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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 IV

THE DISTRIBUTION OF THE NATIONAL DIVIDEND

Chapter I

THE GENERAL PROBLEM OF DISHARMONY

IN the two preceding Parts we have examined the way in which the size of the national dividend is affected by certain important groups of influences. It is not, of course, pretended that all the influences that are relevant have been brought under review. On the contrary, many of the more remote causae causarum, such as those that determine the general attitude of people toward work and saving, as well as many less remote causes that affect the development of mechanical inventions and improved methods of workshop management, have been deliberately left on one side. This deficiency I do not propose to remedy. There is, however, another deficiency, which cannot be thus lightly left unfilled. From the propositions laid down in Chapters VII. and VIII. of Part I. it follows that, while, in general and apart from special exceptions, anything that either increases the dividend without injuring the absolute share of the poor, or increases the absolute share of the poor without injuring the dividend,1 must increase economic welfare, the effect upon economic welfare of anything that increases one of these quantities but diminishes the other is ambiguous. Plainly, when this kind of disharmony exists, the aggregate effect upon economic welfare, brought about by any cause responsible for it, can only be determined by balancing in detail the injury (or benefit) to the dividend as a whole against the benefit (or injury) to the real earnings of the poorer classes. No general solution of problems of that class is possible. It is important, therefore, to determine how far they are likely to arise in real life; to discover, in other words, whether causes acting discordantly upon the dividend as a whole and upon the absolute share of the poor are frequent or rare. When disharmonies are found, certain practical problems arising out of them will have to be examined.

Chapter II

PARETO'S LAW

§ 1. THE mere statement of this problem brings us into contact with an interesting thesis, which, if valid, would immediately dispose of it. This thesis is that no cause operating in opposite senses upon the aggregate amount of the dividend and upon the absolute share of the poor can possibly exist. It is backed by an inductive proof. The data for the induction are derived from some remarkable investigations conducted by Pareto and published by him in his Cours d' économie politique. Statistics of income in a number of countries, principally during the nineteenth century, are brought together. It is shown that, if x signify a given income and N the number of persons with incomes exceeding x, and if a curve be drawn, of which the ordinates are logarithms of x and the abscissae logarithms of N, this curve, for all the countries examined, is approximately a straight line, and is, furthermore, inclined to the vertical axis at an angle, which, in no country, differs by more than three or four degrees from 56°. This means (since tan56° = 1.5) that, if the number of incomes greater than x is equal to N, the number greater than mx is equal to (1/m1.5)·N, whatever the value of m may be. Thus the scheme of income distribution is everywhere the same. "We are confronted, as it were, with a great number of crystals of the same chemical composition. There are large crystals, middle-sized crystals and small crystals, but they are all of the same form."2 These are the facts as found by Pareto. The inference which he appears to draw from them in the Cours d' économie politique contains two parts. He defines diminished inequality among incomes thus: "Incomes can tend towards equality in two quite different ways; that is, either because the larger incomes diminish, or because the smaller incomes increase. Let us give this latter significance to the diminution of inequality among incomes, so that this will take place when the number of the individuals having an income less than an income x diminishes compared with the number of persons having an income greater than x."3 On this basis he finds: First, "we may say generally that the increase of wealth relatively to population will produce either an increase in the minimum income, or a diminution in the inequality of incomes, or both these effects in combination."4 Secondly, "to raise the level of the minimum income or to diminish the inequality of income, it is necessary that wealth should grow more rapidly than population. Hence we see that the problem of improving the condition of the poor is, before everything else, a problem of the production of wealth."5 Now, on Pareto's definition, "to increase the minimum income, or to diminish the inequality of income, or both," is substantially equivalent to "to increase the absolute share of the national dividend accruing to the poor." Hence, what this thesis amounts to in effect is that, on the one hand, anything that increases the national dividend must, in general, increase also the absolute share of the poor, and, on the other hand—and this is the side of it that is relevant here—that it is impossible for the absolute share of the poor to be increased by any cause which does not at the same time increase the national dividend as a whole. Hence disharmony of the type referred to in the preceding chapter is impossible: we cannot be confronted with any proposal the adoption of which would both make the dividend larger and the absolute share of the poor smaller, or vice versa.

§ 2. Now it is quite evident that a sweeping proposition of this kind, based upon an inductive argument, requires very careful consideration. It is, therefore, necessary at the outset to call attention to certain defects in its statistical basis. The sum of what has to be said is that, though the various distributions that are brought under review are similar in form, the likeness among them is by no means complete. In all of them, it is true, the logarithmic income curve—at least for incomes of moderate size—is approximately a straight line; but the inclination of this line, though it does not differ widely, still does differ distinctly, for the different groups of statistics that have been observed. Pareto's lowest figure from adequate data for the tangent of the angle made with the vertical axis is, for instance, 1.24 (Baˆle, 1887), and his highest 1.89 (Prussia, 1852). Nor is this all. As Dr. Bowley has pointed out, in the most important set of figures observed over a long period (those for Prussia) the slope of the curve has been decreasing with the lapse of time. The figures which Dr. Bowley gives differ slightly from those of Pareto, but the general effect is the same in both sets. According to Pareto, however, a smaller slope of the curve means a greater equality in his sense—a sense the appropriateness of which, it will be remembered, is matter for debate—in the distribution of income.6 Dr. Bowley, therefore, naturally offers as an explanation of the Prussian figures: "The incomes are becoming more uniformly distributed in Prussia, and the result is, from these figures, that the Prussian income is getting to the more uniform distribution of the English."7 Hence, interesting as Pareto's comparisons are, to build upon them any precise quantitative law of distribution is plainly unjustifiable.

§ 3. But, if the position is to be fully understood, it is well that this point should be waived. Let us suppose that the statistical basis of Pareto's reasoning is not defective in the way that has been indicated. Even so, much material for criticism remains. For let us consider what exactly this scheme, or form, of distribution is, for the existence of which a mysterious necessity seems to have been discovered. If we were to plot it out, not as Pareto does, but in the simpler form of a curve so drawn that the abscissae represent amounts of income, and the ordinates the number of people in receipt of these amounts, the curve would rise very quickly to its highest point and, thereafter, fall much less quickly. This would express in a picture the well-known fact that there are a very large number of people with incomes much below the average income, and, comparatively, a very small number with incomes above the average income. In short, the essential characteristic of current income distributions is that the great bulk of incomes are massed together near the lower end of the income scale. This fact is significant for the following reason. There is clear evidence that the physical characters of human beings—and considerable evidence that their mental characters—are distributed on an altogether different plan. When, for instance, a curve is plotted out for the heights of any large group of men, the resulting picture will not, as with incomes, have a humped and lop-sided appearance, but it will be a symmetrical curve shaped like a cocked-hat. It will, in short—to use a technical term—be the characteristic Gaussian curve, or curve of error, symmetrical about the mean in such wise that there is no massing near either end, but an equal number of heights above the mean and below it and a lessening number of people at every height as the distance from the mean in either direction is increased. Now, on the face of things, we should expect that, if, as there is reason to think, people's capacities are distributed on a plan of this kind, their incomes will be distributed in the same way. Why is not this expectation realised? A partial answer to this question may, perhaps, be found in a closer analysis of the word "capacities." For our purpose this must mean income-earning capacities. But people earn incomes by means of several different sorts of capacity, among which the principal division is between manual capacity and mental capacity. From the point of view of income-getting, therefore, it cannot properly be assumed that we are dealing with a single homogeneous group. If we examined together the members of a University and the members of a junior school, the table of heights obtained for these two groups jointly would not accord with the normal curve. If the number of persons in the University was much smaller than the number in the junior school group, heights very much above the average of the two groups combined would be unduly numerous. It may be that brain-workers constitute a homogeneous group and handworkers a homogeneous group, but that, for the purpose of income earning, they do not jointly constitute a homogeneous group; that the normal law rules in each separately, but, as with the University and the school, not in both together. On these lines the peculiar form of the income-distribution curve might be partly explained. There is, however, a more important and more certain explanation. Income depends, not on capacity alone, whether manual or mental, but on a combination of capacity and inherited property. Inherited property is not distributed in proportion to capacity, but is concentrated upon a small number of persons. Even apart from the fact, to be referred to in a moment, that the possession of a large property enables the property-owner to improve his capacity by training, this circumstance necessarily deflects the curve of income distribution from the "normal" form. The significance of this, from the standpoint of our present problem, is obvious. If the form of the income-distribution curve is partly determined by the facts of bequest and inheritance, the particular form which is found to be dominant in current conditions cannot possibly be necessary, except upon the assumption that the broad scheme of inheritance now generally in vogue is maintained. An alleged law, then, that should speak of any form as necessary in an absolute sense, runs counter to this apparently irrefutable reasoning.8

§ 4. The statistics adduced by Pareto do not provide a basis for any counter-argument. For, as a matter of logic, it is plain that, if all the different groups to which his statistics refer possess any common characteristic in addition to the fact that they are all in receipt of income, no general inference about income distribution that is based upon them can be extended to groups not possessing these characteristics. But, in fact, all these groups are communities enjoying the general type of inheritance laws common to modern Europe.9 It follows at once that no inference can be drawn as to how the form of the income distribution would be affected if these laws were abolished or fundamentally changed. In his Manuale di economia politica, published some years after the Cours, Pareto himself explicitly recognised this. He wrote: "We cannot assert that the form of the curve would not change if the social constitution were to change radically; if, for example, collectivism were to take the place of the system of private property."10

§ 5. Nor is it necessary to imagine so large a change as the destruction of inheritance laws, in order that the form of the income-curve may be largely affected. There is ground for believing that a like result would come about in consequence of anything that affected, in a marked way, the proportion between "earned" income and income derived from investments. The reason for this opinion is twofold. First, it is found by experience that incomes from property are distributed much more unevenly than incomes from either head-work or hand-work. Mr. Watkins, in his Growth of Large Fortunes, after printing an interesting table, comments on it as follows; "In making the comparisons made possible by this table, the criterion must be relative, not absolute. Convenient relative numbers are the ratio of the upper decile, or the upper centile, to the median. It will be observed that, in the statistics of wages, the upper decile is always somewhat less than twice the median, and, in one occupation of the nine, it is little more than one-fourth greater. In the distribution of salaries the upper decile is approximately twice the median, the inequality thus being not greatly different from that prevailing among wage-incomes. But there is a great gap between this and the prevailing distribution of income from property. In the Massachusetts probate statistics the upper decile is eight or nine times the median, and the error is doubtless in the direction of under-statement, since the figures are not net, so that large deductions for debts should be made from the smaller estates, and also since many very small properties do not pass through the courts. Among French estates the upper decile is thirteen times the median."11 For this country also the available statistics show a much more marked concentration of wealth than of income. This is well illustrated by Professor Clay's comparison between his own estimate for the distribution of capital in the United Kingdom in 1912 and Dr. Bowley's estimate for the distribution of income in 1910. He wrote: "94.5 per cent of persons have 56 per cent of the national income, while 96.2 per cen tof persons have only 17.22 per cent of the national capital; 98.9 per cent of persons have 71 per cent of income, while the same percentage of persons have only 33 per cent of the capital."12 Secondly, the distribution of earned income itself is likely to be more uneven, the greater is the importance of the unevenly distributed income from investments. This result comes about because differences in income from investments make possible different degrees of educational training and afford different opportunities for entering lucrative professions. The correlation between the two sorts of income is illustrated by Benini in a table, in which he divides the figures for certain Italian incomes into two parts: "The one represents the income that people derive from property, supposed to be invested for all the different categories at a uniform rate of, say, 5 per cent; the other represents the strictly personal income, due to work, enjoyed by the same people. For example, a total income of 2000 lire, accompanied by a property of 9016 lire, may be regarded as composed of 451 lire, the fruit of investment, and of 1549 lire, the fruit of professional activity. Calculating in this manner, we obtain the following table:

It will be noticed, of course, that, so soon as total incomes begin to exceed 16,000 lire, the part derived from personal activity diminishes; but this does not mean that the remuneration of the profession followed diminishes; it only means that many will now live wholly on the income derived from their property without following any gainful profession, and that this conduct of theirs reduces the average of the income due to work for the class to which they belong."13 Moreover, there is yet another way in which the form of the income-curve might be modified. A change in the distribution of training and so forth, that is, of investment of capital in people, may take place apart from variations in income from investments. When this happens, the change must tend directly to alter the distribution of earned income, even though original capacities are distributed in accordance with some (the same) law of error. It is perhaps some change of this kind that accounts for the conclusion, which Professor Moore derives from his study of American wage statistics, that the variability of wages (as between different people at the same time) was less in 1900 than it had been in 1890.

§ 6. When these points are conceded, the general defence of "Pareto's Law" as a law of even limited necessity rapidly crumbles. His statistics warrant no inference as to the effect on distribution of the introduction of any cause that is not already present in approximately equivalent form in at least one of the communities—and they are very limited in range—from which these statistics are drawn. This consideration is really fatal; and Pareto is driven, in effect, to abandon the whole claim which, in the earlier exposition of his formula, he seemed to make. In the Manuale di economia politica he insists that that formula is purely empirical. "Some persons would deduce from it a general law as to the only way in which the inequality of incomes can be diminished. But such a conclusion far transcends anything that can be derived from the premises. Empirical laws, like those with which we are here concerned, have little or no value outside the limits for which they were found experimentally to be true."14 This means that, even if the statistical basis of the "law" were much securer than it is, the law would but rarely enable us to assert that any contemplated change must leave the form of income distribution unaltered. As things are, in view of the weakness of its statistical basis, it can never enable us to do this. Disharmony between movements of the national dividend as a whole and of the absolute share accruing to the poor cannot be proved by statistical evidence to be impossible, and a detailed study of the matter must, therefore, be made.

Chapter III

THE SUPPLY OF CAPITAL AND LABOUR

§ 1. IN undertaking that study we are forced to avail ourselves of a somewhat rough method of approximation. Our inquiry is concerned with the comparative effects of certain causes upon the size of the national dividend and upon its distribution among rich and poor persons. No machinery exists by which effects upon distribution in this sense can be directly investigated. But economists have carried through, and have made common property, a very full analysis of the influences that affect distribution in another sense, namely, distribution among the various "factors of production." These two sorts of distribution are not the same. They would be the same if each factor were provided exclusively by a set of persons who provided nothing of any other factor. But, of course, in real life the same man often provides portions of several factors, obtaining part of his income from one and part from another. A landlord is not merely the owner of "the original and indestructible properties of the soil." On the contrary, he frequently invests a great deal of capital in his land, and sometimes also considerable mental labour in choosing his tenants, exercising a certain control over their methods, and deciding, it may be, upon the necessity of evictions. A shopkeeper provides capital, or waiting, to some extent, but he also provides, especially if his sales are on credit, much mental labour in judging the "standing of his customers" and not a little uncertainty-bearing in respect of bad debts. A large capitalist employer is still more obviously capitalist, brain-worker, and uncertainty-bearer combined. Finally, an ordinary manual worker is frequently, in some measure, also a capitalist. In view of these considerations, it is plain that doctrines about distribution among factors of production cannot be applied directly and unreservedly to problems concerning distribution among people. The difficulty is not, however, as it so happens, of decisive practical importance. By far the largest part of the poorer classes in this country consists of wage-earning workpeople. It is true, of course, that "there is no definite line between wage-earners and persons working directly for customers and small employers and small farmers..., nor is there any clear and uniform division between wages and salaries."15 But the dominant position of wage-earners among the poor is illustrated by the fact that, whereas, before the war, they numbered some fifteen and a half millions, persons other than wage-earners with incomes below £160 a year numbered, say, three and a half millions.16 Moreover, it is reasonable to suppose that a large number of persons earning small salaries or small incomes from working on their own account are affected by the main body of relevant economic causes in much the same way as wage-earners proper. For the purpose of the present discussion, therefore, though not, of course, for all purposes, we shall not commit any serious error if we treat manual workers and the poor as roughly equivalent classes. Furthermore, statistics show that by far the most important income-yielding instrument actually possessed by the poor of the United Kingdom, as thus defined, is manual labour. Persons in receipt of wages number, as I have said, some fifteen and a half millions, and it is probable that persons dependent upon wages amount to 30,000,000, or nearly two-thirds of the population. The accumulated property of these persons before the war—it is, of course, a good deal larger now—was estimated at £450,000,000, and the interest on it might, therefore, be put at some £20,000,000 a year. This was probably little more than 1/35th part of the total income of the wage-earners, all the rest being received as wages of labour.17 Hence, just as we have agreed roughly to identify the poor with the wage-earners, we may agree also to identify the earnings of wage-earners with the earnings of the factor labour. No appreciable error is introduced by this simplification. When we have made it, the familiar analysis of economists can be directly applied.

§ 2. We may divide the factors of production, from whose joint operation the national dividend results, into two broad groups, labour and the factors other than labour. Of course, neither labour nor the factors other than labour constitute a homogeneous group made up of similar units. Labour embraces the work both of wholly unskilled workpeople and of numerous sorts of skilled artisans. The factors other than labour embrace, along with the work of Nature, the work of many kinds of mental ability and of various sorts of capital instruments. This circumstance is not, however, relevant to our present problem. That problem is to determine whether and how far economic causes, which affect the national dividend as a whole in one sense, can affect the receipts of the factor labour in the opposite sense. In the present chapter attention will be concentrated upon two sets of causes of the broadest kind, namely, those that act respectively on the supply of capital in general and on the supply of labour in general. It will be convenient to begin with capital.

§ 3. Capital, or to put the same thing in concrete terms, capital instruments, are the embodiment of labour itself, waiting for the fruits of labour and uncertainty-bearing. Consequently, apart from inventions and improvements, which will be considered presently, an increase in the supply of capital instruments can only mean that people have been willing to undertake more waiting for the fruits of labour and more exposure of those fruits to uncertainty. In other words, the supply of waiting, or of uncertainty-bearing, or of both, has been increased. It is obvious that a cause of this kind will make for an increase in the national dividend as a whole. Can it at the same time make for a decrease in the real income of labour? The analysis relevant to this question has been developed by Marshall. Subject to certain important qualifications, which do not affect the present argument, this analysis shows, first, that every factor of production, including entrepreneurs' work,18 tends to be remunerated at a rate equivalent to its marginal net product of commodities in general. It shows, secondly, that, other things being equal, the marginal net product, in this sense, of every factor diminishes as the supply of the factor increases beyond a fairly low minimum.19 For, as the supply of any factor increases, the supplies of all the other factors being given, it pushes forward an irregular boundary along a great number of routes;20 and, the more of it there is, the smaller is the quantity of other factors, with which to co-operate and from which to derive assistance, that each new unit finds available. This proposition expresses what may be called the law of diminishing returns to individual factors of production. This law must not be confused with the law of diminishing returns to resources in general invested in a given occupation, referred to in Part II. Chapter XI.

§ 4. From this analysis an important proposition directly relevant to our present problem can be derived. This proposition has two sides, and is to this effect: If the quantity of any factor of production is increased, the reward per efficiency unit reaped by all factors completely rival to that factor (in the sense of being perfect substitutes) will be diminished, and the reward per efficiency unit reaped by all factors completely co-operant with it, and in no degree substitutes, will be increased. The former half of this proposition is obvious. The advent of Chinese immigrants in the retailing business must injure the British retail shopkeepers of New Zealand, and the steady flow of low-grade European immigrants must keep down the wages of unskilled workmen in the United States.21 The latter half of the proposition is easily proved as follows. Since each unit of the increased factor must be paid at the same rate, and the rate for the new units is less than the old rate, a part of the product of the old as well as of the new units is handed over to the co-operant factors.22 As an illustration, we may note that a high level of wages generally prevails in new countries, because, first, there is a large quantity of land available, and, secondly, by mortgaging the land to foreigners, the inhabitants can obtain a large quantity of capital also.23

§ 5. If, as is, of course, generally true in the concrete, different factors are partly co-operant and partly rival, the effect of an increase in the quantity of one of them upon the reward obtained by the others can be analysed in this wise. Suppose that the quantity of factor A increases from A to (A + a), and that x of the new units are substituted in uses formerly occupied by mx units of the other factor B. Then the effect produced on the reward per unit of B is equal to that which would have been produced had the two factors been entirely co-operant, and had the quantity of A increased from A to (A + a - x) and the quantity of B from B to (B + mx). It is obvious that this effect may represent either an increase or a decrease in the reward per unit of B, and that it is more likely to represent an increase, the larger is (A + a - x)/A relatively to (B + mx)/B. It is not possible, in the absence of knowledge as to the form of the function representing the relations between the factors and their product, to make any statement more precise than this. Interpreted roughly, the condition, under which, on the hypothesis taken, an increase in the quantity of A would lead to an increase in the reward per unit of B, is that the predominant part of the extra units of A can be profitably turned to uses other than those formerly occupied by units of B. Hence, in general, where two factors are partly co-operant and partly rival, an increase in the quantity of the one will augment the reward per unit, and, therefore, the absolute share of the dividend, enjoyed by the other, if the relation of co-operation between the two factors is more important than the relation of rivalry.

§ 6. The question whether the relation between waiting and uncertainty-bearing in general and labour in general is, in the concrete, mainly co-operant or mainly rival is not one to which an a priori answer can be given. If the only sort of capital instruments which mankind had learned how to make were a kind of Frankenstein monster capable of exactly duplicating the labour of manual workers, and not capable of doing anything else, this relation would be wholly one of rivalry. What it is in actual fact, therefore, chiefly depends on the nature of the things which people are able, by combining labour with waiting and uncertainty-bearing, to create. If we consider realistically what these things in the main are—and, of course, when what is contemplated is a general increase in the supply of waiting and uncertainty-bearing, we must imagine the new supplies to be used in an all-round addition to existing capital instruments—it is apparent that their work is mainly co-operant. Railways, ships, factory buildings, machines, motor cars and houses, whether in the hands of private people or of business men who let them out on hire, taken broadly, are tools for, and not rivals to, men. By giving help, they enable any nth worker to produce more stuff or service than he could have produced without them; they do not, by supplanting him, compel him to produce less. This is the general teaching of experience. In particular instances, indeed, the relation is predominantly one of rivalry. But, comparatively, these are unimportant. As Marshall well writes: "There is a real and effective competition between labour in general and [waiting to which should be added uncertainty-bearing] in general. But it covers a small part of the whole field, and is of small importance relatively to the benefit which labour derives from obtaining cheaply the aid of capital, and, therefore, of efficient methods in the production of things that it needs."24 In other words, the relation between capital as a whole and labour as a whole is predominantly one of co-operation. It follows that the question set out for discussion in § 2 must be answered in the negative. It is not, in present conditions, practically possible that a cause (other than inventions and improvements, which will be considered in the next chapter) operating to expand the national dividend by increasing the supply of capital generally should at the same time lessen the real income of labour. Similarly, of course, it can be shown that a cause operating to contract the dividend by diminishing the supply of capital generally cannot at the same time increase the real income of labour. In this field, in short, disharmony cannot occur.

§ 7. This conclusion leads up to the difficult problem of capital investments abroad. Apart from the special qualifications indicated on page 188, it may be presumed that, since nobody will invest abroad rather than at home unless he expects a better return, freedom to invest abroad will augment the national dividend. As against this, it seems at first sight that it will diminish the real income of labour. The funds for investment must be obtained either by exporting goods or by refraining from the import of goods to which we have a claim. It makes very little difference whether or not the granting of a loan is made conditional upon the proceeds of it being expended in purchasing the railway material, or other things, which it is destined to pay for, in the lending country. If this is done, the kind of goods that we export may be altered, but the volume of them will not be substantially affected. In any event the volume of things immediately available in this country will be diminished. This is practically certain to involve a direct injury to labour, either by making the things workpeople buy more expensive, or by reducing the supply of tools and machines that help them in production. It is true that, since some capital will have been withdrawn from home uses, the rate of interest here will go up, and this will encourage saving to create more capital. But this tendency can only mitigate, and not wipe out, the initial injury to labour. It follows that labour must be less well-off in terms of things in general than it would have been if the opening for investing capital abroad had been closed.

This result, however, is not decisive. In certain circumstances, even though this happens, labour may, nevertheless, be better off in terms of the particular things which workpeople are interested to buy. For, as an indirect effect of our foreign investments, these things may have been substantially cheapened. In actual fact this has happened. Sir George Paish, writing in 1914, stated: "In the aggregate, Great Britain has supplied the world outside these islands with nearly £600,000,000 for the construction of railways in the last seven years (out of a total so supplied by her of upwards of eleven hundred millions), and all of the money has been placed in countries upon which we depend for our supplies of food and raw material."25 When our foreign investments are of this character, the real income of labour, in the only sense that signifies, is fairly certain to be increased, so that no disharmony arises. No doubt, if there were special reason to believe that, had the export of capital been forbidden, the funds set free would have been devoted to domestic uses specially beneficial to workpeople, such as the erection of a large number of healthy workmen's cottages, this conclusion would not hold good. But there is not, in general, special reason to believe this.

Moreover, it is necessary to take account of certain more remote consequences of foreign investment. When the export of capital is free, the opportunity to obtain higher interest abroad both causes more British capital to be created—in lieu of consumption—than would have been created otherwise, and also enables a part of it to be invested in enterprises yielding a larger return than would otherwise have been open to it. Thus freedom to export capital at one time exercises a twofold influence in enlarging the aggregate real income of the country at a later time. It follows that, other things being equal, the amount of new capital that can be created there at a later time will be enlarged. This effect will repeat itself cumulatively year after year. In the end, therefore, if we suppose the amount of capital annually exported to remain constant—though not, of course, if we suppose the interest earned on capital invested abroad always to be itself invested there—the extra capital created at home as an indirect result of past exportation must exceed the amount withdrawn by contemporary exportation. On this supposition, in the end, labour as a whole will be benefited and not injured. Though, therefore, disharmony may prevail from the point of view of a short period, in the higher unity of the long view it may well be resolved. The practical inference is that all proposals to restrict the export of capital in the interests of labour—apart from the special reasons discussed on page 188 cited above—should be subjected to a very cautious and critical scrutiny.

§ 8. We turn to the second main group of causes distinguished in § 2, those, namely, which operate through the supply of labour. It is evident that, if this supply is increased, whether the increase comes about through an addition to the number of workpeople or through an addition to their average capacity, the national dividend must be increased. Our problem, therefore, is to ascertain the effect that will be produced upon the aggregate real income of labour. The analysis set out in the preceding section shows that the marginal net product of labour, in terms of things in general, and, therefore, its real earnings per unit, must be diminished. Whether its aggregate earnings will be increased depends, therefore, on whether the elasticity of the demand for labour in general is greater or less than unity. If this elasticity is greater than unity, labour in the aggregate will receive a larger absolute quantity of dividend than before; whereas, if the elasticity is less than unity, it will receive a smaller absolute quantity.26 It is, therefore, necessary to determine whether in fact the elasticity of demand is greater or less than unity.27

Let us begin by ignoring the fact that an addition to the supply of labour available in industry is likely to react upon the supply of other factors co-operating with it. It may then be observed that there is a certain field of personal service where labour works practically unaided by other factors, where, therefore, its productivity per unit would not appreciably fall with an increase in its quantity, and where a good deal could be absorbed without greatly reducing the value of its product in terms of other things. This circumstance points, pro tanto, to a fairly low rate of diminution in the (real) demand for labour in general as the quantity of it increases; though exactly how rapid the rate of diminution would be, or, in other words, how elastic is the demand for labour, it is quite impossible to say. In real life, however, it is illegitimate to ignore reactions, indirectly brought about by an increase in the supply of labour, on the supply of other factors. In particular, the supply of capital is known to be very far from rigidly fixed. When the quantity of labour increases, and, hence, indirectly, the return per unit of capital is enhanced—though, no doubt, those people who have decided to leave some definite sum to their descendants will not be willing to save so much as before—people in general will be willing to save more than before, and so to create a greater quantity of capital.28 Moreover, owing to the greater size of the national dividend, their ability to save will be increased. The resultant increase in the supply of capital will react to increase the marginal productivity of any given quantity of labour. On the whole, therefore, it is probable that the demand for labour, even viewed from the general standpoint of the whole world, is fairly elastic.29 The probability is far stronger as regards the demand for labour in any single country. For capital is so mobile that a small increase in the return per unit obtainable by it in any one country must inevitably—apart from complications due to double income-tax, about which it may be hoped that international arrangements will soon be made—bring about a large influx from foreign countries, or, what comes to the same thing, a large contraction of the outflow that formerly went to foreign countries. Hence the elasticity of the aggregate demand for British labour is greater than the elasticity of that part of the demand which depends on British capital alone. It is, indeed, so much greater that, with any reasonable assumption as to this latter elasticity, the elasticity of the aggregate demand is practically certain, from the standpoint of a long period, which is alone in question here, to be immensely larger than unity.

Hence it follows that an increase in the supply of labour, whether through an increase in the number of units of labour of given efficiency that the average workman provides, or through an increase in the number of workmen providing, on the average, a given number of units of labour, must increase the absolute quantum of dividend that labour in the aggregate receives. It is, no doubt, true that, within the broad group labour, an increase in capacity, which only affected some of the sub-groups, might involve injury to other subgroups, whose capacity has not been improved. Even this danger, however, is likely to be avoided where the different sub-groups are not strictly homogeneous, but are partly co-operant, and where, as occurs when some unskilled labourers are trained to trades, the group, which is not made more capable, is diminished in numbers by the indirect operation of the change that has occurred. Furthermore, these incidents within the broad group labour are, in any event, of subordinate interest. So soon as it is shown that the absolute share of labour as a whole possesses, along with the aggregate dividend, the property of increasing with increases in the supply of labour, the only proposition that is of direct relevance to the present argument is established.

§ 9. When the increase in the supply of labour comes about through an increase in the capacity of labouring people, it is obvious that the consequent increase in the absolute share of dividend accruing to them carries with it, in accordance with the argument of previous chapters, an increase in their economic welfare. When, however, the increase of supply comes about through an increase in numbers, the absolute share per man is lessened, despite the fact that the absolute share of the group as a whole is increased. If there were reason to believe that the loss per man were large, we should hesitate to conclude that an increase of this sort in the supply of labour involves an increase in the economic welfare of labour. In fact, however, it can be shown that, under the conditions now existing in this country, the loss per man would be very small. That it would be very small in terms of commodities in general follows from the fact already established, that the elasticity of the demand for labour in England is large. If the conditions were such that an increase in numbers would lead to a material increase in the price of food or other articles predominantly consumed by the working-classes, it might, indeed, be large in terms of the things that are of significance to them. At present, however, the fact that we are able to import food freely from abroad, makes it impossible that an increase in the population of a small country such as ours should, to any important extent, evoke the law of increasing supply price in respect of it. Hence, in all senses, the diminution of real wages per head of the working-classes would be very small.30 Consequently, it seems reasonable to conclude that an increase in the absolute share of labour, even when it results from an increase in the numbers of the population, will carry with it an increase in the economic welfare of working people. It is not necessary, therefore, to qualify our conclusion, that causes impinging upon the supply of labour affect the aggregate amount of the dividend and the aggregate real earnings of labour in the same sense, by emphasising the caution that the welfare of labour is sometimes diminished by causes that increase its wealth.

§ 10. The results that have been reached in this chapter serve to rebut two popular opinions. The first of these has to do with hours of labour, and is to the effect that a general shortening of the working day, because it will cut down the supply of labour, will enable workpeople as a whole to secure terms so much better than before that their aggregate real income must be increased. The truth is that, in so far as a diminution in the hours of work leads to a more than corresponding increase in capacity, both the national dividend and the absolute share of labour will benefit. But, if the reduction of hours is pushed beyond this point, so that it injures the national dividend, the real income of labour must, in view of the elasticity of the demand for labour, necessarily be injured also. The second popular opinion is that the compulsory withdrawal from work of persons in receipt of State assistance would increase the aggregate real earnings of the poor, and, therefore, from the point of view of labour, ought to be encouraged. Two schemes were submitted to the Royal Commission on the Aged Poor, one of which contained, as a condition for the receipt of a pension, "the abstention from all work of pensioners, male and female," while the other would have awarded pensions to "every one over sixty, and prohibited work beyond that age."31 The defence proffered for those schemes was that, if pensioners did not abstain from work, independent workpeople would find their earnings diminished. From a long-period point of view, however, the interests of the poor should be identified, not with those of independent workpeople only, but with those of all workpeople; for all workpeople are liable to become dependent at some period of their lives. But it follows directly from what was said in the preceding section that, if the supply of labour is contracted, the aggregate earnings of independent and dependent workpeople together will be diminished. Hence, so far as the present argument goes, it is inadvisable to adopt the policy embodied in these two pension schemes. It should be noted, however, that the cessation of work by pensioners can be defended from a more special point of view. It may be held desirable that the qualification for a pension should be, not age, but declining strength. This cannot be tested directly, but, if abstention from work were made a condition for receiving, say, a 10s. pension, conformity to the condition would ensure that recipients were really incapable of earning much more than 10s. regularly. Hence such an arrangement, though it would abolish work on the part of many persons below the 10s. line, might, nevertheless, be desirable as a means of preventing many other persons from obtaining pensions, and, in consequence of obtaining or expecting them, from relaxing their efforts in industry. The pension policy pursued by certain friendly societies seems to be based on considerations of this order.32 Clearly, however, this argument is not relevant where the condition for the receipt of a pension is, not declining strength, but the attainment of some definite age.

Chapter IV

INVENTIONS AND IMPROVEMENTS

§ 1. WE have thus seen that in existing conditions causes acting through the supply of capital in general and also causes acting through the supply of labour in general operate harmoniously. They either increase both the national dividend and the real earnings of labour, or they decrease both of them. A more complicated problem has to be faced when the initiating cause is an invention or improvement in processes or methods. All developments of this kind, since they enable something to be produced which was not being produced at all before, or enable something which was being produced before to be produced more easily, must increase the national dividend. Unless at the same time they indirectly alter distribution adversely to labour, they must also increase the real income which falls to labour. Hence, of any invention considered in the abstract, there is an initial presumption that its effects will be harmonious, in the sense that it will benefit labour as well as increase the national dividend. But it is possible that a given invention may change the parts played by capital and labour in production in such a way as to make labour less valuable relatively to capital than it was before; and, if this happens, the absolute share received by labour may be diminished. Our problem is to determine in what, if any, conditions this result will come about. It is interesting to observe that exactly the same analysis is appropriate when the initiating cause is, not an invention in the ordinary sense, but a development which enables a country to obtain some commodity more cheaply than before by making something else with which to purchase it from elsewhere, instead of making the commodity itself. Here too more of what people want is made available; and here too the proportionate parts played by labour and capital in production may be changed.

§ 2. The popular solution of our problem is very simple. It is thought that workpeople will be injured if an invention causes less labour to be employed in the industry to which it refers, and benefited if it causes more labour to be employed there. Such a view leads at once to optimism. Mr. Hobson has, indeed, shown that inventions do not always cause more labour to be employed in the industry where they are introduced: "The introduction of spinning and weaving machinery into Lancashire and Yorkshire afforded a considerable increase of employment, and a number of successive inventions and improvements during the second and third quarters of the last century had a similar result, but later increments of machinery have not been attended by similar results; on the contrary, there has been a decline in the number of persons employed in some of the staple textile processes. The introduction of typesetting machines into printing works has been followed by a large increase of employment; the introduction of clicking machinery into the shoe trade has been followed by a net reduction of employment."33 A broader illustration of a diminution of employment in a particular sphere, in consequence of an invention in that sphere, may be found in agriculture: for it is well known that agricultural machines have displaced a substantial number of agricultural labourers. An occasional failure of this kind is fully admitted by all. Still, in the main, inventions are believed by those who have studied the matter to increase, and not to diminish, employment at the point at which they act. Thus M. Levasseur writes: "The common opinion is that 'the machine drives out the workman' and robs a part of the working-classes of work. It is certainly true that a shop furnished with powerful machinery yields in a given time a greater product, with the help of a much smaller number of employees, than a shop where the same goods are made by hand. It is this that one perceives in the first instance. What one only perceives later, by dint of study, is that the goods made economically by machinery, being sold, in general, at a lower price, often find such a number of new purchasers that the increased production, thus made necessary, provides employment for a greater number of workpeople than were employed before the machinery was introduced."34 Again, the Poor Law Commissioners are gratified to find among manufacturers a remarkable consensus of opinion concerning the effects of improvements in machinery. They believe that such improvements "do temporarily reduce the demand for labour within the department where such changes occur; that the displacement does not, as a rule, reduce the labour employed in each producing unit, the workers dispensed with being readily absorbed within the same business—particularly in shipbuilding, where changes are slowly introduced and affect only a few men at a time—and that the final result is that more labour is required instead of less."35 Now, I am not concerned to deny the empirical part of these conclusions. I do not dispute the Poor Law Commissioners' assertion that the conditions necessary to secure that increased employment in any sphere will ultimately result from an invention in that sphere are, as a matter of practice, usually fulfilled. I do dispute, however, the very widespread opinion that these facts are directly relevant to the question whether inventions and improvements are beneficial allies or injurious foes to the fortunes of labour, and so of the poor as a whole. To elucidate that issue a different and more far-reaching analysis is necessary.

§ 3. Every invention or improvement either facilitates the manufacture of some commodity or service that is already being produced, or makes possible the manufacture of some new commodity or service. It is certain, therefore, to lead to a cheapening and an increased consumption of the commodity affected by it. With the differently made and enlarged output, a different amount of labour, and also a different amount of capital (or waiting), will be employed in the industry and in the subsidiary industries engaged in making machinery for it. Let us suppose that workpeople purchase absolutely none of the product which the invention has cheapened. Then the effect of the invention upon their real income depends upon its effect on the marginal net product of things for which labour is responsible in other industries; for, when equilibrium is established, it will get, in the industry where the invention has taken place, the same real wage as it gets in these industries. For the present purpose we may reasonably leave out of account factors of production other than labour and capital. It will then follow that, if, as a result of the invention, the quantity of labour in industries other than the improved industry and its subsidiaries is diminished in a larger ratio, or increased in a smaller ratio, than the quantity of capital, the marginal net product of labour in terms of the things workpeople buy—and, therefore, the aggregate real income of workpeople—must be increased. In the converse event this aggregate real income must be diminished. If the two ratios of change are equal, it must be left unaltered. Inventions which have these several effects I shall call, respectively, capital-saving inventions, labour-saving inventions and neutral inventions. It will, of course, be observed that this use of terms is different from the common use, according to which every invention that enables a given amount of product to be got with the help of less labour is labour-saving.

§ 4. It is easy to apply this analysis to practice, provided we have to do with an industry in which (and also in its subsidiaries) the proportion of the country's total labour employed is equal to the proportion of its total capital. In this class of industry anything which changes in one direction the ratio between the labour and capital employed there must change in the opposite direction the ratio outside. Hence, on my definition, an invention or improvement which reduces the ratio of capital to labour in the industry where it applies will be capital-saving, one which increases it, labour-saving, and one which leaves it unchanged, neutral. In these conditions, therefore, we are able with fair confidence to distinguish in the concrete the several classes of inventions. Thus, assuming the above conditions to prevail, the introduction of two-shift or three-shift systems, making possible the more continuous working of machinery, must be a capital-saving invention. For, if, instead of only 12 hours being worked in each 24-hour period, the whole 24 hours are worked, a staff of 100 men, 50 working by day and 50 by night, will only require half as much machinery to produce a given output as they would need if the whole 100 worked by day only. Of course, the machinery will wear out more quickly when it is worked for a longer time per day. But for many kinds of machinery the working life is—on account of obsolescence—much shorter than the physical life. Consequently, though the substitution of two twelve-hour shifts for one twelve-hour shift would not reduce the capital required for a given scale of production by as much as a half, it would, in general, reduce it a good deal. In whatever way, therefore, the absolute quantity of output is changed, the ratio of capital to labour employed must be diminished. The same result holds good of developments that enable the manufacturers, wholesalers or retailers, who deal in any commodity, to conduct their business equally efficiently with a smaller amount of capital locked up in the form of stocks. For, here again, whatever happens to absolute amounts, the ratio of capital to labour employed must be diminished. This point is of some importance in view of the economy in the matter of stock-holding, which, as will be shown in Appendix I., modern improvements in communication have made practicable. Among developments more ordinarily named inventions, we might, still assuming the industries to which they apply to have previously employed capital and labour in normal proportions, count as capital-saving such things as Marconi's invention of wireless telegraphy, by which the need for cables is removed. Probably, however, the majority of inventions in the narrower sense would have to be reckoned as "labour-saving," because, as Dr. Cassell has observed, "almost all the efforts of inventors are directed towards finding durable instruments to do work which has hitherto been done by hand."36 These results, it must be remembered, are not necessarily valid, unless, before the invention, the industry (and its subsidiaries), in which the invention is made, was employing labour and capital in the same proportion as the general average of all industries. If it was employing an abnormally large proportion of labour or of capital, an invention, which changed the ratio in it in any direction, might change the ratio in other industries in the same, and not in the opposite, direction. Suppose, for example, that in a particular industry 3000 units of labour and 1000 units of capital are being employed, and in the rest of industry one million units of each. In consequence of an invention in this particular industry only 2000 units of labour and 500 units of capital come to be needed there. The ratio of labour to capital there is, therefore, increased from 3 to 1 to 4 to 1. At the same time in the rest of industry it is increased from 1 to 1 to 1,001,000 to 1,000,500. It is thus evident that a knowledge of the effect on the ratio in the improved industry would not by itself enable us to determine whether the invention is labour-saving or capital-saving or neutral. But, plainly, we have no ground for supposing that labour-saving inventions in my sense are impossible. If they take place in the conditions contemplated up to this point of our analysis, disharmony must result. The national dividend will be increased, but the real earnings of labour will be lessened.

§ 5. The conditions so far contemplated are not, however, in conformity with the facts. It has been assumed that workpeople purchase absolutely none of the commodity or service which the invention or improvement has cheapened. Obviously this assumption is highly unfavourable to the prospect of their obtaining an increased real income. When conditions are such that, even on this assumption, they would gain, in so far as in fact they do purchase the commodity they will gain still more; and, when conditions are such that, on this assumption, they would lose, nevertheless in real life they may gain. In short, the more important is the part played by the commodity to which the invention refers in the consumption of poor people, the more likely it is that the net effect of the invention will be advantageous to them.

In the light of this result it is a very significant fact that the things principally purchased by the working-classes are relatively crude things, which can be readily made on a large scale by machinery, while the things principally purchased by the well-to-do are of higher quality, and, therefore, involve a larger use of human labour. Marshall writes: "Probably about twice as much horse-power is used in providing for each pound's worth of expenditure on commodities by the poor as by the rich." But it is just in things of this kind that the readiest opportunities are found for mechanical inventions and improvements, and in which, as a matter of fact, these are most extensively made. No doubt, the consumption of the poor embraces a much larger proportion of house-room and food than the consumption of the rich, and both building labour and agricultural labour are relatively little aided by those mechanical instruments, in respect of which technical improvements and devices of organisation have the widest scope. This qualification is especially applicable to the very poor. "The fall of prices does not benefit the various grades of wage-earners in direct ratio to their wages. Rent and certain other necessary elements of expenditure, such as fuel, which have risen in amount for the large majority of workers, play a relatively larger part in the budget of the lower grades of workers, reducing to that extent their gain from the general fall of prices. The poorest classes, whose retail purchases are made in very small quantities, also gain least from the lower prices of other commodities than housing and fuel."37 But these qualifications leave the main result untouched. On the whole, the poor spend a larger proportion of their income than other classes on things the manufacture of which specially lends itself to inventions. Thus Leroy-Beaulieu notes: "The man of fashion, who is fitted for his clothes by a tailor, gains nothing from the great reduction of prices which shops selling clothes ready-made offer to the less comfortable section of the population."38 He contrasts with these things "all those objects, which the mass of the people have hitherto done without, but which have now come into general use, and which contribute either to better hygiene or to increased decency and dignity in the homes of the workpeople. Stockings, handkerchlefs, more varied and more suitable garments, curtains for the windows, carpets on the floors, a less exiguous array of furniture, these things constitute democratic luxury, the fruit of the development of mankind's powers of production."39 Nor is this all. It has to be added, as Marshall has strongly urged, that the staple articles of food mainly consumed by the poor are, so far as this country is concerned, largely brought from abroad, and that one of the most marked features of recent times has been the development of improvements in the machinery of transport, and the consequent heavy fall in transport charges. To this may be added the important improvement in the machinery for retailing goods to poor persons, which has been realised by co-operative stores, and the consequent heavy fall in the cost of the service of retailing.

Of course the historical fact that recent inventions have largely affected commodities, which enter directly or indirectly into the consumption of the working-classes, is not a proof that further inventions will be predominantly of a like kind. It is, however, open to us to urge that this historical fact is conformable to a priori expectation, because, not only are the openings for profit, and, therefore, the stimulus to invention, exceptionally great among "mass-goods" of wide consumption, but also, as Marshall has pointed out, and as the history of the motor car, culminating in the petrol-driven lorry and motor omnibus, illustrates, even those improvements, which were originally designed exclusively for the luxuries of the rich, are apt soon to spread themselves to the comforts of other classes.40 These considerations lead to the conclusion that it is less likely than the argument of the preceding section alone would suggest that any given invention will injure the real income of labour.

§ 6. Yet another qualification must be added to the analysis of §§ 3-4. That analysis tacitly assumed that the invention, whose consequences were examined, had no effect on the quantity of new waiting, or capital, which people are prepared annually to create. This assumption, however, is not warranted. Certain sorts of invention, by giving a new field for "spending," may cause rich people to save less and so to provide less new capital to help labour in production. The invention of luxurious motor cars for private travel, by inducing people to spend more of their income on petrol, chauffeurs' wages and so on,41 has probably had this effect, and the impending invention of comfortable private air cars probably will have it. Nor is the effect necessarily confined to inventions which create opportunities for new forms of consumption. It may also follow from those that cheapen consumption goods which are already known, provided that they are of highly elastic demand. People who could have saved and created capital may be tempted to spend instead. On the other hand, inventions that cheapen things for which the demand is highly inelastic, by enabling people to get what they want at less cost, will leave them a greater margin out of which to make savings, and so will indirectly increase the annual creation of new capital. Whether the tendency thus set up by inventions is towards a decrease or towards an increase in the annual addition that is made to capital, it is cumulative, in the sense that in each successive year that year's check to the flow of new capital is added to the total check imposed on the stock of all capital. For this reason it is more important than it might be thought to be at first sight. When the indirect effect of an invention is to diminish savings, it may injure labour even though it is capital-saving; and, when the indirect effect is to increase savings, it may benefit labour even though it is both labour-saving and also concerned with some product which does not enter at all into workpeople's consumption. There is reason to believe that hitherto the general body of inventions has had the effect of increasing, and not of diminishing, the opportunity and the will to accumulate new capital.

§ 7. From these various considerations it is plain that no rigid and exact conclusions can be drawn. The general impression created by our study is that, though inventions and improvements injurious to the real income of the working-classes may occur, they will not occur often. The great majority of inventions and improvements will increase the real income of labour as well as the aggregate national dividend. Disharmony, as a result of inventions, is a possible, but a decidedly improbable, contingency. Nobody would seriously propose to interfere with, or to obstruct, inventions in order to provide a safeguard against it.

Chapter V

THE MANIPULATION OF WAGES

§ 1. IN the latter portion of Part III. I examined at length the conditions under which an enforced increase in the wages rate paid in a particular occupation or place would injure the national dividend. We have now to consider the effect that will be produced on the real income of workpeople, and so of the poor, as a whole. For simplicity we may take for examination—no difference is made in the substance of the argument—the state of things contemplated in Part III. Chapter XVII. §§ 8-9. The wage rate was there supposed to be forced up in an occupation where it had formerly been both "fair" relatively to other industries and equal to the value of the marginal net product of the work for which it was paid. It was assumed that no difference was made either to employers' technique or to the capacity of the workpeople to whom the increased wage was given: and, on this assumption, it was proved that the national dividend must be diminished. In what, if any, conditions will the real income of labour as a whole, nevertheless, be increased?

§ 2. The first step towards answering this question is to determine in what circumstances the enforcement of an uneconomically high wage—that is a convenient term for a wage that damages the dividend—will increase the real earnings of the particular group of workpeople in whose behalf it is won. It should be noticed in passing that an uneconomic enhancement of the wage rate in any occupation may take the form either of a special enhancement of the rate per unit of labour paid to inferior workpeople—e.g. such workpeople may be given the same time-wages as competent workers—or of a general enhancement of the rate per unit of capacity paid to all workpeople. It is evident that an uneconomic enhancement of the former kind must either throw all the inferior workpeople out of work altogether, or must diminish the aggregate quantity of labour employed to exactly the same extent as an equal enhancement in the rate per unit of capacity paid to all the workpeople in the occupation. Hence it is bound to have a less favourable effect on the aggregate earnings of the whole group of workpeople concerned than the latter kind of enhancement. In what follows, therefore, it will be sufficient to consider that type of uneconomically high rate which affects equally the wages per unit of capacity paid to all workpeople in an occupation. To determine in the abstract the conditions in which the establishment of this type of uneconomically high wage will increase the real earnings of this group of workpeople is perfectly simple. It will increase them if the demand for the labour of the group has an elasticity less than unity, and it will diminish them if the elasticity is greater than unity. This result—on the assumption, of course, that the workpeople concerned are not themselves purchasers to any appreciable extent of the commodity they produce—is an obvious arithmetical truism, following at once from the definition of elasticity. To fill it out in the concrete, to investigate, that is to say, the conditions that determine whether the demand for the services of any assigned group of workpeople is likely to have a high elasticity or a low one, is the task we have now to essay.

§ 3. In the fifth section of Part II. Chapter XIV., an analysis was given of the determinants of elasticity with reference to the demands for different classes of commodities. This analysis is applicable to the demands for different classes of labour also. In that application it may be set out as follows.

First, we have the general fact that the demand for anything is likely to be more elastic, the more readily substitutes for that thing can be obtained. This fact has an important bearing on the relation between labour and machinery; for, in some industries, a very small addition to the cost of working a process by hand would induce employers to adopt mechanical appliances. Aves, for example, quotes the statement of an ex-inspectress that, in the Victorian clothing trade, where minimum wage determinations have unintentionally discriminated against home work, employment was transferred to factories using machinery, and "practically all outside work was stopped."42 In like manner, the tanners of Victoria, commenting on the effects of the Wages Board in their industry, state: "Labour-saving machinery is forced into use, so much so that the tannery trade has been practically revolutionised since the Wages Board system was applied to the trade."43 In circumstances of this kind the high elasticity of demand for labour is, in effect, due to the fact that there is a readily available and closely competing substitute for its services in the rival factor capital, or, more strictly, other labour accompanied by a greater amount of waiting. Since it is easier to introduce this substitute after an interval than immediately, elasticity in demand due to this cause is greater from the standpoint of a long period than of a short period.

Secondly, we have the general fact that the demand for anything is likely to be less elastic, the less important is the part played by the cost of that thing in the total cost of some other thing, in the production of which it is employed. This general fact enables us to point out certain occupations in which the demand for a particular class of labour is likely to be especially inelastic. One of these is the occupation of women in sewing on the covers of racquet and fives balls.44 Another is that of making trouser-buttons. Lord Askwith writes: "The rich man's trousers may be cut by an expensive tailor. The buttons on those trousers may be made by sweated industry. High payment for those buttons would be but a minute part of the cost of the whole article."45 The engineering work done by engineers engaged by building firms, since these persons are employed only incidentally and as a trivial part of the total producing force, is in a similar position. In like manner, the part played by the original labour is small in commodities for which the addition to wholesale price made by the work of the retailer is large. "For example, when we find that the maker of a lady's costume is paid 10d. or 1s., while the article is sold for 25s. to 30s., it is obvious that the wage paid is so small in relation to the retail price that, even were the wage doubled, it need necessarily affect the price but little, if at all."46 This condition, that the part played by labour in a particular act of production shall be small, is probably fulfilled fairly often, and it is likely to be fulfilled still more often as the relative importance of installations of plant and machinery in production increases. One writer has even suggested that "the labour cost of production in most industries is usually not sufficient materially to affect the price of the finished article." It should be noticed, however, that, in the important work of coal production, hewers' labour constitutes a very large part of the total cost, and the condition stipulated for is, therefore, not fulfilled.

Thirdly, we have the general fact that the demand for anything is likely to be more elastic, the more elastic is the supply of co-operant agents of production. This fact makes it evident that the demand for labour will be specially inelastic in industries which make use of raw materials of highly inelastic supply. Apart from raw materials, the principal co-operant agents working with labour in any industry are capital instruments, managing ability and other labour. From the standpoint of a long period the supply of these to any single industry is, beyond doubt, exceedingly elastic. But, from the standpoint of a short period or a period of moderate length, it is likely to be inelastic; for specialised machinery and managing skill, and even other labour, can neither be created or brought from elsewhere, nor yet destroyed or carried off elsewhere, in the twinkling of an eye. Here again, therefore, the forces making for elasticity of demand are stronger from the standpoint of a long period than of a short period. It should be added that in some industries, notably coal-mining, Nature herself acts as a very important co-operant factor of production. In times of expanded demand new men have to be set to work on seams much more difficult and less productive than those ordinarily worked.47 This means, from a short-period point of view, a highly inelastic demand for labour.

Fourthly, we have the general fact that the demand for anything is likely to be more elastic, the more elastic is the demand for any further thing which it contributes to produce. This fact implies that the demand will be specially inelastic for the services of workpeople engaged in the manufacture of commodities of highly inelastic demand. When the elasticity of the public demand for any commodity is given, it is obvious that, from a short-period point of view, the elasticity of the demand for new production of it will be greater or less, according as the thing can or cannot be readily made for stock. Apart from this, the circumstances upon which the elasticity of demand for various classes of commodities depends were discussed in the fourteenth chapter of Part II. The most significant of them for our present purpose is the presence or absence of foreign competition. Thus a critic comments on some of the effects of New Zealand wage regulation: "In some trades employers have not been able to cope with the extra cost of production owing to competition with the imported article. They have, therefore, had to give up the producing part of their business and increase their importations. In the tanning and fellmongering business some serious results have followed the fixing of a minimum wage. I will mention two instances. Some years ago a firm in the district of Dunedin closed down its works and removed its plant to Australia, largely owing to the conditions imposed by the Arbitration Court. A member of a Christchurch firm has informed me that, since the Court's award in the Canterbury district was made about six years ago, a much larger proportion of sheepskins have been shipped to London, without being handled by the local fellmonger, than was formerly the case. Hides, which should have been tanned here, have been shipped raw. Prior to the award, my informant's firm paid from £10,000 to £15,000 in wages; now the wages sheet amounts to only about £5000. The number of bales of wool scoured annually by the same firm since the award came into force has not been more than 2000; formerly the number was from 6000 to 8000."48 In connection, however, with this matter of foreign competition a word of caution is necessary. Let us imagine that there are a dozen industries in this country, all of about the same size and all subject in about equal measure to foreign competition in the home market. Looking at any one of these industries singly, we conclude, perhaps, that the elasticity of demand for its product is such that an increase of 10 per cent in the cost of making it in this country would stimulate importation and reduce the demand for the home-product by 50 per cent. It is natural to infer that a 10 per cent increase in costs in all twelve industries together would reduce the demand for the home-product in all of them by 50 per cent. This, however, is not so. Foreign imports collectively constitute the foreign demand for British exports. When, therefore, for any reason it becomes advantageous to increase the sendings of one kind of import, other kinds of import will tend to fall off, the adjustment being brought about through—but not by—a change in price levels. Thus, when an extra flow of imports, stimulated by increased home-costs, helps to bring about a contraction in the demand for the home-product in one industry, the contraction will be, in part, cancelled by an expansion, made possible by lessened imports, in other industries. In other words, the demand for the whole body of British products subject to foreign competition is less elastic than the demand for a single representative item among these products. It follows that, other things being equal, the workpeople immediately affected are more likely to be benefited by interference to raise their wages if the interference is extended to several industries subject to foreign competition than they would be if it were confined to one.

§ 4. With these results in mind we may proceed to the next stage in our inquiry, and ask in what conditions the establishment at one point of an uneconomically high wage, which raises the real earnings of the workpeople there, will also raise the real earnings of the workpeople as a whole. Let us still suppose that the commodity, to the makers of which an uneconomically high wage has been assigned, is exclusively consumed by persons other than workpeople. It may be noted, in passing, that, when a factor making for inelasticity in the demand for the services of the particular group of workpeople in whom we are interested is inelasticity of supply and, therefore, "squeezability" in some co-operant group, a part of the gain to the first group will be offset by loss to the second. For the purpose of a general analysis, however, we may neglect this rather special point.

If the elasticity of demand for labour in the occupation where the wage rate has been raised is less than unity, the aggregate earnings of labour as a whole, and not merely the earnings in that occupation, will be increased, provided that either the casual method or the privileged class method of engaging labour, as described in Chapter XIII. of Part III., prevails in that occupation. Under the casual method workpeople will be attracted into the occupation from outside until the prospect of earnings per man inside and outside are brought to equality; and, since the number of workpeople left outside is diminished by this drain, the wage rate there will be raised. This proves that aggregate earnings inside and outside together must be raised. Under the privileged class method of engagement no one will be attracted from outside and no one will be driven out. Hence earnings outside will be unchanged. Since, therefore, earnings inside are, ex hypothesi, increased, it again follows that earnings as a whole are increased. If the preference method of engagement prevails, conditions are conceivable in which earnings as a whole would not be increased. For some persons must be driven out of the industry where the wage is raised, and, though those left there will be getting more than they were getting before, the influx of labour into other industries might, if the demand in these industries had an elasticity less than unity, so lower earnings outside as to outweigh the gain inside. Since, however, as was shown in Chapter III., the demand for labour in industry in general is highly elastic, the conditions necessary to this result are not fulfilled. In real life, therefore, the earnings of labour as a whole must be increased whenever an uneconomically high wage is enforced in a selected occupation, provided that the elasticity of the demand for labour there is less than unity.

If the elasticity of demand in the occupation where the wage rate is raised is greater than unity, analogous reasoning shows that earnings as a whole cannot be increased, provided that either the casual or the privileged class method of engagement prevails in the occupation. For some workpeople will be driven out of the occupation, and a new equilibrium will be established, with an expectation of earnings for every one equal to the earnings in other occupations; and these will have been made lower than before by an influx of new workers. If, however, the preference method prevails, earnings as a whole may be increased even though the elasticity of demand is greater than unity. Those who are left in the industry where the wage is raised will be getting more than they were getting before; and, though everybody else will be getting less than before, yet, if the demand for labour in other industries is sufficiently elastic, their loss need not be so great as the others' gain.

§ 5. It is now time to remove the assumption set out in § 2, that the commodity produced by the group of workpeople, whose wage is being interfered with, is exclusively consumed by persons other than workpeople. On the strength of that assumption we have been able, up to this point, to ignore the distinction between effects on money earnings and effects on real earnings. Where the assumption is unwarranted we are not justified in doing this. An increase of money earnings may be associated with a decrease of real earnings, and may, therefore, be delusive. If the commodities produced by the favoured workers are consumed by nobody except members of the working-classes, it must be delusive, for it is bound to involve a more than equivalent loss to workpeople (those inside the privileged industry and those outside it together) in their capacity as consumers. If the consumers consist partly of workpeople and partly of others, it is not possible to say absolutely whether the workpeople's gain as producers or loss as consumers will be greater. All we can lay down is that, the more important the part of the consumption for which non-wage-earners are responsible, the more likely it is that the establishment of an uneconomically high wage rate will succeed in bringing about an increase in the real income of workpeople as a whole. When, therefore, the main part of the product of any group of workers is consumed by other workers, though the establishment of an uneconomically high wage rate may enhance the aggregate real income of the favoured workers, it is not probable that it will enhance that of all workers collectively. This point is important, because, in real life, it is rich people who make, or otherwise provide, a great part of the luxuries of the rich, while poor wage-earners make things for other wage-earners. Thus, Mrs. Bosanquet writes: "Nothing strikes one more forcibly in studying the position of the lowest-paid workers than that they are almost always engaged in producing goods for the consumption of their own class.... Badly paid tailors are making cheap clothing that no rich man would look at; badly paid servants are rendering services that would not be tolerated by any one of refinement and culture; while the real requisites of refinement and culture, if by these we mean such things as art, music, and literature, are produced by professional people."49 Again: "The great majority of wage-earners are engaged in producing for the benefit of other wage-earners, and have no direct connection with the non-wage-earning classes. The majority of builders are building houses for wage-earners; the very large majority in the clothing trades are making clothing for the wage-earners; the majority of food-preparers are preparing food for the wage-earners. More especially of the sweated trades is it literally true, almost without exception, that they are working for the wage-earners alone, and that a rise in the price of their products would be paid by the wage-earners alone. How would it be possible that the propertied classes should pay any share in the increased price of ready-made suits, or cheap blouses, or shoddy boots and shoes, or Pink's jams? The burden must fall on the consumers of these articles, and they are the wage-earners."50 Mrs. Bosanquet would not, of course, pretend that there are no rich men's luxuries, towards which poor men's labour contributes an important part. It would seem, however, that not much of the labour of poor persons in the United Kingdom is devoted to the supply of luxuries of this sort.51 It follows that the establishment of an uneconomically high wage rate for a particular group of workpeople is much less likely to involve a real increase in the earnings of workpeople as a whole than it appears to be when the distinction between money earnings and real earnings is ignored.52 So far, however, the possibility that it may involve this remains.

§ 6. But against the realisation of this possibility there is at work a corrective tendency. If the real earnings of labour in the aggregate are increased by the manipulation of wages in any industry, a smaller portion of the productive power of the community is left available to provide payment for the services of capital. Had there been no alteration in the constitution of the national dividend, this would have meant a fall in the real rate of interest offered to new capital. The change in the constitution of the dividend, consisting, as it does, in a shifting of production away from its natural channels, cannot prevent this fall from coming about. It would seem, therefore, that manipulation of wage rates cannot benefit labour in the aggregate without causing the reward offered to savings to be diminished. Now, it is no doubt true that a fall in the real rate of interest will not cause everybody's savings to be diminished. The savings of those people, whose object it is to leave a definite sum to their children at death, will actually be increased; and the savings of the very rich, who merely put by what is left over after their accustomed standard of life has been satisfied, will not be affected at all. There can be little doubt, however, that, on the whole, a fall in the rate of interest will diminish savings to some extent, and, of course, a diminution of savings carries with it a diminution in the rate at which new capital equipment is provided. In this way an indirect influence is set in play tending to make the remuneration of labour in future years decrease. Here, plainly, is a tendency adverse to disharmony. Furthermore, this tendency is quantitatively important. For suppose a policy to be adopted, which, while increasing the real income of labour at the moment, causes the supply of new capital each year to be one per cent less, not necessarily than it was before, but than it would have been apart from the policy. In any one year the loss to the aggregate stock of capital equipment in the country will be small. But the annual losses are cumulative. After, say, ten years, the capital stock that is available to assist labour in its activities may be considerably smaller than it would otherwise have been.53 Moreover, the reduction of this stock is aggravated by the fact that it must itself cause a reduction in the national dividend; that, therefore, the transference to labour of any given annual sum must throw a continually increasing burden on profits; that, therefore, the diminution (or check to the growth) of the national dividend must be greater in the second year than in the first, greater in the third year than in the second, and so on; and that, therefore, the rate of fall in the capital stock must be progressively accelerated. As this stock falls in amount below what it would otherwise have been, the annual earnings of labour also fall continuously. In the end it would seem that, as against any policy, which, in the first instance, benefits labour at the expense of injuring the national dividend, this cumulative tendency is bound to prevail, and that, therefore, from the standpoint of a sufficiently long period, any disharmony that may have been set up must disappear. Since, however, relatively to the stock of capital, the annual creation of new capital is small, and, consequently, any probable change in the annual creation very small, the harmonising tendency will work slowly. This implies that, for some time after the establishment of an uneconomically high wage in particular occupations, disharmony may prevail.

§ 7. Up to this point we have been concerned with the consequences of fixing an uneconomically high wage, as if this were a single self-subsistent act. In actual life, however, it is inevitably mixed up with State policy as regards the protection of persons in distress. If the enforcement of an uneconomically high wage in some occupation throws a certain number of people out of work for a long time, the State will have to help these people. Consequently, if we count as a part of the real income of the poor what the State provides for assisted persons, their real income in this wider sense may well be raised by a policy which lowers the earned part of their real income. Thus, by a forcing up of the wage rate in some occupations, we may suppose that the national dividend is injured, and that those workers who are left in industry gain a little less than those who are thrown out of it lose. There is then harmony between the effects on the national dividend and on the real income of the poor in the narrower sense. But, if, in consequence of increased unemployment, the expenditure of State aid to poor persons becomes £1,000,000 bigger than it would otherwise have been, there may be disharmony between the effect on the dividend and the effect on the real income of the poor in the wider sense. The way is thus opened for a somewhat special argument in favour of forcing up wage rates in low-grade occupations. It may be granted that both the national dividend and the real earnings of labour as a whole will be diminished. But, it may be claimed, at all events if the preference method of engagement prevails, that a number of people, who otherwise would have earned too little to maintain independently a decent life, will now get adequate earnings. A number of others will, indeed, earn less than before—possibly nothing at all—but, owing to the action of the State, they need not receive less than before. Thus we shall have, instead of a large body of people, all of them occasionally or partially supported by the State, one moderate-sized body fully self-supporting and another moderate-sized body scarcely self-supporting at all. From the point of view of economic welfare as a whole, particularly if the conditions are such as to make the fully self-supporting body much larger than the other, the latter state of things may be deemed the better, in spite of the fact that it involves a smaller national dividend. It may be objected, no doubt, that the persons now rendered fully self-supporting will really be sustained by the help of what is, in effect, a special tax upon the people who purchase the things they happen to make; and that the care of relatively incapable citizens is an obligation upon the whole community, and not merely upon those members of it who buy racquet balls, or whatever the article may be. It may be replied, however, that, in so far as relatively incapable citizens are responsible for products of general consumption, or in so far as they do work for municipalities or the State in connection with commodities or services not designed for sale, this objection loses the greater part of its force; and that, in any event, since every indirect tax must hit some people "unfairly," it is not of very great weight. Moreover, since the workers who benefit will not think of themselves as being in any sense "relieved by their customers," there is no danger that any injurious moral effect analogous to the "taint of pauperism" will be produced upon them. Plainly, an issue turning upon considerations of this kind is not susceptible of any general solution. Whenever it is proposed to enforce an uneconomically high wage in any occupation upon the grounds suggested in this section, a decision can only be reached by a careful balancing of conflicting tendencies, after all the relevant circumstances have been studied in detail

Chapter VI

RATIONING

§ 1. IN Chapter XIII. of Part II. some discussion was undertaken of the policy of rationing, as an adjunct to State control over the prices of commodities produced under competitive conditions. A brief study of this policy is now required from another point of view. The rationing of essential commodities to the better-to-do classes, whether coupled or not with price control, may be advocated as a means of ensuring that sufficient supplies at reasonable prices shall be available for the poor. Prima facie it would seem that this policy may affect the size of national dividend in one way and the absolute share of it accruing to the poor in another, thus involving disharmony. The question whether or not this is in fact so will be examined in the present chapter.

§ 2. In the special emergency of the Great War, supplies of certain things were short as a result of causes which could not have been got over, whatever prices sellers had been allowed to charge. Price regulation and rationing did not, therefore, as was argued in Part II. Chapters XII. and XIII., substantially reduce the size of the national dividend. At the same time they jointly saved the poor from a disaster that could not otherwise have been avoided. The grant of large bonuses on wages would not have enabled poor people to obtain essential articles of which the supply was short and the demand of the rich inelastic. The prices of these things would, indeed, have been forced up, but the rich, at the cost of paying more money, would still have obtained as much as before out of the shortened supply, and would have correspondingly cut down the share available for the poor. Thus the poor would have suffered enormously in respect of real income, even though their money income had risen proportionately to the rise in general prices, because particular things of vital importance to them would have been practically unobtainable. Moreover, the fixing of maximum prices without rationing would not have been sufficient; for the presumption is that the rich, by various pulls, would still have skimmed the market. From the joint facts that in the war price control coupled with rationing did not injure production and did benefit distribution it has sometimes been inferred that the same policy continued in normal conditions would produce the same harmoniously beneficial result. That is the issue we have to judge.

§ 3. In attempting to elucidate it we have to make clear, from the present point of view, the relation between rationing and price-fixing. Clearly in a brief period of shortage it is possible, with a given system of rations, to have any one of a large number of regulated price maxima, because, for the time being, the output and (within limits) the amount offered for sale are independent of the price. But, when we are contemplating a policy for normal times, the position is different. Suppose, first, that a given scale of rations is established unaccompanied by any price restriction, and that everybody is purchasing the whole of the ration to which he is entitled. This implies a definite quantity demanded; and there is, in general, only one price that will call out this quantity. If the State fixes a maximum price higher than this, the sellers will not be able to realise it, and the maximum price will become otiose. If, on the other hand, the State fixes a price less than this, not enough will be produced to enable everybody to get his ration: and, consequently, if the rations are to be effective, in the sense that whoever wants his allotted ration can obtain it, the whole ration scale will have to be altered to fit the new price. Suppose, secondly, that a given ration scale is established, but that, while the scale limits the purchases of some people, others are buying less than their ration allowance. As before, to whatever aggregate quantity is being purchased there corresponds one single price that will call out that quantity; and, as before, if the State fixes a maximum price higher than this, the maximum will become otiose. If the State fixes a maximum lower than this, it seems at first sight that a new equilibrium may be established, in which some of those now buying less than their ration will buy the full amount. But, in fact, the lower price must mean a lower output, so that nobody can buy more, or even as much as before, unless others buy less. It must happen, therefore, that some of those who before were purchasing their full ration are now unable, although they still wish, to do so. Here again, therefore, the ration scale becomes ineffective, and a new and lower ration must be established to fit the new price. Hence, generally, to any effective ration scale only one price level can correspond; and it is impossible for the State to establish any other price level without at the same time establishing another effective ration scale. This conclusion is a very important one for my present purpose: because it makes it unnecessary to study both rationing by itself and also rationing accompanied by price regulation. The two things work out, when the numerical constants are adjusted, in exactly the same way; and the whole problem is exhausted when the consequences of rationing alone have been examined.

§ 4. It is evident that any rationing system, which aims at benefiting the poor, must be so designed as to cut down the consumption of the rich. Such facts as that, for example, a uniform bread ration on a scale tolerable to the poor would not accomplish this, because, normally, poor people eat more bread per head than rich people, are not really relevant. We are not concerned here with technique, but with principle; and any rationing scheme, that pretends to increase the supplies available for the poor as a body, must be so devised—the scale need not, of course, be uniform—that it cuts down those available for the rich. So much being understood, our analysis of rationing in normal times may proceed. It works out differently for commodities produced under conditions of decreasing supply price and of increasing supply price.

§ 5. With decreasing supply price from the standpoint of the industry, the ultimate consequence of extruding from the market a part of the demand of the relatively well-to-do is necessarily to contract the production of the commodity and, therefore, since, as was shown in Part II. Chapter XI., too little of it is being produced anyhow,—for decreasing supply price from the standpoint of the industry usually implies also decreasing supply price from the standpoint of the community—to lessen the national dividend. At the same time the rise in price, which a diminution in the supply of an article produced under conditions of decreasing supply price must involve, forces poor people both to buy less of the commodity than they would have done and also to pay more for what they do buy. Thus they are unequivocally damaged. The aggregate dividend and their share of it alike suffer, and disharmony is impossible.

§ 6. With increasing supply price from the standpoint of the industry the extrusion of part of the demand again, of course, contracts the production of the commodity. If the conditions are such that increasing supply price from the standpoint of the industry implies constant supply price from the standpoint of the community, the amount of production that would take place in the absence of interference will be the right amount to maximise the national dividend, and an enforced contraction in it will lessen the national dividend. If, on the other hand, the conditions are such that increasing supply price from the standpoint of the industry implies also increasing supply price from the standpoint of the community, the amount of production that would take place in the absence of interference will—as was shown in Part II. Chapter XI.—be too large to maximise the national dividend, and an enforced contraction in it will, if it does not go beyond a certain definite limit, benefit, and not injure, the national dividend. In either event the price of the commodity will be reduced, so that the poor probably get more of it, and certainly get it at a lower price. Hence the poor must gain. In the second case distinguished above, therefore, if the slice cut off the demand of the rich is not too large, there is harmony of an opposite sort to that which comes about under decreasing supply price; the national dividend and the slice accruing to the poor are both increased. But, if the check to the purchases of the rich is pressed beyond a certain point, there is disharmony, the poor still getting a benefit but the national dividend as a whole suffering loss. In the first case distinguished above there is disharmony of this sort whatever the size of the check to the purchases of the rich.

§ 7. This analysis makes it plain that conditions may exist in which a system of rationing in normal times, if conducted with perfect skill and without any friction, would yield a net social benefit. It does not prove, however, that in practice the rationing of any commodity is in normal times desirable. Not only is the skill of government officials limited, but also a large adverse balance of inconvenience and irritation would have to be neutralised before any positive advantage could begin. Moreover, it must be remembered that, since the rich are relatively few in number, and their consumption of common articles—with the exception of coal, the consumption of which is regulated by the size of a man's house and not by his bodily capacity—a small proportion of the whole, a very large percentage cut in their per capita purchases would involve only a very small percentage cut in the consumption of the country as a whole, and an almost negligible cut, for most things, in the consumption of the world. In general, therefore, its effect in cheapening the supplies to poor persons of articles of increasing supply price would be scarcely perceptible. The practical conclusion seems to be that, while it may redound slightly to the general interest for well-to-do persons voluntarily to restrict their purchases of these articles, yet, in the present state of economic knowledge and administrative efficiency, it would, in ordinary times, do more harm than good for the State to force them to do this by any system of compulsory rationing.54

Chapter VII

SUBSIDIES TO WAGES

§ 1. IN a community in which wage-rates are everywhere adjusted to the conditions of demand and supply, so that no wage-rates are uneconomically high and there is no unemployment beyond what is necessary to allow adjustments to be made to industrial fluctuations, for the State to subsidies wages in particular industries must, in general,55 worsen the distribution of productive resources and damage the national dividend. A policy of wage subsidies applied to all industries would not necessarily damage the distribution of productive resources, but it could not improve this distribution; and, though in some circumstances it might increase the dividend, it would probably only do so at the cost of causing too much work to be done, and, therefore, in a manner injurious, and not beneficial, to economic welfare. Hence, subject to qualifications which the reader can readily provide, we may conclude that in a community, in which, apart from subsidies, rates of wages would be everywhere adjusted to the conditions of demand and supply, and policy of wage subsidies is likely to prove anti-social.

§ 2. In real life, however, it may happen that either in particular industries or, it may be, throughout industry as a whole, wage-rates are established at an uneconomically high level; that is to say, at a level too high to allow the demand for labour to absorb the supply, in such wise that more people are unemployed than are accounted for by the movements they have to make in consequence of industrial fluctuations. Thus there is some reason to believe that in England during the post-war depression, partly through direct State action and partly through the extra bargaining strength given to workpeople's organisations by the development of unemployment insurance, wage-rates over a wide area were set at a level uneconomically high in the above sense. Where conditions of this kind prevail and where public opinion insists that unemployed persons shall be somehow provided for, a policy of wage subsidies is no longer prima facie anti-social, but needs more particular consideration.

§ 3. The possibility of social gain is made clear most easily by means of a highly simplified imaginary case. Consider an agricultural community in which farmers own the land and employ labourers, all of whom are of equal skill. Let nothing else be produced except wheat, and let wages be paid in kind. Let the conditions be such that, with wages at one bushel of wheat per day, all the labourers would find employment, but that, when the rate is put at one and a quarter bushels per day, 10 per cent of them are out of work and the aggregate output of wheat, instead of being A bushels, is cut down to (A - a) bushels. Let the State insist, for humanity's sake, that a man out of work shall, nevertheless, receive, say, one-third of a bushel of wheat for maintenance, and let it take from farmers whatever amount of wheat is needed to permit of this. In such a case it is easy to see in a general way that, if a tax is imposed on the income of farmers or on the rental value of their land, and the proceeds used to give a subsidy of so much per cent on wages, the labourers are bound to gain, and the farmers—when their loss through the tax is balanced against the extra output of wheat and their savings in respect of unemployed labour—may gain. For a full understanding of the situation it is, however, helpful to make use of a few symbols.56

§ 4. Let (x + h) workpeople be attached to a given industry, whose products are not exported. Let w₂ be the wage at which all of them would find employment; w₁ the wage which is actually established, and x the number of men that are actually employed. If then things are allowed to take their "natural" course, h workpeople will be unemployed in the industry. For humanity's sake these must be somehow provided for; so we suppose that a payment r is made to each of them, and—to make the case as strong as possible—that the whole sum hr is taken from non-wage-earners. This is the position in the absence of any subsidy. Now let a subsidy at a rate s = (w₁ - w₂) be paid in respect of each workman employed; and let the funds for it be raised by taxation imposed on non-wage-earners (e.g. income tax). The wage (including the subsidy) paid to each workman will hereafter still be w₁—the workmen already in work will receive no more than before—but it will now pay employers in the industry to take on (x + h) workpeople instead of x workpeople. The output of the new h workpeople taken on will have a value equal to some amount (dependent on the slope of the demand curve for labour) intermediate between hw₁ and hw₂. Let it be {hw₂ + hc}; which, in the special case where the demand curve for labour is a straight line, = {hw₂ + ½h(w₁ - w₂)} = {hw₂ + ½hs}. From these data it is easy to calculate loss and gain. Workpeople as a body obviously gain; for h more of them are employed at the full wage w₁ for which they stipulated. Non-wage-earners neither gain nor lose in respect of the x workpeople who would be employed anyhow. In respect of the others they make a payment in wages plus subsidy equal to hw₁: they obtain an extra product of a value equal to (hw₂ + hc), which is less than hw₁; and they save a payment to unemployed workpeople equal to hr. Their net gain is, therefore, equal to {hw₂ + hc + hr - hw₁} = h(r + c - s). This is necessarily positive, provided that the rate of subsidy required is less than the rate of contribution which would have been paid to unemployed workmen. When this condition is satisfied it is obvious that both the absolute receipts of labour and also the national dividend as a whole must be larger than they would have been had other things been equal but no subsidy paid.57

§ 5. The foregoing analysis was explicitly confined to industries whose products are not exported. If the policy of subsidies were applied to export industries, the balance of gain and loss would work out less satisfactorily, because foreigners, instead of domestic users, would get the benefit of the price reduction due to the subsidy; in effect British non-wage-earners would be paying a part of the costs of work done for foreigners, which, had there been no subsidy, foreigners themselves would have paid. Here, therefore, there would only be a net gain to British non-wage-earners if the foreign demand were so extremely elastic that employment would be increased from x to (x + h) by a subsidy s, such that (x + h)s is less than hr. The case for subsidies as a means of mitigating the ill-effects of uneconomically high wage-rates is, therefore, substantially weaker for export industries than for others. Even so, however, it is clear that the subsidy device is applicable over a considerable range. It will lessen the volume of unemployment in any industry (with uneconomically high wages) to which it is applied; and, so long as it is on an appropriate scale and is confined to industries whose products are not exported, it will correspondingly increase the real income of the country.

§ 6. The foregoing analysis is in principle favourable to a policy of wage subsidies, at all events in industries other than export industries, provided that the maintenance of uneconomically high wage-rates is taken for granted. When, however, we pass from generalities to more detailed considerations, pitfalls are revealed. The most obvious difficulty has to do with the comparative treatment of workpeople in different occupations. If all occupations were rigidly separated from one another, so that, not only could no one pass directly from one to another, but also the choice among them to be made by each new generation coming to industrial age was rigidly fixed, everything would be quite simple. Each occupation could be treated as a single problem. In real life, however, different occupations are not rigidly separated, and account must, therefore, be taken of possible effects of a policy of subsidies in modifying the proportions of workpeople attached to different occupations. If exactly equal fiscal encouragement were given to all occupations, no effects of this kind would tend to come about. In practice, however, it can hardly be doubted that larger subsidies would be paid in industries with low wage-rates and large unemployment than in others. For example, at the present time the relatively distressed engineering and ship-building industries would certainly demand more favourable treatment than, say, the railway industry. As the demand for the products of any industry fell off and distress became more pronounced, higher subsidies, both absolutely and relatively to those ruling in other industries, would always be called for. Such pleas would often be acceded to. As a consequence, too many people would be set to and kept at work in some industries and too few in others. Extraordinary strength and competence on the part of the Government would be needed to prevent a policy of wage subsidies from acting in this way. If these were not forthcoming the resulting social loss might well be large. There is also a second serious danger. If the Government were in a position to control the wage demands of the workpeople as well as the amount of the subsidies, and if it were absolutely impervious to political pressure, the adoption of the above policy would not lead to any change in the rate of wages demanded. In practice, however, once the policy was adopted and, as a result of it, unemployment reduced to a low level, there would be a strong temptation to workpeople to demand higher wage-rates, while employers, hoping to recoup themselves from an increased subsidy, might not resist these demands very strenuously. In this way both wage-rates and the rates of subsidy would be subjected to a continuous upward pressure. This tendency, which would exist even in a static community, would be accentuated in the actual world; for in times of boom wages would tend, as now, to go up; and, when, subsequently, depression came, there would be a powerful demand, very likely on the part of employers and workpeople acting together, for an addition to the subsidy to prevent them from falling again. The annual revenue required to provide the subsidy would thus tend to grow larger and larger continually. The burden imposed on non-wage-earners would be raised above the benefit accorded them, and the gap would grow always wider. The supply of the services rendered by them in work and saving would be discouraged; and in the end both the national dividend and the real absolute share of it enjoyed by workpeople would be diminished.

§ 7. The broad result then is this. If wage-earners insist on maintaining a real rate of wages above the economic level in the sense defined above, and if no mitigating action is undertaken by the State, an abnormal volume of unemployment, with all the material and moral waste that this implies, is the inevitable concomitant. In principle it appears that this evil is susceptible of large alleviation, of a kind not involving injury to society at large, by a system of wage subsidies. But in practice it is probable that the application of such a system would be bungled, and that a community which relied upon it would lose more than it gained.

Chapter VIII

DIRECT TRANSFERENCES FROM THE RELATIVELY RICH TO THE RELATIVELY POOR

§ 1. WE now turn to what is in practice by far the most important field of possible disharmony. In a great number of ways, and for a great variety of reasons, poor people in civilised countries are given help, in the main through some State agency, at the expense of their better-to-do fellow-citizens. In Great Britain in 1925 the contribution from central government funds towards social services, chiefly for old-age pensions, education, unemployment insurance, health insurance and housing, amounted to 113 millions, and the contributions from the funds of local authorities, chiefly for education and Poor Law relief, to 79 millions.58 Evidently a large part of these 192 millions represent what is, in effect, a transfer of income from relatively rich for the benefit of relatively poor persons. Prima facie the transference, which this help implies, must increase, and it can certainly be so arranged that it shall increase, the real income available for the poor. Hence the question whether any particular form of help to the poor involves disharmony is often equivalent to the question whether its indirect consequence is to increase or to diminish the national dividend. This question, in one or another of its various aspects, will be the theme of the next four chapters. But, before we embark upon it, a brief comment is needed upon two popular arguments, one of which asserts that no transference of resources to the poor is possible, because, in effect, all money taken from the rich is really taken from the poor, while the other asserts that it is not possible, because the beneficiaries will give back what they have received by agreeing to accept lower wages.

§ 2. The position taken up in the former of these arguments is that any levy of money, whether voluntary or compulsory, from the well-to-do for the benefit of some poor persons necessarily implies the infliction of a substantially equivalent burden upon other poor persons, through the reduction which the rich are compelled to make in their purchases of the services rendered by them. The foundation of this view may be set out as follows. It is obvious that a great part of the expenditure of the rich involves, directly or indirectly, the employment of labour; and it is equally obvious that, if the incomes of the rich are diminished by, say, £20,000,000 of taxation, their expenditure for consumption and for capital investment together must be contracted to a corresponding extent. Some persons, concentrating attention upon these facts, immediately conclude that the workpeople, whose services this expenditure would have called into being if the tax had not been there—and an exactly analogous argument applies to a voluntary contribution—must suffer a loss of income approximating to the twenty million pounds levied in taxation. To argue thus, however, is to ignore the fact that the twenty million pounds collected from the rich is, ex hypothesi, transferred to the poor, and that the expenditure of it by them is likely to be no less productive of employment than the expenditure of it by the rich would have been. No doubt, if we are contemplating the immediate effect of the addition of twenty millions to the taxation of the rich for the benefit of the poor, it is relevant to observe that the men who lose jobs on the one side will not be the same persons as those who find them on the other; and that, therefore, a certain number of men, who have been trained to special aptitudes, may find their immaterial capital of acquired skill rendered permanently worthless. This loss, however, is the result, not of taxation, but of change in taxation, and would emerge equally in consequence of a reduction by twenty millions in imposts levied on the rich for the benefit of the poor. Our problem is not concerned with incidents of this character. The comparison we have to make is between one permanent system, under which nothing is collected from the rich and handed over to the poor, and another permanent system, under which twenty millions is so collected and handed over. To this comparison the incident we have just been discussing is irrelevant. Speaking broadly and apart from special circumstances, we may say that it makes very little difference to the employment of, and wages paid for, labour, whether twenty millions is annually transferred or not transferred from any one class to any other class. The idea that reactions in this field will render attempts at transference of no effect is, therefore, illusory.

§ 3. The latter of the two arguments distinguished above asserts that, if any group of poor persons are accorded any form of subsidy, they will, in consequence, be willing to work for less than the worth of their services to their employer, and so will, in effect, transfer back the subsidy they have received to members of the richer classes. This view rests partly upon a priori reasoning and partly upon what is called experience. It needs, therefore, a twofold discussion. The a priori reasoning starts from the fact that a Poor Law subsidy enables a person to accept lower wages than it would be possible for him to accept otherwise without starvation, or, at all events, serious discomfort; and it proceeds to assert that, if a person is enabled to work for less, he will be willing to work for less. Now, no doubt, in certain special circumstances, when a workman, in receipt of a subsidy insufficient to enable him to live up to his accustomed standard of life, is confronted by an employer occupying towards him the position of a monopolist, this inference may be valid. In general, however, where competition exists among employers, it is quite invalid. A person who, by saving in the past, has become possessed of a competence, is enabled to work for less than one who has not. A millionaire is enabled to work for less even than a relieved pauper. So far from this ability making it probable that he will strike a worse bargain in the higgling of the market, it is likely, in general, to have the opposite effect. It is not the fact that the wife of a man in good work is likely to accept abnormally low wages. On the contrary, the woman who, for this or any other reason, can afford to "stand out," is, in general, among those who resist such wages most strenuously.59 Let us turn, then, to the reasoning from what is called experience. This starts from two admitted facts. The first fact is that old and infirm persons in receipt of a Poor Law subsidy very frequently earn from private employers considerably less than the ordinary wage per hour current for the class of work on which they are engaged. The second fact—given in evidence before the Poor Law Commission of 1832—is that the refusal of guardians to grant relief in aid of wages "soon had the effect of making the farmer pay his labourers fairly." From these facts the inference is drawn that, where a Poor Law subsidy exists, workpeople accept a wage lower than the worth of their work to their employers. This inference, however, is illegitimate. There is an alternative and more probable explanation. As regards old and infirm persons, may it not be that the low wage per hour is due to the circumstance that the work they can do in an hour is poor in quality or little in quantity? As regards the old Poor Law, may it not be that the unreformed system of relief, so long as it prevailed, caused people to work slackly and badly, that, when it was abolished, they worked harder, and that this was the cause of the alteration in their wages? The view that the true analysis of experience is to be found along these lines, and not in the suggestion that relieved persons work for less than they are worth to their employers, is made likely by general considerations. It has been further confirmed by recent investigations, which tend to show that, where two people differ solely in the fact that one does, and the other does not, receive a Poor Law subsidy, their wages are in fact the same. Thus investigators appointed by the Poor Law Commission of 1909, as a result of their inquiry into the effects of out-relief on wages, write: "We found no evidence that women wage-earners, to whose families out-relief is given, cut rates. Such wage-earners are invariably found working at the same rates of pay as the much larger number of women not in receipt of relief, who entirely swamp them.... We could find no evidence that the daughters of paupers accepted lower rates than others, or earned less than others, because of their indirect relation to pauperism."60 This argument, therefore, like that set out in § 2, breaks down. The direct transference of resources from the relatively rich to the relatively poor, by way of philanthropic or State action, whatever its ultimate consequences may prove to be, is at least not impossible. Of course, this conclusion does not deny that additional work by assisted, or any other, workers slightly lowers the general rate of wages.61 But that proposition is quite different from the proposition that assistance to persons who are working anyhow has this effect.

§ 4. In view of this result we may proceed undisturbed to our main problem—that of determining the effect of various sorts of transference upon the size of the national dividend. Some sorts, it would seem, are likely to increase that dividend and others to diminish it. We have, therefore, to investigate the conditions upon which the occurrence of the one or the other of these opposing consequences depends. These conditions can be examined most effectively by means of an analysis in which the distinction between the effect of the fact, and the effect of the expectation, of transference is made fundamental. Of course, when we have to do with a levy, which is made once and for all to meet some exceptional need, and the regular continuance of which is not anticipated, effects operating through expectation do not have to be considered. In ordinary times, however, the fact of a tax levy imposed one year carries with it the expectation that it will be continued in future years, so that both fact and expectation are relevant. I shall consider first the expectation of transferences from the rich; secondly, the expectation of transferences to the poor; and thirdly, the fact of transferences.

Chapter IX

THE EFFECT ON THE NATIONAL DIVIDEND OF THE EXPECTATION OF TRANSFERENCES FROM THE RELATIVELY RICH

§ 1. THE expectation of levies from the relatively rich, as from any other class, acts upon the national dividend differently according as the levy is voluntary or coercive. The contribution of a voluntary levy implies that a new use has been found, into which people wish to put some resources more keenly than they wish to put them into other available uses. This means that their desire to possess resources is enhanced, and, therefore, that the provision they are willing to make of waiting and effort, in order to obtain resources, is also enhanced. Hence the expectation by the rich of voluntary transferences from the rich is likely to make for an increase in the size of the national dividend. "Though it would have disastrous effects if the State should attempt to enforce universal benevolence, yet only beneficial results would follow if all men were to become wisely benevolent."62 It is, therefore, important to consider briefly what scope there is in the modern world for this type of transference.

§ 2. The most obvious form which it can and does take is that of generous conduct towards their workpeople on the part of wealthy employers of labour. Since these workpeople spend a great part of their lives in buildings provided by their employers and in conditions largely under their control, the employers have the power to spend money in their interest with exceptional effect. Acting in careful collaboration with chosen representatives of the workpeople, they can contribute conveniences, opportunities for recreation and opportunities for education, and can make it a condition of employment for their younger workers that these things shall be used. Thus Messrs. Cadbury at Bournville require all their employees under eighteen to take part in regular gymnastic classes and in regular and elaborate courses of education, in part provided by, and in part paid for by, the firm.63 The special opportunities which they enjoy for effective action may well create in wealthy employers a special sense of obligation. This sense was admirably expressed by the well-known Dutch employer Van Marken, when he declared: "It seems to me the duty of an employer to aid his subordinates by every means at his command—his heart, his intellect, his money—to attain that highest stage which alone makes life worth living. My own conviction is that in doing so the employer will make no sacrifices. But, if he needs must make them, be it from the material or the moral point of view, let him make them up to the limit of his capacity. It is his sacred duty."64 With the education of opinion among well-to-do employers of labour we may look increasingly for a growth of this sense of patronal obligation. Furthermore, this sense may be fortified and extended by the egoistic consideration that generous treatment of workpeople is often a splendid advertisement, leading indirectly to large profits. On this point I cannot do better than adopt Ashley's excellent words: "Instead of cynically pooh-poohing it [employers' welfare work] for that reason, I think this is a particularly encouraging fact, and highly creditable to human nature. It shows that there is such a thing as a consumers' conscience. The whole essence of the Consumers' League work in America and of the White Lists of the Christian Social Union in this country is to make it 'good business' to be known to manufacture under satisfactory working conditions; and, with increasing publicity and an increasing fellow-feeling among all classes, I expect that this is going to be the case more and more."65

§ 3. Voluntary transference of resources may also take the form of generous conduct on the part of the wealthy to those poor persons who are united to them through common citizenship of the same town. Here, too, there is a special relation and, consequently, a special spur towards generous action: for the wealthy donor of such things as public parks and playgrounds has the satisfaction of choosing the form of his gift, of directing the use of it in some measure, and of seeing the fruits of it develop before his eyes. This localised generosity may easily expand into a wider patriotism, which interests itself, not merely in fellow-citizens of a common city, but in fellow-citizens of a common country. Pure public spirit often leads wealthy persons voluntarily to provide, partly in their lifetime and partly by legacies at death, large sums for the service of the poor. Often, too, public spirit is reinforced by the craving, strong in some men, for that sense of power which the fact of giving conveys.

§ 4. The normal motives prompting men to these and other forms of voluntary transference of resources to public ends are already of considerable force, and it is open to us to stimulate them still further. "No doubt," Marshall writes, "men are capable of much more unselfish service than they generally render; and the supreme aim of the economist is to discover how this latent social asset can be developed more quickly and turned to account more wisely."66 Not much has yet been accomplished in this direction. It is well understood, however, that Government, if it so chooses, has power to harness to the nobler motives for generosity others of a lower order. Much will be done for the sake of fame and praise, and fame of a sort may be offered as a reward for private munificence. Thus the transference of resources from the rich can be purchased, in a delicately veiled manner, by honours and decorations that cost nobody anything. These things are at once symbols and conveyers of reputation; for, when a worthless man is decorated, those who feel, or pretend to feel, respect for the decorator, offer a vicarious respect to the decorated also. No doubt, in some degree, the issue of fresh decorations may diminish the value to their possessors of those already issued. To confer the Order of Merit broadcast among excellent bricklayers would annihilate its attractive power for the class in whose behoof it was originally designed. This difficulty can, however, be overcome to a great extent by the creation of new orders, instead of the extension of old ones. It is not impossible, therefore, that, along these lines, inducements might be provided adequate to secure the transference of a good deal of income from rich people, without the expectation of the transference involving any diminution, but, rather, some appreciable increase, in the waiting and effort furnished by them towards the upbuilding of the national dividend.

§ 5. Unfortunately it is quite certain that, in present conditions, voluntary transferences will fall very much below the aggregate of transferences from relatively well-to-do people which the general sense of the community demands. A considerable amount of coercive transference is, therefore, also necessary. This means, in one form or another, taxes, and probably, in the main, direct taxes graduated against the owners of large incomes and properties. The taxes, to which resort is in practice most likely to be had, are taxes on incomes and taxes on property passing at death. In what follows attention will be confined to these taxes. It is proposed to examine the kind of reactions on the national dividend to which the imposition of the one or the other kind is likely to lead.

§ 6. Let us consider first an income tax in which there is no differentiation against saving. As I have shown elsewhere, this means, broadly speaking, an income tax under which either savings themselves or the incomes subsequently yielded by these savings are exempted.67 When such an income tax is graduated so as to yield a substantial contribution from the relatively well-to-do, in what way will the expectation of the levies to be made under it react on the size of the national dividend? Three possible lines of reaction may be distinguished. First, the knowledge that this tax is there might drive men capable of earning large incomes by their work to live and work abroad rather than in the taxing country. Secondly, it might drive men with large powers of saving to make their investments abroad rather than in the taxing country. Thirdly, it might cause men capable of earning large incomes by their work, while continuing to reside in England, to work less (or conceivably, as will be argued in a moment, to work more) than they would have done had there been no tax. These three lines of reaction will now be considered in turn.

§ 7. If one country has a much higher income tax on large incomes than others, this fact will certainly constitute some inducement to men capable of earning large incomes to go and live abroad. There is reason to believe, however, that residence in their native land means so much to many rich men—particularly since the advantage of wealth is largely social advantage—that it would need a very large excess of tax to affect many of them in this way. Moreover, the movement towards high income tax on large incomes has a wide sweep, and the man who contemplates leaving his home to escape taxes there must reflect that similar taxes may before long be imposed in the country to which he goes. Along these lines, therefore, the reaction on the national dividend is not likely to be very important.

§ 8. At first sight it might seem that the second line of reaction is, on the other hand, almost certain to be very important. For, whereas a rich man will dislike moving himself abroad, he will not, it would seem, as a rule object to sending his capital abroad. The fear, however, that high income taxes will, in this way, drive capital abroad in large quantities, arises, at all events so far as the United Kingdom is concerned, from an imperfect knowledge of the exact scope of the British income-tax law. It is, no doubt, true that a tax striking the fruits of capital, in so far as it impinges on the investments of foreigners in England, lessens the advantage to foreigners of investment here, and, pro tanto, stimulates foreign individuals to withdraw their capital, and foreign corporations with plant abroad to withdraw their head offices. This, however, is a minor matter, for foreign investment here is admittedly small in amount. The substantial fear is that high income tax will drive British-owned capital to foreign fields. This fear is not well grounded. Since the English income tax, unlike the income taxes of the colonies, is levied on incomes received in England, and not merely upon those earned or built up there, high income tax here, in general, constitutes no inducement to an Englishman resident in England to send his capital abroad for investment. He will have to pay income tax when he brings the income derived from it home from abroad; and, under an amendment of the income-tax law passed in 1914, he must even pay if he leaves it abroad for investment there. Nor is this all. As things are at present, the income from English capital invested abroad will often have to pay a foreign income or other tax as well as the British income tax; so that a man, by sending his capital abroad, so far from escaping taxation, would actually encounter more of it. Hence, apart from deliberate and purposed fraud, if English capital is to be driven abroad, English capitalists must be driven there also. Nor is it even true that the supposed indirect effect of high income tax, namely, the fear of "Socialism," could rationally drive capital abroad without driving its owners abroad also; for, presumably, "Socialism" would not fasten on British factory-owners and leave British owners of foreign securities unscathed. Hence the same fact that limits the tendency of high income tax to drive able men to do their work abroad—namely, the desire to live in their native land—also limits the tendency to drive their capital abroad.

§ 9. There remains the third line of reaction—that, namely, on the amount of work which those persons who are subjected to a high income tax will do. This is a more complicated matter. At first sight it might seem that the expectation of having to pay any tax upon the fruit of work must in some degree discourage the performance of work. This, however, is not so, because, if a man's income is reduced by taxation, the addition of a £ to his income will satisfy a more urgent want than it would have done had his income not been reduced, and, consequently, though extra work will yield a less net return of money, it may, under certain types of tax, yield a greater net return of satisfaction. Proceeding on this line, of thought, we observe that if an income-tax scale is so drawn as to impose equal sacrifice on all tax-payers (of similar temperament) whatever their incomes, the amount of work which they elect to do will not be altered at all by the expectation of it. As Professor Carver writes: "The minimum of repression (on industry and enterprise) is secured by so distributing taxes that an equal sacrifice is required of all. No one is discouraged from the acquisition of wealth or a large income, or from entering this or that occupation, if there is equal sacrifice involved in either case."68 Now, we do not know enough about the relation between differences in the sizes of incomes and differences in the amounts of satisfaction yielded by them to be able to say what scale of income-tax graduation would conform to the canon of equal sacrifice. It would, however, be generally agreed that a proportionate income tax would involve a heavier sacrifice to poor people than to rich people, and that some degree of progression in the tax rate could be introduced without making the sacrifice imposed on the rich exceed that imposed on the poor. It is not an untenable view, therefore, that taxes on the better-to-do classes adequate to yield the revenue we require for transference to the poor could be contrived on equal sacrifice principles, and, therefore, in a way innocuous to the national dividend. In view of the fact that, when an able man is actually engaged in work, a large part of his aim is simply "success," and that that is not interfered with by any tax that hits his rivals equally with himself, it may well be that, in the upper part of the tax scale, a fairly steep rate of progression might be adopted without the limits set by the principle of equal sacrifice being overstepped. It will be easily understood, however, that the scale of progression which conforms to the principle of equal sacrifice is very much less steep than that required to bring about minimum aggregate sacrifice. Most people will agree, therefore, that a scale somewhat steeper than that yielding equal sacrifice is desirable. If such a scale is adopted, some repressive influence on the amount of work done and, therefore, on the size of the national dividend must be exercised. It is important to realise, however, that, contrary to common opinion, the extent of this repressive influence upon any particular tax-payer depends, not on the absolute amount, or the absolute percentage, of his income that he is required to pay in taxes, but on the relation between this amount or percentage and the amount or percentage which he would be required to pay if his income were a little more or a little less.

§ 10. When an income tax of a type that does not differentiate against savings cuts down the national dividend of the moment by checking work, it will also indirectly cut down the dividend of future years, because, with the smaller dividend of the moment, there will be less to invest as well as less to consume. An income tax, which is constructed on the same general plan and yields an equal revenue, but which does differentiate against saving, may be expected to have a larger effect. We need not suppose that it will affect the amount of work done and, therefore, the size of the dividend of the moment otherwise than the non-differential tax would have done. The non-differential tax lessens in a given degree the advantage that work yields, whatever is done with the fruit of work; the differential tax lessens in a smaller degree the advantage which the part of it devoted to spending yields, and in a larger degree the advantage which the part devoted to saving yields. The net effect on the quantity of work done is likely to be much the same in either case.69 It may be expected, however, that the differential tax will discourage savings more seriously—in spite of the fact that it may cause the savings of certain persons to increase70 —than the non-differential tax, and, therefore, to contract more seriously the dividend of future years. How far it will do this it is impossible, with our present knowledge, to determine. All that can be said is that, if we take the point of view of a fairly long period, the succession of national dividends spread over a series of years is likely to be damaged somewhat more by the expectation of an income tax which differentiates against saving than it would be by that of a non-differential income tax yielding the same revenue.

§ 11. The second fiscal instrument, distinguished in § 5, through which substantial levies on the relatively well-to-do can be made, is the system of graduated taxes upon property passing at death. These duties, which are actuarially equivalent to deferred income tax on income derived from property, plainly differentiate against savings. The expectation of them will, therefore, check savings and so contract the national dividend of future years. Since, however, they do not as a rule hit savings till some years after they are made, this repressive effect need not be very great. For let us suppose that twenty million £'s a year are to be raised. This can be done either by collecting, say, £100 every year from each of a group of 200,000 people (income tax), or by collecting £2000 from each of them at death, say, on the average, once in twenty years (death duties). The choice between the two methods is indifferent to the State. But it is not indifferent to the persons concerned. Since these persons discount future taxes precisely as they discount all future events, and since their concern in any event is largely diminished if the event is known to fall due when they themselves are no longer alive, the expectation of taxes levied after the second method will have the smaller restrictive influence upon the quantity of capital created by them. Moreover, there are additional reasons why death duties should impose a relatively small check upon the creation of capital. A part of the stimulus to accumulation consists in the power and prestige that riches confer. In persons of only moderate fortune, who have, or hope to have, children, this motive is not, indeed, likely to play a dominant part. A desire to provide for their children will be the main motive, and, if it were removed, many of them would elect to "retire" from work much earlier than they do now. But, as Professor Carver observes: "After one's accumulation has increased beyond that which is necessary to safeguard one's offspring and to provide for the genuine prosperity of one's family, the motive to further accumulation changes. One then engages in business enterprises because of a love of action and a love of power. Accumulated capital becomes then one of the instruments of the game. So long as the player is left in possession of this instrument while he is one of the players, he is not likely to be discouraged from accumulation merely by the fact that the State, rather than his heirs, gets it after he is through with it."71 In a like spirit the late Mr. Carnegie wrote: "To the class whose ambition it is to leave great fortunes and to be talked about after death, it will be even more attractive, and, indeed, a somewhat nobler ambition, to have enormous sums paid over to the State from their fortunes." We may add the similar saying of Walter Rathenau: "The object of the business man's work, of his worries, his pride and his aspirations, is just his undertaking, be it a commercial company, factory, bank, shipping concern, theatre, or railway. The undertaking seems to take on form and substance, and to be ever with him, having as it were, by virtue of his book-keeping, his organisation, and his branches, an independent economic existence. The business man is wholly devoted to making his business a flourishing, healthy, living organism."72 Hence very heavy death duties could probably be levied on large fortunes—particularly on such parts of them as are left out of the direct line—without the knowledge that these taxes exist and will have ultimately to be paid exercising any large influence in discouraging rich men from saving.

§ 12. The general result of this analysis is, unfortunately, very nebulous. It is probable on the whole that, unlike the expectation of voluntary transferences from the rich, the expectation of coercive transferences from them by taxation will do harm to the dividend, particularly if the taxation imposed is heavy or steeply graduated. But we cannot determine the size of the adverse influence, even when the quantity of revenue to be raised and the scheme of taxation to be enforced are exactly set out.73

Chapter X

THE EFFECT ON THE NATIONAL DIVIDEND OF THE EXPECTATION OF TRANSFERENCES TO THE POOR

§ 1. IN turning to examine the effect on the national dividend of the expectation of transferences to the poor, we come at once into contact with a widely held opinion. The experience of the old Poor Law has made people very much afraid that any expectation of assistance from public funds will tempt the poor into idleness and thriftlessness. It is common—or at all events was common before the war—to hear proposals for State aid towards housing accommodation, insurance premiums, or even education, denounced on the ground that they constitute relief in aid of wages, and are, therefore, a reversion to the discredited policy of Speenhamland. This reasoning is based on defective analysis. Underlying it is the tacit assumption that the expectation of any one sort of transference to the poor acts in the same way as the expectation of any other sort. In reality different types of transference act in different ways, and nothing of importance can be said that does not take account of this fact. The main lines of division are between transferences which differentiate against idleness and thriftlessness, transferences which are neutral, and transferences which differentiate in favour of idleness and thriftlessness.

§ 2. The first of these groups is made up of those transferences which are conditional upon the recipients making provision for themselves on a scale that is fairly representative of their individual capacity. These transferences can be arranged as follows. First, the poorer members of the community are classified according to the amount of provision that they "could reasonably have been expected to make" for themselves, apart from any transference of resources in their favour. The standard of capacity set up is, of course, different for different sorts of people with different opportunities. For example, the income from savings, which a man can reasonably be expected to have secured at a given age, varies with his situation in life. If, before the war, a man on 12s. a week had secured for himself an annuity of 1s. a week, his thrift was much more real than if a man on 50s. had got an annuity of 3s. a week. The classification of different people into different groups with different standards may be carried out with any degree of roughness or exactness, according to the scope and skill of the various classifying authorities. In ideal conditions a separate standard capacity would be estimated for every individual. Secondly, the standard having been set up, resources are transferred to poor persons on condition that their productive activity comes up to the standard assigned to them, an extra amount, perhaps, being transferred in recognition of any excess above standard to which they may attain. It is not, of course, necessary that the same grant should be made to all persons who live up to their capacity; and, in general, we may presume that a poorer man satisfying this condition will receive more than a less poor man who also satisfies it. The kind of arrangement which this policy embodies has been advocated for certain purposes by Marshall. "Should not indoor and outdoor relief," he asks, "be so administered as to encourage providence, and to afford hope to those whose means are small, but who yet desire to do right as far as they can?"74 Practically the adoption of this ideal would mean that persons coming up to, or exceeding, the standard adjudged reasonable for them would be treated more favourably than similar persons failing to do this. A rough application of it is made in the rules governing the grant of old-age pensions in Denmark. In order to qualify for a pension, a man must have worked and saved enough to keep off the rates between the ages of fifty and sixty. Under this system, though, possibly, thrift, labour and private charity are discouraged, so far as they touch the provision for maintenance after sixty, "on the other hand, both thrift and private charity have been stimulated, so far as they are concerned with provision for maintenance between the ages of fifty and sixty. The motive for maintaining independence during these years is strengthened, and its effectiveness is greatly increased, by the consideration that a limited task, the completion of which is not so distant and uncertain as to deter men from attempting it, is all that is now imposed on the honest and industrious, though indigent, person, or on friends, former employers or others, who may be interested in helping him. Many shrink from trying what seems impossible of achievement, and much effort, which would otherwise have remained latent, has been evoked by bringing the task within the reach of a wider circle of persons."75 There can be little doubt that openings exist for a further application of methods of this kind. It is plain that the expectation of transferences to poor persons, engineered by means of them, will stimulate, and will not diminish, the contribution which potential recipients make towards the upbuilding of the national dividend.

§ 3. The second group, neutral transferences, is made up of those transferences which are dependent on the attainment of some condition, not capable of being varied by voluntary action in the economic sphere, on the part of possible beneficiaries. It thus includes schemes for universal old-age pensions (dependent only on the attainment of a certain age), the universal endowment of motherhood (dependent only on the fact of motherhood), or the universal gift to everybody of a sum deemed sufficient to furnish by itself the essential means of subsistence. These wide-reaching arrangements are, hitherto, nowhere more than projects. But less ambitious examples of neutral transferences have been embodied in actual law. Under them grants of help are made to depend, not on the performance of the recipient, nor on the relation between performance and estimated capacity, but upon estimated capacity itself. The root idea of this system was approached in a Report made to the Poor Law Authority in 1872 by Mr. Wodehouse, in which he endeavoured to distinguish between relief in aid of wages and relief in aid of earnings. "Relief in aid of earnings," he wrote, "is clearly inseparable from any system of out-relief. Thus, in all unions, relief is afforded to able-bodied widows with children, and it is clear that all such relief is in aid of an income obtained by the widow by washing, charing, or other similar employments. So, again, in almost every union that I visited, relief is given to old and infirm men, who, though past regular work, are from time to time employed on occasional odd jobs of various sorts. Relief to these two classes of paupers may, I think, be distinguished from that system of relief in aid of wages, which was so generally prevalent prior to the introduction of the present Poor Law."76 A closer approach to the above idea is made in the treatment which many Boards of Guardians before the war accorded to old and infirm women and to widows with several children. They appeared to hold that, whereas most of the regular trades followed by men provide persons of average capacity, in full employment and without encumbrances, with fairly adequate earnings, most women's trades do not do this. It is not at all obvious that a widow of ordinary ability, even without children, can, with reasonable hours and so forth, earn enough to "maintain herself and provide for the ordinary vicissitudes of life."77 Hence we read: "Once a woman is put on the roll (for out-relief), provided she is not guilty of immorality or frequent intemperance, she is not disturbed. Her earnings may rise and fall, but the relief will not vary. The inquiry as to her earnings is made at her first application and rarely afterwards.... One officer put the common practice into a few words: 'We never bother about what the women earn. We know they never earn ten shillings. They can always find room for half-a-crown.' It follows that, in unions where minute inquiry is the exception—that is to say, in most unions—the pauper worker is not discouraged from working up to her full capacity."78 The French law of 1893 concerning sick relief is of kindred character. It provides that in every commune there shall be drawn up periodically a list of persons who, if they become sick, will be entitled to assistance, the persons on the list being placed there on the ground that they have not the capacity to make provision against sickness for themselves. Yet again, the same principle is embodied in the English system of exacting payment (whether through recoverable loans or otherwise) from persons adjudged capable of making some contribution, to whom medical aid has been given, or whose children have been fed by public authority. A charge is made, based, not on what the actual service rendered to the poor man has cost, but on an estimate of the provision which, apart from the hope of outside help, he might have been expected to make. Thus Circular 552 of the Board of Education urges that, when the parents cannot pay the full cost of meals provided for their children, "it is better that they should pay what their means permit, rather than that meals should be given free of cost."79 In other words, an attempt is made so to arrange the State's contribution to different families that it shall depend upon, and vary inversely with, their estimated capacity to make provision for themselves.

§ 4. The way in which the expectation of a neutral transference will react on the size of the national dividend depends on the kind of things in which the transference is made. As a general rule, of course, it is made in money. In these circumstances it might be thought at first sight that the contribution of effort and waiting which potential recipients make, and, therefore, the size of the dividend, will be wholly unaffected. This, however, is not so. For, if a man of any given presumed capacity knows that he will receive, say, a pound a week as a gift, independently of anything that he may earn for himself, his desire for any nth unit of money earned by himself is lowered. But his aversion to any rth unit of work that he may do remains unaltered; or, since the extra money creates new opportunities for a pleasurable use of leisure, may even be increased. Consequently, if he continued to do the same amount of work as before, his aversion to the last unit of work done would exceed his desire for the money received in exchange for it. It follows that the expectation of a weekly grant will cause the recipient to contract the amount of work that he does, and, therewith, his contribution to the national dividend. The extent of this effect varies with the magnitude of the grant and the forms of (1) the schedule representing his desire for various amounts of money and (2) the schedule representing his aversion from various amounts of work; but, in any event, some contraction in his contribution to the dividend is likely, ceteris paribus, to occur.

§ 5. The transference may, however, be made in the form, not of money, but of things. If these things are things which, apart from the transference, a recipient would have purchased out of his own earnings, or if, not being such things, they are capable of being sold or pawned and thus converted into money, the effect is the same as if money had been transferred. But transference of objects not capable of being sold or pawned, and designed to satisfy needs, which, apart from the transference, a recipient would have left unsatisfied, have a different effect. The last unit of money which a man earns for himself in industry will be required to satisfy the same needs, and will, therefore, be desired with the same intensity as it would have been if no transference had been made. Hence no contraction will occur in the contribution which, by work and waiting, he makes to the national dividend. Thus public parks for the collective use of the poor, or flowers for their private use, can be transferred to them, without the expectation of the transference reacting injuriously upon the dividend. The same remark holds good of general sanitary measures. The grant from State funds of the expenses involved in such things is on a different footing from the grant of funds for ordinary medical treatment. As the Poor Law Commissioners write: "Sanitary measures, for the most part, lie beyond the reach of the individual, and are a common need, which must be provided for in common; while medical treatment is essentially an individual need, and is, for the most part, easily attainable by the individual."80 Similar considerations hold good, in some degree, of the gift of free school education, or of a portion of the costs of it—when the amount of education to be covered is authoritatively fixed—to the children of the poor. For some persons are so poor that, if left to themselves, they could not devote any of their earnings to the purchase of school education, and, therefore, the free provision of it by the State does not lower their desire for any unit of these earnings. Since, when children are taken to be educated, their parents are deprived of the wages they might otherwise have obtained, it may be that, even when to free education free meals are added, there is no net lightening of the costs of living to parents, and, therefore, no diminution in the contribution of work and waiting which they find it profitable to make. In these circumstances the expectation of this variety of neutral transference will leave the size of the national dividend unaltered.

§ 6. There remains the third possibility. There are some commodities and services, the demand for which is so correlated with that for certain other commodities and services that the gift of them increases the recipient's desire for these others, thus increasing his desire for any rthe unit of purchasing power that he may be able to earn, and thus, finally, increasing the work and waiting that he is willing to provide in exchange for purchasing power. It is claimed, for example, that the gift of medical treatment to children in some elementary schools reacts beneficially on the energy of their parents by enlisting co-operation and thought from them. The possibility thus opened up is illustrated in the following passage from Mr. Paterson's Across the Bridges:

A like suggestion is contained in the following extract from the Letters of Octavia Hill:

An illustration of what is meant is furnished by the late Canon Barnett thus:

In undertakings of this kind there is a field for neutral transferences of resources, the expectation of which not merely leaves the national dividend undiminished, but, by creating a new inducement for work and saving, actually increases it.

§ 7. We now pass to the third main group of transferences—namely, those which differentiate in favour of idleness and thriftlessness by making the help that is given larger, the smaller is the provision the recipients have made for themselves. Some resort to this type of transference is involved in all Poor Law systems that fix a state of minimum fortune below which they will not allow any citizen to fall. For, in so far as they raise to this level the real income of all citizens whose provision for themselves falls below it, they implicitly promise that any reduction in private provision shall be made good by an equivalent addition to State provision. It is plain that the expectation of these differential transferences will greatly weaken the motive of many poor persons to make provision for themselves. For, whatever the standard is below which the State has determined that nobody shall fall, any person, who could not provide as much as this for himself but could provide something, will be equally well off if he provides nothing. In so far, therefore, as what a person provides for himself corresponds to what he contributes to the national dividend, transferences that differentiate in favour of small provision threaten grave injury to the national dividend.

§ 8. A recognition of this fact has led many persons to consider plans for limiting the scope of this class of differential transference. Since everybody agrees that in a civilised State no citizen shall be allowed to starve, this can only be done by so enlarging the scope of neutral transferences that the elementary needs of practically all persons, whatever their income, are met through them. The movement in this direction is well illustrated by the debate between advocates and opponents of a universalised system of old-age pensions.84 If, say the advocates of this plan, all persons over a given age, irrespective of their income, are awarded a given pension, there will be no differentiation tempting people in old age to earn smaller incomes than they are able to earn; whereas, if only those persons above the given age who are in receipt of an income below some specified maximum are awarded a pension, there will be an inducement to all persons, who could have earned an income between this maximum and this maximum plus the pension, to earn less than this maximum: and an effect similar in kind, though less in extent, will be produced by sliding-scale pension schemes. On the other side, however, it is pointed out, in accordance with the reasoning of the last chapter, that money cannot generally be collected through taxation without some injurious reaction on the national dividend being produced. This reaction is likely to be more extensive, the greater is the amount of the money that is raised. Since, therefore, universal old-age pensions necessarily cost more than limited old-age pensions, the argument in favour of the universal form is confronted with an argument of the same order that tells against it. Exactly the same issue, somewhat complicated in this instance by eugenic considerations,85 is raised between persons who wish to confine State aid for mothers to those families with young children in which the parents are unable, out of their own resources, to provide for their children adequately, and advocates of the "endowment of motherhood" generally; and again between the advocates of free meals for all school children in elementary schools and advocates of free meals only to those whose parents cannot afford to pay for them. In this last case there has also to be considered the social awkwardness in the schools themselves of distinguishing between two classes of children, and also the practical difficulty of determining which parents can, and which cannot, afford to pay.86 To strike a balance between the conflicting considerations in controversies of this kind is a very delicate task, and one that need not be attempted here. If, however, the method of obviating differential transferences contemplated by the advocates of universal pensions and universal endowment of motherhood were itself universalised, in such wise that the minimum required for subsistence were paid out by the State to everybody, whatever his income might be, the task of balancing gain against loss would no longer be delicate. In these circumstances there can be little doubt that the type of reaction described in § 7 would operate so strongly that the dividend would be seriously injured. In any event, among practical politicians the device of universalising grants to large categories of persons, irrespective of their individual needs, is greatly disliked. There is no real question of pressing it far enough to do away with the need for differential transferences based directly on the poverty of recipients.

§ 9. The expectation of these transferences must, as we have seen, damage the national dividend. If, however, to the receipt of the help they give deterrent conditions are attached, the damage can be mitigated. Consequently the question arises, in what circumstances it is desirable, in the interest of the national dividend, to attach deterrent conditions to State aid, and what form the deterrent conditions, if decided upon, can best assume. To answer this question correctly we need to revert to the concluding sentence of § 7, in which it was indicated that differentiation in favour of people who make small provision for themselves injures the national dividend, only in so far as what a person provides for himself corresponds to what he contributes to the national dividend. It is common to assume that the provision which a person makes for himself must correspond exactly to his contribution to the national dividend, and that, therefore, the contraction of the aggregate provision thus made—which results from the establishment of a system of differential transferences to poor people—implies an equal contraction of the national dividend. This is substantially true of provision made through work and through savings invested in industry and not subsequently withdrawn. But it is not true of provision made in the form of a claim to benefit from a mutual insurance society, secured by the payment of previous contributions to that society. For what a sick or unemployed member draws from this source is only in small part the fruit of savings that have been built up into productive capital investments. In the main it consists of payments made out of the contemporary earnings of other members—payments which they are willing to make in return for a promise that they themselves shall, at need, receive similar assistance; but payments, none the less, which represent a transference of real income, just as the gift of a friend would do, and not a creation of real income. In practice the chief part of the provision which poor people make for themselves, otherwise than by contemporary work, is made by way of some form of insurance, though it is loosely and popularly credited to saving. Consequently, we may conclude broadly that, while any check, caused by differential transferences, to the provision that poor people make for themselves through contemporary work involves a corresponding diminution of the national dividend, any check to the provision they make otherwise than through work involves a very much less than corresponding diminution in the dividend. It follows that there is little to be gained by imposing deterrent conditions upon those recipients of State help who have failed to make this sort of provision.

§ 10. But differentiation in favour of small provision made through contemporary work is a serious matter. If, for example, it is understood that everybody's income will, at need, be brought up by State aid to, say, £3 a week, it will, generally and roughly, be to the interest of everybody capable of earning by work any sum less than £3 a week to be idle and earn nothing. This must damage the national dividend. How much it damages it will, of course, depend on how large the sum fixed on as a minimum is, and how many people in the country would normally earn by work less than that sum. If the sum exceeds the normal earning power of a large part of the community, the damage done must necessarily be very great. It is probable that this consideration lay behind the recommendation of the 1832 Commission, that "the situation on the whole of able-bodied paupers should not be made really, or apparently, so eligible as the situation of the independent labourer of the lowest class"—that is to say, of the ordinary unskilled labourer of full age and in good health. At that time unskilled labourers formed a very large proportion of the population. To have guaranteed to everybody a situation better than these labourers could ordinarily earn would, therefore, have threatened the nation with the withdrawal from work of a mass of people whose aggregate efforts were responsible for an important slice of the dividend. It may be observed, however, that to guarantee now a situation better than that represented by the earnings of an unskilled labourer of 1832 would inflict a much smaller proportionate injury upon the dividend, because the proportion of the population, who are not capable of attaining a situation better than this, has become much smaller. Even to guarantee now a situation represented by the situation of the unskilled labourer of to-day would have a smaller proportionate effect, because the proportion of the dividend contributed by unskilled labour now is smaller than it was in 1832. Plainly, however, for the State, tacitly or openly, to guarantee any standard high enough to affect a substantial number of people must threaten considerable injury to the dividend. Here, therefore, there is real scope for the association with State help of deterrent conditions. Of course, there is no object in attaching such conditions to help given to a man who is idle because he is genuinely unable to find work. The knowledge that he cannot get help without these conditions will not remove this inability. But there is an object in attaching them to help given to those who are idle because they are unwilling to find (or to keep) work. The deterrent conditions will make them less unwilling. Until recently the practical difficulty of distinguishing between these two classes of persons, coupled with a general and justified unwillingness to deal hardly with the former of them, made it impossible to arrange these conditions satisfactorily. A compromise was accepted, under which, instead of no deterrence on the one class and strict deterrence on the other, mild deterrence was imposed on both. This plan did, indeed, save the innocent from gross tyranny, but at the expense of leaving the guilty relatively immune and, therefore, inadequately deterred. Of late years, however, the establishment of employment exchanges has provided machinery by which the truth of a man's plea that he is out of work through no fault of his own can be, in some measure, tested. In trades where the jobs, once obtained, are of "presumed permanence," if the employment exchanges are unable to find employment for a man who applies to them, more particularly if that man has a definite settled home, the plea that he is a victim of misfortune, and not of laziness, may be provisionally accepted. This test is, indeed, not easily applicable to casual trades, where workpeople continually alternate between work and idleness; for in these trades a man might be prepared to accept work for a day or so, whenever it was offered through an employment exchange, and yet might deliberately spend a much longer period out of work than there was any need for him to do. This difficulty must be recognised; and it must be admitted, further, that in the exceptional period of free insurance granted by the British Government after the armistice of November 1918, a number of persons obtained unemployment donation who might, had they wished, have been employed. But, in spite of this, there can be no doubt that the development of employment exchanges has made it possible, over a wide field, to distinguish directly those who cannot from those who will not find work. Consequently, since the former class can be withdrawn altogether from the range of deterrent conditions, it is now feasible so to stiffen up the conditions against the latter class—people who are in need because they will not work with reasonable continuity in private industry—as to make them really effective.

§ 11. Some guidance as to the form that deterrence should take can be obtained from English Poor Law experience. It is clearly suggested, for example, that some degree of enforced labour is an essential ingredient. The importance of this element is well illustrated in some of the evidence given before the Royal Commission of 1832. Thus one witness, in a Memorandum on Liverpool, stated: "The introduction of labour thinned the house very much; it was sometimes difficult to procure a sufficient supply of junk, which was generally obtained from Plymouth; when the supply was known to be scanty, paupers flocked in; but the sight of a load of junk before the door would deter them for any length of time."87 In the same spirit, the Comptroller of the Accounts for the township of Salford stated: "Finding work for those who applied for relief in consequence of being short or out of work has had a very good effect, especially when the work has been of a different kind from that which they have been accustomed to. In Salford employment to break stones on the highways has saved the township several hundred pounds within the last two years; for very few indeed will remain at work more than a few days, while the bare mention of it is quite sufficient for others. They all manage to find employment for themselves, and cease for a time to be troublesome; although it is a singular fact that, when the stock of stones on hand has been completely worked up before the arrival of others, they have, almost to a man, applied again for relief, and the overseers have been obliged to give them relief; but, so soon as an arrival of stones is announced, they find work for themselves again."88 The information given in a later Report on the Poplar Union points in the same direction. But, though enforced labour seems to be an essential ingredient in deterrent conditions, it is not by itself sufficient. The chief reason for this is the extraordinary difficulty of making a man work for the Poor Law Authorities with anything approaching the energy that he would need to put forth for a private employer. It is practically impossible to set relieved persons to work, each at his own trade. Consequently some general form of labour has to be required: and it is impossible to fix, for a miscellaneous assortment of different people, any single standard of performance. Hence the standard exacted has to be measured to each man "with due regard to his ordinary calling or occupation, and his age and physical ability." Since this cannot be tested objectively, "no specified task can be enforced. The capability of the persons employed varies, and it can only be required that each person shall perform the amount of work that he appears to be able to accomplish.... The standard of accomplishment is practically fixed by the unwilling worker."89 The fact that resort cannot be had to the ordinary practice of dismissal leaves the Poor Law Authority without any real defence against this tendency. Consequently potential beneficiaries are aware that the labour which will be imposed upon them if, through unwillingness to work in private industry, they become candidates for public assistance, will not be severe labour. Furthermore, even if this difficulty could be overcome, work for the Poor Law, because its certainty and continuity absolve those engaged in it from the risk, trouble and cost involved in occasional loss of employment and the need of finding a new job, might still prove more attractive than independent labour. Thus, for effective deterrence, something more than enforced labour is required. Disfranchisement (abolished in England in 1918) and the stigma of pauperism are, in the opinion of practical administrators, quite inadequate. Consequently, for those who need support, but will not work to get it, resort must be had to disciplinary measures. This implies detention under control without excessive leave of absence. On the Continent of Europe able-bodied men who fail to support themselves because they will not work are subjected to long periods of detention in labour colonies. In Belgium such persons may be committed to the penal colony of Merxplas for not less than two years nor more than seven years.90 The cantonal law in Berne provides for their internment in a labour institution for any time between six months and two years.91 The German Imperial Penal Code has a similar provision.92 The practice of the Continent is coming to be proposed seriously for adoption in this country also. Thus the Committee on Vagrancy recommended "that a class of habitual vagrants should be defined by Statute, and that this class should include any person who has been three or more times convicted, during a period of, say, twelve months, of certain offences now coming under the Vagrancy Act, namely, sleeping out, begging, refusing to perform his task of work in casual wards, or refusing or neglecting to maintain himself so that he become chargeable to the poor rate."93 There is no reason—much the contrary—why the conditions of deterrence should not be arranged with a view to "improving" the deterred persons, if that be possible; for to a man wishing to be idle the prospect of improvement, whether by training or by education or in any other way, will be as deterrent as anything else. Detention, however, is essential. Its adoption—which the development of employment exchanges as a means of separating the sheep from the goats has made practicable—would enable a far more effective system of deterrence to be associated with State aid to the deliberately idle than is at present known in this country. We cannot, however, seriously expect that the system will ever become perfect enough to prevent the expectation of differential transferences from contracting, in some degree, the size of the national dividend.

Chapter XI

BOUNTIES ON THINGS PURCHASED BY THE POOR

§ 1. SO far we have been considering transferences of a direct kind. There remain transferences through bounties or devices substantially equivalent to bounties. These take three principal forms: first, bounties, provided out of taxes, on the whole consumption of particular commodities which are predominantly purchased by poor persons; secondly, bounties, similarly provided, but confined to that part of the whole consumption which is actually enjoyed by defined categories of poor persons; thirdly, authoritative interference with prices, so contrived that the richer purchasers of particular commodities have to bear part of the cost of what is sold to poorer purchasers. The first of these methods is illustrated by the special subsidies which were paid on bread and potatoes during the Great War to enable prices to be kept down to what was considered a reasonable level. The second and third methods are only practicable in connection with commodities and services which are non-transferable in the sense explained in Part II. Chapter XVII. The second is illustrated by the Irish Labourers Acts, under which, not all house-building in the districts affected, but only house-building for labourers was subsidised, and by the more general provisions which were adopted to meet the post-war house shortage. The third method is illustrated by special arrangements often made in connection with the services supplied by monopolistic "public utilities." Whether these services are actually produced by private concerns or by the public authorities themselves, public authorities can, if they choose, compel sales to selected poor persons to be made at a loss, and can arrange for this loss to be made good through charges to other persons higher than would otherwise have been permitted. This plan is adopted under a number of Tramway Acts, where provision is made for a convenient service of workmen's cars at specially low fares. Thus "a recent report of the Highway Committee of the London County Council estimates that the loss involved by running the workmen's car service is £65,932 per annum."1 The same policy is illustrated in another connection by the (pre-war) practice of the municipality of Wiesbaden, where gas supplied by means of prepayment meters—a more expensive method of supply—was charged for at the same rate as gas supplied by ordinary meters to all persons the annual rent of whose house was less than 400 marks.2 It should be noted that this method is not necessarily confined to commodities and services produced under conditions of monopoly. Provided that the goods are, or can be made, non-transferable, it is open to public authorities to fix a charge at which anybody undertaking a named business or profession must sell whatever quantity of service is demanded by persons in a given category. The result will be to limit the number of persons entering that business or profession, till the expectation of earnings therefrom—derived jointly from sales to the poor and to other persons, for whose purchases the charges are fixed by the normal play of demand and supply—becomes about equal to that ruling in other businesses or professions of a similar difficulty and disagreeableness and involving an equally expensive training. This, of course, implies that the low charges made to the favoured category of persons are associated with charges to other categories higher than would have prevailed if the low charges had not been enforced.

§ 2. To all these methods it has been objected that they necessarily benefit unequally different poor persons whose circumstances are substantially similar. Professor Knoop writes, for example: "It is difficult to see why artisans, mechanics, and day labourers, who travel in the early morning, should receive privileges which men and women serving in shops, clerks, and others, who are no better off financially, do not enjoy."3 It may be replied that, if a thing is good in itself, the partial realisation of it cannot rightly be condemned on the ground that complete realisation is impracticable. We are not, however, concerned with the validity either of this objection or of the different and more forcible objection, from the side of fairness, which can be urged specially against the third method, namely, that it throws the cost of helping the poor upon particular persons, instead of upon the taxpayers generally.4 For the present purpose it is enough to know that all three of the methods distinguished above have, as a matter of fact, been adopted over a fairly wide field.

§ 3. The first of the three necessarily, and, if the categories are so chosen that people cannot practically be drawn by the bounty into a benefited category, the other two also involve "neutral transferences" in the sense explained in § 3 of the last chapter, and not differential transferences. Hence the expectation of them operates on the productive activity of the poor only through their effect on the marginal desiredness which money has to them. But they differ from the kind of neutral transferences so far examined in one respect. They will check to a small extent the contribution of work made by the poor, if they are granted upon things for which the demand of the poor has an elasticity less than unity; but they will increase this contribution to a small extent, if they are granted on things for which this demand has an elasticity greater than unity. For in the former event the marginal desiredness of money to the poor will be lowered, since more is left over for other things; and in the latter event it will be raised. As a matter of fact, bounties are most likely to be given on things of urgent need and, therefore, of inelastic demand. The check to output resulting from the consequent relaxation of effort on the part of potential recipients means some, though probably a very small, diminution of the national dividend.

§ 4. So far it would seem that there is little to choose between help to the poor by bounties and by direct neutral transferences. If the amount of the bounty-fed commodity which each recipient is to consume is fixed authoritatively, as under the British system of free and compulsory elementary education, this is in fact so. It is so, too, if the amount is not fixed authoritatively, but is, for other reasons, not liable to change in consequence of the bounty. Thus poor people are accustomed to buy some things through a common purchase fund, so organised that the payment a member has to make does not vary with the amount of his individual purchases. Sick clubs are arranged on this plan. There will be no inducement to a member of a sick club to increase the amount of the doctor's services that he calls for in a year merely because the fixed amount, that he has been accustomed to pay for membership of the club, is taken over and paid by the State. These conditions, however, are exceptional. In general, when a bounty, or the equivalent of a bounty, is given on any commodity, the purchasers, having regard to the bounty, will buy more of the commodity than they would have done had they received an equivalent subsidy in the form of a direct money grant. In this way resources are diverted out of the natural channels of production, and there is a presumption—which may, of course, as was explained in Part II. Chapter XI., be rebutted by special knowledge—that this diversion will inflict an extra injury on the national dividend, over and above that set out in the preceding paragraph. If the bounty is large enough, it may happen that the output of the bounty-fed commodity will be expanded so far that to the poor themselves the supply price, not merely in terms of money, but in terms of satisfaction, exceeds the demand price, or, in other words, that the economic satisfaction they get from the last increment consumed is less than the economic dissatisfaction involved in producing it. In general the expectation of a transference to the poor through bounties on particular commodities is likely to damage the national dividend rather more than the expectation of a direct neutral transference of equal magnitude. In spite of this, however, the bounty method may still sometimes be better than the other, not only because there may be special economic or non-economic reasons for encouraging the consumption of the particular thing on which the bounty is given, as compared with other things, but also because the element of "charity" is less obvious and, therefore, less damaging to the morale of the beneficiaries, when it is concealed in a bounty than when it is displayed in a direct dole.

Chapter XII

THE EFFECT ON THE NATIONAL DIVIDEND OF THE FACT OF TRANSFERENCE FROM THE RELATIVELY RICH TO THE POOR

§ 1. IN the three preceding chapters we have been concerned with the effect on the national dividend of the expectation of transferences from the rich and of the expectation of transferences to the poor. These things, we have seen, are liable to modify the dividend of any year by reacting both on the contribution of work provided during that year and on the quantity of capital equipment made ready in former years against the needs of that year. The whole story, however, has not yet been told. In the year—any year—that we are considering, the dividend, as determined by these expectations, will be of such and such a size. Thereupon occurs the fact of transferences from the rich to the poor. This, for the years yet to come, superimposes upon the effects we have been considering so far a new set of effects. For it involves a shifting, additional to any shiftings that are brought about by expectations, in the uses to which the dividend of the year we are considering is put. For the present purpose the accessible uses may be taken to be the provision of goods consumable by the rich, the provision of machines to assist future production, and the provision of goods consumable by the poor. When a transference of resources from the rich to the poor takes place, the third of these three divisions of the dividend is increased at the expense of the other two. Our problem is to determine the effect of this alteration in the distribution among different uses of the dividend of one year upon the magnitude of the dividend of later years.

§ 2. If no transference had occurred, the portion of the dividend due to assume the form of machines would have contributed to enlarge the dividend in later years. The portion devoted to the consumption of the rich, in so far as it served to make them more efficient producing agents, would also have done this to some extent. Among rich persons, however, it is improbable that any practicable reduction of consumption—the effect might, of course, be different if a levy were imposed so large as to bring down incomes from £5000 to £100—would diminish efficiency in an appreciable degree. Hence we may say roughly that that part of the sum transferred to the poor in any year, which, if it had not been transferred, would have been converted into capital, is the only part that would have made a substantial contribution to the dividend of the future. How large that part of the transferred sum is will depend to some extent on the method of taxation that is employed. Under the income-tax method we may suppose that in one year twenty million £ is collected from 200,000 people by a levy of £100 on each; under the death-duty method that an equal sum is collected from 10,000 people by a levy of £2000 on each. Things could, no doubt, be so arranged that these two plans would come to substantially the same thing. For under the death-duty method each person might furnish about £100 annually to insurance companies, to be handed over by them in payment of the death duties falling due during the year, instead of furnishing it, as under the income-tax method, to the Treasury. In actual life, however, it is not likely that a tax falling due from any estate every twentieth year will be fully provided against in the untaxed years that precede or follow. Consequently it is probable that under the death-duty method a good deal more than £100 will have to be furnished towards the tax from the resources accruing in the actual year of the tax, and a good deal less from those accruing in other years. It is fairly clear, however, that, as the amount withdrawn from the resources of any year grows, people will be less and less willing, owing to the wrench threatened to their habits, to take it out of consumption. Consequently there will be a tendency for a large part of it to come out of such part of the taxpayers' resources as would normally have been saved; and, if these resources are not sufficient, for it to be raised by the sale of capital. This last arrangement does not, of course, imply the handing over to the State in taxation of actual capital goods, but it does imply that somebody else, who would otherwise have devoted resources to building plant and machinery, will devote them instead to buying the existing plant and machinery that the taxpayer is forced to sell; with the result that the new savings of the community as a whole are contracted by an amount approximately equivalent to the amount of existing capital that the taxpayer throws on the market. In general, then, the fact that death duties consist of large levies at long intervals in place of small levies at short intervals suggests that the resources transferred through them are likely to be drawn from potential capital more largely than would be the case if equal resources were collected through income tax. This suggestion is confirmed and emphasised by the further fact that, under death duties, the moment chosen for the tax levy is one at which the heir is entering into an entirely new fortune. At this moment he will not have accustomed himself to think of his new property as "belonging to him" in the ordinary sense: he will look upon what comes after death duties have been paid as his "inheritance," and will not be spurred on to replenish with new special savings the gap that these duties have made in its original amount. This incident also makes pro tanto for the payment of the duties out of potential capital. The distinction between death duties and income tax in this respect is, however, a secondary matter. Even under death duties, when any given quantity of resources is collected from the rich, it is practically certain that some of it will be taken (perhaps via insurance premiums) from that part of their income which would, in the ordinary course, have been consumed. This implies that the part which would have become capital will not be reduced by the whole amount of the levy. It follows that any given transference of resources from the rich to the poor is bound, in itself and apart from the reactions discussed in the preceding chapters, to increase the national dividend of the future, provided that the return yielded by investment in the poor, through additions to their industrial capacity, is not less than the return yielded by investment in material capital—that is to say, roughly, than the normal rate of interest.

§ 3. Now it must be admitted at once that there are certain classes of poor persons whom no transference of resources could render appreciably more efficient. These classes include the great mass of those who are morally, mentally or physically degenerate. The history of Labour Colonies both at home and abroad and the experience of our own special schools for the feeble-minded make it clear that, for this class of person, real cure is practically impossible. "The officials of the colonies, on being asked their opinion as to whether it could be said with truth that any large proportion of the men sent to Merxplas were rehabilitated, morally or socially, by their stay at Merxplas, replied that in very few cases is such reclamation effected":5 and this is the experience of more than one colony elsewhere devoted to the care of the worst class of the non-criminal population. The fact is that, in the economic, as in the physical, sphere, society is faced with a certain number of incurables. For such persons, when they are found, the utmost that can be done is to seclude them permanently from opportunities of parasitism upon others, of spreading their moral contagion, and of breeding offspring of like character to themselves. The residue of hopelessly vicious, mentally defective, and other unfortunates may, indeed, still be cared for humanely by society, when they come into being, and it would be wrong to neglect any method of treatment that might raise the lives of even a few of them to a higher plane. But our main effort must be, by education and, still more, by restricting propagation among the mentally and physically unfit, to cut off at the source this stream of tainted lives. To cure them in any real sense is beyond human power. The same thing is true of those persons who suffer from no inherent defect and have lived in their day the life of good citizens, but whose powers have been worn out by age or ruined by grave accident. Here again, from the standpoint of investment, the soil is barren. The transference of resources to these persons, in whatever form it is made, may be extremely desirable for other reasons, but it cannot yield any significant return in industrial capacity.

§ 4. Fortunately, however, these classes constitute only a small part of the whole body of poor persons. With the poor regarded generally there is no frozen fixity of quality, but investment is capable of real effect. At a first glance we might, perhaps, expect the marginal return obtainable in this field to be equal to what it is in industry proper. This, however, is not so. In a perfectly adjusted community capital would be invested in the nurture, education and training of different persons, no matter in what class they were born, in such wise that, given the existing state of capital supply, the existing relative demand for services requiring different sorts of ability, and the existing state of industrial technique, the values of the marginal net product yielded by it would be equal everywhere. Thus, as between men with different degrees of the same kind of capacity—duke's sons and cook's sons alike—more would be invested in the abler than in the less able; and, as between men of different kinds of capacity, more would (in general) be invested in those whose kind was in keener demand. There is, however, reason to believe that the ordinary play of economic forces tends unduly to contract investment in the persons of the normal poor, with the result that the marginal return to resources invested, not, indeed, in all, but in a great number of the poor and their children is higher than the marginal return to resources invested in machines. The ground for this belief is that poor persons are without sufficient funds to be able themselves to invest adequately in their own and their children's capacities, while they are also so situated that other persons, who have sufficient funds, are, in great measure, debarred from doing this for them. Under a slave economy, or under a social system so organised that those, in whom alien money was invested, could somehow pledge their capacities as security for loans, the case would be different. But in the actual world there is no easy way in which capitalists can ensure that any considerable part of the return on money invested by them in the capacities of the poor shall accrue to themselves. If they make a loan, they cannot exact security for repayment; if they invest directly, by providing instruction for their own employés, they have no guarantee—unless, indeed, they are manufacturers of proprietary goods requiring a more or less specialised kind of labour, which is of less value to others than to them—that these employés will not shortly quit their service; and, even when there is such security, the employers must expect that the workers, having become more competent, will endeavour to exact a wage increased proportionately to their efficiency, and so to annex for themselves the interest on the employer's investment. In fact, investment in the persons of the poor is checked in a way analogous to that in which investment in land tenanted by rich occupiers and owned by poor men may be checked. The owners cannot afford to invest, and the occupiers, living without proper security as regards tenants' improvements, and receiving, therefore, as private net product, only a portion of the social net product of their investment, are unwilling to invest as much as the interest of the national dividend requires. In view of these considerations there is strong reason to believe that, if a moderate amount of resources were transferred from the relatively rich to the relatively poor, and were invested in poor persons with a single-eyed regard to rendering the poor in general as efficient as possible, the rate of return yielded by these resources in extra product, due to increased capacity, would much exceed the normal rate of interest on capital invested in machinery and plant.6 Of course, however, in real life transferences from the rich to the poor are not all made subject to the condition that they shall be employed in the way most productive of efficiency. It is, therefore, necessary to examine separately the effects of certain principal sorts of transference.

§ 5. First, consider transferences in the form of industrial training to selected persons among able-bodied adult workers. In this class of persons there are always a number who are making exceptionally low earnings, because they are illadjusted to the job in which they are engaged, but who are, nevertheless, of good natural ability. Resources transferred to these persons in the form of training are likely to yield a large return. This fact was recognised, not merely in the special arrangements made for demobilised officers and men after the war, but also in the National Insurance Act of 1911. The hundredth clause of that Act provided that, if, after test and inquiry, "the insurance officer considers that the skill or knowledge of a workman (who repeatedly falls out of employment) is defective, but that there is a reasonable prospect of the defect being remedied by technical instruction, the insurance officer may, subject to any directions given by the Board of Trade, pay out of the unemployment fund all or any of the expenses incidental to the provision of the instruction, if he is of opinion that the charge on the unemployment fund in respect of the workman is likely to be diminished by the provision of the instruction." The class of persons to whom this policy is especially applicable are workpeople not too far advanced in years, whose special skill has been rendered useless by some invention enabling the work they have learnt to do to be performed more economically by unskilled labour in attendance upon an automatic tool. They include, too, those persons whom accident or illness has deprived of some specialised capacity, as well as the victims of permanent changes of fashion. Money spent in teaching these persons a new trade in place of the one they have lost is likely to yield a substantial return. The same thing is true of instruction given to those persons, if in practice they can be distinguished, who, with an aptitude for one sort of occupation, have accidentally, or through perversity, drifted into another. In this category should be included men bred in the country and well fitted for rural life, who have been enticed by the glamour of some city to abandon their proper vocation. It is, however, essential that the men selected for agricultural training should be carefully chosen from among persons with a real turn for agricultural life. Frequently this has not been done.7 The comparative failure which attended early British experiments in farm colonies may have been due to that fact. The agricultural training centres established by the Ministry of Labour at Brandon and at Clayton in Suffolk in 1925 appear to have had considerable success.8 The usefulness of such centres might perhaps be enhanced if they were not confined to the service of persons who have fallen out of employment, but were general training schools of agriculture, open to members of the public, and so endowed with an industrial rather than a remedial atmosphere.9

§ 6. Secondly, we may distinguish transferences in the form of medical attendance and treatment to persons suffering from temporary sickness. If these persons are not assisted in time—delayed help may be comparatively useless—they may well suffer a permanent break-down in health. Resources transferred to them in the form of medical care and appropriate food are likely to prevent a large loss of capacity. Of course, in order that good results may be attained, the transferences must be adequate and the medical attendance or supervision must not be abandoned at too early a stage. On this point the Minority Report of Poor Law Commissioners made a serious complaint against the administration of English Poor Law Infirmaries: "No attempt is made to follow into their homes the hundreds of phthisical and other patients discharged every week from the sick wards of the Workhouses and Poor Law Infirmaries, in order to ensure at any rate some sort of observance of the hygienic precautions, without which they, or their near neighbours, must soon be again numbered among the sick."10 Given, however, that the transferences to sick persons are reasonably made, there is good hope that they will lead to a large increase of capacity.

§ 7. Thirdly, attention may be directed to transferences in the form of training and nurture to the normal children of the poor. Here there is immense scope for profitable investment. It is just when their children are young, and, therefore, in many ways afford the most fruitful soil for investment, that poor families find themselves in the greatest straits, and, therefore, least able to provide adequately for them. The proportion of children who pass their earlier years in great poverty is much larger than the proportion of families who are in this condition at any one time. Thus, taking a standard of life analogous to Mr. Rowntree's poverty line, Dr. Bowley found, just before the war, that "more than half the working-class children of Reading, during some part of their first fourteen years, live in households where the standard of life in question is not attained."11 The same point is brought out by Miss Davies's observation about the village of Cowley, that "from the insignificant one-eighth of the households in primary poverty two-fifths, or nearly half, of all children in the parish are drawn, and that only one-third of all the children are in households above the line of secondary poverty."12 As was observed in Part I. Chapter VIII. § 6, the position in this matter has greatly improved since the war, partly through the rise in the real wages of unskilled labour and partly through the falling-off which has taken place in the average number of children per family. Thus in 1923-24 in Reading the proportion of children under 14 living in houses where the standard specified above could not be reached had fallen (assuming no unemployment) from 1 in 2 to 1 in 7.13 Even yet, however, the position is sufficiently deplorable. Reviewing the statistics collected from the five towns (Northampton, Warrington, Reading, Bolton and Stanley), Dr. Bowley concluded in 1924: "More than 1 in 6 (of the children) are in present circumstances below the line (his calculated poverty line) at some period of their young lives; a smaller proportion are below it for many years consecutively."3 Properly arranged help for these children may do much towards building up, in the most plastic period of life, strong bodies and minds trained, at least in general intelligence, and, perhaps, also in some form of technical skill.

Of course, if these transferences are to be fruitful, they must be reasonably conducted. It is useless, for example, to spend money on educating children while leaving them the prey to demoralising home conditions. If they are not properly looked after at home, a part of the transference to them must be utilised in boarding them out with carefully chosen families, or in sending them compulsorily to an institution or industrial school. Thus both the Majority and the Minority of the Poor Law Commissioners agree that children, who are neglected in the homes of parents in receipt of relief, should be forcibly "sent to an institution or industrial school,"14 and that, for the children of "ins and outs," "power should be taken to keep these children in institutions while the parents are detained in a detention colony."15

Again, it is useless, and may be even harmful, to spend money on educating children so ill-nourished that they cannot learn and merely exhaust their nervous system in trying to do so.16 Underfed children must be provided with meals as well as with education, and, it need hardly be added, these meals must be regular and not spasmodically offered to different children twice or three times in a week. Probably the meals should be continued during the school holidays, for otherwise much of the benefit will be lost. In like manner, it is useless to spend money on educating children, if, at the same time or immediately afterwards, they are permitted to engage in occupations which inquiry shows to be destructive of whatever benefit education might be expected to yield. There is reason to suppose that many of the forms of unskilled labour at present open to boys not merely fail to train, but positively untrain, their victims. In a report presented to the Royal Commission on the Poor Laws Mr. Jackson well writes: "Mere skill of hand or eye is not everything. It is character and sense of responsibility which requires to be fostered, and not only morals, but grit, stamina, mental energy, steadiness, toughness of fibre, endurance, must be trained and developed." But these general qualities can ill withstand the conditions, if these are unalleviated, of many forms of unskilled boy-labour. Mr. Jackson reports the view that "the occupation of van-boys is very calculated to destroy industry," and adds that "opinion is practically unanimous that street-selling is most demoralising to children. It is not so much a question of a skilled trade not being taught as of work which is deteriorating absorbing the years of the boy's life when he most needs educative experience in the wider sense."17 It is plain that, if investment in the children of the poor is to be truly fruitful, it must be accompanied by prohibition, or at all events by restriction, of the right of entry into these occupations.

Yet again, as with the sick, so too with the children, the care expended on them must be adequately prolonged. "It is not sufficient to send a child of fourteen to a situation which may prove unsuitable, and leave it there to look after itself."18 In short, stupidly organised investments in children's capacities—like other stupidly organised investments—will yield little return; but well organised investments, and, more especially, investments adjusted in amount to the natural abilities of the various children affected, hold out large promise. Nor is this promise exhausted when account has been taken of the effect produced on average children. Among the great number of working-class families there are sure to be born from time to time children of exceptional power. Investment in the education of children generally should be credited with the effect it produces in these children. This point and the implications of it are put with great force by Marshall in the following passage: "There is no extravagance more prejudicial to the growth of national wealth than the wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work. No change would conduce so much to a rapid increase of national wealth as an improvement in our schools, and especially those of the middle grade, provided it be combined with an extensive system of scholarships, which will enable the clever son of a working man to rise gradually from school to school till he has the best theoretical and practical education which the age can give."19

§ 8. Up to this point we have been considering transferences made in selected forms and to selected groups among the poor; and we have seen that for such transferences there are "openings," in which the return probably obtainable is very much superior to that offered by investment in machines. It follows that the fact of these transferences, when they are managed by competent persons, is practically certain to benefit the national dividend. The effect of transferences made in a general way, in the form of command over purchasing power, cannot be determined so easily. The main difficulty is that many poor persons are unable, through lack of knowledge, to invest resources in themselves or their children in the best way. Thus, in a recent report of the Board of Education, we read: "A large proportion of the badly nourished children suffer from unsuitable food rather than from lack of food. It is probably no exaggeration to say that the improvement, which could be effected in the physique of elementary school children in the poorer parts of our large towns, if their parents could be taught or persuaded to spend the same amount of money as they now spend on their children's food in a more enlightened and suitable manner, is greater than any improvement which could be effected by feeding them intermittently at the cost of the rates."20 In like manner, Mrs. Bosanquet notes that some two-ninths, out of Rowntree's three-ninths, of poverty is "secondary" poverty. She writes: "The weight of the problem rests with the ignorance and carelessness of parents who do not lack the means to do better; and this view is further enforced by the large amount of evidence that most of the malnutrition is due to misdirected feeding rather than underfeeding."21 To charge the whole body of the poorer classes with ignorance and lack of capacity for management would, indeed, be to utter a gross libel. A sharp distinction must be drawn between poor families whose income, though small, is fairly regular, and poor families where the fathers are in casual and intermittent employment. Families of the latter class, disorganised in their mental habit no less than in their homes, never knowing from day to day or week to week what their income will be, cannot arrange their expenditure well. But families of the former class are in a position, if they choose, to build up a fairly definite standard of life. Among them there are many whose spending is even now arranged with extraordinary competence and wisdom; and, if they were better off, so that the wife was less burdened with work and worry, it may be supposed that their present high standard would be still further raised. Still, though, as against some members of the poorer classes, the charge of incapable management is ridiculous, as against many members it is undoubtedly true. Nor from the nature of things could it be otherwise. The art of spending money, not merely among the poor, but among all classes, is very much less developed than the art of making it. The investments which people make in industry are usually made with the help of specialists, who are in competition with one another and among whom bad judgment ultimately means elimination; but the investments which people make in their own capacities are conducted by themselves—that is to say, by persons who are not specialists, acting in circumstances where the selective influence of competition is excluded. This distinction can be brought out by an illustration drawn from within the business sphere itself. Those entrepreneurs who produce goods for the market are subject, in general, to keen competition among themselves. The result is that the stupid and ignorant tend to be extruded, and those only continue to act as entrepreneurs, who approach fairly closely to the average level of intelligence among their class. In occupations where commodities are produced, not for sale in the market, but for domestic consumption, and where, therefore, the competitive struggle is relaxed, the standard of competence tends, other things being equal, to be lowered. This point is well illustrated by the history of the English textile industries. Wool and linen, at the time of the industrial revolution, were associated with the ordinary routine of peasant life, but the treatment of cotton was not so associated. "Everywhere a professional employment, not a by-product, those who followed it did so for gain."22 The result was that improvements developed and spread much more rapidly in cotton manufacture than in the other textiles. It is plain that the conditions under which the art of spending money is conducted are on a par with those prevailing in domestic, and not with those prevailing in professional, employments. It follows that the main stimulus making for competence and the power of wise choice between different ways of using resources is lacking. Thus, Professor Mitchell writes: "The limitations of the family life effectually debar us from making full use of our domestic brains. The trained intelligence and the conquering capacity of the highly efficient housewife cannot be applied to the congenial task of setting to rights the disordered households of her inefficient neighbours. These neighbours, and even the husbands of these neighbours, are prone to regard critical commentaries upon their slack methods, however pertinent and constructive in character, as meddlesome interferences. And the woman with a consuming passion for good management cannot compel her less progressive sisters to adopt her system against their wills, as an enterprising advertiser may whip his reluctant rivals into line. For the masterful housewife cannot win away the husbands of slack managers, as the masterful merchant can win away the customers of the less able. What ability in spending money is developed among scattered individuals we dam up within the walls of the single household."23 The inevitable consequence is that among all classes, and among the poor along with the others, there is a very great amount of ignorance concerning the comparative (marginal) advantages of different ways of spending money. Consequently it is idle to expect that resources transferred to poor persons in the form of general purchasing power will be employed by them exclusively in the openings that are likely to yield the largest return of capacity. When the mistakes made are very grave, the national dividend may gain less from the improvements wrought in the capacity of the poor than it loses by the withdrawal from ordinary investment of that part of the transferred resources, which, if they had not been transferred, would have been devoted to that use.24 There is a danger that resources transferred to poor persons, in the form of command over purchasing power, will, from the point of view of the national dividend, be wasted. The Royal Commissioners on the Poor Laws complain, for example, that out-relief, as administered in many parts of Great Britain, serves merely "to perpetuate social and moral conditions of the worst type."25 Many Boards of Guardians take no measures to ascertain what recipients do with the relief granted to them.26 "With significant exceptions, Boards of Guardians give these doles and allowances without requiring in return for them even the most elementary conditions.... We have seen homes thus maintained out of the public funds in a state of indescribable filth and neglect, the abodes of habitual intemperance and disorderly living."27

§ 9. The practical inference from this discussion is that transferences to the poor, made in the form of command over purchasing power, have a much better chance of benefiting the national dividend of the future if they are associated with some degree of oversight over the persons to whom the transferences are made. This oversight, and whatever control it may be necessary to couple with it, must, of course, be very carefully guarded. It should be based on a full recognition of the fact that people are not machines, and that their industrial—not to speak of their human—capacity is a function of their moral, as well as of their material, surroundings. If the arrangements are such that persons hitherto respectable are compelled, for any considerable time, to associate with vagabonds and ne'er-do-weels, their industrial character is endangered. If, on the other hand, the gift of material aid is accompanied by the interest, sympathy and counsel of friends, willingness to work and save may be largely and permanently encouraged. Out of a full experience Canon Barnett wrote: "Many have been the schemes of reform I have known, but, out of eleven years' experience, I would say that none touches the root of the evil which does not bring helper and helped into friendly relations."28 A system of administration, in which, as in the Elberfeld and Bergen plans—copied in essentials by the voluntary Guilds of Help now growing up in many English towns29 —the elements of personal care are largely utilised, is thus likely to prove, even from a purely monetary point of view, a better investment than one dependent on mechanical rules. This consideration emphasises the great importance of associating voluntary effort with the official machinery of State aid to the poor.

Chapter XIII

A NATIONAL MINIMUM STANDARD OF REAL INCOME

§ 1. WHEN we desire to determine whether the fact and the expectation of the fact, taken together, of any given annual transference of resources from the relatively rich to the relatively poor are likely to increase the national dividend, all the various considerations set out in the preceding chapters must be taken into account. There is little doubt but that plans could be devised, which would enable transferences, involving a very large amount of resources, to be made with results advantageous to production. Since the generality of these transferences will also increase the real incomes of the relatively poor, they must redound to the advantage of economic welfare in a wholly unambiguous way. Transferences which diminish the national dividend, on the other hand, are liable, through various reactions which have been indicated in the course of this discussion, to diminish the real earnings of the relatively poor; and, if their amount is kept constant, they may do this to so great an extent that the earnings per year of the relatively poor plus the transference made to them will ultimately be less than their earnings alone would have been, had no transference been made. When this happens, these transferences also affect economic welfare in an unambiguous way: this time by injuring it. There remains, however, one further sort of transference, the results of which cannot be unambiguous. I refer to a system of transferences varied from year to year in such a way as to compensate for any reduction that may come about in that part of the income of the poor which accrues to them through earnings. An arrangement of this sort is implicitly introduced whenever a government establishes a minimum standard of real income, below which it refuses to allow any citizen in any circumstances to fall. For the establishment of such a minimum standard, implying, as it does, transferences to the poor of a kind that differentiate in favour of poverty, is likely to diminish the national dividend, while it will, at the same time, for an indefinitely long period, increase the aggregate real income of the poor. To determine the effect, which the establishment of this kind of minimum standard is likely to exercise upon economic welfare, involves, therefore, a balancing of conflicting considerations.

§ 2. Before this balancing is attempted, it is desirable to obtain a clear notion of what precisely the minimum standard should be taken to signify. It must be conceived, not as a subjective minimum of satisfaction, but as an objective minimum of conditions. The conditions, too, must be conditions, not in respect of one aspect of life only, but in general. Thus the minimum includes some defined quantity and quality of house accommodation, of medical care, of education, of food, of leisure, of the apparatus of sanitary convenience and safety where work is carried on, and so on. Furthermore, the minimum is absolute. If a citizen can afford to attain to it in all departments, the State cares nothing that he would prefer to fail in one. It will not allow him, for example, to save money for a carouse at the cost of living in a room unfit for human habitation. There is, indeed, some danger in this policy. It is a very delicate matter for the State to determine authoritatively in what way poor people shall distribute scanty resources among various competing needs. The temperaments and circumstances of different individuals differ so greatly that rigid rules are bound to be unsatisfactory. Thus Dr. Bowley writes: "The opinion is quite tenable that the poor are forced (by the effect of the law to enforce a minimum quality and quantity of housing accommodation) to pay for a standard of housing higher than they obtain in food, and that they would make more of their income if they were worse housed and better fed."30 This danger must be recognised; but the public spirit of the time demands also that it shall be faced. A man must not be permitted to fall below the minimum in one department in order that he may rise above it in others. Again, if a citizen cannot afford to attain the minimum in all departments, but, by failing in one, can remain independent, that does not justify the State in standing aside. The State must not permit anywhere hours of child labour or of women's labour or conditions of housing accommodation incompatible with the minimum standard, on the ground that, by resort to them, some given family could, and, without resort to them, it could not, support itself; for, if that is the fact, the family ought not to be required to support itself. There is no defence for the policy of "giving poor widows and incapable fathers permission to keep their children out of school and take their earnings."31 Rather, the Committee on the Employment of Children Act are wholly right when they declare: "We feel, moreover, that the cases of widows and others, who are now too often economically dependent on child labour, should be met, no longer by the sacrifice of the future to the present, but, rather, by more scientific, and possibly by more generous, methods of public assistance."32 The same type of reasoning applies, with even greater force, to the common plea that women should be allowed to work in factories shortly before and shortly after confinement, because, if they are not allowed to do this, they and their children alike will suffer shocking poverty. In these circumstances it is the duty of the State, not to remit the law, but to defend those affected by it from this evil consequence.

§ 3. There is general agreement among practical philanthropists that some minimum standard of conditions ought to be set up at a level high enough to make impossible the occurrence to anybody of extreme want; and that whatever transference of resources from relatively rich to relatively poor persons is necessary to secure this must be made, without reference to possible injurious consequences upon the magnitude of the dividend.33 This policy of practical philanthropists is justified by analysis, in the sense that it can be shown to be conducive to economic welfare on the whole, if we believe the misery that results to individuals from extreme want to be indefinitely large; for, then, the good of abolishing extreme want is not commensurable with any evils that may follow should a diminution of the dividend take place. Up to this point, therefore, there is no difficulty. But our discussion cannot stop at this point. It is necessary to ask, not merely whether economic welfare will be promoted by the establishment of any minimum standard, but also by what minimum standard it will be promoted most effectively. Now, above the level of extreme want, it is generally admitted that increments of income involve finite increments of satisfaction. Hence the direct good of transference and the indirect evil resulting from a diminished dividend are both finite quantities; and the correct formal answer to our question is that economic welfare is best promoted by a minimum standard raised to such a level that the direct good resulting from the transference of the marginal pound transferred to the poor just balances the indirect evil brought about by the consequent reduction of the dividend.

§ 4. To derive from this formal answer a quantitative estimate of what the minimum standard of real income established in any particular country at any particular time ought to be, it would be necessary to obtain and to analyse a mass of detailed information, much of which is not, in present circumstances, accessible to students. One practical conclusion can, however, be safely drawn. This is that, other things being equal, the minimum can be advantageously set higher, the larger is the real income per head of the community. The reason, of course, is that every increase in average income implies a diminution in the number of people unable by their own efforts to attain to any given minimum standard; and, therefore, a diminution, both absolute and proportionate, in the damage to the dividend which an external guarantee of that standard threatens to bring about. It follows that, when we have to do with a group of pioneer workers in rough and adverse natural circumstances, the minimum standard may rightly be set at a low level. But, as inventions and discoveries progress, as capital is accumulated and Nature subdued, it should be correspondingly raised. Thus it is reasonable that, while a relatively poor country makes only a low provision for its "destitute" citizens, a relatively rich country should make a somewhat better provision for all who are "necessitous."34

§ 5. In this connection it is important that there should be no confusion as to what is meant by a rich country. For the present purpose country means, not Government, but people. There is a widespread impression that a nation's duty to make provision for its poorer citizens depends upon the amount of money that the Government has to provide for other purposes; and from this it is inferred that the great increase in the British Budget required to meet the annual charges on the war debt justifies, and, indeed, commands, large retrenchments in social expenditure. This idea is, in great measure, illusory. It is true, of course, that the indirect effect in checking production of the expectation of continuous taxation sufficient to yield 800 million post-war £s annually is a good deal greater than that of the expectation of taxes yielding 200 million pre-war £s. But this, though important, is a secondary matter. The essential fact is that, when interest is paid to domestic holders—the case is, of course, different with foreign holders—of Government securities, no part of the real income of the country is directly used up. Resources are merely transferred from one group of citizens to another. No doubt, when a nation has to provide funds for a large internal debt in consequence of a war, this is a sign that resources have been expended on war that might have been expended on building up capital equipment and so making the real income larger. It must not be forgotten, however, that a large part of the resources that were lent, for example, to the British Government by its citizens in the Great War, was not withdrawn from what would have been real capital, but was the result of economies in consumption and special activities in production, which, but for the war, would not have taken place. Even, therefore, as a sign of a country's capacity to give help to its poor, the magnitude of an internal war debt is of little use. The true test of this capacity is the direct one—aggregate real income compared with population. It is, indeed, proper to subtract from this the resources which are necessarily used up in unproductive ways. Thus, when a country is so situated that it has to devote an exceptionally large proportion of its real income to the upkeep of powerful armaments, or to the payment of interest to foreigners, who, in the past, have lent money to its Government, or to machinery for preserving internal order, account must be taken of these things. As a rule, however, they are relatively unimportant. The amount of the aggregate real income in relation to the number of the population is the dominant relevant fact.

§ 6. For the United Kingdom the best available estimate gives an aggregate national income, for 1913-14, represented at then prices by some 2250 million pounds. Deducting some 250 millions for rates and taxes and some 230 millions for new investments, we have left a sum sufficient, if it could have been divided up equally without being diminished in the process, to yield an income of £162 to each representative family of 4½ persons.35 Of course, as a matter of fact, it would have been quite impossible to pool the national income in this way without a large part of the flow of goods and services, which this money figure represents, disappearing altogether. Apart from great improvements in productive organisation, which may, perhaps, be hoped for, but certainly cannot be predicted with confidence, there is no reason to expect that the real income per head of the country—we need not trouble about its swollen reflex in the glass of money—will be substantially greater in the near future than it was in 1913-14. In view of these facts it is plain that, wealthy as this country is, as compared both with itself in the past and with most of its neighbours in the present, it is not wealthy in an absolute sense. As things are it is literally impossible for it, by any manipulation of distribution, to provide for all its citizens a really high standard of living. In so far, therefore, as social reformers rely upon improvements in the distribution of wealth, as distinguished from improvements in production, they are bound to chasten their hopes. The national minimum may rightly be set now much higher than it could have been set a hundred or fifty years ago. But, with the national average no larger than it is, it is inevitable that the national minimum must still be set at a deplorably low level.

§ 7. So far nothing has been said of the common view that, in determining the minimum standard which it will establish for itself, one country must have regard to the policy of other countries. It is widely held that the prohibition in England of socially undesirable practices, such as the employment of women at night, the use of unfenced machinery, the building of factories without proper sanitary arrangements, or the working of unduly long hours, involve a larger real cost to us if undertaken here alone than if undertaken by all industrial countries together. The reason commonly given for this view, that isolated action here would cause a flood of imports from abroad destructive of our industries, fails to take account of the fact that, subject to certain well-known qualifications, imports cannot expand in the long period without exports expanding correspondingly; so that our industries as a whole could not suffer injury in the manner contemplated. It is true, however, that, if a handicap is imposed on productive methods in one country only, there will be a tendency for employing power, capital and labour to leave that country. If all leave in equal proportions, the general scale of the country's industry will be correspondingly reduced, the rate of pay per unit of every factor remaining much as before. The national dividend need not fall as much as production falls, because capitalists may still live and receive income here while employing their capital elsewhere. Since, in fact, capital—at all events if we suppose the obstacle of double income-tax to be done away with by international and intra-imperial agreement—is more mobile than labour, the presumption is that capital will leave in a somewhat larger proportion, and that, therefore, the earnings per head of work-people will fall. In whatever way the detail of the movement is worked out, it is plain that economic welfare in the country affected is likely to be lessened. The injury thus inflicted on it cannot, it should be observed, be prevented by setting up a tariff against imports from countries where labour legislation is less advanced. On the contrary, such a tariff, by interfering with the normal distribution of the country's resources among different occupations, would, in general, make the national dividend smaller, and the injury, therefore, worse. If, however, the handicap of these high minima is extended to all important countries by international labour legislation, the danger that our capital will be driven abroad is removed—at the cost of some slight damage to us in the terms on which our goods exchange against foreign goods.

§ 8. From these considerations it appears that the extension by international labour legislation of regulations, which are both desirable in themselves and also a real handicap to industry, is likely, though in a way different from that commonly supposed, to lessen the burden which these regulations would inflict on any country adopting them in isolation. To this extent it will, therefore, really be easier for a country to rule out injurious methods and processes, if it can persuade other nations to move forward in company with it. Moreover, when the injurious methods specially affect particular industries, an international agreement will really make it easier for the persons engaged in those industries to accept a veto upon injurious methods; and it will almost always be thought to make this easier both for those persons and for the community regarded as a whole. Hence the development of machinery for international labour legislation may be expected to accomplish something solid in speeding up improvements in industrial conditions. The advantage to be looked for is the greater in that many improvements in method, which are not really handicaps at all, but, through their effect on efficiency, net benefits, are, nevertheless, popularly believed to be handicaps, and are, therefore, unlikely to be adopted by cautious statesmen without some outside stimulus. International negotiation may often furnish such a stimulus and give strength to reformers in a country where the social movement is slack or the power of vested interests strong. There can be little doubt, for example, that the Franco-Italian treaty of 1906 led indirectly to a general improvement in Italian practice in the supervision and enforcement of labour laws. At the same time it would be a mistake to expect from the lever of internationalism more than it has power to give. Inevitably international minima, if they are to secure general or wide assent, must lag behind the practice of the most advanced nations. It would be disastrous if a custom should grow up of regarding these international minima as national maxima; for that would check the forward movement of pioneer nations, and so indirectly of the whole world. Just as a "good" employer, while welcoming the Factory Acts, will keep his own practice well in advance of the legal standards, so also a "good" nation will always maintain national laws more ambitious than those which at the time have international sanction.36

§ 9. One word should be added in conclusion. In spite of what was said in Part I. Chapter IX. about the probable reaction of improved fortunes upon the standard of living, it must be conceded that the establishment by the State of an effective national minimum, since it must in effect, if not in name, differentiate to some extent in favour of large families, may somewhat increase the birth-rate among the poor. It is reasonable to hope that this tendency would not be very pronounced, since the people affected would be mainly those the size of whose families is not determined to any large extent by economic considerations. As much cannot be said, however, of an associated tendency. The establishment of an effective minimum standard, if adopted in one country alone, might well lead to a considerable increase in the numbers of the population through the immigration of relatively inefficient poor persons attracted by the prospect of State aid. If it did lead to this, the new immigrants would consume more than they contributed to the dividend; and, as their numbers grew, the native-born citizens of the country concerned would be more and more heavily mulcted to maintain them. It is, therefore, to the advantage of a State, which has established a minimum standard above that enjoyed by its neighbours, to forbid the immigration of persons who seem unlikely to attain this minimum without help from the public funds. To this end idiots, feeble-minded persons, cripples, beggars and vagrants, and persons over or under a certain age may be excluded, unless they are either accompanied by relatives able to support them, or themselves possess an adequate income derived from investments.37 Unfortunately, however, it is exceedingly difficult to devise machinery which shall be effective in excluding all "undesirable" immigrants without at the same time excluding some that are "desirable."

[1.][1] That is to say, without injuring it either from the point of view of the period before the change or from the point of view of the period after the change. Cf. ante, p. 54.

[2.][2] Cours d'économie politique, ii. pp. 306-7.

[3.][3] Manuale di economia politica, p. 371.

[4.][4] Cours d' économie politique, ii. p. 324.

[5.][5] Ibid. p. 408

[6.][6] Cf. ante, p. 96.

[7.][7] Select Committee on the Income Tax, 1906, Evidence, p. 81.

[8.][8] Cf. Benini, Principii di statistica metodologica, p. 810.

[9.][9] Of course it is not suggested that the inheritance laws of all modern European countries are exactly identical. They differ considerably in detail. The French laws, for example, force a more even division of estates among children than the English laws and deny special privileges to the eldest son. It is interesting to connect this fact with the observation of Benini (Principii di statistica metodologica, p. 191), that the distribution of wealth is more even in France than it is here. (Cf. also Ely, Property and Contract, vol. i. p. 89.)

[10.][10] Loc. cit. pp. 370-71.

[11.][11] The Growth of Large Fortunes, p. 18.

[12.][12] Proceedings of the Manchester Statistical Society, 1924-26, pp. 64-5. For a useful summary of the available statistics concerning income and capital distribution, cf. Carr-Saunders and Jones, Social Structure in England and Wales (1927), chapters ix. and x.

[13.][13] Principii di statistica metodologica, pp. 836-7.

[14.][14] Manuale di economia politica, pp. 371-2.

[15.][15] Bowley, The Division of the Product of Industry, p. 12.

[16.][16] Ibid. p. 11.

[17.][17] Cf. Chiozza-Money, Riches and Poverty, p. 49.

[18.][18] The special case of the entrepreneur's earnings is discussed in detail by Professor Edgeworth in the Quarterly Journal of Economics for February 1904; it is also touched upon in his paper on "Mathematical Theories" in the Economic Journal of December 1907.

[19.][19] This idea is well expressed by Turgot in an elaborate figure (cf. Cassel, Nature and Necessity of Interest, p. 22). In illustration, it may be noticed that, as the rate of interest falls, instrumental goods come to be built more solidly and to be repaired and renewed more readily when need arises.

[20.][20] The significance of this qualification is that, in a given state of the other factors, an increase in the supply of one factor up to the amount required to provide a single group-unit on the optimum scale—e.g. a sufficient number of men to lift a heavy tree or a sufficient number to run one factory of optimum size in each occupation—need not yield diminishing returns. It is not relevant to the present argument that an increase in the scale of population, by generating closer contacts and mutual stimulation of thought, may indirectly lead to an increase in the supply of capital and to improved organisation, and that, therefore, output may increase in a larger proportion than population. The law of diminishing returns is concerned with the effects of an increase in the supply of one factor of production when the supply of other factors is not increased.

[21.][21] Professor Taussig wrote in 1906 that, whereas most money incomes in the United States have increased, "the wages of ordinary day labour and of such factory labour as is virtually unskilled seem to have remained stationary and sometimes seem even to have fallen" (Quarterly Journal of Economics, 1906, p. 521). Whether the unskilled immigrants are mainly rival or mainly co-operant with the skilled workers of America is another and more difficult question. Dr. Hourwich writes on this point: "It is only because the new immigrants have furnished the class of unskilled labour that the native workmen and older immigrants have been raised to the plane of an aristocracy of labour" (Immigration and Labour, p. 12). In the same sense Prof. Prato (Le Protectionisme ouvrier, p. 72) maintains that, in general, the low-grade immigrant takes on occupations which native-born workpeople wish to leave, and that this is true, not only of the Chinese and European immigrant into the United States, but also of the Italian and Belgian immigrant to France, Switzerland, and Germany.

[22.][22] It is not relevant to the present argument to note, though the point may be added for completeness, that, in response to the improved demand, the co-operant factors tend to increase in quantity, but, since their supply curve is inclined positively, not to a sufficient extent to reduce their receipts to the old level.

[23.][23] Cf. Marshall, Royal Commission on Labour, Q. 4237-8.

[24.][24] Principles of Economics, p. 540.

[25.][25] "The Export of Capital and the Cost of Living," Manchester Statistical Society, Feb. 1914, p. 78.

[26.][26] The general proposition, of which the statement in the text is a special instance, is that, other things being equal, an increase in the quantity of any one factor of production will be accompanied by an increase in the absolute share of product accruing to that factor, provided that the demand for the said factor has an elasticity greater than unity. The condition on which it will be accompanied by an increase in the proportionate share of product accruing to the factor is different from this, and can be determined as follows. The supply functions of the other factors being given, the aggregate output P depends on the quantity of the variable factor, in such wise that, if x represents this quantity, P=f(x). The absolute share accruing to the variable factor is, therefore, represented by xf', and the proportionate share by xf'/f. The condition that this latter magnitude shall increase when x increases is that is positive.

Let e represent the elasticity of demand for the factor in question. Then and the above condition can be expressed, by easy substitution, in the form Thus e exceeds unity by a larger amount, the larger is the proportionate share of the product accruing, before the variation, to our variable factor. The condition set out above in symbols can be expressed in words, as Dr. Dalton has pointed out, by the statement that "the elasticity of demand is greater than the reciprocal of the relative share of all other factors taken together" (The Inequality of Incomes, p. 187).

[27.][27] The term elasticity of demand, as employed by Marshall and in the text above, signifies proportionate change in quantity divided by proportionate change in price when the changes are very small (strictly infinitesimal). It is what Dr. Dalton calls "point elasticity" (cf. The Inequality of Incomes, pp. 192-7). Hence, in order that the argument of the text may hold good of substantial increases of supply, we must suppose that the elasticity of demand is greater or less than unity, as the case may be, not merely in respect either of the old or of the new quantity of supply, but also in respect of all the quantities intermediate between these two.

[28.][28] Cf. Marshall, Principles of Economics, p. 235.

[29.][29] Cf. Edgeworth, "On the Use of the Differential Calculus in Economics," Rivista di Scientia, vol. vii. pp. 90-91.

[30.][30] Cf. Marshall, Principles of Economics, p. 672.

[31.][31] Report of the Royal Commission on the Aged Poor, p. 72.

[32.][32] Royal Commission on the Aged Poor, Minutes of Evidence (Q. 10,880).

[33.][33] Hobson, The Industrial System, p. 281.

[34.][34] Salariat et salaires, p. 421.

[35.][35] Report, p. 344.

[36.][36] Nature and Necessity of Interest, p. 112.

[37.][37] Report of the Royal Commission on the Poor Laws, p. 309.

[38.][38] La Répartition des richesses, p. 37.

[39.][39] La Répartition des richesses, p. 440.

[40.][40] Cf. Principles of Economics, p. 541.

[41.][41] This statement is not incompatible with the facts (1) that the resources devoted to making the motor car itself are turned into "capital" uses, and (2) that the existence of a private motor car of given value may tend to push up wages (by drawing people into service with it away from other employment) as much as the existence of a machine employed in industry.

[42.][42] Report on Wages Boards, p. 197. This "determination" fixed both an hour rate and a piece-work rate, compelling the latter to be paid to outworkers. The intention was that the two should be equivalent, but employers in practice found the hour, or wages, rate much the cheaper. The ex-inspectress added: "When the wages rate and the piece-work rate were nearly the same, as in the shirt and underclothing trade, the trouble did not occur, and, after ten years' working of the determination, these trades count many outworkers to-day." The choice between an out and an in-worker is affected by the fact that, when employing outworkers, the employer escapes charges for working space, light, firing, and so forth. "The savings upon factory rent, upkeep, and superintendence appear to be larger factors in the cheapness of home work than the lowness of wages" (Black, Makers of our Clothes, p. 44). Cf. also Marconcini, L' industria domesticu salariata (pp. 432-3). On the other hand, of course, economies of superintendence and, sometimes, of power are to be obtained in factory work.

[43.][43] Report on Wages Boards, p. 179. Cf. ante, Part III. Chapter XIV. § 8.

[44.][44] Cf. Lyttleton, Contemporary Review, February 1909.

[45.][45] Fortnightly Review, August 1908, p. 225.

[46.][46] Cadbury and Shann, Sweating, p. 124.

[47.][47] Cf. Hooker, Statistical Journal, 1894, p. 635 n.

[48.][48] Broadhead, State Regulation of Labour in New Zealand, p. 215.

[49.][49] Bosanquet, The Strength of the People, p. 71.

[50.][50] The Strength of the People, pp. 294-5.

[51.][51] For examples of things made by "sweated" workers and consumed by others than wage-earners, cf. Cadbury and Shann, Sweating, p. 123.

[52.][52] The reason why this conflict between the interests of a particular class of wage-earners and those of wage-earners as a whole, when the particular class endeavours to force up its rate of wages above the normal, is not generally recognised may well be, as Mr. H. D. Henderson suggests, that most wage movements are associated with trade cycles. In consequence of this, the wage rates of different groups generally move up and down together, and, therefore, to the casual observer, there appears to be a greater harmony of interest than there really is (Supply and Demand, p. 157).

[53.][53] Cf. Marshall, Economics of Industry, pp. 372-3.

[54.][54] It must be remembered, however, that, if only 500 rich men cut down their consumption of this type of article in a given proportion, the benefit to the poor will be less than half what it would have been had 1000 done so; because what one rich man voluntarily refrains from consuming another rich man, tempted by the resultant lowering of price, may be tempted to bid for. This is, pro tanto, an argument for compulsory (and, therefore, universal), as against voluntary, rationing.

[55.][55] Cf. Part I. Chaps. IX.-XI.

[56.][56] The analysis which follows was suggested to me by Mr. Ramsey of King's College, Cambridge.

[57.][57] In the special case where the demand curve for labour is a straight line the net gain is equal to h(r - ½s); which is necessarily positive, provided that the rate of subsidy is less than twice the rate of contribution to unemployed workmen.

[58.][58] Cf. Carr-Saunders and Jones, Social Structure in England and Wales, p. 158.

[59.][59] For an illustration of this among home-working tailoresses cf. Vesselitsky, The Home Worker, p. 17.

[60.][60] Report of the Royal Commission on the Poor Laws, Appendix, vol. xxxvi. pp. vi-vii.

[61.][61] Cf. ante, Chapter III. § 10. Dr. Hourwick, in his book Immigration and Labour, seems to miss this point; for, having shown that immigrants into the United States do not earn less wages for equally efficient work than native Americans, he treats this conclusion as implying that they do not affect the wages of native Americans.

[62.][62] Carver, Social Justice, p. 142.

[63.][63] Cf. Cadbury, Experiments in Industrial Organisation, p. 17.

[64.][64] Meakin, Model Factories and Villages, p. 27.

[65.][65] Preface to Cadbury's Experiments in Industrial Organisation, p. xiii.

[66.][66] Principles of Economics, p. 9.

[67.][67] Cf. A Study in Public Finance, Part II. chapter x.

[68.][68] Annals of the American Academy, 1895, p. 95.

[69.][69] If the desire for income to save is decidedly more elastic than the desire for income to spend, the differential tax can be shown to be more restrictive of work than the other; in the converse case it can be shown to be less restrictive. But we have no reason to suppose that the desire for one of these uses is, from a long-period standpoint, much more or much less elastic than that for the other.

[70.][70] Cf. ante, p. 666. The possibility that, for some people, a tax on savings might cause more savings to be made is parallel to the possibility that, for some people, a tax on work might cause more work to be done. The maximum amount that could in any circumstances be added to savings or to work is an amount sufficient to discharge the whole tax, in such wise that the taxed persons would be left with the same amount of available income as they would have had if there had been no tax.

[71.][71] Essays in Social Justice, p. 323. Professor Fisher even writes: "The ordinary normal self-made American millionaire is rather disposed, I believe, to look on the inheritance of his millions by his children with some misgiving" (Journal of Political Economy, vol. xxiv. p. 711).

[72.][72] A. G. Sombart, The Quintessence of Capitalism, p. 173.

[73.][73] For a fuller discussion of the comparative effects of various forms of taxation, of. A Study in Public Finance, Part II.

[74.][74] Economic Journal, 1891, p. 189.

[75.][75] "Denmark and its Aged Poor," Yale Review, 1899, p. 15. The following sentence from the first report on the working of the British Unemployment Insurance Scheme is of interest in this connection: "Twenty of our Trade Unions, with an estimated membership of over 86,000 in the (compulsorily) Insured Trades, have begun to make provision for unemployment since the passing of the Act; while other Associations making such provision have much increased their membership" ([Cd. 6965], p. iv.). The help given towards insurance would thus seem to have stimulated private effort.

[76.][76] Quoted in Appendix, vol. xvii., to the Report of the Royal Commission on the Poor Laws [Cd. 4690], p. 355.

[77.][77] Cf. Report to the Poor Law Commission by Mr. Steel Maitland and Miss Squire, Appendix, vol. xvi. p. 5. The position of widows is, of course, especially likely to be difficult in districts where there is no established women's trade. In such districts "widows left destitute come at once for poor relief and remain throughout their widowhood on the rates." Where opportunities for home work exist, pauperism may be postponed—often at the expense of hours far longer than a proper interpretation of the minimum standard, to be stipulated for in chapter xii., would allow. (Cf. ibid. p. 182.)

[78.][78] Report to the Poor Law Commission by Miss Williams and Mr. Jones, Appendix, vol. xvii. p. 334.

[79.][79] Loc. cit. Par. 4. The Board's Report on the Working of the Act in 1910 showed that the amount of money actually recovered from parents was insignificant. ([Cd. 5131], p. 9.) This, however, was largely due to the facts (1) that many local Education Boards deliberately limit their provision of meals to necessitous children, and (2) that, when they do not do this, parents who can afford to pay dislike sending their children to meals where no distinction is made between payers and non-payers. (Cf. Bulkley, The Feeding of School Children, pp. 107-9.) In these circumstances not many children whose parents are capable of paying anything are likely to be affected. In respect of lunatics the conditions are different, and considerable contributions from relatives are collected. (Cf. Freeman, Economic Journal, 1911, pp. 294 et seq.) It must be admitted, however, that there are considerable practical difficulties in the way of exacting payment for a service which it is understood will be rendered whether payment is made or not. Further objection is often taken to the device of "recoverable loans," on the ground that they divert energy from industrial effort to attempts at evading payment. As Mrs. Bosanquet observes: "Many a shilling is recklessly wasted, because, if not spent, it will only go to the debt collector" (Economic Journal, 1896, p. 223).

[80.][80] Report of the Royal Commission on the Poor Law, p. 231.

[81.][81] Loc. cit. p. 110.

[82.][82] Loc. cit. p. 207.

[83.][83] Practicable Socialism, p. 237.

[84.][84] This controversy is presented in a clear-cut form in the Report of the Departmental Committee on Old-Age Pensions [Cmd. 410], 1919. The majority of the Committee recommended that the means limit for pensions should be abolished, but the minority dissented from this recommendation.

[85.][85] Cf. Darwin, The Racial Effects of Public Assistance, pp. 13-15.

[86.][86] Cf. Brooks's Labour's Challenge to the Social Order, p. 228 et seq.

[87.][87] Report of the Poor Law Commission of 1832, p. 161.

[88.][88] Ibid. p. 162.

[89.][89] Report of the Committee on Distress from Want of Employment, quoted by Beveridge, Unemployment, p. 153.

[90.][90] Cf. Dawson, The Vagrancy Problem, p. 136.

[91.][91] Ibid. p. 179.

[92.][92] Ibid. p. 193.

[93.][93] Report of the Departmental Committee on Vagrancy, vol. i. p. 59.

[1.][1] Knoop, Principles of Municipal Trading, p. 266.

[2.][2] Ibid. p. 213.

[3.][3] Knoop, Principles of Municipal Trading, p. 266.

[4.][4] Cf. ante, Part IV. Chapter V. § 7.

[5.][5] Report of the Royal Commission on the Poor Laws, Appendix, vol. xxxii. p. 17.

[6.][6] It should be noted that, if the transference is very large, the resultant shortage of material capital may cause the rate of interest to increase appreciably; and that then the advantage of investment in the capacities of the poor will have to be balanced against the advantage of investment in machines yielding this increased rate.

[7.][7] On the continent of Europe, "the Farm Colonies, as distinguished from penal workhouses, do not, in general, receive the genuine unemployed, i.e. those who are out of work against their will. The great majority of the frequenters are the shiftless loafers, who, in the severer seasons of the year or in times of special distress, seek the shelter they offer rather than expose themselves to continued want or run the risk of entering the penal workhouse" (Bulletin of the United States Bureau of Labour, 1908, No. 76, p. 788).

[8.][8] Cf. Webb, English Local Government, vol. iv. p. 692.

[9.][9] Cf. Report on The Transference of Functions of Poor Law Authorities [Cd. 8917], p. 26.

[10.][10] Royal Commission on the Poor Laws, Minority Report, p. 867.

[11.][11] Journal of the Royal Statistical Society, June 1913, p. 692.

[12.][12] Life in an English Village, p. 287.

[13.][13] Has Poverty diminished! pp. 24-5.

[14.][14] Royal Commission on the Poor Laws, Report, p. 620.

[15.][15] Ibid. p. 187.

[16.][16] Cf. Bulkley, The Feeding of School Children, p. 179.

[17.][17] Royal Commission on the Poor Laws, Appendix, vol. xx. pp. 23-7.

[18.][18] Royal Commission on the Poor Laws, Report, p. 188.

[19.][19] Marshall, Principles of Economics, p. 213. Furthermore, it should be noticed that such a policy will react to the advantage even of those members of the manual working class who are not directly touched by the improved educational opportunities; for it will both increase the demand for their services, by increasing the number of persons capable of acting as business managers, and also diminish the supply of their services by withdrawing these men from among them.

[20.][20] [Cd. 5131], p. 5.

[21.][21] "Physical Degeneration and the Poverty Line," Contemporary Review, Jan. 1904, p. 72.

[22.][22] Cf. Clapham, Cambridge Modern History, vol. x. p. 753.

[23.][23] "The Backward Art of Spending Money," American Economic Review, No. 2, p. 274.

[24.][24] It may possibly be objected that of £100 invested in industry, £50 or more goes as wages, and, therefore, is also invested in the poor. This is a misconception. When £100 is invested in industry, £100 worth of labour and tools is devoted to making machinery: when it is invested in the persons of poor people, £100 worth of labour and tools is devoted to making consumable goods for their use.

[25.][25] Royal Commission on the Poor Laws, Majority Report, p. 102.

[26.][26] Ibid. p. 267.

[27.][27] Royal Commission on the Poor Laws, Minority Report, p. 750.

[28.][28] Practicable Socialism, p. 104.

[29.][29] Cf. Mr. Snowden's Report of the Local Government Board on Guilds of Help [Cd. 5664].

[30.][30] The Measurement of Social Phenomena, p. 173.

[31.][31] Cf. Henderson, Industrial Insurance in the United States, p. 301.

[32.][32] Report, p. 15.

[33.][33] It is sometimes suggested that those very improvements in the capacity of labour, which have been discussed in previous parts of this book, are calculated to push some men below the minimum standard. It is true, as a point of analysis, that increased capacity of labour is, in effect, equivalent to an addition to its supply, and, therefore, involves a slight reduction in the real wage of a labour unit of given quality. In view, however, of the elastic character of the demand for labour in general, the number of the unimproved men whom this change would push over the line of self-support would almost certainly be very small.

[34.][34] This is the term employed by the Majority Commissioners of the 1909 Report on the Poor Laws.

[35.][35] Cf. Bowley, The Division of the Product of Industry, pp. 20 et seq.

[36.][36] The International Labour Conference of 1919, in framing its convention on Women's Employment, aimed at a high standard. On each separate provision of the Convention it fell behind the practice of some countries, but the existing law of no country covered the whole requirement of the Convention (G. Hetherington, International Labour Legislation, p. 90).

[37.][37] For a summary of a number of laws on this matter, cf. Grunzel, Economic Protectionism, pp. 281 et seq.