people of two countries can sometimes, though not always, be detected by statistical methods. For example, Germans before the war would not eat mutton though it was a penny cheaper than pork, while Englishmen ate it readily (Cd. 4032, pp. xlviii and xlix). Again Germans eat rye bread, whereas English people eat white bread. We know that this is not due merely to the fact that rye bread is relatively cheap in Germany and that Germans are poorer than Englishmen, because, if it were cheapness alone that was responsible for the consumption of rye in Germany, there would presumably be a higher consumption of white bread among better-to-do Germans. This, however, is not found. Hence, we may legitimately infer that Germans have a taste for rye bread, as against wheaten bread, different from the English taste.

[57.][57] Cf. Dr. Bowley's observation: "The values included in incomes are values in exchange, which are dependent, not only on the goods or services in question, but also on the whole complex of the income and purchases of the whole of a society... The numerical measurement of total national income is thus dependent on the distribution of income and would alter with it" (The Measurement of Social Phenomena, pp. 207-8). Cf. also stamp, British Incomes and Property, pp. 419-20.

[58.][58] Principles of Economics, pp. 131-2, footnote.

[59.][59] These words are necessary to take account of the fact that, if the aggregate money income of our group be altered, a second period £ will not be the same thing as a first period £.

[60.][60] It is perhaps well to repeat here in symbols what has been stated previously in words, that, the equation of the demand curve for any commodity being p=φ(x), the money demand for an increment of h units means, not {(x+h)φ(x+h)-xφ(x)}, but

[61.][61] Professor Irving Fisher, in his admirable study of The Making of Index Numbers, appears to take the view that there is a way of making measures of this sort which is right in an absolute sense, and not merely in the sense that it will yield a measure consonant with the particular purpose which we want the measure to serve. Having examined a great many different sorts of index numbers, he found that, after those suffering from definite defects of a technical sort had been eliminated, the remainder, though formed on widely different plans, gave approximately equivalent results, and concluded: "Humanly speaking, then, an index number is an absolutely accurate instrument" (p. 229). Now, the close consilience of the results reached by different methods undoubtedly suggests to the mind that there exists somewhere an absolutely right result to which they are all approximating. But there is, so far as I can see, no real ground for accepting this metaphysical suggestion. Consider the analogy of a measure designed to ascertain the average height of a group of trees. It is easy to find the arithmetical, the geometrical, or any other average of their heights. In many conditions all ordinary forms of average will work out very nearly the same. But this is no proof that there is stored up in heaven an ideal average height different from these and, in an absolute sense, more accurate or truer than any of them. There is a true arithmetical average, a true geometrical average, a true harmonic average; but the concept of an archetypal avenge right in an absolute sense is, as it seems to me, an illusion. When we want to satisfy a given purpose it is proper to ask: will the arithmetical or the geometrical average best serve our purpose? If the two averages happen to be nearly the same, we are in the happy position that it does not much matter should we accidently choose the wrong one. But we cannot properly say more than this, There is some reason to believe, however, that, when Professor Fisher claims that the choice of the formula for a price index number is independent of the purpose to be served, he is using the term purpose in a narrower sense than mine, and would not disagree with what is here said.

[62.][62] This is necessary in order to conform to the definition of the national dividend given in Chapter III. Had we defined the dividend so that it included only what is actually consumed during the year, no machines would come into it. On our definition we ought strictly to include all new machinery and plant over and above what is required to maintain capital intact, minus an allowance for the part of the value of this machinery and plant that is used up in producing consumable goods during the year itself.

[63.][63] This proposition and the results based upon it depend on the condition that our group is able to buy at the ruling price the quantity of any commodity which it wishes to buy at that price. When official maximum prices have been fixed, and people's purchases at those prices are restricted, either by a process of rationing or by the fact that at those prices there is not enough of the commodity to satisfy the demand, this condition is, of course, not realised. During the Great War the situation was further complicated by the fact that the legal prices were often departed from—at least in Germany—in practice.

[64.][64] [Cd. 4032], pp. vii and xlv.

[65.][65] A Treatise on Money, vol. i. p. 112.

[66.][66] A. Treatise of Money, vol. i. p. 113.

[67.][67] The Making of Index Numbers, p. 64.

[68.][68] Loc. cit. pp. 72 and 74.

[69.][69] The Making of Index Numbers, p. 242.

[70.][70] Similar considerations suggest that the existence of "new commodities," or rather, in this case, different commodities, is a more serious obstacle in the way of comparing two distant than two neighbouring places, because it is much more likely that one of the two distant places (e.g. a tropical as against a polar region) than it is that one of the two neigbhouring places will purchase commodities that are not known in the other. As between distant places the chain method, about to be described, could theoretically be applied via a chain of intermediate places; but practically this method of comparison would probably prove unworkable.

[71.][71] Cf. Marshall, Contemporary Review, March 1887, p. 371, etc.

[72.][72] Professor Fisher does not, as it seems to me, take sufficient account of this aspect of the chain method. If there were no new commodities to be considered, or if new commodities as between distant years were unimportant, I should not quarrel with his position. It would then be true, as he argues, that, in a comparison of 1900 and 1920, our index number should be based directly on the prices and quantities ruling in those two years, and that the prices and quantities ruling in 1910, which, if the chain method were used, would be involved, are irrelevant, and resort to them a source of error. It is easy to see, for example, that, if the position of 1900 as to quantities and prices is exactly repeated in 1920, an index made on the chain method would probably not give, as it ought to do, a number for 1920 equal to that for 1900. (Cf. The Review of Economic Statistics, May 1921, p. 110.) But if, say, half the expenditure in 1920 is on commodities that did not exist in 1900, a chain comparison is no longer an inferior substitute for a direct comparison: it is the only sort of comparison that it is possible to make at all. For this reason it seems to me on the whole best that, in constructing a series of index numbers, we should employ the chain method, and not the method of calculating a number for each year relative to one (the same) base year. In the absence of new commodities the issue would be balanced, because, whereas the chain method gives perfectly correct results only as between successive years, the other method—except with constant weight formulae, which are inadmissible on other grounds—gives perfectly correct results only as between the base year and each other year. But the argument from new commodities tips the scale in favour of chain series. Of course, if, having constructed a chain series, we desire a more special comparison between two years (other than successive years) covered by it, and if, as between those years, the "new commodity" trouble happens to be unimportant, it will be well to calculate a new number directly for this purpose instead of using the series number. (For Fisher's view compare The Making of Index Numbers, p. 308, etc.)

[73.][73] Professor Mitchell writes: "The sluggish movement of manufactured goods and of consumers' commodities in particular, the capricious jumping of farm products, the rapidly increasing dearness of lumber, etc., are all part and parcel of the fluctuations which the price level is actually undergoing.... Every restriction in the scope of the data implies a limitation in the significance of the results" (Bulletin of the U.S.A. Bureau of Labour Statistics, No. 173, pp. 66-7). This is quite correct as it stands, but it must not be interpreted to imply that both finished products and the raw materials embodied in those same finished products should be included.

[74.][74] Cf. Marshall, Contemporary Review, March 1887, p. 374.

[75.][75] Ibid. P. 375. Cf. also Marshall, Money, Credit, and Commerce,, p. 33.

[76.][76] Mrs. Wood, Economic Journal, 1913, pp. 622-3.

[77.][77] Cours d'économie politique, p. 281.

[78.][78] This proposition can be proved by means of the principle of inverse probability. There are more ways in which a sample that will change in a given degree can be drawn from a complete collection which changes in that degree than there are ways in which such a sample could be drawn from a collection that changed in a different degree. Therefore any given sample that has been taken without bias from any collection is more likely to represent that collection correctly as it stands than it would do after being subjected to any kind of doctoring. It must be confessed, however, that the question, whether a commodity whose price has moved very differently from the main part of our sample ought to be included, is a delicate one. The omission of "extreme observations" is sometimes deemed desirable in the calculation of physical measurements. What should be done in this matter depends on whether or not a priori expectations, coupled with the general form of our sample, show that the original distribution, from which the sample is taken, obeys some ascertained law of error. Whether they do this or not will often be hard to decide. It should be added that the practical effect of omitting extreme observations is only likely to be important when the number of commodities included in our sample is small; and that it is just when this number is small that adequate grounds for exclusion are most difficult to come by.

[79.][79] [Cd. 4032], p. xxxiv.

[80.][80] J. M. Keynes, Economic Journal, 1908, p. 473.

[81.][81] Cf. The Making of Index Numbers, p. 211, etc., and p. 260, etc.

[82.][82] U.S. Bulletin of Labour, No. 173, p. 23.

[83.][83] Cf. Walpole's account of the way in which the introduction of street lamps led to an increased demand for illuminants within the neighbouring houses (History of England, i. 86). An elaborate method of advertising electric light is quoted in Whyte's Electrical Industry (p. 57). A company undertakes to instal six lamps in a house free of all charge for a six months' trial, the house-holder paying only for the current that he uses. After the six months, the company undertakes to remove the whole arrangement if the customer so desires.

[84.][84] Cf. Miss Octavia Hill's practice of insisting on the cleanliness of the stair-cases of her houses, and Sir H. Plunkett's account of the Cork Exhibition, 1902 (Ireland in the New Century, pp. 285-7).

[85.][85] Jevons, Methods of Social Reform, p. 32. It should be noted, however, that Dr. Marshall believes this order of consideration to have a relatively small range. He writes: "Those demands, which show high elasticity in the long run, show a high elasticity almost at once; so that, subject to a few exceptions, we may speak of the demand for a commodity as being of high or low elasticity without specifying how far we are looking ahead" (Principles of Economics, p. 456).

[86.][86] Cf. M. Bousquet (Weltwirtschaftliches Archiv, Oct. 1929, pp. 174 et seq.) for an opposite view. M. Bousquet argues that economic welfare depends on the relation between incomes and needs, and that an increase in income involves, after time for adjustment has been allowed, such an increase of needs that the original relation between income and needs is re-established. Hence, he concludes, the economic welfare of a representative man is a constant, unaffected in the long run by changes in his income.

[87.][87] It should be noticed that one of the things to which people will divert consumption, if distribution is altered in favour of the poor, is the quasi-commodity, leisure. It is well established that the high-wage countries and industries are generally also both the short-hour countries and industries and the countries and industries in which the wage-earning work required from women and children in supplement of the family budget is the smallest. The former point is illustrated by some statistics of the wage rate and hours of labour of carpenters in the United States, Great Britain, France, Germany, and Belgium, published in No. 54 of the Bulletin of the U.S. Bureau of Labour (p. 1125). In illustration of the latter point, Sir Sydney Chapman notes the assertion that, whereas the German collier finds only 65·8 per cent of his family's earnings, the wealthier American collier finds 77·5 per cent (Work and Wages, i. p. 17). Mr. Rowntree's interesting table for York points, when properly analysed, in the same direction (Poverty, p. 171); and Miss Vessellitsky shows that low-paid home-work among women is found principally in those districts, e.g. East Anglia, "Where the bad conditions of male labour make it almost indispensable for the wife to supplement the husband's earnings," whereas, in districts where men's wages are good, women only work at industry if they themselves can obtain well-paid jobs (The Home-worker, p. 4). Again, reference may be made to the familiar correlation found in recent English history between rising wages and falling hours. Yet again, a study of the rates of wages and hours of labour in different districts in England would, I suspect, reveal a correlation of the same type. It does so for the wages and hours statistics of bricklayers as given in the Abstract of Labour Statistics for 1908 (pp. 42, etc.). These facts are somewhat awkward to fit in to the method of exposition followed in this book, because leisure is not included as a commodity in my definition of the national dividend: and in so far, therefore, as improved distribution causes leisure to be substituted for things, it must involve a decrease in the national dividend. Plainly, however, this sort of decrease should be ignored when we are considering the effect of changes of distribution on economic welfare; for the loss of welfare associated with the constriction of production to which they lead is necessarily less than the gain of welfare due to the leisure itself.

[88.][88] The difficult case in which a transference leads to a contraction in the size of the dividend from the point of view of either the pre-change or the post-change period, and not from that of the other, will not be considered here. Henceforward it will be assumed that we have to do with changes in the dividend that are either positive or negative from both the relevant points of view, and, therefore, except for special reasons, we shall speak simply of increases and decreases in the dividend.

[89.][89] Posthumous Essay on Social Freedom, Oxford and Cambridge Review, Jan. 1907.

[90.][90] Di un Socialismo in accordo colla dottrina economica liberale, p. 285

[91.][91] [Cd. 4795], p. 46.

[92.][92] Similarly, of course, when we are taking a long view, the argument that a reduction in the real income of the rich inflicts a special injury, because it forces them to abandon habits to which they have grown accustomed, loses most of its force.

[93.][93] Quarterly Journal of Economics, Feb. 1914, p. 261; and The Division of the Product of Industry before the War, 1918, pp. 11 and 14.

[95.][95] Livelihood and poverty, pp. 46-7. The reason for the excess in the proportion of children in poverty is the twofold one, that poor families are apt to be larger than others, and that a large family is itself a cause of life in poverty. Cf. Bowley, The Measurement of Social Phenomena, p. 187.

[96.][96] Urwick, Luxury and the Waste of Life, pp. 87 and 90.

[97.][97] The National Income, 1924, p. 58.

[98.][98] The National Income, 1924, pp. 58-9.

[99.][99] Has Poverty Diminished, p.16. The discrepancies between the percentages given in this passage for 1913 and that given in Livelihood and Poverty is apparently due to the fact that in the latter work 480 houses inhabited by the middle and upper classes were excluded from the calculation (Cf. Livelihood and Poverty, p. 46, footnote).

[100.][100] Has Poverty Diminished, p.21.

[101.][101] The National Income, 1924, p. 59. It must, of course, be held in mind that a large part of the heavy taxation of rich persons goes to pay interest on war loan held by rich persons.

[102.][102] Cf. Gini, Variabilità e mutabilitd, p. 72.

[103.][103] If A be the mean income, n the number of incomes, and a1, a2...deviations from the mean, aggregate satisfaction, on our assumption, But we know that {a1 + a2+...}=0. We know nothing to sugest whether the sum of the terms beyond the third is positive or negative. But it is certain that 1/2 {a12+22+ &hellip}f'' is negative. If, therefore, the fourth and following terms are small relatively to the third term, it is certain, and in general it is probable, that aggregate satisfaction is larger, the smaller is (a12+a22+...). This latter sum, of course, varies in the same sense as the mean square deviation or standard deviation Dr. Dalton, in the course of an interesting article on "The Measurement of the Inequality of Incomes," has shown that, in a community where many incomes diverge widely from the average, the probability which the above argument establishes is only of a low order (Economic Journal, Sept. 1920, p. 355)

[104.][104] Cf. Economic Journal, Dec. 1913, p. 641.

[105.][105] But Cf. Sidgwick's observation: "It seems at least highly doubtful whether a mere increase in the number of human beings living as an average unskilled labourer lives in England can be regarded as involving a material increase in the quantum of human happiness" (Principles of Political Economy, p. 522, note). A population, which, in given conditions, maximises this quantum, seems to have a much better claim to be called the optimum population than a population which maximises real income per head. The practice, which has gained a certain currency, of using the term in this latter sense is, therefore, unfortunate.

[106.][106] Cf. Pareto, Cours d' èconomic politique, pp. 88 et seq. Cf. also Marshall, Principles of Economics, pp. 189-90.

[107.][107] Principles of Political Economy, pp. 252 and 254. Mr. Wright, commenting on the fall in the birth rate in the later nineteenth century, suggests that increased command over nature is more likely to be taken out in an improved standard of comfort when it manifests itself in a fall of prices than when it manifests itself in higher money wages; for people do not readily see behind money (Population, p. 117).

[108.][108] La Repartition des richesses, p. 439.

[109.][109] Cf. Mombert, Archiv für Socialwissenschaft, vol. xxxiv. p. 817. Cf. also Aftalion, Les Crises periodiques de surproduction, vol. i. pp. 208-9.

[110.][110] Economic Journal, 1910, p. 385.

[111.][111] The Relation of Fertility in Man to Social Status, pp. 15 and 19. M. Bertillon has shown that, in general, a high birth rate and a high death rate are correlated (La Depopulation de la France, pp. 66 et seq.). This correlation is partly due to the fact that the death of children induces parents to get more, and partly to the fact that a high birth rate often means many children born in poor circumstances and so likely to die. Thus, Dr. Newsholme suggests that the observed correlation "is probably due in great part to the fact that large families are common among the poorest classes, and these classes are specially exposed to influences producing excessive infant mortality" (Second Report on Infant Mortality [Cd. 6909], p. 57). A similar conclusion as regards the North of England is reached in Elderton's Report on the English Birth-rate, Part I.

[112.][112] The Relation of Fertility in Man to Social Status, pp. 15 and 19.

[113.][113] The Fall in the Birth-rate, p. 31.

[114.][114] Journal of the Royal Statistical Society, 1920, p. 431.

[115.][115] Cf. Journal of the Royal Statistical Society, 1920, p. 417.

[116.][116] Cf. Leroy-Beaulieu's argument: "II se trouve dans les quartiers riches une plus forte proportion de ménages âgés, de gens retraités, de domestiques, classe particuliérement stérile, et personnes qui ne passent qu'une partie de l'année à la ville; la natalité enregistrée doit done y être plus faible, sans qu'on puisse rien en inférer. On qualifie le XVIe arrondissement qui compte 135,000 habitants comme un arrondissement riche et le VIIIe également qui, de son côte, compte 104,000 habitants. Or, il est manifeste que les gens vraiment riches ne représentent pas la dixiéme partie, peut-être pas même la vingtiéme partie, de la population de ces arrondissements dits riches; les gens opulents ne se comptent pas, même á Paris, par centaines de mille; le gros de la population de ces arrondissements est composé de domestiques, de concierges, de petits boutiquiers et d'ouvriers d'élite. Les conclusions que l'on tire de la natalité dans les quartiers dits riches de Paris sont donc sans valeur" (La Question de la population, p. 399).

[117.][117] Cf. Darwin, "Eugenics in Relation to Economics and Statistics," Journal of the Royal Statistical Society, 1919, p. 7.

[118.][118] The inducement to immigration offered by old-age pensions might be kept very small by a rule requiring previous residence of, say, 20 years as a condition of qualification; for a far-off benefit affects action but slightly, the more so if, as in this case, the possibility of death makes it uncertain as well as distant.

[119.][119] Mendel's Principles of Heredity, p. 305.

[120.][120] The Family and the Nation, p. 74.

[121.][121] Independent Review, May 1906, p. 183.

[122.][122] Probability the Basis of Eugenics, p. 29.

[123.][123] Cf. Bateson, Presidential Address to the British Association, Nature, Aug. 1914, p. 677.

[124.][124] The Family and the Nation, p. 71.

[125.][125] Haycraft, Darwinism and Race Progress, p. 144.

[126.][126] The Scope and Importance of National Eugenics, p. 38.

[127.][127] Mendel's Principles of Heredity, p. 305.

[128.][128] Ibid. p. 305. It is, however, important to remember that a bad recessive quality cannot be eliminated merely by preventing propagation among persons who manifest it; for it will also be borne in the germ-plasm of a number of apparently normal persons. Feeble-mindedness appears to be a recessive quality (cf. Gates, Heredity and Eugenics, p. 159). Calculation shows that, if 3 per cent of a population now is feeble-minded, it would require 250 generations (i.e. about 8000 years) to reduce the proportion to 1 in 100,000 by merely segregating or sterilising those who show the characteristics. To distinguish and to prevent propagation among those apparently normal persons who bear feeble-mindedness as a recessive quality would, however, be a task far beyond our present powers (cf. ibid. p. 173).

[129.][129] The standard work on this subject is Eugenical Sterilisation in the United States, by Dr. H. H. Laughlin, 1922.

[130.][130] Mendelism (second edition), pp. 80-81.

[131.][131] Cf. Recent Progress in the Study of Variation, Heredity and Evolution, by R. H. Lock.

[132.][132] Wilson, The Cell in Development and Inheritance, p. 13; quoted by R. H. Lock, Variation, Heredity and Evolution, p. 68.

[133.][133] Heredity, p. 124.

[134.][134] J. A. Thomson, Heredity, p. 198.

[135.][135] Ibid. p. 204.

[136.][136] Lock, Variation and Heredity, pp. 69-71.

[137.][137] Punnett, Mendelism, p. 81.

[138.][138] Eichholz, "Evidence to the Committee on Physical Deterioration," Report, p. 14. Dr. Eichholz's view appears to be formed a posteriori, and not to be an inference from general biological principles.

[139.][139] Eugenics Review, November 1910, p. 236.

[140.][140] An interesting comparison can be made between the process of evolution in these two worlds. In both we find three elements, the occurrence of, propagation of, and conflict between, mutations.

In both worlds the kind of mutations that occur appear to be fortuitous, and cannot be controlled, though in both it is sometimes suggested that the tendency to mutate is encouraged by large changes in, and particular kinds of, environment. For example, Rae suggested, as conditions favourable to the emergence of inventions, general upheavals, such as wars or migrations, and the adoption in any art of a new material—such as steel in building—either for lack of the old material or through the possession of a specially effective new one, and he maintained that the stable agricultural districts rarely yield inventions (The Sociological Theory of Capital, pp. 172-3). In both worlds again, with every increase of variability, the chance that a "good" mutation will occur is increased. Hence, ceteris paribus, environments that make for variability are a means to good. Thus, of local governments Marshall writes: "All power of variation that is consistent with order and economy of administration is an almost unmixed good. The prospects of progress are increased by the multiplicity of parallel experiments and the intercommunion of ideas between many people, each of whom has some opportunity of testing practically the value of his own suggestions" (Memorandum to the Royal Commission on Local Taxation, p. 123; cf. also Booth, Industry, v. p. 86; and Hobhouse, Democracy and Reaction, pp. 121-3).

The propagation of mutations, on the other hand, does not proceed in the same way among ideas as among organisms. Among the latter the fertility of the mutated members that survive is not, but among the former it is, affected by their adaptation or otherwise to successful struggle. Animals that are failures and those that are successes are equally likely, if they survive, to have offspring. But, among ideas, those that fail are likely to be barren and those that succeed to be prolific.

Still more marked is the difference between the character of the struggle that takes place between mutated members in the two groups. In the physical world the process is negative—the failures are cut off. In the world of ideas it is positive—successful ideas are adopted and imitated. One consequence of this is that, in general, a successful experiment diffuses itself much more rapidly than a successful "sport."

[141.][141] This consideration affords a powerful argument for the expenditure of State funds upon training the girls of the present generation to become competent mothers and housewives, because, if only one generation were so taught, a family tradition would very probably become established, and the knowledge given in the first instance at public cost would propagate itself through successive generations without any further cost to anybody. (Cf. Report of the Inter-departmental Committee on Physical Deterioration, p. 42.)

[142.][142] Cf. Fiske, Invention, p. 253.

[143.][143] Majewski, La Science de la civilisation, p. 228.

[144.][144] La Logique sociale, p. 352.

[145.][145] Principles of Economics, p. 780.

[146.][146] Ibid. p. 563.

[147.][147] The importance of this point is illustrated by the observation of the London Education Committee of 1905, that the children born in a year when infant mortality is low have more than average physique, and vice versa. (Cf. Wells, New Worlds for Old, p. 216.)

[148.][148] In later editions of his book Professor Punnett's argument is stated in a leas sweeping form and does not conflict with what has been said above. (Cf. Mendelism, third edition, p. 167.)

[149.][149] Carr-Saunders, The Population Problem, pp. 480-81.

[150.][150] Cf. Haycraft, Darwinism and Race Progress, p. 58.

[151.][151] [Cd. 5263], p. 82 (1909-10).

[152.][152] Report for 1909-10 [Cd. 5263], p. 17.

[153.][153] Dr. Newsholme's argument was severely criticised—partly under a misapprehension of its purpose—by Professor Karl Pearson in his Cavendish lecture, 1912, p. 13. Dr. Newsholme replied in his second (1913) report [Cd. 6909], pp. 46-52.

[154.][154] Heredity, p. 528.

[155.][155] This class of difficulty is experienced in many statistical investigations of social problems. For example, an interesting inquiry into the inheritance of ability, as indicated by the Oxford class lists and the school lists of Harrow and Charterhouse, was published some years ago by Mr. Schuster. But the value of his results is in some measure—it is not possible to say in what measure—impaired by the fact that the possession of able parents is apt to be correlated with the reception of a good formal, and, still more, informal, education. Mr. Schuster argues (p. 23) that the error due to this circumstance is not likely to be large. (Cf. also Karl Pearson, Biometrika, vol. iii. p. 156.) M. Nicefero, on the other hand, in his study of Les Classes pauvres, lays stress on the effects of environment in promoting the physical and psychical inferiority of these classes; but he does not seem to justify by evidence his conclusion that "tous les facteurs—en dernière analyse—plongent leur racine bien plus dans le milien économique de la societé moderne que dans la structure même de l'individu" (p. 332).

[156.][156] Pareto ignores these considerations when he argues (Systèmes socialistes, p. 13 et seq.) that an increase in the relative number of children born to the rich must make for national deterioration because, since the children of the rich are subjected to a less severe struggle than those of the poor, feeble children, who would die if born to the poor, will, if born to the rich, survive and, in turn, have feeble children. In view of the facts noted in the text, this circumstance should be regarded merely as a counteracting force, mitigating, but not destroying, the beneficial consequences likely to result from a relative increase in the fertility of the rich.

[157.][157] Cf. ante, Chapter IX. § 3.