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BOOK VI

THE DISTRIBUTION OF THE NATIONAL INCOME.

BOOK VI, CHAPTER I

PRELIMINARY SURVEY OF DISTRIBUTION.

§ 1. The keynote of this Book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value; for every agent of production would reap a return adequate to cover its own expenses of production with wear-and-tear, etc.; at all events after allowance had been made for casual failures to adjust supply to demand. But as it is, our growing power over nature makes her yield an ever larger surplus above necessaries; and this is not absorbed by an unlimited increase of the population. There remain therefore the questions:—What are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e. the Standard of Comfort? What by the influence which methods of consumption and of living generally exert on efficiency; by wants and activities, i.e. by the Standard of Life? What by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work (including here the undertaking of ventures) and "wait," as contrasted with those who work and consume at once the fruits of their endeavours? An attempt is made to give a broad answer to those and some similar questions.

We shall begin a preliminary survey of the subject by noting how French and English writers a century ago represented value as governed almost wholly by cost of production, demand taking a subordinate place. Next we shall observe how near to the truth these results would be in a stationary state; and what corrections need to be introduced in order to bring these results into harmony with the actual conditions of life and work: and thus the remainder of Chapter I. will be given mainly to the demand for labour.

In Chapter II. we shall first consider its supply under modern conditions; and thence we shall turn to a general view of the causes which fix the broad lines of distribution of the national income between labour, and the owners of capital and land. In this rapid survey we shall pass by unnoticed many details: to fill in some of these is the task of the remainder of the Book; but others must stand over for a later Volume.

§ 2. The simplest account of the causes which determine the distribution of the national income is that given by the French economists who just preceded Adam Smith; and it is based upon the peculiar circumstances of France in the latter half of last century. The taxes, and other exactions levied from the French peasant, were then limited only by his ability to pay; and few of the labouring classes were far from starvation. So the Economists or Physiocrats, as they were called, assumed for the sake of simplicity, that there was a natural law of population according to which the wages of labour were kept at starvation limit1 . They did not suppose that this was true of the whole working population, but the exceptions were so few, that they thought that the general impression given by their assumption was true: somewhat in the same way as it is well to begin an account of the shape of the earth, by saying that it is an oblate spheroid, although a few mountains do project as much as a thousandth part of its radius beyond the general level.

Again, they knew that the rate of interest in Europe had fallen during the five preceding centuries, in consequence of the fact that "economy had in general prevailed over luxury." But they were impressed very much by the sensitiveness of capital, and the quickness with which it evaded the oppressions of the tax-gatherer by retiring from his grasp; and they therefore concluded that there was no great violence in the supposition that if its profits were reduced below what they then were, capital would speedily be consumed or migrate. Accordingly they assumed, again for the sake of simplicity, that there was something like a natural, or necessary rate of profit, corresponding in some measure to the natural rate of wages; that if the current rate exceeded this necessary level, capital would grow rapidly, till it forced down the rate of profit to that level; and that, if the current rate went below that level, capital would shrink quickly, and the rate would be forced upwards again. They thought that, wages and profits being thus fixed by natural laws, the natural value of everything was governed simply as the sum of wages and profits required to remunerate the producers2 .

Adam Smith worked out this conclusion more fully than the Physiocrats did; though it was left for Ricardo to make clear that the labour and capital needed for production must be estimated at the margin of cultivation, so as to avoid the element of rent. But Adam Smith saw also that labour and capital were not at the verge of starvation in England, as they were in France. In England the wages of a great part of the working classes were sufficient to allow much more than the mere necessaries of existence; and capital had too rich and safe a field of employment there to be likely to go out of existence, or to emigrate. So when he is carefully weighing his words, his use of the terms "the natural rate of wages," and "the natural rate of profit," has not that sharp definition and fixedness which it had in the mouths of the Physiocrats; and he goes a good way towards explaining how they are determined by the ever-fluctuating conditions of demand and supply. He even insists that the liberal reward of labour "increases the industry of the common people"; that "a plentiful subsistence increases the bodily strength of the labourer; and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workman more active, diligent and expeditious, than where they are low; in England, for example, than in Scotland; in the neighbourhood of great towns than in remote country places3 ." And yet he sometimes falls back into the old way of speaking, and thus makes careless readers suppose that he believes the mean level of the wages of labour to be fixed by an iron law at the bare necessaries of life.

Malthus again, in his admirable survey of the course of wages in England from the thirteenth to the eighteenth centuries, shows how their mean level oscillated from century to century, falling sometimes down to about half a peck of corn a day, and rising sometimes up to a peck and a half or even, in the fifteenth century, to about two pecks. But although he observes that "an inferior mode of living may be a cause as well as a consequence of poverty," he traces this effect almost exclusively to the consequent increase of numbers; he does not anticipate the stress which economists of our own generation lay on the influence which habits of living exercise on the efficiency, and therefore on the earning power of the labourer4 .

Ricardo's language is even more unguarded than that of Adam Smith and Malthus. It is true, indeed, that he says distinctly5 :—"It is not to be understood that the natural price of labour estimated in food and necessaries is absolutely fixed and constant ... It essentially depends on the habits and customs of the people." But, having said this once, he does not take the trouble to repeat it constantly; and most of his readers forget that he says it. In the course of his argument he frequently adopts a mode of speaking similar to that of Turgot and the Physiocrats6 ; and seems to imply that the tendency of population to increase rapidly as soon as wages rise above the bare necessaries of life, causes wages to be fixed by "a natural law" to the level of these bare necessaries. This law has been called, especially in Germany, Ricardo's "iron" or "brazen" law: many German socialists believe that this law is in operation now even in the western world; and that it will continue to be so, as long as the plan on which production is organized remains "capitalistic" or "individualistic"; and they claim Ricardo as an authority on their side7 .

In fact, however, Ricardo was not only aware that the necessary or natural limit of wages was fixed by no iron law, but is determined by the local conditions and habits of each place and time: he was further keenly sensitive to the importance of a higher "standard of living," and called on the friends of humanity to exert themselves to encourage the growth of a resolve among the working classes not to allow their wages to fall anywhere near the bare necessaries of life8 .

The persistency with which many writers continue to attribute to him a belief in the "iron law" can be accounted for only by his delight "in imagining strong cases," and his habit of not repeating a hint, which he had once given, that he was omitting for the sake of simplicity the conditions and limitations that were needed to make his results applicable to real life9 .

Mill did not make any great advance in the theory of wages beyond his predecessors, in spite of the care with which he set himself to emphasize the distinctly human element in economics. He, however, followed Malthus in dwelling on those lessons of history which show that, if a fall of wages caused the labouring classes to lower their standard of comfort "the injury done to them will be permanent, and their deteriorated condition will become a new minimum tending to perpetuate itself as the more ample minimum did before10 .

But it was only in the last generation that a careful study was begun to be made of the effects that high wages have in increasing the efficiency not only of those who receive them, but also of their children and grandchildren. In this matter the lead has been taken by Walker and other American economists; and the application of the comparative method of study to the industrial problems of different countries of the old and new worlds is forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour; a fact which, though it is more full of hope for the future of the human race than any other that is known to us, will be found to exercise a very complicating influence on the theory of distribution.

It has now become certain that the problem of distribution is much more difficult than it was thought to be by earlier economists, and that no solution of it which claims to be simple can be true. Most of the old attempts to give an easy answer to it, were really answers to imaginary questions that might have arisen in other worlds than ours, in which the conditions of life were very simple. The work done in answering these questions was not wasted. For a very difficult problem can best be solved by being broken up into pieces: and each of these simple questions contained a part of the great and difficult problem which we have to solve. Let us profit by this experience and work our way by successive steps in the remainder of this chapter towards understanding the general causes which govern the demand for labour and capital in real life11 .

§ 3. Let us begin by studying the influence of demand on the earnings of labour, drawn from an imaginary world in which everyone owns the capital that aids him in his labour; so that the problem of the relations of capital and labour do not arise in it. That is, let us suppose but little capital to be used; while everyone owns whatever capital he does use, and the gifts of nature are so abundant that they are free and unappropriated. Let us suppose, further, that everyone is not only of equal capacity, but of equal willingness to work, and does in fact work equally hard: also that all work is unskilled,—or rather unspecialized in this sense, that if any two people were to change occupations, each would do as much and as good work as the other had done. Lastly, let us suppose that everyone produces things ready for sale without the aid of others, and that he himself disposes of them to their ultimate consumers: so that the demand for everything is direct.

In this case the problem of value is very simple. Things exchange for one another in proportion to the labour spent in producing them. If the supply of any one thing runs short, it may for a little time sell for more than its normal price: it may exchange for things the production of which had required more labour than it had: but, if so, people will at once leave other work to produce it, and in a very short time its value will fall to the normal level. There may be slight temporary disturbances, but as a rule anyone's earnings will be equal to those of anyone else. In other words, each will have an equal share in the net sum total of things and services produced; or, as we may say, the national income or dividend; which will constitute the demand for labour12 .

If now a new invention doubles the efficiency of work in any trade, so that a man can make twice as many things of a certain kind in a year without requiring additional appliances, then those things will fall to half their old exchange value. The effective demand for everyone's labour will be a little increased, and the share which each can draw from the common earnings-stream will be a little larger than before. He may if he chooses take twice as many things of this particular kind, together with his old allowance of other things: or he may take somewhat more than before of everything. If there be an increase in the efficiency of production in many trades the common earnings-stream or dividend will be considerably larger; the commodities produced by those trades will constitute a considerably larger demand for those produced by others, and increase the purchasing power of everyone's earnings.

§ 4. Nor will the position be greatly changed if we suppose that some specialized skill is required in each trade, provided other things remain as before: that is, provided the workers are still supposed to be all of equal capacity and industry; and all trades to be equally agreeable and equally easy to be learnt. The normal rate of earnings will still be the same in all trades; for if a day's labour in one trade produces things that sell for more than a day's labour in others, and this inequality shows any signs of lasting, people will bring up their children by preference to the favoured trade. It is true that there may be some slight irregularities. The drifting from one trade to another must occupy time; and some trades may for a while get more than their normal share of the earnings-stream, while others get less, or even lack work. But in spite of these disturbances, the current value of everything will fluctuate about its normal value; which will in this case, as in the preceding, depend simply on the amount of labour spent on the thing: for the normal value of all kinds of labour will still be equal. The productive power of the community will have been increased by the division of labour; the common national dividend or earnings-stream will be larger; and as all will, putting aside passing disturbances, share alike in it, each will be able to buy with the fruits of his own labour things more serviceable to him than he could have produced for himself.

In this stage, as in those considered before, it is still true that the value of each thing corresponds closely to the amount of labour spent upon it; and that the earnings of everyone are governed simply by the bounty of nature and by the progress of the arts of production.

§ 5. Next, let us still neglect the influence which the liberality of the expenditure on rearing and training workers exerts on their efficiency, leaving that matter to be discussed with other aspects of the supply side of distribution in the next chapter: and let us look at the influence that changes in the numbers of the population exert on the incomes which nature will yield. We suppose then that the growth of population proceeds at a rate, which is either fixed; or, at all events, not affected by the rate of wages: it may be influenced by changes in custom, in moral opinion and in medical knowledge. And we still suppose all labour to be of the same grade, and the national dividend to be divided out equally to each family, save for some slight passing inequalities. In this case every improvement in the arts of production or transport, every new discovery, every new victory over nature will increase equally the comforts and luxuries at the command of each family.

But this case differs from the last; because in this case, the increase of population, if maintained long enough, must ultimately outgrow the improvements in the arts of production, and cause the law of diminishing return to assert itself in agriculture. That is to say, those who work on the land will get less wheat and other produce in return for their labour and capital. An hour's labour will represent a less quantity of wheat than before throughout the agricultural trades, and therefore throughout all other trades; since all labour is supposed to be of the same grade, and earnings are therefore as a rule equal in all trades.

Further we must note that the surplus or rental value of land will tend to rise. For the value of any kind of produce must equal that of the labour, aided on our supposition by a uniform quantity of capital throughout, which is required to produce it, whether on good land or bad, under barely remunerative, or marginal conditions. More labour and capital than before will be needed to raise a quarter of wheat, etc., on the margin; and therefore the wheat, etc., which is returned by nature to the labour applied under advantageous circumstances, will have a higher value relatively to that labour and capital than before: or, in other words, it will yield a larger surplus value over that of the labour and capital used in raising it.

§ 6. Let us now drop the supposition that labour is so mobile as to ensure equal remuneration for equal efforts, throughout the whole of society, and let us approach much nearer to the actual condition of life by supposing that labour is not all of one industrial grade, but of several. Let us suppose that parents always bring up their children to an occupation in their own grade; that they have a free choice within that grade, but not outside it. Lastly, let us suppose that the increase of numbers in each grade is governed by other than economic causes: as before it may be fixed, or it may be influenced by changes in custom, in moral opinion, etc. In this case also the aggregate national dividend will be governed by the abundance of nature's return to man's work in the existing state of the arts of production; but the distribution of that dividend between the different grades will be unequal. It will be governed by the demand of the people themselves. The share of those in any industrial compartment will be the higher, the more extensive and urgent the needs which they are able to satisfy on the part of those who are themselves drawing large shares of the national income.

Suppose, for instance, artists to form a grade or caste or industrial compartment by themselves; then, their number being fixed, or at least controlled by causes independent of their earnings, their earnings will be governed by the resources and the eagerness of those classes of the population who care for such gratifications as artists can furnish.

§ 7. We may now leave the imaginary world, in which everyone owns the capital that aids him in his work; and return to our own, where the relations of labour and capital play a great part in the problem of distribution. But let us still confine our attention to the distribution of the national dividend among the various agents of production, in accordance with the quantity of each agent, and the services which it renders; and leave the reflex influence which the remuneration of each agent exerts on the supply of that agent, to be considered in the next chapter.

We have seen how the alert business man is ever seeking for the most profitable application of his resources, and endeavouring to make use of each several agent of production up to that margin, or limit, at which he would gain by transferring a small part of his expenditure to some other agent; and how he is thus, so far as his influence goes, the medium through which the principle of substitution so adjusts the employment of each agent that, in its marginal application, its cost is proportionate to the additional net product resulting from its use. We have to apply this general reasoning to the case of the hire of labour13 .

A question constantly in the mind of the careful business man is whether he has the right number of men for his work. In some cases that is settled for him by his plant: there must be one and only one engine driver on each express locomotive. But some express trains have only one guard; and when the traffic is heavy they may lose a few minutes which could be saved by a second guard: therefore an alert manager is constantly weighing the net product in saving of time and of annoyance to passengers, that will accrue from the aid of a second guard on an important train, and considering whether it will be worth its cost. This question is similar in kind to, but simpler in form than, the question whether "it would pay" to put an additional train on the time-table, which would call for more expenditure on plant as well as on labour.

Again one sometimes hears it said that a certain farmer starves his land for labour. Perhaps he has enough horses and plant; but "if he took on another man, he would get his money back, and a good deal more": that is, the net product of an additional man would more than cover his wages. Let us suppose that a farmer is raising such a question as to the number of his shepherds. For simplicity, we may suppose that an additional man would not require any further expenditure on plant or stock: that he would save the farmer himself just as much trouble in some ways as he gives in others; so that nothing has to be allowed for earnings of management (even when these are interpreted broadly so as to include insurance against risk, etc.): and lastly that the farmer reckons that he would do just so much in preventing the wastage of lambs, and in other ways as will increase by twenty his annual output of sheep in good condition. That is to say, he reckons that the net product of an additional man will be twenty sheep. If he can be got for much less than the equivalent of their price, the alert farmer will certainly hire him; but, if only for about that price, the farmer will be on the margin of doubt; and the man may then be called a marginal shepherd, because his employment is marginal.

It is best to assume throughout that the man is of normal efficiency. He would indeed be the marginal shepherd even if he were of exceptional efficiency, provided only that his net produce were equal to his wages: the farmer might have reckoned that a shepherd of normal efficiency would have added only sixteen sheep to output; and therefore have been willing to hire this man at a quarter more than the ordinary wages. But to assume him to be thus exceptional would be most inexpedient. He should be representative: that is, of normal efficiency14 .

If he is representative, and his employer is representative, the twenty sheep will represent the net product and therefore the earning power of a shepherd. But if the employer is a bad manager, if for instance he lets his men run short of necessaries for the sheep, the man may save only fifteen sheep instead of twenty. Net product tends to represent normal wages only if the worker and his conditions of employment are both normal.

The additional product to be got by this shepherd's labour is largely influenced by the number of shepherds whom the farmer already employs. And this again is governed by general conditions of demand and supply, and especially by the number of those from whom the ranks of shepherds could have been recruited during the current generation; by the demand for mutton and wool and by the area from which supplies of them can be obtained; by the effectiveness of the shepherds on all other farms; and so on. And the amount of the marginal product is further largely influenced by the competition of other uses for land: the space available for sheep-farming is curtailed by the demand for land for growing timber or oats, preserving deer, etc.15

This illustration has been chosen from a simple industry; but, though the form may be different, the substance of the problem is the same in every industry. Subject to conditions which are indicated in the footnote, but are not important for our main purpose, the wages of every class of labour tend to be equal to the net product due to the additional labour of the marginal labourer of that class16 .

This doctrine has sometimes been put forward as a theory of wages. But there is no valid ground for any such pretension. The doctrine that the earnings of a worker tend to be equal to the net product of his work, has by itself no real meaning; since in order to estimate net product, we have to take for granted all the expenses of production of the commodity on which he works, other than his own wages.

But though this objection is valid against a claim that it contains a theory of wages; it is not valid against a claim that the doctrine throws into clear light the action of one of the causes that govern wages.

§ 8. In later chapters we shall need to take other illustrations for special purposes of the principle illustrated in the last section from the case of manual labour; and in particular to show how the value of some parts of the work of business management can be measured, when it is found that the effective output of a business is increased as much by some additional superintendence, as it would be by the hire of an additional ordinary worker. Again, the earnings of a machine can sometimes be estimated by the addition to the output of a factory which it might effect in certain cases without involving any incidental extra expense.

Generalizing from the work of a particular machine to that of machinery of a given aggregate value, we may suppose that in a certain factory an extra £100 worth of machinery can be applied so as not to involve any other extra expense, and so as to add annually £4 worth to the net output of the factory, after allowing for its own wear-and-tear. If the investors of capital push it into every occupation in which it seems likely to gain a high reward; and if, after this has been done and equilibrium has been found, it still pays and only just pays to employ this machinery, we can infer from this fact that the yearly rate of interest is 4 per cent. But illustrations of this kind merely indicate part of the action of the great causes which govern value. They cannot be made into a theory of interest, any more than into a theory of wages, without reasoning in a circle.

It may however be well to carry a little further our illustration of the nature of the demand for capital for any use; and to observe the way in which the aggregate demand for it is made up of the demands for many different uses.

To fix the ideas, let us take some particular trade, say that of hat-making, and inquire what determines the amount of capital which it absorbs. Suppose that the rate of interest is 4 per cent. per annum on perfectly good security; and that the hat-making trade absorbs a capital of one million pounds. This implies that the hat-making trade can turn the whole million pounds' worth of capital to so good account that they would pay 4 per cent. per annum net for the use of it rather than go without any of it17 .

Some things are necessary to them; they must have not only some food, clothing, and house room, but also some circulating capital, such as raw material, and some fixed capital, such as tools and perhaps a little machinery. And though competition prevents anything more than the ordinary trade profit being got by the use of this necessary capital; yet the loss of it would be so injurious that those in the trade would have been willing to pay 50 per cent. on it, if they could not have got the use of it on easier terms. There may be other machinery which the trade would have refused to dispense with if the rate of interest had been 20 per cent. per annum, but not if it had been higher. If the rate had been 10 per cent., still more would have been used; if it had been 6 per cent., still more; if 5 per cent., still more; and finally the rate being 4 per cent. they use more still. When they have this amount, the marginal utility of the machinery, i.e. the utility of that machinery which it is only just worth their while to employ, is measured by 4 per cent.

A rise in the rate of interest would diminish their use of machinery; for they would avoid the use of all that did not give a net annual surplus of more than 4 per cent. on its value. And a fall in the rate of interest would lead them to demand the aid of more capital, and to introduce machinery which gave a net annual surplus of something less than 4 per cent. on its value. Again, the lower the rate of interest, the more substantial will be the style of building used for the hat-making factories and the homes of the hat-makers; and a fall in the rate of interest will lead to the employment of more capital in the hat-making trade in the form of larger stocks of raw material, and of the finished commodity in the hands of retail dealers18 .

The methods in which capital will be applied may vary much even within the same trade. Each undertaker having regard to his own means, will push the investment of capital in his business in each several direction until what appears in his judgment to be the margin of profitableness is reached; and that margin is, as we have said, a boundary line cutting one after another every possible line of investment, and moving irregularly outwards in all directions whenever there is a fall in the rate of interest at which extra capital can be obtained. Thus the demand for the loan of capital is the aggregate of the demands of all individuals in all trades; and it obeys a law similar to that which holds for the sale of commodities: just as there is a certain amount of a commodity which can find purchasers at any given price. When the price rises the amount that can be sold diminishes, and so it is with regard to the use of capital.

And as with borrowings for productive purposes, so with those of spendthrifts or governments who mortgage their future resources in order to obtain the means of immediate expenditure. It is true that their actions are often but little governed by cool calculation, and that they frequently decide how much they want to borrow with but little reference to the price they will have to pay for the loan; but still the rate of interest exercises a perceptible influence on borrowings even of this kind.

§ 9. To sum up the whole in a comprehensive, if difficult, statement:—Every agent of production, land, machinery, skilled labour, unskilled labour, etc., tends to be applied in production as far as it profitably can be. If employers, and other business men, think that they can get a better result by using a little more of any one agent they will do so. They estimate the net product (that is the net increase of the money value of their total output after allowing for incidental expenses) that will be got by a little more outlay in this direction, or a little more outlay in that; and if they can gain by shifting a little of their outlay from one direction to another, they will do so19 .

Thus then the uses of each agent of production are governed by the general conditions of demand in relation to supply: that is, on the one hand, by the urgency of all the uses to which the agent can be put, taken together with the means at the command of those who need it; and, on the other hand, by the available stocks of it. And equality is maintained between its values for each use by the constant tendency to shift it from uses, in which its services are of less value to others in which they are of greater value, in accordance with the principle of substitution.

If less use is made of unskilled labour or any agent, the reason will be that at some point at which people were on the margin of doubt whether it was worth while to use that agent, they have decided that it is not worth their while. That is what is meant by saying that we must watch the marginal uses, and the marginal efficiency of each agent. We must do so, simply because it is only at the margin that any of those shiftings can occur by which changed relations of supply and demand manifest themselves.

If we neglected differences between the grades of labour, and regarded all labour as of one kind, or at least as all expressed in terms of a certain kind of labour of standard efficiency, we might look for the margin of indifference between the direct application of labour and that of material capital; and we might say shortly, to quote von Thünen's words, that "the efficiency of capital must be the measure of its earnings, since if the labour of capital were cheaper than that of men, the undertaker would dismiss some of his workmen, and in the opposite case he would increase their number20 ."

But, of course, the increased competition of capital in general for employment is of a different character from the competition of machinery for employment in any single trade. The latter may push a particular kind of labour out of employment altogether; the former cannot displace labour in general, for it must cause an increased employment of the makers of those things which are used as capital. And in fact, the substitution of capital for labour is really the substitution of labour, combined with much waiting, in the place of other forms of labour combined with little waiting21 .

§ 10. When we speak of the national dividend, or distributable net income of the whole nation, as divided into the shares of land, labour and capital, we must be clear as to what things we are including, and what things we are excluding. It will seldom make very much difference to our argument whether we use all the terms broadly, or all the terms narrowly. But it is essential that our usage should be consistent throughout any one argument; and that, whatever is included on one side of the account of the demand for, and supply of, land, labour, and capital, should be included also on the other.

The labour and capital of the country, acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. The limiting word "net" is needed to provide for the using up of raw and half-finished commodities, and for the wearing out and depreciation of plant which is involved in production: all such waste must of course be deducted from the gross produce before the true or net income can be found. And net income due on account of foreign investments must be added in. (See above II. IV. 6.) This is the true net annual income, or revenue, of the country; or, the national dividend: we may, of course, estimate it for a year or for any other period. The terms National Income and National Dividend are convertible; only the latter is the more significant when we are looking at the national income in the character of the sum of the new sources of enjoyments that are available for distribution. But it is best here to follow the common practice, and not count as part of the national income or dividend anything that is not commonly counted as part of the income of the individual. Thus, unless anything is said to the contrary, the services which a person renders to himself, and those which he renders gratuitously to members of his family or friends; the benefits which he derives from using his own personal goods, or public property such as toll-free bridges, are not reckoned as parts of the national dividend, but are left to be accounted for separately.

Some part of production goes to increase the stock of raw material, machinery, etc., and does not merely replace material that has been used up, or machinery that has been worn out: and this part of the national income or dividend does not pass direct into personal consumption. But it does pass into consumption in the broad sense of the term which is commonly used by, say, a manufacturer of printing machines, when some of his stock is sold to printers. And in this broad sense it is true that all production is for consumption; that the national dividend is convertible with the aggregate of net production, and also with the aggregate of consumption. Under ordinary conditions of industry, production and consumption move together: there is no consumption except that for which the way has been prepared by appropriate production: and all production is followed by the consumption for which it was designed. There may indeed be some miscalculation in particular branches of production; and a collapse of commercial credit may fill nearly all warehouses for a time with unsold goods. But such conditions are exceptional and are not within our present view. (See below V. XIII. 10; and Appendix J, 3.)

BOOK VI, CHAPTER II

PRELIMINARY SURVEY OF DISTRIBUTION, CONTINUED.

§ 1. As was indicated at the beginning of last chapter, we are now to supplement the study of the influence of demand on distribution, by a study of the reflex influence of remuneration on the supply of different agents of production. We have to combine the two in a preliminary general view of the parts played by cost of production and by utility or desirability in governing the distribution of the national dividend between different kinds of labour and the owners of capital and land.

Ricardo and the able business men who followed in his wake took the operation of demand too much for granted as a thing which did not need to be explained: they did not emphasize it, nor study it with sufficient care; and this neglect has caused much confusion, and has obscured important truths. In the reaction, too much insistence has been laid on the fact that the earnings of every agent of production come from, and are for the time mainly governed by the value of the product which it takes part in producing; its earnings being so far governed on the same principle as the rent of land; and some have even thought it possible to constitute a complete theory of Distribution out of multifold applications of the law of rent. But they will not reach to that end. Ricardo and his followers seem to have been rightly guided by their intuitions, when they silently determined that the forces of supply were those, the study of which is the more urgent and involves the greater difficulty.

When we inquire what it is that governs the [marginal] efficiency of a factor of production, whether it be any kind of labour or material capital, we find that the immediate solution requires a knowledge of the available supply of that factor; for if the supply is increased, the thing will be applied to uses for which it is less needed, and in which it is less efficient. And the ultimate solution requires a knowledge also of the causes that determine that supply. The nominal value of everything, whether it be a particular kind of labour or capital or anything else, rests, like the keystone of an arch, balanced in equilibrium between the contending pressures of its two opposing sides; the forces of demand press on the one side, and those of supply on the other.

The production of everything, whether an agent of production or a commodity ready for immediate consumption, is carried forward up to that limit or margin at which there is equilibrium between the forces of demand and supply. The amount of the thing and its price, the amounts of the several factors or agents of production used in making it, and their prices—all these elements mutually govern one another, and if an external cause should alter any one of them the effect of the disturbance extends to all the others.

In the same way, when several balls are lying in a bowl, they mutually govern one another's positions; and again when a heavy weight is suspended by several elastic strings of different strengths and lengths (all of them being stretched) attached to different points in the ceiling, the equilibrium positions of all the strings and of the weight mutually govern one another. If any one of the strings is shortened, everything else will change its position, and the length and the tension of every other string will be altered also.

§ 2. We have seen that the effective supply of any agent of production at any time depends firstly on the stock of it in existence, and secondly on the willingness of those, in whose charge it is, to apply it in production. This willingness is not decided simply by the immediate return which is expected; though there may be a lower limit, which in some cases may be described as a prime cost, below which no work will be done at all. A manufacturer for instance has no hesitation in declining to put his machinery in motion for an order that will not cover the extra direct money outlay caused by the work, together with the actual wear-and-tear of the machinery; while there are somewhat similar considerations with regard to the wear-and-tear of the worker's own strength and to the fatigue and other discommodities of his work. And, though for the present we are concerned with cost and remuneration under normal conditions rather than with the direct cost to the individual of any particular piece of work that he does; yet it may be well to make a short statement on the subject here in order to avoid misconceptions.

It has already been noticed22 that when a man is fresh and eager, and doing work of his own choice, it really costs him nothing. For as some socialists have urged with pardonable exaggeration, few people know how much they enjoy moderate work, till something occurs to prevent them from working altogether. But rightly or wrongly, most persons believe that the greater part of the work which they do, when earning their living, yields them no surplus of pleasure; but on the contrary costs them something. They are glad when the hour for stopping arrives: perhaps they forget that the earlier hours of their work have not cost them as much as the last: they are rather apt to think of nine hours' work as costing them nine times as much as the last hour; and it seldom occurs to them to think of themselves as reaping a producer's surplus or rent, through being paid for every hour at a rate sufficient to compensate them for the last, and most distressing hour23 .

The longer a man works, or even is on duty, the greater is his desire for a respite, unless indeed he has become numbed by his work; while every hour's additional work gives him more pay, and brings him nearer to the stage at which his most urgent wants are satisfied; and the higher the pay, the sooner this stage is reached. It depends then on the individual, whether with growing pay new wants arise, and new desires to provide comforts for others or for himself in after years; or he is soon satiated with those enjoyments that can be gained only by work, and then craves more rest, and more opportunities for activities that are themselves pleasurable. No universal rule can be laid down; but experience seems to show that the more ignorant and phlegmatic of races and of individuals, especially if they live in a southern clime, will stay at their work a shorter time, and will exert themselves less while at it, if the rate of pay rises so as to give them their accustomed enjoyments in return for less work than before. But those whose mental horizon is wider, and who have more firmness and elasticity of character, will work the harder and the longer the higher the rate of pay which is open to them; unless indeed they prefer to divert their activities to higher aims than work for material gain. But this point will need to be discussed more fully under the head of the influence of progress on value. Meanwhile we may conclude that increased remuneration causes an immediate increase in the supply of efficient work, as a rule; and that the exceptions to this rule, just noticed, are seldom on a large scale, though they are not devoid of significance24 .

§ 3. When however we turn from the immediate influence exerted by a rise in wages on the work done by an individual to its ultimate effect after a generation or two, the result is less uncertain. It is indeed true that, though a temporary improvement will give a good many young people the opportunity to marry and set up house, for which they have been waiting; yet a permanent increase of prosperity is quite as likely to lower as to raise the birth-rate. But on the other hand, an increase of wages is almost certain to diminish the death-rate, unless it has been obtained at the price of the neglect by mothers of their duties to their children. And the case is much stronger when we look at the influence of high wages on the physical and mental vigour of the coming generation.

For there is a certain consumption which is strictly necessary for each grade of work in this sense, that if any of it is curtailed the work cannot be done efficiently: the adults might indeed take good care of themselves at the expense of their children, but that would only defer the decay of efficiency for one generation. Further there are conventional necessaries, which are so strictly demanded by custom and habit, that in fact people generally would give up much of their necessaries, strictly so called, rather than go without the greater part of these. Thirdly there are habitual comforts, which some, though not all, would not entirely relinquish even when hardly pressed. Many of these conventional necessaries and customary comforts are the embodiment of material and moral progress, and their extent varies from age to age and from place to place. The greater they are, the less economical is man as an agent of production. But if they are wisely chosen they attain in the highest degree the end of all production: for they then raise the tone of human life.

Any increase in consumption that is strictly necessary to efficiency pays its own way and adds to, as much as it draws from, the national dividend. But an increase of consumption, that is not thus necessary, can be afforded only through an increase in man's command over nature: and that can come about through advance in knowledge and the arts of production, through improved organization and access to larger and richer sources of raw material, and lastly through the growth of capital and the material means of attaining desired ends in any form.

Thus the question how closely the supply of labour responds to the demand for it, is in a great measure resolved into the question how great a part of the present consumption of the people at large consists of necessaries, strictly so called, for the life and efficiency of young and old; how much consists of conventional necessaries which theoretically could be dispensed with, but practically would be preferred by the majority of the people to some of those things that were really necessary for efficiency; and how much is really superfluous regarded as a means towards production, though of course part of it may be of supreme importance regarded as an end in itself.

The earlier French and English economists, as we noted at the beginning of the preceding chapter, classed nearly all the consumption of the working classes under the first head. They did so, partly for simplicity, and partly because those classes were then poor in England and very poor in France; and they inferred that the supply of labour would correspond to changes in the effective demand for it in the same way, though of course not quite as fast as that of machinery would. And an answer not very different from theirs must be given to the question with regard to the less advanced countries even now. For throughout the greater part of the world the working classes can afford but few luxuries and not even many conventional necessaries; and any increase in their earnings would result in so great an increase of their numbers as to bring down their earnings quickly to nearly the old level at their mere expenses of rearing. Over a great part of the world wages are governed, nearly after the so-called iron or brazen law, which ties them close to the cost of rearing and sustaining a rather inefficient class of labourers.

As regards the modern western world the answer is materially different; so great has been the recent advance in knowledge and freedom, in vigour and wealth, and in the easy access to rich distant fields for the supply of food and raw material. But it is still true even in England to-day that much the greater part of the consumption of the main body of the population conduces to sustain life and vigour; not perhaps in the most economical manner, but yet without any great waste. Doubtless some indulgences are positively harmful; but these are diminishing relatively to the rest, the chief exception perhaps being that of gambling. Most of that expenditure which is not strictly economical as a means towards efficiency, yet helps to form habits of ready resourceful enterprise, and gives that variety to life without which men become dull and stagnant, and achieve little though they may plod much; and it is well recognized that even in western countries skilled labour is generally the cheapest where wages are the highest. It may be admitted that the industrial development of Japan is tending to show that some of the more expensive conventional necessaries might conceivably be given up without a corresponding diminution of efficiency: but, though this experience may be fruitful of far-reaching results in the future, yet it has little bearing on the past and the present. It remains true that, taking man as he is, and has been hitherto, in the western world the earnings that are got by efficient labour are not much above the lowest that are needed to cover the expenses of rearing and training efficient workers, and of sustaining and bringing into activity their full energies25 .

We conclude then that an increase of wages, unless earned under unwholesome conditions, almost always increases the strength, physical, mental and even moral of the coming generation; and that, other things being equal, an increase in the earnings that are to be got by labour increases its rate of growth; or, in other words, a rise in its demand-price increases the supply of it. If the state of knowledge, and of social and domestic habits be given; then the vigour of the people as a whole if not their numbers, and both the numbers and vigour of any trade in particular, may be said to have a supply-price in this sense, that there is a certain level of the demand-price which will keep them stationary; that a higher price would cause them to increase, and that a lower price would cause them to decrease.

Thus again we see that demand and supply exert coordinate influences on wages; neither has a claim to predominance; any more than has either blade of a pair of scissors, or either pier of an arch. Wages tend to equal the net product of labour; its marginal productivity rules the demand-price for it; and, on the other side, wages tend to retain a close though indirect and intricate relation with the cost of rearing, training and sustaining the energy of efficient labour. The various elements of the problem mutually determine (in the sense of governing) one another; and incidentally this secures that supply-price and demand-price tend to equality: wages are not governed by demand-price nor by supply-price, but by the whole set of causes which govern demand and supply26 .

A word should be said as to the common phrase "the general rate of wages," or "the wages of labour in general." Such phrases are convenient in a broad view of distribution, and especially when we are considering the general relations of capital and labour. But in fact there is no such thing in modern civilization as a general rate of wages. Each of a hundred or more groups of workers has its own wage problem, its own set of special causes, natural and artificial, controlling the supply-price, and limiting the number of its members; each has its own demand-price governed by the need that other agents of production have of its services.

§ 4. Somewhat similar difficulties arise with regard to the phrase "the general rate of interest." But here the chief trouble comes from the fact that the income derived from capital already invested in particular things, such as factories or ships, is properly a quasi-rent and can be regarded as interest only on the assumption that the capital value of the investment has remained unaltered. Leaving this difficulty on one side for the present27 ; and recollecting that the phrase "the general rate of interest" applies in strictness only to the anticipated net earnings from new investments of free capital, we may resume briefly the results of our earlier studies of the growth of capital.

We have seen28 that the accumulation of wealth is governed by a great variety of causes: by custom, by habits of self-control and of realizing the future, and above all by the power of family affection: security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways. But though saving in general is affected by many causes other than the rate of interest: and though the saving of many people is but little affected by the rate of interest; while a few, who have determined to secure an income of a certain fixed amount for themselves or their family, will save less with a high rate than with a low rate of interest: yet a strong balance of evidence seems to rest with the opinion that a rise in the rate of interest, or demand-price for saving, tends to increase the volume of saving.

Thus then interest, being the price paid for the use of capital in any market, tends towards an equilibrium level such that the aggregate demand for capital in that market, at that rate of interest, is equal to the aggregate stock forthcoming there at that rate. If the market, which we are considering, is a small one—say a single town, or a single trade in a progressive country—an increased demand for capital in it will be promptly met by an increased supply drawn from surrounding districts or trades. But if we are considering the whole world, or even the whole of a large country as one market for capital, we cannot regard the aggregate supply of it as altered quickly and to a considerable extent by a change in the rate of interest. For the general fund of capital is the product of labour and waiting; and the extra work, and the extra waiting, to which a rise in the rate of interest would act as an incentive, would not quickly amount to much as compared with the work and waiting, of which the total existing stock of capital is the result. An extensive increase in the demand for capital in general will therefore be met for a time not so much by an increase of supply, as by a rise in the rate of interest; which will cause capital to withdraw itself partially from those uses in which its marginal utility is lowest. It is only slowly and gradually that the rise in the rate of interest will increase the total stock of capital.

§ 5. Land is on a different footing from man himself and those agents of production which are made by man; among which are included improvements made by him on the land itself29 . For while the supplies of all other agents of production respond in various degrees and various ways to the demand for their services, land makes no such response. Thus an exceptional rise in the earnings of any class of labour, tends to increase its numbers, or efficiency, or both; and the increase in the supply of efficient work of that class tends to cheapen the services which it renders to the community. If the increase is in their numbers then the rate of earnings of each will tend downwards towards the old level. But if the increase is in their efficiency; then, though they will probably earn more per head than before, the gain to them will come from an increased national dividend, and will not be at the expense of other agents of production. And the same is true as regards capital: but it is not true as regards land. While therefore the value of land, in common with the values of other agents of production, is subject to those influences which were discussed towards the end of the preceding chapter; it is not subject to those which have been brought into the reckoning in the present discussion.

It is true that land is but a particular form of capital from the point of view of the individual manufacturer or cultivator. And land shares the influences of the laws of demand and of substitution which were discussed in the last chapter, because the existing stock of it, like the existing stock of capital or of labour of any kind, tends to be shifted from one use to another till nothing could be gained for production by any further shifting. And, so far as the discussions of the last chapter are concerned, the income that is derived from a factory, a warehouse, or a plough (allowance being made for wear-and-tear, etc.) is governed in the same way as is the income from land. In each case the income tends to equal the value of the marginal net product of the agent: in each case this is governed for the time by the total stock of the agent and the need that other agents have of its aid.

That is one side of the question. The other is that land (in an old country) does not share the reflex influences, discussed in this chapter, which a high rate of earnings exerts on the supply of other agents of production, and consequently on their contributions to the national dividend, and consequently on the real cost at which their services are purchased by other agents of production. The building an additional floor on one factory or putting an extra plough on one farm, does not generally take a floor from another factory or a plough from another farm; the nation adds a factory floor or a plough to its business as the individual does to his. There is thus a larger national dividend which is to be shared out; and in the long run the increased earnings of the manufacturer or farmer are not as a rule at the cost of other producers. In contrast to this the stock of land (in an old country) at any time is the stock for all time; and when a manufacturer or cultivator decides to take in a little more land to his business, he decides in effect to take it away from someone else's business. He adds a little more land to his business; but the nation adds no land to its business, the change does not in itself increase the national income.

§ 6. To conclude this stage of our argument:—The net aggregate of all the commodities produced is itself the true source from which flow the demand prices for all these commodities, and therefore for the agents of production used in making them. Or, to put the same thing in another way, this national dividend is at once the aggregate net product of, and the sole source of payment for, all the agents of production within the country: it is divided up into earnings of labour; interest of capital; and lastly the producer's surplus, or rent, of land and of other differential advantages for production. It constitutes the whole of them, and the whole of it is distributed among them; and the larger it is, the larger, other things being equal, will be the share of each of them.

It is distributed among them, speaking generally, in proportion to the need which people have for their several services—i.e. not the total need, but the marginal need. By this is meant the need at that point, at which people are indifferent whether they purchase a little more of the services (or the fruits of the services) of one agent, or devote their further resources to purchasing the services (or the fruits of the services) of other agents. Other things being equal, each agent is likely to increase the faster, the larger the share which it gets, unless indeed it is not capable of being increased at all. But every such increase will do something towards filling up the more urgent needs for that agent; and will thus lessen the marginal need for it, and lower the price at which it can find a market. That is to say, an increase in the proportionate share, or rate of remuneration, of any agent is likely to bring into play forces, that will reduce that share, and leave a larger proportionate share of the dividend to be shared among others. This reflex action may be slow. But, if there is no violent change in the arts of production or in the general economic condition of society, the supply of each agent will be closely governed by its cost of production: account being taken of those conventional necessaries, which constantly expand as the growing richness of the national income yields to one class after another an increasing surplus above the mere necessaries for efficiency.

§ 7. In studying the influence which increased efficiency and increased earnings in one trade exert on the condition of others we may start from the general fact that, other things being equal, the larger the supply of any agent of production, the further will it have to push its way into uses for which it is not specially fitted; the lower will be the demand price with which it will have to be contented in those uses in which its employment is on the verge or margin of not being found profitable; and, in so far as competition equalizes the price which it gets in all uses, this price will be its price for all uses. The extra production resulting from the increase in that agent of production will go to swell the national dividend, and other agents of production will benefit thereby: but that agent itself will have to submit to a lower rate of pay.

For instance, if without any other change, capital increases fast, the rate of interest must fall; if without any other change, the number of those ready to do any particular kind of labour increases, their wages must fall. In either case there will result an increased production, and an increased national dividend: in either case the loss of one agent of production must result in a gain to others; but not necessarily to all others. Thus the opening up of rich quarries of slate or the increase in numbers or efficiency of quarrymen, would tend to improve the houses of all classes; and it would tend to increase the demand for bricklayers' and carpenters' labour, and raise their wages. But it would injure the makers of roofing tiles as producers of building materials, more than it benefited them as consumers. The increase in the supply of this one agent increases the demand for many others by a little, and for some others by much; but for some it lessens the demand.

We know that the wages of any worker, say an operative in a boot and shoe factory, tend to equal the net product of his labour. They are not governed by that net product; for net products, like all other incidents of marginal uses, are governed together with value by the general relations of demand and supply30 . But when, (1) the aggregate application of capital and labour to the boot and shoe industry up to that limit, at which the additional products resulting from any further application could barely be made at profitable rates; (2) the distribution of resources between plant, labour, and other agents of production has been appropriately made; (3) we have in view a factory, working with normally good fortune, conducted with normal ability, and where the conditions are such that there is a doubt whether to take on an additional operative of normal ability and energy, who offers himself at the normal wage:—when all these things are done, then we may fairly conclude that the loss of that man's work would be likely to cause a diminution in the net output of that factory, the value of which was about equal to his wages. The inversion of this statement runs that his wages are about equal to that net product: (of course the net product of an individual cannot be separated mechanically from that of others who are working together with him)31 .

The work done by the various classes of operatives in a boot and shoe factory is not all of the same difficulty: but we may ignore differences in industrial rank between the classes, and suppose them to be all of the same rank. (This supposition greatly simplifies the wording of the argument, without affecting its general character.)

Now under the rapidly changing conditions of modern work, one industry or another is apt to be from time to time rather over supplied or rather under supplied with labour: and these inevitable inequalities are apt to be increased by restrictive combinations and other influences. But yet the fluidity of labour is sufficient to make it true that the wages of labour of the same industrial grade or rank tend to equality in different occupations throughout the same western country. Accordingly no considerable inaccuracy is involved in the statement that in general, every worker of the same industrial rank with a normal boot-operative will be able to buy a pair of boots of any kind (after providing the cost of their material), with the wages earned by him, in about the same time as is required by such an operative to contribute a pair of boots of that kind to the net product of his factory. Putting this statement into a more general form we may say that every worker will in general be able with the earnings of a hundred days' labour to buy the net products of a hundred days' labour of other workers in the same grade with himself: he may select them in whatever way he chooses, so as to make up that aggregate sum.

If the normal earnings of workers in another grade are half as high again as his own, the boot-operative must spend three days' wages in order to get the net product of two days' labour of a worker in that grade; and so in proportion.

Thus, other things being equal, every increase in the net efficiency of labour in any trade, including his own, will raise in the same proportion the real value of that part of his wages which the boot-operative spends on the products of that trade; and other things being equal, the equilibrium level of the real wages of the boot-operative depends directly on, and varies directly with, the average efficiency of the trades, including his own, which produce those things on which he spends his wages. Conversely, the rejection by the workers in any industry of an improvement, by which its efficiency could be increased ten per cent., inflicts on the boot-operative an injury measured by ten per cent. of that part of his wages which he spends on the products of that industry. But an increased efficiency on the part of workers, whose products compete with his own, may injure him temporarily at least, especially if he is not himself a consumer of those products.

Again, the boot-operative will gain by anything, that changes the relative positions of different grades in such a way as to raise his grade relatively to others. He will gain by an increase of medical men whose aid he occasionally needs. And he will gain more if those grades which are occupied chiefly with the tasks of managing business, whether manufacturing, trading, or any other, receive a great influx from other grades: for then the earnings of management will be lowered permanently relatively to the earnings of manual work, there will be a rise in the net product of every kind of manual labour; and, other things being equal, the boot-operative will get more of every commodity on which he spends those wages that represent his own net product.

§ 8. The process of substitution, of which we have been discussing the tendencies, is one form of competition; and it may be well to insist again that we do not assume that competition is perfect. Perfect competition requires a perfect knowledge of the state of the market; and though no great departure from the actual facts of life is involved in assuming this knowledge on the part of dealers when we are considering the course of business in Lombard Street, the Stock Exchange, or in a wholesale Produce Market; it would be an altogether unreasonable assumption to make when we are examining the causes that govern the supply of labour in any of the lower grades of industry. For if a man had sufficient ability to know everything about the market for his labour, he would have too much to remain long in a low grade. The older economists, in constant contact as they were with the actual facts of business life, must have known this well enough; but partly for brevity and simplicity, partly because the term "free competition" had become almost a catchword, partly because they had not sufficiently classified and conditioned their doctrines, they often seemed to imply that they did assume this perfect knowledge.

It is therefore specially important to insist that we do not assume the members of any industrial group to be endowed with more ability and forethought, or to be governed by motives other than those which are in fact normal to, and would be attributed by every well-informed person to, the members of that group; account being taken of the general conditions of time and place. There may be a good deal of wayward and impulsive action, sordid and noble motives may mingle their threads together; but there is a constant tendency for each man to select such occupations for himself and his children as seem to him on the whole the most advantageous of those which are within the range of his resources, and of the efforts which he is able and willing to make in order to reach them32 .

§ 9. The last group of questions, which still remain to be discussed, is concerned with the relation of capital in general to wages in general. It is obvious that though capital in general is constantly competing with labour for the field of employment in particular trades; yet since capital itself is the embodiment of labour as well as of waiting, the competition is really between some kinds of labour aided by a good deal of waiting, and other kinds of labour aided by less waiting. When for instance it is said that "capitalistic machinery has displaced much labour that was employed in making boots," what is meant is, that formerly there were many who made boots by hand, and a very few who made awls and other simple implements, aided by a little waiting; while now there are rather fewer persons occupied in boot making; and they make a much larger number of boots than before by aid of powerful machines, made by engineers aided by a good deal of waiting. There is a real and effective competition between labour in general and waiting in general. But it covers a small part of the whole field, and is of small importance relatively to the benefits which labour derives from obtaining cheaply the aid of capital, and therefore of efficient methods in the production of things that it needs33 .

For speaking generally, an increase in the power and the willingness to save will cause the services of waiting to be pushed constantly further; and will prevent it from obtaining employment at as high a rate of interest as before. That is, the rate of interest will constantly fall, unless indeed invention opens new advantageous uses of roundabout methods of production. But this growth of capital will increase the national dividend; open out new and rich fields for the employment of labour in other directions; and will thus more than compensate for the partial displacement of the services of labour by those of waiting34 .

The increase of the national dividend owing to the growth of capital and invention is certain to affect all classes of commodities; and to enable the shoemaker, for instance, to purchase with his earnings more food and clothes, more and better supplies of water, artificial light and heat, travel, and so on. It may be admitted that a few improvements affect only commodities consumed by the rich, in the first instance at least; that no part of the corresponding increase of the national dividend goes directly to the labouring classes; and that they do not at once gain anything to compensate for the probable disturbance of some of their members in particular trades. But such cases are rare, and generally on a small scale: and even in them there is nearly always some indirect compensation. For improvements, designed for the luxuries of the rich, soon spread themselves to the comforts of other classes. And, though it is not a necessary consequence, yet in fact a cheapening of luxuries does generally lead in various ways to increased desires on the part of the rich for things made by hand and for personal services, and increases also the means at their disposal for gratifying those desires. This points to another aspect of the relation between capital in general and wages in general.

§ 10. It is to be understood that the share of the national dividend, which any particular industrial class receives during the year, consists either of things that were made during the year, or of the equivalents of those things. For many of the things made, or partly made, during the year are likely to remain in the possession of capitalists and undertakers of industry and to be added to the stock of capital; while in return they, directly or indirectly, hand over to the working classes some things that had been made in previous years.

The ordinary bargain between labour and capital is that the wage-receiver gets command over commodities in a form ready for immediate consumption, and in exchange carries his employer's goods a stage further towards being ready for immediate consumption. But while this is true of most employees, it is not true of those who finish the processes of production. For instance, those who put together and finish watches, give to their employers far more commodities in a form ready for immediate consumption, than they obtain as wages. And if we take one season of the year with another, so as to allow for seed and harvest time, we find that workmen as a whole hand over to their employers more finished commodities than they receive as wages. There is, however, a rather forced sense in which we may perhaps be justified in saying that the earnings of labour depend upon advances made to labour by capital. For—not to take account of machinery and factories, of ships and railroads—the houses loaned to workmen, and even the raw materials in various stages which will be worked up into commodities consumed by them, represent a far greater provision of capital for their use than the equivalent of the advances which they make to the capitalist, even when they work for a month for him before getting any wages.

In all this then there is nothing to make the relations between capital in general and labour in general differ widely from those between any other two agents of production, in the general scheme of distribution already explained. The modern doctrine of the relations between labour and capital is the outcome to which all the earlier doctrines on the subject were working their way; and differs only in its greater exactness, completeness and homogeneity, from that given by Mill in the third chapter of his fourth book; the only place in which he collects together all the various elements of the problem.

To conclude another stage of the argument:—Capital in general and labour in general co-operate in the production of the national dividend, and draw from it their earnings in the measure of their respective (marginal) efficiencies. Their mutual dependence is of the closest; capital without labour is dead; the labourer without the aid of his own or someone else's capital would not long be alive. Where labour is energetic, capital reaps a high reward and grows apace; and, thanks to capital and knowledge, the ordinary labourer in the western world is in many respects better fed, clothed and even housed than were princes in earlier times. The co-operation of capital and labour is as essential as that of the spinner of yarn and the weaver of cloth: there is a little priority on the part of the spinner; but that gives him no pre-eminence. The prosperity of each is bound up with the strength and activity of the other; though each may gain temporarily, if not permanently, a somewhat larger share of the national dividend at the expense of the other.

In the modern world, private employers and officials of joint-stock companies, many of whom have but little capital of their own, act as the centre of the great industrial wheel. The interests of owners of capital and of workers radiate towards them and from them: and they hold the whole together in a firm grip. They will therefore take a predominant place in those discussions of fluctuations of employment and of wages, which are deferred to the second volume of this treatise; and a prominent, though not predominant, place in those discussions of the secondary features in the mode of action of demand and supply peculiar to labour, capital and land respectively, which will occupy the next eight chapters.

In Appendix J some account will be given of the "Wages-fund" doctrine. Reason will be shown for thinking that it laid excessive stress on the side of demand for labour, to the neglect of the causes which govern its supply; and that it suggested a correlation between the stock of capital and the flow of wages, instead of the true correlation between the flow of the products of labour aided by capital and the flow of wages. But reason will also be given for the opinion that the classical economists themselves—though perhaps not nearly all their followers—if cross examined, would have explained away the misleading suggestions of the doctrine; and thus have brought it into close accord, so far as it went, with modern doctrines. In Appendix K some study will be made of the various kinds of producers' and consumers' surpluses; raising questions of some abstract interest, but of little practical importance.

As has already been intimated, the efficiencies (total and marginal) of the several factors of production, their contributions direct and indirect to the aggregate net product, or national dividend; and the shares of that dividend which accrue to them severally are correlated by a number of mutual interactions so complicated, that it is impossible to comprehend the whole in a single statement. But yet by aid of the terse, compact, precise language of Mathematics it is possible to lead up to a fairly unified general view; though of course it can take no account of differences of quality, except in so far as they can be interpreted more or less crudely into differences of quantity35 .

BOOK VI, CHAPTER III

EARNINGS OF LABOUR.

§ 1. When discussing the general theory of equilibrium of demand and supply in the last Book, and the main outlines of the central problem of distribution and exchange in the first two chapters of this Book, we left on one side, as far as might be, all considerations turning on the special qualities and incidents of the agents of production. We did not inquire in detail how far the general theories of the relations between the value of an appliance for production and that of the product, which it helps to make, are applicable to the incomes earned by natural abilities, or by skill and knowledge acquired long ago, whether in the ranks of the employers, the employed, or the professional classes. We avoided difficulties connected with the analysis of Profits, paying no attention to the many different scopes which the usage of the marketplace assigns to this term, and even the more elementary term Interest; and we took no account of the influence of varieties of tenure on the form of demand for land. These and some other deficiencies will be made good by more detailed analysis in the following three groups of chapters on demand and supply in relation to labour, to capital and business power, and to land, respectively.

Problems relating to methods of estimating and reckoning earnings, to which the present chapter is devoted, belong mainly to the province of arithmetic or book-keeping: but much error has arisen from treating them carelessly.

§ 2. When watching the action of demand and supply with regard to a material commodity, we are constantly met by the difficulty that two things which are being sold under the same name in the same market, are really not of the same quality and not of the same value to the purchasers. Or, if the things are really alike, they may be sold even in the face of the keenest competition at prices which are nominally different, because the conditions of sale are not the same: for instance, a part of the expense or risk of delivery which is borne in the one case by the seller may in the other be transferred to the buyer. But difficulties of this kind are much greater in the case of labour than of material commodities: the true price that is paid for labour often differs widely, and in ways that are not easily traced, from that which is nominally paid.

There is a preliminary difficulty as to the term "efficiency." When it is said that about equal earnings (or rather equal "net advantages," see above II. IV. 2) are obtained in the long run in different occupations by persons of about equal efficiency, the term "efficiency" must be interpreted broadly. It must refer to general industrial efficiency, as defined above (IV. V. 1). But when reference is made to differences of earning power of different people in the same occupation, then efficiency is to be estimated with special reference to those particular elements of efficiency which are needed for that occupation.

It is commonly said that the tendency of competition is to equalize the earnings of people engaged in the same trade or in trades of equal difficulty; but this statement requires to be interpreted carefully. For competition tends to make the earnings got by two individuals of unequal efficiency in any given time, say, a day or a year, not equal, but unequal; and, in like manner, it tends not to equalize, but to render unequal the average weekly wages in two districts in which the average standards of efficiency are unequal. Given that the average strength and energy of the working-classes are higher in the North of England than in the South, it then follows that the more completely "competition makes things find their own level," the more certain is it that average weekly wages will be higher in the North than in the South36 .

Cliffe Leslie and some other writers have naïvely laid stress on local variations of wages as tending to prove that there is very little mobility among the working-classes, and that the competition among them for employment is ineffective. But most of the facts which they quote relate only to wages reckoned by the day or week: they are only half-facts, and when the missing halves are supplied, they generally support the opposite inference to that on behalf of which they are quoted. For it is found that local variations of weekly wages and of efficiency generally correspond: and thus the facts tend to prove the effectiveness of competition, so far as they bear on the question at all. We shall however presently find that the full interpretation of such facts as these is a task of great difficulty and complexity.

The earnings, or wages, which a person gets in any given time, such as a day, a week, or a year, may be called his time-earnings, or time-wages: and we may then say that Cliffe Leslie's instances of unequal time-wages tend on the whole to support, and not to weaken, the presumption that competition adjusts earnings in occupations of equal difficulty and in neighbouring places to the efficiency of the workers.

But the ambiguity of the phrase, "the efficiency of the workers," has not yet been completely cleared away. When the payment for work of any kind is apportioned to the quantity and quality of the work turned out, it is said that uniform rates of piece-work wages are being paid; and if two persons work under the same conditions and with equally good appliances, they are paid in proportion to their efficiencies when they receive piece-work wages calculated by the same lists of prices for each several kind of work. If however the appliances are not equally good, a uniform rate of piece-work wages gives results disproportionate to the efficiency of the workers. If, for instance, the same lists of piece-work wages were used in cotton mills supplied with old-fashioned machinery, as in those which have the latest improvements, the apparent equality would represent a real inequality. The more effective competition is, and the more perfectly economic freedom and enterprise are developed, the more surely will the lists be higher in the mills that have old-fashioned machinery than in the others.

In order therefore to give its right meaning to the statement that economic freedom and enterprise tend to equalize wages in occupations of the same difficulty and in the same neighbourhood, we require the use of a new term. We may find it in efficiency-wages, or more broadly efficiency-earnings; that is, earnings measured, not as time-earnings are with reference to the time spent in earning them; and not as piece-work earnings are with reference to the amount of output resulting from the work by which they are earned; but with reference to the exertion of ability and efficiency required of the worker.

The tendency then of economic freedom and enterprise (or, in more common phrase, of competition), to cause every one's earnings to find their own level, is a tendency to equality of efficiency-earnings in the same district. This tendency will be the stronger, the greater is the mobility of labour, the less strictly specialized it is, the more keenly parents are on the look-out for the most advantageous occupations for their children, the more rapidly they are able to adapt themselves to changes in economic conditions, and lastly the slower and the less violent these changes are.

This statement of the tendency is, however, still subject to a slight correction. For we have hitherto supposed that it is a matter of indifference to the employer whether he employs few or many people to do a piece of work, provided his total wages-bill for the work is the same. But that is not the case. Those workers who earn most in a week when paid at a given rate for their work, are those who are cheapest to their employers; and they are the cheapest also to the community, unless indeed they overstrain themselves, and work themselves out prematurely. For they use only the same amount of fixed capital as their slower fellow-workers; and, since they turn out more work, each part of it has to bear a less charge on this account. The prime costs are equal in the two cases; but the total cost of that done by those who are more efficient, and get the higher time-wages, is lower than the total cost of that done by those who get the lower time-wages at the same rate of piece-work payment37 .

This point is seldom of much importance in out-of-door work, where there is abundance of room, and comparatively little use of expensive machinery; for then, except in the matter of superintendence, it makes very little difference to the employer, whose wages-bill for a certain piece of work is £100, whether that sum is divided between twenty efficient or thirty inefficient workers. But when expensive machinery is used which has to be proportioned to the number of workers, the employer would often find the total cost of his goods lowered if he could get twenty men to turn out for a wages-bill of £50 as much work as he had previously got done by thirty men for a wages-bill of £40. In all matters of this kind the leadership of the world lies with America, and it is not an uncommon saying there, that he is the best business man who contrives to pay the highest wages.

The corrected law then stands that the tendency of economic freedom and enterprise is generally to equalize efficiency-earnings in the same district: but where much expensive fixed capital is used, it would be to the advantage of the employer to raise the time-earnings of the more efficient workers more than in proportion to their efficiency. Of course this tendency is liable to be opposed by special customs and institutions; and, in some cases, by trades-union regulations38 .

§ 3. Thus much with regard to estimates of the work for which the earnings are given: but next we have to consider most carefully the facts, that in estimating the real earnings of an occupation account must be taken of many things besides its money receipts, and that on the other side of the account we must reckon for many incidental disadvantages besides those directly involved in the strain and stress of the work.

As Adam Smith says, "the real wages of labour may be said to consist in the quantity of the necessaries and conveniences of life that are given for it; its nominal wages in the quantity of money.......The labourer is rich or poor, is well or ill rewarded, in proportion to the real, not to the nominal, price of his labour39 ." But the words "that are given for it" must not be taken to apply only to the necessaries and conveniences that are directly provided by the purchaser of the labour or its products; for account must be taken also of the advantages which are attached to the occupation, and require no special outlay on his part.

In endeavouring to ascertain the real wages of an occupation at any place or time, the first step is to allow for variations in the purchasing power of the money in which nominal wages are returned. This point cannot be thoroughly dealt with till we come to treat of the theory of money as a whole. But it may be remarked in passing that this allowance would not be a simple arithmetical reckoning, even if we had perfectly accurate statistics of the history of the price of all commodities. For if we compare distant places or distant times, we find people with different wants, and different means of supplying those wants: and even when we confine our attention to the same time and place we find people of different classes spending their incomes in very different ways. For instance, the prices of velvet, of operatic entertainments and scientific books are not very important to the lower ranks of industry; but a fall in the price of bread or of shoe leather affects them much more than it does the higher ranks. Differences of this kind must always be borne in mind, and it is generally possible to make some sort of rough allowance for them40 .

§ 4. We have already noticed that a person's total real income is found by deducting from his gross income the outgoings that belong to its production; and that this gross income includes many things which do not appear in the form of money payments and are in danger of being overlooked41 .

Firstly, then, with regard to the outgoings. We do not here reckon the expenses of education, general and special, involved in the preparation for any trade: nor do we take account of the exhaustion of a person's health and strength in his work. Allowance for them may be best made in other ways. But we must deduct all trade expenses, whether they are incurred by professional men or artisans. Thus from the barrister's gross income we must deduct the rent of his office and the salary of his clerk; from the carpenter's gross income we must deduct the expenses which he incurs for tools; and when estimating the earnings of quarrymen in any district we must find out whether local custom assigns the expenses of tools and blasting powder to them or their employers. Such cases are comparatively simple; but it is more difficult to decide how large a part of the expenses, which a medical man incurs for house and carriage and social entertainments, should be regarded as trade expenses42 .

§ 5. Again, when servants or shop assistants have to supply themselves at their own cost with expensive clothes, which they would not buy if free to do as they liked, the value of their wages to them is somewhat lowered by this compulsion. And when the employer provides expensive liveries, houseroom and food for his servants, these are generally worth less to them than they cost to him: it is therefore an error to reckon the real wages of domestic servants, as some statisticians have done, by adding to their money wages the equivalent of the cost to their employer of everything that he provides for them.

On the other hand, when a farmer hauls coals free for his men, he chooses, of course, times when his horses have little to do, and the real addition to their earnings is much greater than the cost to him. The same applies to many perquisites and allowances, as, for instance, when the employer allows his men to have without payment commodities which though useful to them, are almost valueless to him on account of the great expenses involved in marketing them; or, again, when he allows them to buy for their own use at the wholesale price commodities which they have helped to produce. When, however, this permission to purchase is changed into an obligation to purchase, the door is open to grave abuses. The farmer who in old times used to compel his men to take from him spoilt grain at the wholesale price of good grain, was really paying them lower wages than he appeared to be. And on the whole when this so-called truck-system prevails in any trade in an old country, we may fairly assume that the real rate of wages is lower that the nominal43 .

§ 6. Next we have to take account of the influences exerted on the real rate of earnings in an occupation by the uncertainty of success and the inconstancy of employment in it.

We should obviously start by taking the earnings of an occupation as the average between those of the successful and unsuccessful members of it; but care is required to get the true average. For if the average earnings of those who are successful are £2000 a year, and of those who are unsuccessful are £400 a year, the average of the whole will be £1200 a year if the former group is as large as the latter; but if, as is perhaps the case with barristers, the unsuccessful are ten times as numerous as the successful, the true average is but £550. And further, many of those who have failed most completely, are likely to have left the occupation altogether, and thus to escape being counted.

And again, though, by taking this average, we obviate the necessity of making any separate allowance for insurance against risk, account generally remains to be taken of the evil of uncertainty. For there are many people of a sober steady-going temper, who like to know what is before them, and who would far rather have an appointment which offered a certain income of say £400 a year than one which was not unlikely to yield £600, but had an equal chance of affording only £200. Uncertainty, therefore, which does not appeal to great ambitions and lofty aspirations, has special attractions for very few; while it acts as a deterrent to many of those who are making their choice of a career. And as a rule the certainty of moderate success attracts more than an expectation of an uncertain success that has an equal actuarial value.

But on the other hand, if an occupation offers a few extremely high prizes, its attractiveness is increased out of all proportion to their aggregate value. For this there are two reasons. The first is that young men of an adventurous disposition are more attracted by the prospects of a great success than they are deterred by the fear of failure; and the second is that the social rank of an occupation depends more on the highest dignity and the best position which can be attained through it than on the average good fortune of those engaged in it. It is an old maxim of statecraft that a Government should offer a few good prizes in every department of its service: and in aristocratic countries the chief officials receive very high salaries, while those of the lower grades are comforted in the receipt of salaries below the market level for similar services by their hopes of ultimately rising to a coveted post, and by the social consideration which in such countries always attends on public officers. This arrangement has the incidental effect of favouring those who are already rich and powerful; and partly for that reason it is not adopted in democratic countries. They often go to the opposite extreme, and pay more than the market rates for their services to the lower ranks, and less to the upper ranks. But that plan, whatever be its merits on other grounds, is certainly an expensive one.

We may next consider the influence which inconstancy of employment exerts on wages. It is obvious that in those occupations in which employment is irregular, the pay must be high in proportion to the work done: the medical man and the shoeblack must each receive when at work a pay which covers a sort of retaining fee for the time when he has nothing to do. If the advantages of their occupations are in other respects equal, and their work equally difficult, the bricklayer when at work must be paid a higher rate than the joiner, and the joiner than the railway guard. For work on the railways is nearly constant all the year round; while the joiner and the bricklayer are always in danger of being made idle by slackness of trade, and the bricklayer's work is further interrupted by frost and rain. The ordinary method of allowing for such interruptions is to add up the earnings for a long period of time and to take the average of them; but this is not quite satisfactory unless we assume that the rest and leisure, which a man gets when out of employment, are of no service to him directly or indirectly44 .

This assumption may be fairly made in some cases; for waiting for work often involves so much anxiety and worry that it causes more strain than the work itself would do45 . But that is not always so. Interruptions of work that occur in the regular course of business, and therefore raise no fears about the future, give opportunity for the system to recruit itself and lay in stores of energy for future exertions. The successful barrister, for instance, is subject to a severe strain during some parts of the year; and that is itself an evil. But when allowance has been made for it, he may be regarded as losing very little by being prevented from earning any fees during the legal vacations46 .

§ 7. Next we must take account of the opportunities which a man's surroundings may afford of supplementing the earnings which he gets in his chief occupation, by doing work of other kinds. And account may need to be taken also of the opportunities which these surroundings offer for the work of other members of his family.

Many economists have even proposed to take as their unit the earnings of a family: and there is much to be said for this plan with reference to agriculture and those old-fashioned domestic trades in which the whole family works together, provided that allowance is made for the loss resulting from any consequent neglect by the wife of her household duties. But in modern England trades of this kind are exceptional; the occupation of the head of a family seldom exerts much direct influence on those of its other members, except those of his sons whom he introduces into his own trade; though of course when the place in which he works is fixed, the employments, to which his family can get easy access, are limited by the resources of the neighbourhood.

§ 8. Thus then the attractiveness of a trade depends on many other causes besides the difficulty and strain of the work to be done in it on the one hand, and the money-earnings to be got in it on the other. And when the earnings in any occupation are regarded as acting on the supply of labour in it, or when they are spoken of as being its supply price, we must always understand that the term earnings is only used as a short expression for its "net advantages47 ." We must take account of the facts that one trade is healthier or cleanlier than another, that it is carried on in a more wholesome or pleasant locality, or that it involves a better social position; as is instanced by Adam Smith's well-known remark that the aversion which many people have for the work of a butcher, and to some extent for the butcher himself, raises earnings in the butchers' trade above those in other trades of equal difficulty.

Of course individual character will always assert itself in estimating particular advantages at a high or a low rate. Some persons, for instance, are so fond of having a cottage to themselves that they prefer living on low wages in the country to getting much higher wages in the town; while others are indifferent as to the amount of houseroom they get, and are willing to go without the comforts of life provided they can procure what they regard as its luxuries. This was the case, for example, with a family of whom the Royal Commission on the Housing of the Working Classes in 1884 were told: their joint earnings were £7 a week, but they chose to live in one room, so as to be able to spend money freely on excursions and amusements.

Personal peculiarities, such as these, prevent us from predicting with certainty the conduct of particular individuals. But if each advantage and disadvantage is reckoned at the average of the money values it has for the class of people who would be likely to enter an occupation, or to bring up their children to it, we shall have the means of estimating roughly the relative strengths of the forces that tend to increase or diminish the supply of labour in that occupation at the time and place which we are considering. For it cannot be too often repeated that grave errors are likely to result from taking over an estimate of this kind based on the circumstances of one time and place, and applying it without proper precaution to those of another time or another place.

In this connection it is interesting to observe the influence of differences of national temperament in our own time. Thus in America we see Swedes and Norwegians drift to agriculture in the North-west, while the Irish, if they go on the land at all, choose farms in the older Eastern States. The preponderance of Germans in the furniture and the brewing industries; of Italians in railway building; of Slavs in meat packing and in some groups of mines, and of Irish and French Canadians in some of the textile industries of the United States; and the preference of the Jewish immigrants in London for the clothing industries and for retail trade—all these are due partly to differences in national aptitudes, but partly also to differences in the estimates that people of different races form of the incidental advantages and disadvantages of different trades.

Lastly, the disagreeableness of work seems to have very little effect in raising wages, if it is of such a kind that it can be done by those whose industrial abilities are of a very low order. For the progress of science has kept alive many people who are unfit for any but the lowest grade of work. They compete eagerly for the comparatively small quantity of work for which they are fitted, and in their urgent need they think almost exclusively of the wages they can earn: they cannot afford to pay much attention to incidental discomforts, and indeed the influence of their surroundings has prepared many of them to regard the dirtiness of an occupation as an evil of but minor importance.

Hence arises the paradoxical result that the dirtiness of some occupations is a cause of the lowness of the wages earned in them. For employers find that this dirtiness adds much to the wages they would have to pay to get the work done by skilled men of high character working with improved appliances; and so they often adhere to old methods which require only unskilled workers of but indifferent character, and who can be hired for low (Time-) wages, because they are not worth much to any employer. There is no more urgent social need than that labour of this kind should be made scarce and therefore dear.

BOOK VI, CHAPTER IV

EARNINGS OF LABOUR, CONTINUED.

§ 1. The action of demand and supply with regard to labour was discussed in the last chapter with reference to the difficulties of ascertaining the real as opposed to the nominal price of labour. But some peculiarities in this action remain to be studied, which are of a more vital character. For they affect not merely the form, but also the substance of the action of the forces of demand and supply; and to some extent they limit and hamper the free action of those forces. We shall find that the influence of many of them is not at all to be measured by their first and most obvious effects: and that those effects which are cumulative are generally far more important in the long run than those which are not, however prominent the latter may appear.

The problem has thus much in common with that of tracing the economic influence of custom. For it has already been noticed, and it will become more clear as we go on, that the direct effects of custom in causing a thing to be sold for a price sometimes a little higher and sometimes a little lower than it would otherwise fetch, are not really of very great importance, because any such divergence does not, as a rule, tend to perpetuate and increase itself; but on the contrary, if it becomes considerable, it tends itself to call into action forces that counteract it. Sometimes these forces break down the custom altogether; but more often they evade it by gradual and imperceptible changes in the character of the thing sold, so that the purchaser really gets a new thing at the old price under the old name. These direct effects then are obvious, but they are not cumulative. On the other hand, the indirect effects of custom in hindering the methods of production and the character of producers from developing themselves freely are not obvious; but they generally are cumulative, and therefore exert a deep and controlling influence over the history of the world. If custom checks the progress of one generation, then the next generation starts from a lower level than it otherwise would have done; and any retardation which it suffers itself is accumulated and added to that of its predecessor, and so on from generation to generation48 .

And so it is with regard to the action of demand and supply on the earnings of labour. If at any time it presses hardly on any individuals or class, the direct effects of the evils are obvious. But the sufferings that result are of different kinds: those, the effects of which end with the evil by which they were caused, are not generally to be compared in importance with those that have the indirect effect of lowering the character of the workers or of hindering it from becoming stronger. For these last cause further weakness and further suffering, which again in their turn cause yet further weakness and further suffering, and so on cumulatively. On the other hand, high earnings, and a strong character, lead to greater strength and higher earnings, which again lead to still greater strength and still higher earnings, and so on cumulatively.

§ 2. The first point to which we have to direct our attention is the fact that human agents of production are not bought and sold as machinery and other material agents of production are. The worker sells his work, but he himself remains his own property: those who bear the expenses of rearing and educating him receive but very little of the price that is paid for his services in later years49 .

Whatever deficiencies the modern methods of business may have, they have at least this virtue, that he who bears the expenses of production of material goods, receives the price that is paid for them. He who builds factories or steam-engines or houses, or rears slaves, reaps the benefit of all net services which they render so long as he keeps them for himself; and when he sells them he gets a price which is the estimated net value of their future services; and therefore he extends his outlay until there seems to him no good reason for thinking that the gains resulting from any further investment would compensate him. He must do this prudently and boldly, under the penalty of finding himself worsted in competition with others who follow a broader and more far-sighted policy, and of ultimately disappearing from the ranks of those who direct the course of the world's business. The action of competition, and the survival in the struggle for existence of those who know best how to extract the greatest benefits for themselves from the environment, tend in the long run to put the building of factories and steam-engines into the hands of those who will be ready and able to incur every expense which will add more than it costs to their value as productive agents. But the investment of capital in the rearing and early training of the workers of England is limited by the resources of parents in the various grades of society, by their power of forecasting the future, and by their willingness to sacrifice themselves for the sake of their children.

This evil is indeed of comparatively small importance with regard to the higher industrial grades. For in those grades most people distinctly realize the future, and "discount it at a low rate of interest." They exert themselves much to select the best careers for their sons, and the best trainings for those careers; and they are generally willing and able to incur a considerable expense for the purpose. The professional classes especially, while generally eager to save some capital for their children, are even more on the alert for opportunities of investing it in them. And whenever there occurs in the upper grades of industry a new opening for which an extra and special education is required, the future gains need not be very high relatively to the present outlay, in order to secure a keen competition for the post.

But in the lower ranks of society the evil is great. For the slender means and education of the parents, and the comparative weakness of their power of distinctly realizing the future, prevent them from investing capital in the education and training of their children with the same free and bold enterprise with which capital is applied to improving the machinery of any well-managed factory. Many of the children of the working-classes are imperfectly fed and clothed; they are housed in a way that promotes neither physical nor moral health; they receive a school education which, though in modern England it may not be very bad so far as it goes, yet goes only a little way; they have few opportunities of getting a broader view of life or an insight into the nature of the higher work of business, of science or of art; they meet hard and exhausting toil early on the way, and for the greater part keep to it all their lives. At least they go to the grave carrying with them undeveloped abilities and faculties; which, if they could have borne full fruit, would have added to the material wealth of the country—to say nothing of higher considerations—many times as much as would have covered the expense of providing adequate opportunities for their development.

But the point on which we have specially to insist now is that this evil is cumulative. The worse fed are the children of one generation, the less will they earn when they grow up, and the less will be their power of providing adequately for the material wants of their children; and so on to following generations. And again, the less fully their own faculties are developed, the less will they realize the importance of developing the best faculties of their children, and the less will be their power of doing so. And conversely any change that awards to the workers of one generation better earnings, together with better opportunities of developing their best qualities, will increase the material and moral advantages which they have the power to offer to their children: while by increasing their own intelligence, wisdom and forethought, such a change will also to some extent increase their willingness to sacrifice their own pleasures for the wellbeing of their children; though there is much of that willingness now even among the poorest classes, so far as their means and the limits of their knowledge will allow.

§ 3. The advantages which those born in one of the higher grades of society have over those born in a lower, consist in a great measure of the better introductions and the better start in life which they receive from their parents; and the importance of this good start in life is nowhere seen more clearly than in a comparison of the fortunes of the sons of artisans and of unskilled labourers. There are not many skilled trades to which the son of an unskilled labourer can get easy access; and in the large majority of cases the son follows the father's calling. In the old-fashioned domestic industries this was almost a universal rule; and, even under modern conditions, the father has often great facilities for introducing his son to his own trade. Employers and their foremen generally give to a lad whose father they already know and trust, a preference over one for whom they would have to incur the entire responsibility. And in many trades a lad, even after he has got entrance to the works, is not very likely to make good progress and obtain a secure footing, unless he is able to work by the side of his father, or some friend of his father's, who will take the trouble to teach him and to let him do work that requires careful supervision, but has an educational value.

And the son of the artisan has further advantages. He generally lives in a better and cleaner house, and under material surroundings that are more consistent with refinement than those with which the ordinary labourer is familiar. His parents are likely to be better educated, and to have a higher notion of their duties to their children; and, last but not least, his mother is likely to be able to give more of her time to the care of her family.

If we compare one country of the civilized world with another, or one part of England with another, or one trade in England with another, we find that the degradation of the working-classes varies almost uniformly with the amount of rough work done by women. The most valuable of all capital is that invested in human beings; and of that capital the most precious part is the result of the care and influence of the mother, so long as she retains her tender and unselfish instincts, and has not been hardened by the strain and stress of unfeminine work.

This draws our attention to another aspect of the principle already noticed, that in estimating the cost of production of efficient labour, we must often take as our unit the family. At all events we cannot treat the cost of production of efficient men as an isolated problem; it must be taken as part of the broader problem of the cost of production of efficient men together with the women who are fitted to make their homes happy, and to bring up their children vigorous in body and mind, truthful and cleanly, gentle and brave50 .

§ 4. As the youth grows up, the influence of his parents and his schoolmaster declines; and thenceforward to the end of his life his character is moulded chiefly by the nature of his work and the influence of those with whom he associates for business, for pleasure and for religious worship.

A good deal has already been said of the technical training of adults, of the decadence of the old apprenticeship system, and of the difficulty of finding anything to take its place. Here again we meet the difficulty that whoever may incur the expense of investing capital in developing the abilities of the workman, those abilities will be the property of the workman himself: and thus the virtue of those who have aided him must remain for the greater part its own reward.

It is true that high-paid labour is really cheap to those employers who are aiming at leading the race, and whose ambition it is to turn out the best work by the most advanced methods. They are likely to give their men high wages and to train them carefully; partly because it pays them to do so, and partly because the character that fits them to take the lead in the arts of production is likely also to make them take a generous interest in the wellbeing of those who work for them. But though the number of such employers is increasing, they are still comparatively few. And even they cannot always afford to carry the investment of capital in the training of their men as far as they would have done, if the results of the investment accrued to them in the same way as the results of any improvements they might make in their machinery. Even they are sometimes checked by the reflection that they are in a similar position to that of a farmer who, with an uncertain tenure and no security of compensation for his improvements, is sinking capital in raising the value of his landlord's property.

Again, in paying his workpeople high wages and in caring for their happiness and culture, the liberal employer confers benefits which do not end with his own generation. For the children of his workpeople share in them, and grow up stronger in body and in character than otherwise they would have done. The price which he has paid for labour will have borne the expenses of production of an increased supply of high industrial faculties in the next generation: but these faculties will be the property of others, who will have the right to hire them out for the best price they will fetch: neither he nor even his heirs can reckon on reaping much material reward for this part of the good that he has done.

§ 5. The next of those characteristics of the action of demand and supply peculiar to labour, which we have to study, lies in the fact that when a person sells his services, he has to present himself where they are delivered. It matters nothing to the seller of bricks whether they are to be used in building a palace or a sewer: but it matters a great deal to the seller of labour, who undertakes to perform a task of given difficulty, whether or not the place in which it is to be done is a wholesome and a pleasant one, and whether or not his associates will be such as he cares to have. In those yearly hirings which still remain in some parts of England, the labourer inquires what sort of a temper his new employer has, quite as carefully as what rate of wages he pays.

This peculiarity of labour is of great importance in many individual cases, but it does not often exert a broad and deep influence of the same nature as that last discussed. The more disagreeable the incidents of an occupation, the higher of course are the wages required to attract people into it: but whether these incidents do lasting and widespreading harm depends on whether they are such as to undermine men's physical health and strength or to lower their character. When they are not of this sort, they are indeed evils in themselves, but they do not generally cause other evils beyond themselves; their effects are seldom cumulative.

Since however no one can deliver his labour in a market in which he is not himself present, it follows that the mobility of labour and the mobility of the labourer are convertible terms: and the unwillingness to quit home, and to leave old associations, including perhaps some loved cottage and burial-ground, will often turn the scale against a proposal to seek better wages in a new place. And when the different members of a family are engaged in different trades, and a migration, which would be advantageous to one member would be injurious to others, the inseparability of the worker from his work considerably hinders the adjustment of the supply of labour to the demand for it. But of this more hereafter.

§ 6. Again, labour is often sold under special disadvantages, arising from the closely connected group of facts that labour power is "perishable," that the sellers of it are commonly poor and have no reserve fund, and that they cannot easily withhold it from the market.

Perishableness is an attribute common to the labour of all grades: the time lost when a worker is thrown out of employment cannot be recovered, though in some cases his energies may be refreshed by rest51 . It must however be remembered that much of the working power of material agents of production is perishable in the same sense; for a great part of the income, which they also are prevented from earning by being thrown out of work, is completely lost. There is indeed some saving of wear-and-tear on a factory, or a steam-ship, when it is lying idle: but this is often small compared with the income which its owners have to forego: they get no compensation for their loss of interest on the capital invested, or for the depreciation which it undergoes from the action of the elements or from its tendency to be rendered obsolete by new inventions.

Again, many vendible commodities are perishable. In the strike of dock labourers in London in 1889, the perishableness of the fruit, meat, etc. on many of the ships told strongly on the side of the strikers.

The want of reserve funds and of the power of long withholding their labour from the market is common to nearly all grades of those whose work is chiefly with their hands. But it is especially true of unskilled labourers, partly because their wages leave very little margin for saving, partly because when any group of them suspends work, there are large numbers who are capable of filling their places. And, as we shall see presently when we come to discuss trade combinations, it is more difficult for them than for skilled artisans to form themselves into strong and lasting combinations; and so to put themselves on something like terms of equality in bargaining with their employers. For it must be remembered that a man who employs a thousand others, is in himself an absolutely rigid combination to the extent of one thousand units among buyers in the labour market.

But these statements do not apply to all kinds of labour. Domestic servants though they have not large reserve funds, and seldom any formal trades-union, are sometimes better able than their employers to act in concert. The total real wages of domestic servants of fashionable London are very high in comparison with other skilled trades in which equal skill and ability are required. But on the other hand those domestic servants who have no specialized skill, and who hire themselves to persons with very narrow means, have not been able to make even tolerably good terms for themselves: they work very hard for very low wages.

Turning next to the highest grades of industry, we find that as a rule they have the advantage in bargaining over the purchaser of their labour. Many of the professional classes are richer, have larger reserve funds, more knowledge and resolution, and much greater power of concerted action with regard to the terms on which they sell their services, than the greater number of their clients and customers.

If further evidence were wanted that the disadvantages of bargaining under which the vendor of labour commonly suffers, depend on his own circumstances and qualities, and not on the fact that the particular thing which he has to sell is labour; such evidence could be found by comparing the successful barrister or solicitor or physician, or opera singer or jockey with the poorer independent producers of vendible goods. Those, for instance, who in remote places collect shell-fish to be sold in the large central markets, have little reserve funds and little knowledge of the world, and of what other producers are doing in other parts of the country: while those to whom they sell, are a small and compact body of wholesale dealers with wide knowledge and large reserve funds; and in consequence the sellers are at a great disadvantage in bargaining. And much the same is true of the women and children who sell hand-made lace, and of the garret masters of East London who sell furniture to large and powerful dealers.

It is however certain that manual labourers as a class are at a disadvantage in bargaining; and that the disadvantage wherever it exists is likely to be cumulative in its effects. For though, so long as there is any competition among employers at all, they are likely to bid for labour something not very much less than its real value to them, that is, something not very much less than the highest price they would pay rather than go on without it; yet anything that lowers wages tends to lower the efficiency of the labourer's work, and therefore to lower the price which the employer would rather pay than go without that work. The effects of the labourer's disadvantage in bargaining are therefore cumulative in two ways. It lowers his wages; and as we have seen, this lowers his efficiency as a worker, and thereby lowers the normal value of his labour. And in addition it diminishes his efficiency as a bargainer, and thus increases the chance that he will sell his labour for less than its normal value52 .

BOOK VI, CHAPTER V

EARNINGS OF LABOUR, CONTINUED.

§ 1. The next peculiarity in the action of demand and supply with regard to labour, which we have to consider, is closely connected with some of those we have already discussed. It consists in the length of time that is required to prepare and train labour for its work, and in the slowness of the returns which result from this training.

This discounting of the future, this deliberate adjustment of supply of expensively trained labour to the demand for it, is most clearly seen in the choice made by parents of occupations for their children, and in their efforts to raise their children into a higher grade than their own.

It was these chiefly that Adam Smith had in view when he said:—"When any expensive machine is erected, the extraordinary work to be performed by it before it is worn out, it must be expected, will replace the capital laid out upon it, with at least the ordinary profits. A man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this too in a reasonable time, regard being had to the very uncertain duration of human life, in the same manner as to the more certain duration of the machine."

But this statement is to be received only as a broad indication of general tendencies. For independently of the fact that in rearing and educating their children, parents are governed by motives different from those which induce a capitalist undertaker to erect a new machine, the period over which the earning power extends is generally greater in the case of a man than of a machine; and therefore the circumstances by which the earnings are determined are less capable of being foreseen, and the adjustment of supply to demand is both slower and more imperfect. For though factories and houses, the main shafts of a mine and the embankments of a railway, may have much longer lives than those of the men who made them; yet these are exceptions to the general rule.

§ 2. Not much less than a generation elapses between the choice by parents of a skilled trade for one of their children, and his reaping the full results of their choice. And meanwhile the character of the trade may have been almost revolutionized by changes, of which some probably threw long shadows before them, but others were such as could not have been foreseen even by the shrewdest persons and those best acquainted with the circumstances of the trade.

The working classes in nearly all parts of England are constantly on the look-out for advantageous openings for the labour of themselves and their children; and they question friends and relations, who have settled in other districts, as to the wages that are to be got in various trades, and as to their incidental advantages and disadvantages. But it is very difficult to ascertain the causes that are likely to determine the distant future of the trades which they are selecting for their children; and there are not many who enter on this abstruse inquiry. The majority assume without a further thought that the condition of each trade in their own time sufficiently indicates what it will be in the future; and, so far as the influence of this habit extends, the supply of labour in a trade in any one generation tends to conform to its earnings not in that but in the preceding generation.

Again, some parents, observing that the earnings in one trade have been for some years rising relatively to others in the same grade, assume that the course of change is likely to continue in the same direction. But it often happens that the previous rise was due to temporary causes, and that, even if there had been no exceptional influx of labour into the trade, the rise would have been followed by a fall instead of a further rise: and, if there is such an exceptional influx, the consequence may be a supply of labour so excessive, that its earnings remain below their normal level for many years.

Next we have to recall the fact that, although there are some trades which are difficult of access except to the sons of those already in them, yet the majority draw recruits from the sons of those in other trades in the same grade: and therefore when we consider the dependence of the supply of labour on the resources of those who bear the expenses of its education and training, we must often regard the whole grade, rather than any one trade, as our unit; and say that, in so far as the supply of labour is limited by the funds available for defraying its cost of production, the supply of labour in any grade is determined by the earnings of that grade in the last rather than in the present generation.

It must, however, be remembered that the birth-rate in every grade of society is determined by many causes, among which deliberate calculations of the future hold but a secondary place: though, even in a country in which tradition counts for as little as it does in modern England, a great influence is exerted by custom and public opinion which are themselves the outcome of the experience of past generations.

§ 3. But we must not omit to notice those adjustments of the supply of labour to the demand for it, which are effected by movements of adults from one trade to another, one grade to another, and one place to another. The movements from one grade to another can seldom be on a very large scale; although it is true that exceptional opportunities may sometimes develop rapidly a great deal of latent ability among the lower grades. Thus, for instance, the sudden opening out of a new country, or such an event as the American war, will raise from the lower ranks of labour many men who bear themselves well in difficult and responsible posts.

But the movements of adult labour from trade to trade and from place to place can in some cases be so large and so rapid as to reduce within a very short compass the period which is required to enable the supply of labour to adjust itself to the demand. That general ability which is easily transferable from one trade to another, is every year rising in importance relatively to that manual skill and technical knowledge which are specialized to one branch of industry. And thus economic progress brings with it on the one hand a constantly increasing changefulness in the methods of industry, and therefore a constantly increasing difficulty in predicting the demand for labour of any kind a generation ahead; but on the other hand it brings also an increasing power of remedying such errors of adjustment as have been made53 .

§ 4. Let us now revert to the principle that the income derived from the appliances for the production of a commodity exerts a controlling influence in the long run over their own supply and price, and therefore over the supply and the price of the commodity itself; but that within short periods there is not time for the exercise of any considerable influence of this kind. And let us inquire how this principle needs to be modified when it is applied not to the material agents of production, which are only a means towards an end, and which may be the private property of the capitalist, but to human beings who are ends as well as means of production and who remain their own property.

To begin with we must notice that, since labour is slowly produced and slowly worn out, we must take the term "long period" more strictly, and regard it as generally implying a greater duration, when we are considering the relations of normal demand and supply for labour, than when we are considering them for ordinary commodities. There are many problems, the period of which is long enough to enable the supply of ordinary commodities, and even of most of the material appliances required for making them, to be adjusted to the demand; and long enough therefore to justify us in regarding the average prices of those commodities during the period as "normal," and as equal to their normal expenses of production in a fairly broad use of the term; while yet the period would not be long enough to allow the supply of labour to be adjusted at all well to the demand for it. The average earnings of labour during this period therefore would not be at all certain to give about a normal return to those who provided the labour; but they would rather have to be regarded as determined by the available stock of labour on the one hand, and the demand for it on the other. Let us consider this point more closely.

§ 5. Market variations in the price of a commodity are governed by the temporary relations between demand and the stock that is in the market or within easy access of it. When the market price so determined is above its normal level, those who are able to bring new supplies into the market in time to take advantage of the high price receive an abnormally high reward; and if they are small handicraftsmen working on their own account, the whole of this rise in price goes to increase their earnings.

In the modern industrial world, however, those who undertake the risks of production and to whom the benefits of any rise in price, and the evils of any fall, come in the first instance, are capitalist undertakers of industry. Their net receipts in excess of the immediate outlay involved for making the commodity, that is, its prime (money) cost, are a return derived for the time being from the capital invested in their business in various forms, including their own faculties and abilities. But, when trade is good, the force of competition among the employers themselves, each desiring to extend his business, and to get for himself as much as possible of this high return, makes them consent to pay higher wages to their employees in order to obtain their services; and even if they act in concert, and refuse for a time any concession, a combination among their employees may force it from them under penalty of foregoing the harvest, which the favourable turn of the market is offering. The result generally is that before long a great part of the gains are being distributed among the employees; and that their earnings remain above the normal level so long as the prosperity lasts.

Thus the high wages of miners during the inflation which culminated in 1873, were governed for the time by the relation in which the demand for their services stood to the amount of skilled mining labour available, the unskilled labour imported into the trade being counted as equivalent to an amount of skilled labour of equal efficiency. Had it been impossible to import any such labour at all, the earnings of miners would have been limited only by the elasticity of the demand for coal on the one hand, and the gradual coming to age of the rising generation of miners on the other. As it was, men were drawn from other occupations which they were not eager to leave; for they could have got high wages by staying where they were, since the prosperity of the coal and iron trades was but the highest crest of a swelling tide of credit. These new men were unaccustomed to underground work; its discomforts told heavily on them, while its dangers were increased by their want of technical knowledge, and their want of skill caused them to waste much of their strength. The limits therefore which their competition imposed on the rise of the special earnings of miners' skill were not narrow.

When the tide turned those of the new-comers who were least adapted for the work left the mines; but even then the miners who remained were too many for the work to be done, and their wage fell; till it reached that limit, at which those who were least adapted for the work and life of a miner, could get more by selling their labour in other trades. And that limit was a low one; for the swollen tide of credit, which culminated in 1873, had undermined solid business, impaired the true foundations of prosperity, and left nearly every industry in a more or less unhealthy and depressed condition.

§ 6. We have already remarked that only part of the return derived from an improvement which is being exhausted can be regarded as being its net earnings; for a sum equivalent to the exhaustion of the capital value of the improvement must be deducted from these returns, before they can be counted as net income of any kind. Similarly allowance must be made for the wear-and-tear of a machine, as well as for the cost of working it, before we can arrive at its net earnings. Now the miner is as liable to wear-and-tear as machinery is; and a deduction must be made from his earnings also on account of wear-and-tear, when the special return of his skill is being estimated54 .

But in his case there is a further difficulty. For while the owner of machinery does not suffer from its being kept long at work when the expenses of working it, including wear-and-tear, have once been allowed for; the owner of skilled faculties does suffer when they are kept long at work, and he suffers incidental inconveniences, such as loss of recreation and of freedom of movement, etc. If the miner has only four days' work in one week and earns £1, and in the next week he has six days' work and earns £1. 10s.; only part of this extra 10s. can be regarded as return for his skill, for the remainder must be reckoned as the recompense of his additional fatigue as well as wear-and-tear55 .

To conclude this part of our argument. The market price of everything, i.e. its price for short periods, is determined mainly by the relations in which the demand for it stands to the available stocks of it; and in the case of any agent of production, whether it be a human or a material agent, this demand is "derived" from the demand for those things which it is used in making. In these relatively short periods fluctuations in wages follow, and do not precede, fluctuations in the selling prices of the goods produced.

But the incomes which are being earned by all agents of production, human as well as material, and those which appear likely to be earned by them in the future, exercise a ceaseless influence on those persons by whose action the future supplies of these agents are determined. There is a constant tendency towards a position of normal equilibrium, in which the supply of each of these agents shall stand in such a relation to the demand for its services, as to give to those who have provided the supply a sufficient reward for their efforts and sacrifices. If the economic conditions of the country remained stationary sufficiently long, this tendency would realize itself in such an adjustment of supply to demand, that both machines and human beings would earn generally an amount that corresponded fairly with their cost of rearing and training, conventional necessaries as well as those things which are strictly necessary being reckoned for. But conventional necessaries might change under the influence of non-economic causes, even while economic conditions themselves were stationary: and this change would affect the supply of labour, and would lessen the national dividend and slightly alter its distribution. As it is, the economic conditions of the country are constantly changing, and the point of adjustment of normal demand and supply in relation to labour is constantly being shifted.

§ 7. We may now discuss the question under what head to class those extra incomes which are earned by extraordinary natural abilities. Since they are not the result of the investment of human effort in an agent of production for the purpose of increasing its efficiency, there is a strong primâ facie cause for regarding them as a producer's surplus, resulting from the possession of a differential advantage for production, freely given by nature. This analogy is valid and useful so long as we are merely analysing the component parts of the income earned by an individual. And there is some interest in the inquiry how much of the income of successful men is due to chance, to opportunity, to the conjuncture; how much to the good start that they have had in life; how much is profits on the capital invested in their special training, how much is the reward of exceptionally hard work; and how much remains as a producer's surplus or rent resulting from the possession of rare natural gifts.

But when we are considering the whole body of those engaged in any occupation, we are not at liberty to treat the exceptionally high earnings of successful men as rent, without making allowance for the low earnings of those who fail. For the supply of labour in any occupation is governed, other things being equal, by the earnings of which it holds out the prospect. The future of those who enter the occupation cannot be predicted with certainty: some, who start with the least promise, turn out to have great latent ability, and, aided perhaps by good luck, they earn large fortunes; while others, who made a brilliant promise at starting, come to nothing. For the chances of success and failure are to be taken together, much as are the chances of good and bad hauls by a fisherman or of good and bad harvests by a farmer; and a youth when selecting an occupation, or his parents when selecting one for him, are very far from leaving out of account the fortunes of successful men. These fortunes are therefore part of the price that is paid in the long run for the supply of labour and ability that seeks the occupation: they enter into the true or "long period" normal supply price of labour in it.

It may be conceded, however, that, if a certain class of people were marked out from their birth as having special gifts for some particular occupation, and for no other, so that they would be sure to seek that occupation in any case, then the earnings which such men would get might be left out of account as exceptional, when we were considering the chances of success or failure for ordinary persons. But as a matter of fact that is not the case; for a great part of a person's success in any occupation depends on the development of talents and tastes, the strength of which cannot be clearly predicted until he has already committed himself to a choice of occupation. Such predictions are at least as fallible as those which a new settler can make as to the future fertility and advantages of situation of the various plots of land that are offered for his selection56 . And partly for this reason the extra income derived from rare natural qualities bears a closer analogy to the surplus produce from the holding of a settler who has made an exceptionally lucky selection, than to the rent of land in an old country. But land and human beings differ in so many respects, that even that analogy, if pursued very far, is apt to mislead: and the greatest caution is required in the application of the term producer's surplus to the earnings of extraordinary ability.

Finally, it may be observed that the argument of V. VIII.—XI., with regard to the special earnings (whether of the nature of rents or quasi-rents) of appliances capable of being used in several branches of production, is applicable to the special earnings of natural abilities, and of skill. When land or machinery capable of being used for producing one commodity is used for another, the supply price of the first is raised, though not by an amount dependent on the incomes which those appliances for production would yield in the second use. So when trained skill or natural abilities which could have been applied to produce one commodity, are applied for another, the supply price of the first is raised through the narrowing of its sources of supply.

BOOK VI, CHAPTER VI

INTEREST OF CAPITAL.

§ 1. The relations between demand and supply cannot be studied by themselves in the case of capital any more than they could in the case of labour. All the elements of the great central problem of distribution and exchange mutually govern one another: and the first two chapters of this Book, and more especially the parts that relate directly to capital, may be taken as an introduction to this and the next two chapters. But before entering on the detailed analysis with which they will be mainly occupied, something may be said as to the position which the modern study of capital and interest holds in relation to earlier work.

The aid which economic science has given towards understanding the part played by capital in our industrial system is solid and substantial; but it has made no startling discoveries. Everything of importance which is now known to economists has long been acted upon by able business men, though they may not have been able to express their knowledge clearly, or even accurately.

Everyone is aware that no payment would be offered for the use of capital unless some gain were expected from that use; and further that these gains are of many kinds. Some borrow to meet a pressing need, real or imaginary, and pay others to sacrifice the present to the future in order that they themselves may sacrifice the future to the present. Some borrow to obtain machinery, and other "intermediate" goods, with which they may make things to be sold at a profit; some to obtain hotels, theatres and other things which yield their services directly, but are yet a source of profit to those who control them. Some borrow houses for themselves to live in, or else the means wherewith to buy or build their own houses; and the absorption of the resources of the country in such things as houses increases, other things being equal, with every increase in those resources and every consequent fall in the rate of interest, just as does the absorption of those resources in machinery, docks, etc. The demand for durable stone houses in place of wood houses which give nearly equal accommodation for the time indicates that a country is growing in wealth, and that capital is to be had at a lower rate of interest; and it acts on the market for capital and on the rate of interest in the same way as would a demand for new factories or railways.

Everyone knows that people will not lend gratis as a rule; because, even if they have not themselves some good use to which to turn the capital or its equivalent, they are sure to be able to find others to whom its use would be of benefit, and who would pay for the loan of it: and they stand out for the best market57 .

Everyone knows that few, even among the Anglo-Saxon and other steadfast and self-disciplined races, care to save a large part of their incomes; and that many openings have been made for the use of capital in recent times by the progress of discovery and the opening up of new countries: and thus everyone understands generally the causes which have kept the supply of accumulated wealth so small relatively to the demand for its use, that that use is on the balance a source of gain, and can therefore require a payment when loaned. Everyone is aware that the accumulation of wealth is held in check, and the rate of interest so far sustained, by the preference which the great mass of humanity have for present over deferred gratifications, or, in other words, by their unwillingness to "wait." And indeed the true work of economic analysis in this respect is, not to emphasize this familiar truth, but to point out how much more numerous are the exceptions to this general preference than would appear at first sight58 .

These truths are familiar; and they are the basis of the theory of capital and interest. But in the affairs of ordinary life truths are apt to present themselves in fragments. Particular relations are seen clearly one at a time; but the interactions of mutually self-determining causes are seldom grouped as a whole. The chief task of economics then as regards capital is to set out in order and in their mutual relations, all the forces which operate in the production and accumulation of wealth and the distribution of income; so that as regards both capital and other agents of production they may be seen mutually governing one another.

Next it has to analyse the influences which sway men in their choice between present and deferred gratifications, including leisure and opportunities for forms of activity that are their own reward. But here the post of honour lies with mental science; the received doctrines of which economics applies, in combination with other material, to its special problems59 .

Its work is therefore heavier in that analysis, on which we are to be engaged in this and the next two chapters, of the gains that are derived from the aid of accumulated wealth in the attainment of desirable ends, especially when that wealth takes the form of trade capital. For these gains or profits contain many elements, some of which belong to interest for the use of capital in a broad sense of the term; while others constitute net interest, or interest properly so called. Some constitute the reward of managing ability and of enterprise, including the bearing of risks; and others again belong not so much to any one of these agents of production as to their combination.

The scientific doctrine of capital has had a long history of continuous growth and improvement in these three directions during the last three centuries. Adam Smith appears to have seen indistinctly, and Ricardo to have seen distinctly, almost everything of primary importance in the theory, very much as it is known now: and though one writer has preferred to emphasize one of its many sides, and another another, there seems no good reason for believing that any great economist since the time of Adam Smith has ever completely overlooked any side; and especially is it certain that nothing which would be familiar to men of business was overlooked by the practical financial genius of Ricardo. But there has been progress; almost everyone has improved some part, and given it a sharper and clearer outline; or else has helped to explain the complex relations of its different parts. Scarcely anything done by any great thinker has had to be undone, but something new has constantly been added60 .

§ 2. But if we go back to mediæval and ancient history we certainly do seem to find an absence of clear ideas as to the nature of the services which capital renders in production, and for which interest is the payment; and since this early history is exercising an indirect influence on the problems of our own age, something should be said of it here.

In primitive communities there were but few openings for the employment of fresh capital in enterprise, and anyone who had property that he did not need for his own immediate use, would seldom forego much by lending it on good security to others without charging any interest for the loan. Those who borrowed were generally the poor and the weak, people whose needs were urgent and whose powers of bargaining were very small. Those who lent were as a rule either people who spared freely of their superfluity to help their distressed neighbours, or else professional money-lenders. To these last the poor man had resort in his need; and they frequently made a cruel use of their power, entangling him in meshes from which he could not escape without great suffering, and perhaps the loss of the personal freedom of himself or his children. Not only uneducated people, but the sages of early times, the fathers of the mediæval church, and the English rulers of India in our own time, have been inclined to say, that money-lenders "traffic in other people's misfortunes, seeking gain through their adversity: under the pretence of compassion they dig a pit for the oppressed61 ." In such a state of society it may be a question for discussion, whether it is to the public advantage that people should be encouraged to borrow wealth under a contract to return it with increase after a time: whether such contracts, taken one with another, do not on the whole diminish rather than increase the sum total of human happiness.

But unfortunately attempts were made to solve this difficult and important practical question by a philosophical distinction between the interest for the loan of money and the rental of material wealth. Aristotle had said that money was barren, and that to derive interest from lending it out was to put it to an unnatural use. And following his lead Scholastic writers argued with much labour and ingenuity that he who lent out a house or a horse might charge for its use, because he gave up the enjoyment of a thing that was directly productive of benefit. But they found no similar excuse for the interest on money: that, they said, was wrong, because it was a charge for a service which did not cost the lender anything62 .

If the loan really cost him nothing, if he could have made no use of the money himself, if he was rich and the borrower poor and needy, then it might no doubt be argued that he was morally bound to lend his money gratis: but on the same grounds he would have been bound to lend without charge to a poor neighbour a house which he would not himself inhabit, or a horse for a day's work of which he had himself no need. The doctrine of these writers therefore really implied, and in fact it did convey to people's minds the mischievous fallacy that—independently of the special circumstances of the borrower and the lender—the loan of money, i.e. of command over things in general, is not a sacrifice on the part of the lender and a benefit to the borrower, of the same kind as the loan of a particular commodity: they obscured the fact that he who borrows money can buy, for instance, a young horse, whose services he can use, and which he can sell, when the loan has to be returned, at as good a price as he paid for him. The lender gives up the power of doing this, the borrower acquires it: there is no substantial difference between the loan of the purchase price of a horse and the loan of a horse63 .

§3. History has in part repeated itself: and in the modern Western World a new reforming impulse has derived strength from, and given strength to, another erroneous analysis of the nature of interest. As civilization has progressed, the loans of wealth to needy people have become steadily more rare, and a less important part of the whole; while the loans of capital for productive use in business have grown at an ever-increasing rate. And in consequence, though the borrowers are not now regarded as the subjects of oppression, a grievance has been found in the fact that all producers, whether working with borrowed capital or not, reckon interest on the capital used by them as among the expenses which they require to have returned to them in the long run in the price of their wares as a condition of their continuing business. On this account, and on account of the openings which the present industrial system offers of amassing great wealth by sustained good fortune in speculation, it has been argued that the payment of interest in modern times oppresses the working classes indirectly, though not directly; and that it deprives them of their fair share of the benefits resulting from the growth of knowledge. And hence is derived the practical conclusion that it would be for the general happiness and therefore right, that no private person should be allowed to own any of the means of production, nor any direct means of enjoyment, save such as he needs for his own use.

This practical conclusion has been supported by other arguments which will claim our attention; but at present we are only concerned with the doctrine that has been used by William Thompson, Rodbertus, Karl Marx, and others in support of it. They argued that labour always produces a "Surplus"64 above its wages and the wear-and-tear of capital used in aiding it: and that the wrong done to labour lies in the exploitation of this surplus by others. But this assumption that the whole of this Surplus is the produce of labour, already takes for granted what they ultimately profess to prove by it; they make no attempt to prove it; and it is not true. It is not true that the spinning of yarn in a factory, after allowance has been made for the wear-and-tear of the machinery, is the product of the labour of the operatives. It is the product of their labour, together with that of the employer and subordinate managers, and of the capital employed; and that capital itself is the product of labour and waiting: and therefore the spinning is the product of labour of many kinds, and of waiting. If we admit that it is the product of labour alone, and not of labour and waiting, we can no doubt be compelled by inexorable logic to admit that there is no justification for Interest, the reward of waiting; for the conclusion is implied in the premiss. Rodbertus and Marx do indeed boldly claim the authority of Ricardo for their premiss; but it is really as opposed to his explicit statement and the general tenor of his theory of value, as it is to common sense65 .

To put the same thing in other words; if it be true that the postponement of gratifications involves in general a sacrifice on the part of him who postpones, just as additional effort does on the part of him who labours; and if it be true that this postponement enables man to use methods of production of which the first cost is great; but by which the aggregate of enjoyment is increased, as certainly as it would be by an increase of labour; then it cannot be true that the value of a thing depends simply on the amount of labour spent on it. Every attempt to establish this premiss has necessarily assumed implicitly that the service performed by capital is a "free" good, rendered without sacrifice, and therefore needing no interest as a reward to induce its continuance; and this is the very conclusion which the premiss is wanted to prove. The strength of Rodbertus' and Marx's sympathies with suffering must always claim our respect: but what they regarded as the scientific foundation of their practical proposals appears to be little more than a series of arguments in a circle to the effect that there is no economic justification for interest, while that result has been all along latent in their premisses; though, in the case of Marx, it was shrouded by mysterious Hegelian phrases, with which he "coquetted," as he tells us in his Preface.

§ 4. We may now proceed with our analysis. The interest of which we speak when we say that interest is the earnings of capital simply, or the reward of waiting simply, is Net interest; but what commonly passes by the name of Interest, includes other elements besides this, and may be called Gross interest.

These additional elements are the more important, the lower and more rudimentary the state of commercial security and of the organization of credit. Thus, for instance, in mediæval times, when a prince wanted to forestall some of his future revenues, he borrowed perhaps a thousand ounces of silver, and undertook to pay back fifteen hundred at the end of a year. There was however no perfect security that he would fulfil the promise; and perhaps the lender would have been willing to exchange that promise for an absolute certainty of receiving thirteen hundred at the end of the year. In that case, while the nominal rate at which the loan was made was fifty per cent., the real rate was thirty.

The necessity for making this allowance for insurance against risk is so obvious, that it is not often overlooked. But it is less obvious that every loan causes some trouble to the lender; that when, from the nature of the case, the loan involves considerable risk, a great deal of trouble has often to be taken to keep these risks as small as possible; and that then a great part of what appears to the borrower as interest, is, from the point of view of the lender, earnings of management of a troublesome business.

At the present time the net interest on capital in England is a little under three per cent. per annum; for no more than that can be obtained by investing in such first-rate stock-exchange securities as yield to the owner a secure income without appreciable trouble or expense on his part. And when we find capable business men borrowing on perfectly secure mortgages, at (say) four per cent., we may regard that gross interest of four per cent. as consisting of net interest, or interest proper, to the extent of a little under three per cent., and of earnings of management by the lenders to the extent of rather more than one per cent66 .

Again, a pawnbroker's business involves next to no risk; but his loans are generally made at the rate of 25 per cent. per annum, or more; the greater part of which is really earnings of management of a troublesome business. Or to take a more extreme case, there are men in London, and Paris, and probably elsewhere, who make a living by lending money to costermongers. The money is often lent at the beginning of the day for the purchase of fruit, etc., and returned at the end of the day, when the sales are over, at a profit of ten per cent.: there is a little risk in the trade, and the money is seldom lost67 . Now a farthing invested at ten per cent. a day would amount to a billion pounds at the end of a year. But no one can become rich by lending to costermongers; because no one can lend much in this way. The so-called interest on the loans really consists almost entirely of earnings of a kind of work for which few capitalists have a taste.

§5. It is then necessary to analyse a little more carefully the extra risks which are introduced into business when much of the capital used in it has been borrowed. Let us suppose that two men are carrying on similar businesses, the one working with his own, the other chiefly with borrowed capital.

There is one set of risks which is common to both; which may be described as the trade risks of the particular business in which they are engaged. They arise from fluctuations in the markets for their raw materials and finished goods, from unforeseen changes of fashion, from new inventions, from the incursion of new and powerful rivals into their respective neighbourhoods, and so on. But there is another set of risks, the burden of which has to be borne by the man working with borrowed capital, and not by the other; and we may call them personal risks. For he who lends capital to be used by another for trade purposes, has to charge a high interest as insurance against the chances of some flaw or deficiency in the borrower's personal character or ability68 .

The borrower may be less able than he appears, less energetic, or less honest. He has not the same inducements, as a man working with his own capital has, to look failure straight in the face, and withdraw from a speculative enterprise as soon as it shows signs of going against him. On the contrary, should his standard of honour not be high, he may be not very keen of sight as to his losses. For if he withdraws at once, he will have lost all he has of his own; and if he allows the speculation to run on, any additional loss will fall on his creditors; and any gain will come to himself. Many creditors lose through semi-fraudulent inertness of this kind on the part of their debtors, and a few lose through deliberate fraud: the debtor for instance may conceal in subtle ways the property that is really his creditors', until his bankruptcy is over, and he has entered on a new business career; he can bring gradually into play his secret reserve funds without exciting over-much suspicion.

The price then that the borrower has to pay for the loan of capital, and which he regards as interest, is from the point of view of the lender more properly to be regarded as profits: for it includes insurance against risks which are often very heavy, and earnings of management for the task, which is often very arduous, of keeping those risks as small as possible. Variations in the nature of these risks and of the task of management will of course occasion corresponding variations in the gross interest, so called, that is paid for the use of money. The tendency of competition is therefore not towards equalizing this gross interest: on the contrary, the more thoroughly lenders and borrowers understand their business, the more certainly will some classes of borrowers obtain loans at a lower rate than others.

We must defer to a later stage our study of the marvellously efficient organization of the modern money market by which capital is transferred from one place where it is super-abundant to another where it is wanted; or from one trade that is in the process of contraction to another which is being expanded: and at present we must be contended to take it for granted that a very small difference between the rates of net interest to be got on the loan of capital in two different modes of investment in the same Western country will cause capital to flow, though perhaps by indirect channels, from the one to the other.

It is true that if either of the investments is on a small scale, and few people know much about it, the flow of capital may be slow. One person, for instance, may be paying five per cent. on a small mortgage, while his neighbour is paying four per cent. on a mortgage which offers no better security. But in all large affairs the rate of net interest (so far as it can be disentangled from the other elements of profits) is nearly the same all over England. And further the divergencies between the average rates of net interest in different countries of the Western World are rapidly diminishing, as a result of the general growth of intercourse, and especially of the fact that the leading capitalists of all these countries hold large quantities of stock-exchange securities, which yield the same revenue and are sold practically at the same price on the same day all over the world.

When we come to discuss the Money Market we shall have to study the causes which render the supply of capital for immediate use much larger at some times than at others; and which at certain times make bankers and others contented with an extremely low rate of interest, provided the security be good and they can get their money back into their own hands quickly in case of need. At such times they are willing to lend for short periods even to borrowers, whose security is not of the first order, at a rate of interest that is not very high. For their risks of loss are much reduced by their power of refusing to renew the loan, if they notice any indication of weakness on the part of the borrower; and since short loans on good security are fetching only a nominal price, nearly the whole of what interest they get from him is insurance against risk, and remuneration of their own trouble. But on the other hand such loans are not really very cheap to the borrower: they surround him by risks, to avoid which he would often be willing to pay a much higher rate of interest. For if any misfortune should injure his credit, or if a disturbance of the money market should cause a temporary scarcity of loanable capital, he may be quickly brought into great straits. Loans to traders at nominally low rates of interest, if for short periods only, do not therefore really form exceptions to the general rule just discussed.

§ 6. The flow of investment of resources from their common source in production consists of two streams. The smaller consists of new additions to the accumulated stock. The larger merely replaces that which is destroyed; whether by immediate consumption, as in the case of food, fuel, etc.; by wear-and-tear, as in that of railway irons; by the lapse of time, as in that of a thatched roof or a trade directory; or by all these combined. The annual flow of this second stream is probably not less than a quarter of the total stock of capital, even in a country in which the prevailing forms of capital are as durable as in England. It is therefore not unreasonable to assume for the present that the owners of capital in general have been able in the main to adapt its forms to the normal conditions of the time, so as to derive as good a net income from their investments in one way as another.

It is only on this supposition that we are at liberty to speak of capital in general as being accumulated under the expectation of a certain net interest which is the same for all its forms. For it cannot be repeated too often that the phrase "the rate of interest" is applicable to old investments of capital only in a very limited sense. For instance, we may perhaps estimate that a trade capital of some seven thousand millions is invested in the different trades of this country at about three per cent. net interest. But such a method of speaking, though convenient and justifiable for many purposes, is not accurate. What ought to be said is that, taking the rate of net interest on the investments of new capital in each of those trades [i.e. on marginal investments] to be about three per cent.; then the aggregate net income rendered by the whole of the trade-capital invested in the various trades is such that, if capitalized at 33 years' purchase (that is on the basis of interest at three per cent.), it would amount to some seven thousand million pounds. For the value of the capital already invested in improving land or erecting a building; in making a railway or a machine is the aggregate discounted value of its estimated future net incomes [or quasi-rents]; and if its prospective income-yielding power should diminish, its value would fall accordingly and would be the capitalized value of that smaller income after allowing for depreciation.

§ 7. Throughout the present volume we are supposing, in the absence of any special statement to the contrary, that all values are expressed in terms of money of fixed purchasing power, just as astronomers have taught us to determine the beginning or the ending of the day with reference not to the actual sun but to a mean sun which is supposed to move uniformly through the heavens. Further, the influences which changes in the purchasing power of money do exert on the terms on which loans are arranged, are most conspicuous in the market for short loans—a market which differs in many of its incidents from any other, and a full discussion of their influences must be deferred. But they should be noticed here in passing, at all events as a point of abstract theory. For the rate of interest which the borrower is willing to pay measures the benefits that he expects to derive from the use of the capital only on the assumption that the money has the same purchasing power when it is borrowed and when it is returned.

Let us suppose, for instance, that a man borrows £100 under contract to pay back £105 at the end of the year. If meanwhile the purchasing power of money has risen 10 per cent. (or which is the same thing, general prices have fallen in the ratio of 10 to 11), he cannot get the £105 which he has to pay back without selling one-tenth more commodities than would have been sufficient for the purpose at the beginning of the year. Assuming, that is, that the things which he handles have not changed in value relatively to things in general, he must sell at the end of the year commodities which would have cost him £115. 10s. at the beginning, in order to pay back with interest his loan of £100; and therefore he has lost ground unless the commodities have increased under his hands 15½ per cent. While nominally paying 5 per cent. for the use of his money, he has really been paying 15½ per cent.

On the other hand, if prices had risen so much that the purchasing power of money had fallen 10 per cent. during the year, and he could get £100 for things which cost him £90 at the beginning of the year; then, instead of paying 5 per cent. for the loan, he would really be paid 5½ per cent. for taking charge of the money69 .

When we come to discuss the causes of alternating periods of inflation and depression of commercial activity, we shall find that they are intimately connected with those variations in the real rate of interest which are caused by changes in the purchasing power of money. For when prices are likely to rise, people rush to borrow money and buy goods, and thus help prices to rise; business is inflated, and is managed recklessly and wastefully; those working on borrowed capital pay back less real value than they borrowed, and enrich themselves at the expense of the community. When afterwards credit is shaken and prices begin to fall, everyone wants to get rid of commodities and get hold of money which is rapidly rising in value; this makes prices fall all the faster, and the further fall makes credit shrink even more, and thus for a long time prices fall because prices have fallen.

We shall find that fluctuations in prices are caused only to a very slight extent by fluctuations in the supply of the precious metals; and that they would not be much diminished by the adoption of gold and silver instead of gold as the basis of our currency. But the evils which they cause are so great, that it is worth while to do much in order to diminish them a little. These evils however are not necessarily inherent in those slow changes in the purchasing power of money, which follow the course of man's changing command over nature: and in such changes there is generally both loss and gain. In the fifty years preceding the great war, improvements in the arts of production and in the access to rich sources of supply of raw material doubled the efficiency of man's labour in procuring many of the things which he wants. An injury would have been done to those members of the working classes (now indeed rapidly diminishing in number) whose money wages are much influenced by custom; if the purchasing power of a sovereign in terms of commodities had remained stationary, instead of following, as it has, the increasing command by man over nature. But this matter will require full discussion in another place.

BOOK VI, CHAPTER VII

PROFITS OF CAPITAL AND BUSINESS POWER.

§ 1. In the concluding chapters of Book IV. we made some study of the various forms of business management, and the faculties required for them; and we saw how the supply of business power in command of capital may be regarded as consisting of three elements, the supply of capital, the supply of the business power to manage it, and the supply of the organization by which the two are brought together and made effective for production. In the last chapter we were concerned mainly with interest, the earnings of the first of these elements. In the earlier part of this chapter we shall be occupied with the earnings of the second and third taken together, which we have called gross earnings of management; and afterwards we shall pass to the relation in which this stands to the earnings of the second taken by itself which we have called net earnings of management70 . We have to inquire more closely into the nature of the services which are rendered to society by those who undertake and manage business enterprises, and the rewards of their work; and we shall find that the causes by which these are governed are less arbitrary, and present closer analogies to those which govern other kinds of earnings, than is commonly supposed.

We must however make a distinction at starting. We must call to mind71 the fact that the struggle for survival tends to make those methods of organization prevail, which are best fitted to thrive in their environment; but not necessarily those best fitted to benefit their environment, unless it happens that they are duly rewarded for all the benefits which they confer, whether direct or indirect. And in fact this is not so. For as a general rule the law of substitution—which is nothing more than a special and limited application of the law of survival of the fittest—tends to make one method of industrial organization supplant another when it offers a direct and immediate service at a lower price. The indirect and ultimate services which either will render have, as a general rule, little or no weight in the balance; and as a result many businesses languish and die, which might in the long run have done good work for society if only they could have obtained a fair start. This is especially true of some forms of co-operative associations.

In this connection we may divide employers and other undertakers into two classes, those who open out new and improved methods of business, and those who follow beaten tracks. The services which the latter perform for society are chiefly direct and seldom miss their full reward: but it is otherwise with the former class.

For instance, economies have lately been introduced into some branches of iron manufacture by diminishing the number of times which the metal is heated in passing from iron ore to its final form; and some of these new inventions have been of such a nature that they could neither be patented nor kept secret. Let us suppose then that a manufacturer with a capital of £50,000 is getting in normal times a net profit of £4,000 a year, £1,500 of which we may regard as his earnings of management, leaving £2,500 for the other two elements of profits. We assume that he has been working so far in the same way as his neighbours, and showing an amount of ability which, though great, is no more than the normal or average ability of the people who fill such exceptionally difficult posts; that is, we assume that £1,500 a year is the normal earnings for the kind of work he has been doing. But as time goes on, he thinks out a way of dispensing with one of the heatings that have hitherto been customary; and in consequence, without increasing his expenses, he is able to increase his annual output by things which can be sold for £2,000 net. So long, therefore, as he can sell his wares at the old price, his earnings of management will be £2,000 a year above the average; and he will earn the full reward of his services to society. His neighbours however will copy his plan, and probably make more than average profits for a time. But soon competition will increase the supply, and lower the price of their wares, until their profits fall to about their old level; for no one could get extra high wages for making eggs stand on their ends after Columbus's plan had become public property.

Many business men whose inventions have in the long run been of almost priceless value to the world, have earned even less by their discoveries than Milton by his Paradise Lost or Millet by his Angelus; and while many men have amassed great wealth by good fortune, rather than by exceptional ability in the performance of public services of high importance, it is probable that those business men who have pioneered new paths have often conferred on society benefits out of all proportion to their own gains, even though they have died millionaires. Although then we shall find that the rewards of every business undertaker tend to be proportionate to the direct services he renders to the community, this will by itself go but a small way towards proving that the existing industrial organization of society is the best conceivable, or even the best attainable; and it must not be forgotten that the scope of our present inquiry is limited to a study of the action of causes that determine the earnings of business undertaking and management under existing social institutions.

We will begin by tracing the adjustment of the rewards of the services rendered to society by ordinary workmen, by foremen, and by employers of different grades: we shall find the principle of substitution everywhere at work.

§ 2. We have already noticed that a great part of the work done by the head of a small business himself, is relegated in a large business to salaried heads of departments, managers, foremen and others. And this thread will guide us to much that is useful for our present inquiry. The simplest case is that of the earnings of the ordinary foreman; with which we may begin.

Let us suppose, for instance, that a railway contractor or a dockyard manager finds that it answers best to have one foreman to every twenty labourers, the wages of a foreman being twice those of a labourer. This means that, if he found himself with 500 labourers and 24 foremen, he would expect to get just a little more work done at the same expense by adding one more foreman, than by adding two more ordinary labourers: while if he had had 490 labourers and 25 foremen, he would have found it better to add two more labourers. If he could have got his foreman for one and a half times the wages of a labourer, perhaps he would have employed one foreman to every fifteen labourers. But, as it is, the number of foremen employed is determined at one-twentieth of that of the labourers, and their demand price at twice the labourers' wages72 .

In exceptional cases the foremen may earn their wages by overdriving those whose work they superintend. But we may now suppose them to contribute to the success of the undertaking in a legitimate way, by securing a better organization of its details; so that fewer things are done amiss and need to be undone; so that everyone finds the help that he wants in moving heavy weights, etc., ready for him just when he wants it; so that all machinery and implements are kept in good working order, and no one has to waste his time and strength by working with inadequate appliances, and so on. The wages of foremen who do work of this kind may be taken as typical of a great part of the earnings of management: society, acting through the individual employer, offers an effective demand for their services until that margin is reached at which the aggregate efficiency of industry would be increased by adding workers of some other trade more than by adding the foremen whose wages would add an equal amount to the expenses of production.

So far the employer has been regarded as the agent through whom competition acts in contriving and arranging the factors of production so that the maximum of direct services (estimated by their money measure) should be performed at a minimum money cost. But now we have to look at the work of the employers themselves being contrived and arranged for them, though of course in a more haphazard fashion, by the immediate action of their own competition.

§ 3. Let us then look next at the way in which the work of foremen and salaried managers is constantly being weighed against that of the heads of businesses. It will be interesting to watch the course of a small business as it gradually expands. A house carpenter, for instance, steadily increases his stock of tools, till he can hire a small workshop, and undertake odd jobs for private persons, who have to agree with him as to what is to be done. The work of management and of undertaking what little risks there are, is shared between them and him; and, as this gives them a great deal of trouble, they are not willing to pay him at a high rate for what work of management he does73 .

So his next step is to undertake all the different sides of small repairs. He has now entered on the career of a master-builder; and if his business grows, he gradually withdraws himself from manual labour, and to some extent even from the superintendence of its details. Substituting for his own work that of hired men, he has now to deduct their wages from his receipts, before he can begin to reckon his profits: and unless he proves himself to have a business ability up to the normal level of that grade of industry which he has now entered, he will probably soon lose all the little capital which he has gained, and after a short struggle return to that humbler rank of life in which he has prospered. Should his ability be just about that level, he will, with average good fortune, retain his position and perhaps gain a little ground: and the excess of his receipts over his outgoings will be representative of the normal earnings of management in his grade.

If his ability be greater than that which is normal in his grade, he will be able to obtain as good a result with a given outlay for wages and other expenses, as most of his rivals can with a larger outlay: he will have substituted his extra ability in organization for some of their outlay; and his earnings of management will include the value of that outlay with which he has dispensed. He will thus increase his capital and his credit: and be able to borrow more, and at a lower rate of interest. He will obtain a wider business acquaintanceship and connection; and he will get an increased knowledge of materials and processes, and opportunities for bold but wise and profitable adventure; until at last he has delegated to others nearly all those duties which occupied his whole time even after he had ceased to do manual work himself74 .

§ 4. Having watched the adjustment of the earnings of foremen and of ordinary workmen, and again of employers and foremen, we may now look at the earnings of employers on a small and a large scale.

Our carpenter having become a master-builder on a very large scale, his undertakings will be so many and so great as to have occupied the time and energies of some scores of employers who superintended all the details of their several businesses. Throughout this struggle between large businesses and small, we see the principle of substitution constantly in operation; the large employer substitution a little of his own work and a good deal of that of salaried managers and foremen for that of a small employer. When, for instance, tenders are invited for erecting a building, a builder with a large capital often finds it worth his while to enter the lists, even though he lives at a distance. The local builders secure great economies in having workshops and men whom they can trust already near the spot; while he gains something through buying his materials on a large scale, through his command of machinery, especially for woodwork, and perhaps through being able to borrow what capital he wants on easier terms. These two sets of advantages frequently about balance one another; and the contest for the field of employment often turns on the relative efficiencies of the undivided energies of the small builder, and of that slight supervision which is all that the abler but busier large builder can afford to give himself, though he supplements it by the work of his local manager and of the clerks in his central office75 .

§ 5. So far we have been considering the gross earnings of management of a man who applies his own capital in business, and therefore can himself reap the equivalent of the costs direct and indirect, which are entailed when command over capital has to be collected from owners, who do not care to apply it to business uses themselves, and to be transferred to those whose own capital is insufficient for their enterprises.

We are next to consider the struggle for survival in pushing forward in some trades business men working chiefly with their own capital and in others those who work chiefly with borrowed capital. The personal risks, against which the lender of capital to be used in business requires to be indemnified, vary to some extent with the nature of that business, as well as with the circumstances of the individual borrower. They are very high in some cases, as for instance when a man is starting in a new branch of the electrical trades, in which there is very little past experience to go by, and the lender cannot easily form any independent judgment as to the progress which is being made by the borrower; and in all such cases the man working with borrowed capital is at a great disadvantage; the rate of profit is determined chiefly by the competition of those who apply their own capital. It may happen that not many such men have access to the trade; and in that case the competition may not be keen, and the rate of profit may be high; that is, it may exceed considerably net interest on the capital together with earnings of management on a scale commensurate with the difficulty of the business done, though that difficulty will probably be above the average.

And again, the new man with but little capital of his own is at a disadvantage in trades which move slowly and in which it is necessary to sow a long time before one reaps.

But in all those industries in which bold and tireless enterprise can reap a quick harvest; and in particular wherever high profits are to be made for a time by cheaper reproductions of costly wares, there the new man is in his element: it is he who by his quick resolutions and dexterous contrivances, and perhaps also a little by his natural recklessness, "forces the pace."

And he often holds his own with great tenacity even under considerable disadvantages; for the freedom and dignity of his position are very attractive to him. Thus the peasant proprietor whose little plot is heavily mortgaged, the small so-called "sweater" or "garret master" who takes out a sub-contract at a low price, will often work harder than the ordinary workman, and for a lower net income. And the manufacturer who is doing a large business with comparatively little capital of his own will reckon his labour and anxiety almost as nothing, for he knows that he must anyhow work for his living, and he is unwilling to go into service to another: he will therefore work feverishly for a gain that would not count much in the balance with a wealthier rival, who, being able to retire and live in comfort on the interest of his capital, may be doubting whether it is worth while to endure any longer the wear-and-tear of business life.

The inflation of prices which culminated in 1873, enriched borrowers in general, and in particular business undertakers, at the expense of other members of society. New men therefore found their way into business made very smooth; and those who had already made or inherited business fortunes, found their way made smooth for retiring from active work. Thus Bagehot, writing about that time76 , argued that the growth of new men was making English business increasingly democratic: and, though admitting that "the propensity to variation in the social as in the animal kingdom is the principle of progress," he pointed out regretfully how much the country might have gained by the long duration of families of merchant princes. But in recent years there has been some reaction, due partly to social causes, and partly to the influence of a continued fall in prices. The sons of business men are rather more inclined than they were a generation ago to take pride in their fathers' callings; and they find it harder to satisfy the demands of an ever-increasing luxury on the income which would be theirs if they withdrew from business.

§ 6. But the weighing in the balance of the services and therefore the earnings of employees against the earnings of management of business men is in some ways best illustrated by reference to Joint-stock companies. For in them most of the work of management is divided between salaried directors (who indeed hold a few shares themselves) and salaried managers and other subordinate officials, most of whom have little or no capital of any kind; and their earnings, being almost the pure earnings of labour, are governed in the long run by those general causes which rule the earnings of labour of equal difficulty and disagreeableness in ordinary occupations.

As has already been observed77 , joint-stock companies are hampered by internal frictions, and conflicts of interest between shareholders and debenture holders, between ordinary and preferred shareholders, and between all these and the directors; and by the need for an elaborate system of checks and counterchecks. They seldom have the enterprise, the energy, the unity of purpose and the quickness of action of a private business. But these disadvantages are of relatively small importance in some trades. That publicity, which is one of the chief drawbacks of public companies in many branches of manufacture and of speculative commerce, is a positive advantage in ordinary banking and insurance and kindred businesses; while in these, as well as in most of the transport industries (railways, tramways, canals, and the supply of gas, water, and electricity), their unbounded command over capital gives them almost undisputed sway.

When powerful joint-stock companies are working in harmony, and are not directly or indirectly involved in speculative ventures on the stock exchange, or in campaigns for the crushing or for the compulsory fusion of rivals, they generally look forward to a distant future, and pursue a far-seeing if a sluggish policy. They are seldom willing to sacrifice their reputation for the sake of a temporary gain; they are not inclined to drive such extremely hard bargains with their employees as will make their service unpopular.

§ 7. Thus then each of the many modern methods of business has its own advantages and disadvantages: and its application is extended in every direction until that limit or margin is reached, at which its special advantages for that use no longer exceed its disadvantages. Or, to put the same thing in another way, the margin of profitableness of different methods of business organization for any particular purpose, is to be regarded not as a point on any one line, but a boundary line of irregular shape cutting one after another every possible line of business organization; and these modern methods, partly on account of their great variety, but partly also on account of the scope which many of them offer to men of business ability who have no capital, render possible a much closer correspondence between the earnings of undertaking and management and the services by which those earnings are got than could be generally attained under the primitive system in which capital was scarcely ever applied to production by any save its owners. For then it could only be by a fortunate accident that those who had the capital and the opportunity for carrying on any trade or performing any service, of which the public was in need, had the aptitudes and the abilities required for the task. But, as it is, that share of the normal expenses of production of any commodity which is commonly classed as profits, is so controlled on every side by the action of the principle of substitution, that it cannot long diverge from the normal supply price of the capital needed, added to the normal supply price of the ability and energy required for managing the business, and lastly the normal supply price of that organization by which the appropriate business ability and the requisite capital are brought together.

The supply of business power is large and elastic, since the area from which it is drawn is wide. Everyone has the business of his own life to conduct; and in this he can gain some training for business management, if he has the natural aptitudes for it. There is therefore no other kind of useful rare and therefore highly-paid ability which depends so little on labour and expense applied specially to obtaining it, and so much on "natural qualities." And, further, business power is highly non-specialized; because in the large majority of trades, technical knowledge and skill become every day less important relatively to the broad and non-specialized faculties of judgment, promptness, resource, carefulness and steadfastness of purpose78 .

It is true that in small businesses, in which the master is little more than the head workman, specialized skill is very important. And it is true that "each sort of trade has a tradition of its own, which is never written, probably could not be written, which can only be learnt in fragments, and which is best taken in early life, before the mind is shaped and the ideas fixed. But each trade in modern commerce is surrounded by subsidiary and kindred trades, which familiarize the imagination with it, and make its state known79 ." Moreover those general faculties, which are characteristic of the modern business man, increase in importance as the scale of business increases. It is they which mark him out as a leader of men; and which enable him to go straight to the kernel of the practical problems with which he has to deal, to see almost instinctively the relative proportions of things, to conceive wise and far-reaching policies, and to carry them out calmly and resolutely80 .

It must be admitted indeed that the adjustment of supply to demand in the case of business ability is somewhat hindered by the difficulty of ascertaining exactly what is the price that is being paid for it in any trade. It is comparatively easy to find out the wages of bricklayers or puddlers by striking an average between the wages that are earned by men of various degrees of efficiency, and allowing for the inconstancy of their employment. But the gross earnings of management which a man is getting can only be found after making up a careful account of the true profits of his business, and deducting interest on his capital. The exact state of his affairs is often not known by himself; and it can seldom be guessed at all accurately even by those who are in the same trade with himself. It is not true even in a little village at the present day that everyone knows all his neighbour's affairs. As Cliffe Leslie said, "The village inn-keeper, publican or shopkeeper, who is making a small fortune does not invite competition by telling his neighbours of his profits, and the man who is not doing well does not alarm his creditors by exposing the state of his affairs81 ."

But though it may be difficult to read the lessons of an individual trader's experience, those of a whole trade can never be completely hidden, and cannot be hidden at all for long. Although one cannot tell whether the tide is rising or falling by merely watching half-a-dozen waves breaking on the seashore, yet a very little patience settles the question; and there is a general agreement among business men that the average rate of profits in a trade cannot rise or fall much without general attention being attracted to the change before long. And though it may sometimes be a more difficult task for a business man than for a skilled labourer, to find out whether he could improve his prospects by changing his trade, yet the business man has great opportunities for discovering whatever can be found out about the present and future of other trades; and if he should wish to change his trade, he will generally be able to do so more easily than the skilled workman could.

On the whole then we may conclude that the rarity of the natural abilities and the expensiveness of the special training required for the work affect normal earnings of management in much the same way as they do the normal wages of skilled labour. In either case, a rise in the income to be earned sets in operation forces tending to increase the supply of those capable of earning it; and in either case, the extent to which the supply will be increased by a given rise of income, depends upon the social and economic condition of those from whom the supply is drawn. For though it is true that an able business man who starts in life with a great deal of capital and a good business connection is likely to obtain higher earnings of management than an equally able man who starts without these advantages; yet there are similar, though smaller, inequalities between the earnings of professional men of equal abilities who start with unequal social advantages; and the wages even of a working man depend on the start he has had in life almost as much as on the expense which his father has been able to afford for his education82 .

BOOK VI, CHAPTER VIII

PROFITS OF CAPITAL AND BUSINESS POWER, CONTINUED.

§ 1. The causes that govern Earnings of Management have not been studied with any great care till within the last fifty years. The earlier economists did not do much good work in this direction because they did not adequately distinguish the component elements of profits, but searched for a simple general law governing the average rate of profits—a law which, from the nature of the case, cannot exist.

In analysing the causes that govern profits the first difficulty which we meet is in some measure verbal. It arises from the fact that the head of a small business does himself much of the work which in a large business is done by salaried managers and foremen, whose earnings are deducted from the net receipts of the large business before its profits are reckoned, while the earnings of the whole of his labour are reckoned among his profits. This difficulty has long been recognized. Adam Smith himself pointed out that:—"The whole drugs which the best employed apothecary in a large market-town will sell in a year may not perhaps cost him above thirty or forty pounds. Though he should sell them, therefore, for three or four hundred, or at a thousand per cent. profit this may frequently be no more than the reasonable wages of his labour charged in the only way in which he can charge them, upon the price of the drugs. The greater part of the apparent profit is real wages disguised in the garb of profit. In a small seaport town a little grocer will make forty or fifty per cent. upon a stock of a single hundred pounds, while a considerable wholesale merchant in the same place will scarce make eight or ten per cent. upon a stock of ten thousand83 ."

It is here important to distinguish between the annual rate of profits on the capital invested in a business, and the rate of profits that are made every time the capital of the business is turned over; that is, every time sales are made equal to that capital, or the rate of profits on the turnover. At present we are concerned with profits per annum.

The greater part of the nominal inequality between the normal rates of profit per annum in small businesses and in large would disappear, if the scope of the term profits were narrowed in the former case or widened in the latter, so that it included in both cases the remuneration of the same classes of services. There are indeed some trades in which the rate of profit, rightly estimated, on large capitals tends to be higher than on small, though if reckoned in the ordinary way it would appear lower. For of two businesses competing in the same trade, that with the larger capital can nearly always buy at the cheaper rate, and can avail itself of many economies in the specialization of skill and machinery and in other ways, which are out of the reach of the smaller business: while the only important special advantage, which the latter is likely to have, consists of its greater facilities for getting near its customers and consulting their individual wants. In trades in which this last advantage is not important, and especially in some manufacturing trades in which the large firm can sell at a better price than the small one, the outgoings of the former are proportionately less and the incomings larger; and therefore, if profits are so reckoned as to include the same elements in both cases, the rate of profit in the former case must be higher than in the latter.

But these are the very businesses in which it most frequently happens that large firms after first crushing out small ones, either combine with one another and thus secure for themselves the gains of a limited monopoly, or by keen competition among themselves reduce the rate of profit very low. There are many branches of the textile, the metal, and the transport trades in which no business can be started at all except with a large capital; while those that are begun on a moderate scale struggle through great difficulties, in the hope that, after a time, it may be possible to find employment for a large capital, which will yield earnings of management high in the aggregate though low in proportion to the capital.

There are some trades which require a very high order of ability, but in which it is nearly as easy to manage a very large business as one of moderate size. In rolling mills, for instance, there is little detail which cannot be reduced to routine, and a capital of £1,000,000 invested in them can be easily controlled by one able man. A rate of profits of 20 per cent. is not a very high average rate for some branches of the iron trade, which demand incessant thought and contrivance in matters of detail: but it would yield £150,000 a year as earnings of management to the owner of such works. And even stronger cases are offered by recent fusions of giant firms in successive branches of the heavy iron industry. Their profits fluctuate much with the state of trade: but, though enormous in the aggregate, they are said to be on the average at a low rate.

The rate of profits is low in nearly all those trades which require very little ability of the highest order, and in which a public or private firm with a good connection and a large capital can hold its own against new-comers, so long as it is managed by men of industrious habits with sound common sense and a moderate share of enterprise. And men of this kind are seldom wanting either to a well-established public company or to a private firm which is ready to take the ablest of its servants into partnership.

On the whole, then, we may conclude firstly that the true rate of profits in large businesses is higher than at first sight appears, because much that is commonly counted as profits in the small business ought to be classed under another head, before the rate of profits in it is compared with that in a large business: and secondly that, even when this correction has been made, the rate of profit reckoned in the ordinary way declines generally as the size of the business increases.

§ 2. The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. The work of management may be heavy because it involves great mental strain in organizing and devising new methods; or because it involves great anxiety and risk: and these two things frequently go together. Individual trades have indeed peculiarities of their own, and all rules on the subject are liable to great exceptions. But the following general propositions will be found to be valid, other things being equal, and to explain many inequalities in the normal rates of profit in different trades.

First, the extent of the work of management needed in a business depends more on the amount of the circulating capital used than on that of the fixed. The rate of profit tends therefore to be low in trades in which there is a disproportionately large amount of durable plant, that requires but little trouble and attention when once it has been laid down. As we have seen, these trades are likely to get into the hands of joint-stock companies: and the aggregate salaries of the directors and higher officials bear a very small proportion to the capital employed in the case of railway and water companies, and, even in a more marked degree, of companies that own canals and docks and bridges.

Further, given the proportion between the fixed and circulating capital of a business; the work of management will generally be the heavier, and the rate of profits the higher, the more important the wages-bill is relatively to the cost of material and the value of the stock-in-trade.

In trades that handle costly materials, success depends very much upon good fortune and ability in buying and selling; and the order of mind required for interpreting rightly and reducing to their proper proportions the causes that are likely to affect price is rare, and can command high earnings. The allowance to be made for this is so important in certain trades as to have induced some American writers to regard profits as remuneration of risk simply; and as consisting of what remains after deducting interest and earnings of management from gross profits. But this use of the term seems on the whole not advantageous, because it tends to class the work of management with mere routine superintendence. It is of course true that as a rule a person will not enter on a risky business, unless, other things being equal, he expects to gain from it more than he would in other trades open to him, after his probable losses had been deducted from his probable gains on a fair actuarial estimate. If there were not a positive evil in such risk, people would not pay premia to insurance companies; which they know are calculated on a scale sufficiently above the true actuarial value of the risk to pay the companies' great expenses of advertising and working, and yet to yield a surplus of net profits. And where the risks are not insured for, they must be compensated in the long run on a scale about as high as would be required for the premia of an insurance company, if the practical difficulties of insurance against business risks could be overcome. But further many of those who would be most competent to manage difficult businesses with wisdom and enterprise, are repelled from great risks, because their own capital is not large enough to bear great losses. Thus a risky trade is apt to get into the hands of rather reckless people; or perhaps into the hands of a few powerful capitalists, who work it ably, but arrange among themselves that the market shall not be forced so as to prevent them from having a high rate of profit on the average84 .

In trades in which the speculative element is not very important, so that the work of management consists chiefly of superintendence, the earnings of management will follow pretty closely on the amount of work done in the business; and a very rough but convenient measure of this is found in the wages-bill. And perhaps the least inaccurate of all the broad statements that can be made with regard to a general tendency of profits to equality in different trades, is that where equal capitals are employed, profits tend to be a certain percentage per annum on the total capital, together with a certain percentage on the wages-bill85 .

A manufacturer of exceptional ability and energy will apply better methods, and perhaps better machinery than his rivals: he will organize better the manufacturing and the marketing sides of his business; and he will bring them into better relation to one another. By these means he will extend his business; and therefore he will be able to take greater advantage from the specialization both of labour and of plant86 . Thus he will obtain increasing return and also increasing profit: for if he is only one among many producers his increased output will not materially lower the prices of his goods, and nearly all the benefit of his economies will accrue to himself. If he happens to have a partial monopoly of his branch of industry, he will so regulate his increased output, that his monopoly profits increase87 .

But when such improvements are not confined to one or two producers: when they arise from a general increase in demand and the output which corresponds to it; or from improved methods or machinery, that are accessible to the whole industry; or from advances made by subsidiary industries, and increased "external" economies generally; then the prices of the products will keep close to a level which yields only a normal rate of profits to that class of industry. And in the process, the industry is likely to have passed over to a class in which the normal rate of profits is lower than in its old class; because there is in it more uniformity and monotony, and less mental strain than before; and, though this is nearly the same thing in other words, because it is more suited to joint-stock management. Thus a general increase in the proportion which the quantity of product bears to the quantity of labour and capital in an industry is likely to be accompanied by a fall in the rate of profits; which may, from some points of view, be regarded as a diminishing return measured in values88 .

§ 3. We may now pass from profit per annum and examine the causes that govern profit on the turnover. It is obvious that while the normal rate of profit per annum varies within narrow limits, the profit on the turnover may vary very widely from one branch of trade to another, because it depends on the length of time and the amount of work required for the turnover. Thus wholesale dealers, who buy and sell large quantities of produce in single transactions, and who are able to turn over their capital very rapidly, may make large fortunes though their average profit on the turnover is less than one per cent.; and, in the extreme case of large stock-exchange dealings, even when it is only a small fraction of one per cent. But a shipbuilder who has to put labour and material into the ship, and to provide a berth for it, a long while before it is ready for sale, and who has to take care for every detail connected with it, must add a very high percentage to his direct and indirect outlay in order to remunerate him for his labour, and the locking up of his capital89 .

Again, in the textile industries some firms buy raw material and turn out finished goods, while others confine themselves to spinning, to weaving, or to finishing; and it is obvious that the rate of profit on the turnover of one of the first class must be equal to the sum of the rates of profit of one of each of the three other classes90 Again, the retail dealer's profit on the turnover is often only five or ten per cent. for commodities which are in general demand, and which are not subject to changes of fashion; so that while the sales are large, the necessary stocks are small, and the capital invested in them can be turned over very rapidly, with very little trouble and no risk. But a profit on the turnover of nearly a hundred per cent. is required to remunerate the retailer of some kinds of fancy goods which can be sold but slowly, of which varied stocks must be kept, which require a large place for their display, and which a change of fashion may render unsaleable except at a loss; and even this high rate is often exceeded in the case of fish, fruit, flowers and vegetables91 .

§ 4. We see then that there is no general tendency of profits on the turnover to equality; but there may be, and as a matter of fact there is in each trade and in every branch of each trade, a more or less definite rate of profits on the turnover which is regarded as a "fair" or normal rate. Of course these rates are always changing in consequence of changes in the methods of trade; which are generally begun by individuals who desire to do a larger trade at a lower rate of profit on the turnover than has been customary, but at a larger rate of profit per annum on their capital. If however there happens to be no great change of this kind going on, the traditions of the trade that a certain rate of profit on the turnover should be charged for a particular class of work are of great practical service to those in the trade. Such traditions are the outcome of much experience tending to show that, if that rate is charged, a proper allowance will be made for all the costs (supplementary as well as prime) incurred for that particular purpose, and in addition the normal rate of profits per annum in that class of business will be afforded. If they charge a price which gives much less than this rate of profit on the turnover they can hardly prosper; and if they charge much more they are in danger of losing their custom, since others can afford to undersell them. This is the "fair" rate of profit on the turnover which an honest man is expected to charge for making goods to order, when no price has been agreed on beforehand; and it is the rate which a court of law will allow, in case a dispute should arise between buyer and seller92 .

§ 5. During all this inquiry we have had in view chiefly the ultimate, or long-period or true normal results of economic forces; we have considered the way in which the supply of business ability in command of capital tends in the long run to adjust itself to the demand; we have seen how it seeks constantly every business and every method of conducting every business in which it can render services that are so highly valued by persons who are able to pay good prices for the satisfaction of their wants, that those services will in the long run earn a high reward. The motive force is the competition of undertakers: each one tries every opening, forecasting probable future events, reducing them to their true relative proportions, and considering what surplus is likely to be afforded by the receipts of any undertaking over the outlay required for it. All his prospective gains enter into the profits which draw him towards the undertaking; all the investments of his capital and energies in making the appliances for future production, and in building up the "immaterial" capital of a business connection, have to show themselves to him as likely to be profitable, before he will enter on them: the whole of the profits which he expects from them enter into the reward, which he expects in the long run for his venture. And if he is a man of normal ability (normal that is for that class of work), and is on the margin of doubt whether to make the venture or not, they may be taken as true representatives of the (marginal) normal expenses of production of the services in question. Thus the whole of the normal profits enter into true or long-period supply price.

The motives which induce a man and his father to invest capital and labour in preparing him for his work as an artisan, as a professional man, or as a business man, are similar to those which lead to the investment of capital and labour in building up the material plant and the organization of a business. In each case the investment (so far as man's action is governed by deliberate motive at all) is carried up to that margin at which any further investment appears to offer no balance of gain, no excess or surplus of utility over "dis-utility"; and the price, that is expected as a reward for all this investment, is therefore a part of the normal expenses of production of the services rendered by it.

A long period of time is however needed in order to get the full operation of all these causes, so that exceptional success may be balanced against exceptional failure. On the one hand are those who succeed abundantly because they turn out to have rare ability or rare good fortune either in the particular incidents of their speculative enterprises, or in meeting with a favourable opportunity for the general development of their business. And on the other are those who are mentally or morally incapable of making good use of their training and their favourable start in life, who have no special aptitude for their calling, whose speculations are unfortunate, or whose businesses are cramped by the encroachment of rivals, or left stranded by the tide of demand receding from them and flowing in some other direction.

But though these disturbing causes may thus be neglected in problems relating to normal earnings and normal value; they assume the first rank, and exert a predominating influence, with regard to the incomes earned by particular individuals at particular times. And, since these disturbing causes affect profits and the earnings of management in very different ways from those in which they affect ordinary earnings, there is a scientific necessity for treating differently profits and ordinary earnings when we are discussing temporary fluctuations and individual incidents. Questions relating to market fluctuations cannot indeed be properly handled till the theories of money, credit and foreign trade have been discussed: but even at this stage we may note the following contrast between the ways in which disturbing causes such as we have just described affect profits and ordinary earnings.

§ 6. In the first place the undertaker's profits bear the first brunt of any change in the price of those things which are the product of his capital (including his business organization), of his labour and of the labour of his employees; and as a result fluctuations of his profits generally precede fluctuations of their wages, and are much more extensive. For, other things being equal, a comparatively small rise in the price for which he can sell his product is not unlikely to increase his profit manyfold, or perhaps to substitute a profit for a loss. That rise will make him eager to reap the harvest of good prices while he can; and he will be in fear that his employees will leave him or refuse to work. He will therefore be more able and more willing to pay the high wages; and wages will tend upwards. But experience shows that (whether they are governed by sliding scales or not) they seldom rise as much in proportion as prices; and therefore they do not rise nearly as much in proportion as profits.

Another aspect of the same fact is that when trade is bad, the employee at worst is earning nothing towards the support of himself and his family; but the employer's outgoings are likely to exceed his incomings, particularly if he is using much borrowed capital. In that case even his gross earnings of management are a negative quantity: that is, he is losing his capital. In very bad times this happens to a great number, perhaps the majority of undertakers; and it happens almost constantly to those who are less fortunate, or less able, or less well fitted for their special trade than others.

§ 7. To pass to another point, the number of those who succeed in business is but a small percentage of the whole; and in their hands are concentrated the fortunes of others several times as numerous as themselves, who have made savings of their own, or who have inherited the savings of others and lost them all, together with the fruits of their own efforts, in unsuccessful business. In order therefore to find the average profits of a trade we must not divide the aggregate profits made in it by the number of those who are reaping them, nor even by that number added to the number who have failed: but from the aggregate profits of the successful we must subtract the aggregate losses of those who have failed, and perhaps disappeared from the trade; and we must then divide the remainder by the sum of the numbers of those who have succeeded and those who have failed. It is probable that the true gross earnings of management, that is, the excess of profits over interest, is not on the average more than a half, and in some risky trades not more than a tenth part, of what it appears to be to persons who form their estimate of the profitableness of a trade by observation only of those who have secured its prizes. There are, however, as we shall presently see, reasons for thinking that the risks of trade are on the whole diminishing rather than increasing93 .

§ 8. We may pass to another difference between the fluctuations of profits and ordinary earnings. We have seen that before free capital and labour have been invested in securing the skill required for the work of the artisan or professional man, the income expected to be derived from them is of the nature of profits: though the rate of such profits which is required, is often high for two reasons:—the people who make the outlay do not themselves reap the greater part of the reward arising from it; and they are frequently in straitened circumstances, and not able to invest for a distant return without great self-denial. And we have seen that, when the artisan or professional man has once obtained the skill required for his work, a part of his earnings are for the future really a quasi-rent of the capital and labour invested in fitting him for his work, in obtaining his start in life, his business connections, and generally his opportunity for turning his faculties to good account; and only the remainder of his income is true earnings of effort. But this remainder is generally a large part of the whole. And here lies the contrast. For when a similar analysis is made of the profits of the business man, the proportions are found to be different: in his case the greater part is quasi-rent.

The income which the undertaker of business on a large scale gets from the capital, material and immaterial, invested in his business is so great, and liable to such violent fluctuations from a considerable negative to a large positive quantity, that he often thinks very little of his own labour in the matter. If profitable business opens out to him, he regards the harvest accruing from it as almost pure gain; there is so little difference between the trouble of having his business on his hands only partially active, and that of working it to its full capacity, that as a rule it scarcely occurs to him to set off his own extra labour as a deduction from those gains: they do not present themselves to his mind as to any considerable extent earnings purchased by extra fatigue, in the same way as the extra earnings got by working overtime do to the artisan. This fact is the chief cause, and to some extent the justification, of the imperfect recognition by the general public, and even by some economists, of the fundamental unity underlying the causes that determine normal profits and normal wages.

Closely allied to the preceding difference is another. When an artisan or a professional man has exceptional natural abilities, which are not made by human effort, and are not the result of sacrifices undergone for a future gain, they enable him to obtain a surplus income over what ordinary persons could expect from similar exertions following on similar investments of capital and labour in their education and start in life; a surplus which is of the nature of rent.

But, to revert to a point mentioned at the end of last chapter, the class of business undertakers contains a disproportionately large number of persons with high natural ability; since, in addition to the able men born within its ranks it includes also a large share of the best natural abilities born in the lower ranks of industry. And thus while profits on capital invested in education is a specially important element in the incomes of professional men taken as a class, the rent of rare natural abilities may be regarded as a specially important element in the incomes of business men, so long as we consider them as individuals. (In relation to normal value the earnings even of rare abilities are, as we have seen, to be regarded rather as a quasi-rent than as a rent proper.)

But there are exceptions to this rule. The humdrum business man, who has inherited a good business and has just sufficient force to keep it together, may reap an income of many thousands a year, which contains very little rent of rare natural qualities. And, on the other hand, the greater part of incomes earned by exceptionally successful barristers, and writers, and painters, and singers, and jockeys may be classed as the rent of rare natural abilities—so long at least as we regard them as individuals, and are not considering the dependence of the normal supply of labour in their several occupations on the prospects of brilliant success which they hold out to aspiring youth.

The income of a particular business is often very much affected by changes in its industrial environment and opportunity or conjuncture. But similar influences affect the special income derived from the skill of many classes of workers. The discovery of rich copper-mines in America and Australia lowered the earning power of the skill of Cornish miners, so long as they stayed at home: and every new discovery of rich mines in the new districts raised the earning power of the skill of those miners who had already gone there. And again, the growth of a taste for theatrical amusements while raising the normal earnings of actors, and inducing an increased supply of their skill, raises the earning power of the skill of those already in the profession, a great part of which is, from the point of view of the individual, a producer's surplus due to rare natural qualities94 .

§ 9. Next let us consider in relation to one another the interests of different industrial classes engaged in the same trade.

This solidarity is a special case of the general fact that the demand for the several factors of production of any commodity is a joint demand, and we may refer back to the illustration of this general fact which is given in Book V. chapter VI. We there saw how a change in the supply of (say) plasterers' labour would affect the interests of all other branches of the building trades in the same way, but much more intensely than it would the general public. The fact is that the incomes derived from the specialized capital and the specialized skill belonging to all the various industrial classes engaged in producing houses, or calico, or anything else, depend very much on the general prosperity of the trade. And in so far as this is the case they may be regarded for short periods as shares of a composite or joint income of the whole trade. The share of each class tends to rise when this aggregate income is increased by an increase in their own efficiency or by any external cause. But when the aggregate income is stationary, and any one class gets a better share than before, it must be at the expense of the others. This is true of the whole body of those engaged in any trade; and it is true in a special sense of those who have spent a great part of their lives in working together in the same business establishment.

§ 10. The earnings of a successful business, looked at from the point of view of the business man himself, are the aggregate of the earnings, firstly, of his own ability, secondly, of his plant and other material capital, and thirdly, of his good-will, or business organization and connection. But really it is more than the sum of these: for his efficiency depends partly on his being in that particular business; and if he were to sell it at a fair price, and then engage himself in another business, his income would probably be much diminished. The whole value of his business connection to him when working it is a notable instance of Conjuncture or Opportunity value. It is mainly a product of ability and labour, though good fortune may have contributed to it. That part which is transferable, and may be bought by a private individual, or by a large amalgamation of firms, must be entered among their costs; and is in a sense a Conjuncture or Opportunity cost.

The point of view of the employer however does not include the whole gains of the business: for there is another part which attaches to his employees. Indeed, in some cases and for some purposes, nearly the whole income of a business may be regarded as a quasi-rent, that is an income determined for the time by the state of the market for its wares, with but little reference to the cost of preparing for their work the various things and persons engaged in it. In other words it is a composite quasi-rent95 divisible among the different persons in the business by bargaining, supplemented by custom and by notions of fairness—results which are brought about by causes, that bear some analogy to those that, in early forms of civilization, have put the producer's surplus from the land almost permanently into the hands not of single individuals, but of cultivating firms. Thus the head clerk in a business has an acquaintance with men and things, the use of which he could in some cases sell at a high price to rival firms. But in other cases it is of a kind to be of no value save to the business in which he already is; and then his departure would perhaps injure it by several times the value of his salary, while probably he could not get half that salary elsewhere96 .

It is important to see how the position of such employees differs from that of others, whose services would be of almost equal value to any business in a large trade. The income of one of these in any week consists, as we have seen, partly of a recompense for the fatigue incurred by the work of that week, and partly of a quasi-rent of his specialized skill and ability: and, assuming competition to be perfectly efficient, this quasi-rent is determined by the price which either his present employers, or any other, would be willing to pay for his services in the state in which the market for their wares is during that week. The prices, that have to be paid for given work of a given kind, being thus determined by the general conditions of the trade, these prices enter into the direct outgoings which have to be deducted from its gross earnings in order to ascertain the quasi-rent of this particular firm at the time: but in the rise or fall of that quasi-rent the employees would have no share. In fact however competition is not thus perfectly efficient. Even where the same price is paid all over the market for the same work with the same machinery, the prosperity of a firm increases the chance of advancement for each of its employees, and also his chance of continuous employment when trade is slack, and much-coveted overtime when trade is good.

Thus there is de facto some sort of profit-and-loss sharing between almost every business and its employees; and perhaps this is in its very highest form when, without being embodied in a definite contract, the solidarity of interests between those who work together in the same business is recognized with cordial generosity as the result of true brotherly feeling. But such cases are not very common; and as a rule the relations between employers and employed are raised to a higher plane both economically and morally by the adoption of the system of profit-sharing; especially when it is regarded as but a step towards the still higher but much more difficult level of true co-operation.

If the employers in any trade act together and so do the employed, the solution of the problem of wages becomes indeterminate; and there is nothing but bargaining to decide the exact shares in which the excess of its incomings over its outgoings for the time should be divided between employers and employed. Leaving out of account industries which are being superseded, no lowering of wages will be permanently in the interest of employers, which drives many skilled workers to other markets, or even to other industries in which they abandon the special earnings of skill; and wages must be high enough in an average year to attract young people to the trade. This sets lower limits to wages, and upper limits are set by corresponding necessities as to the supply of capital and business power. But what point between these limits should be taken at any time can be decided only by higgling and bargaining; which are however likely to be tempered somewhat by ethico-prudential considerations, especially if there be a good court of conciliation in the trade.

The problem is in practice even more complex. For each group of employees is likely to have its own union, and to fight for its own hand. The employers act as buffers: but a strike for higher wages on the part of one group may, in effect, deplete the wages of some other group almost as much as the employers' profits.

This is not a fitting place for a study of the causes and effects of trade combinations and of alliances and counter-alliances among employers and employed, as well as among traders and manufacturers. They present a succession of picturesque incidents and romantic transformations, which arrest public attention and seem to indicate a coming change of our social arrangements now in one direction and now in another; and their importance is certainly great and grows rapidly. But it is apt to be exaggerated; for indeed many of them are little more than eddies, such as have always fluttered over the surface of progress. And though they are on a larger and more imposing scale in this modern age than before; yet now, as ever, the main body of movement depends on the deep silent strong stream of the tendencies of normal distribution and exchange; which "are not seen," but which control the course of those episodes which "are seen." For even in conciliation and arbitration, the central difficulty is to discover what is that normal level from which the decisions of the court must not depart far under penalty of destroying their own authority.

BOOK VI, CHAPTER IX

RENT OF LAND.

§ 1. It has been argued in Book V. that the rent of land is no unique fact, but simply the chief species of a large genus of economic phenomena; and that the theory of the rent of land is no isolated economic doctrine, but merely one of the chief applications of a particular corollary from the general theory of demand and supply; that there is a continuous gradation from the true rent of those free gifts which have been appropriated by man, through the income derived from permanent improvements of the soil, to those yielded by farm and factory buildings, steam-engines and less durable goods. In this and the following chapter we are to make a special study of the net income of land. That study has two parts. One part relates to the total quantity of the net income, or producer's surplus from land: the other to the way in which this income is distributed between those who have an interest in the land. The first is general, whatever be the form of land tenure. We will begin with it, and suppose that the cultivation of the land is undertaken by its owner.

We may call to mind that the land has an "inherent" income of heat and light and air and rain, which man cannot greatly affect; and advantages of situation, many of which are wholly beyond his control, while but few of the remainder are the direct result of the investment of capital and effort in the land by its individual owners. These are the chief of its properties, the supply of which is not dependent on human effort, and which would therefore not be increased by extra rewards to that effort: and a tax on which would always fall exclusively on the owners97 .

On the other hand those chemical or mechanical properties of the soil, on which its fertility largely depends, can be modified, and in extreme cases entirely changed by man's action. But a tax on the income derived from improvements which, though capable of general application are yet slowly made and slowly exhausted, would not appreciably affect the supply of them during a short period, nor therefore the supply of produce due to them. It would consequently fall in the main on the owner; a leaseholder being regarded for the time as owner, subject to a mortgage. In a long period, however, it would diminish the supply of them, would raise the normal supply price of produce and fall on the consumer.

§ 2. Now let us revert to our study of the tendency to diminishing return in agriculture in the fourth Book; still supposing that the owner of the land undertakes its cultivation, so that our reasoning may be general, and independent of the incidents of particular forms of land tenure.

We saw how the return to successive doses of capital and labour, though it may increase for the first few doses, will begin to diminish, when the land is already well cultivated. The cultivator continues to apply additional capital and labour, till he reaches a point at which the return is only just sufficient to repay his outlay and reward him for his own work. That will be the dose on the margin of cultivation, whether it happens to be applied to rich or to poor land; an amount equal to the return to it will be required, and will be sufficient to repay him for each of his previous doses. The excess of the gross produce over this amount is his producer's surplus.

He looks forward as far as he can: but it is seldom possible to look forward very far. And at any given time he takes for granted all that richness of the soil which results from permanent improvements; and the income (or quasi-rent) derived from those improvements, together with that due to the original qualities of the soil, constitutes his producer's surplus or rent. Henceforth it is only the income derived from new investments that appears as earnings and profits: he carries these new investments up to the margin of profitableness; and his producer's surplus or rent is the excess of the gross income from the improved land over what is required to remunerate him for the fresh doses of capital and labour he annually applies.

This surplus depends on, firstly, the richness of the land, and secondly, the relative values of those things which he has to sell and of those things which he needs to buy. The richness or fertility of the land, we have seen, cannot be measured absolutely, for it varies with the nature of the crops raised, and with the methods and intensity of cultivation. Two pieces of land cultivated even by the same man with equal expenditures of capital and labour, are likely, if they yield equal crops of barley, to give unequal crops of wheat; if they return equal crops of wheat when cultivated slightly or in a primitive fashion, they are likely to yield unequal crops when cultivated intensively, or on modern methods. Further, the prices at which the various requisites of the farm can be bought, and its various products sold, depend on the industrial environment; and changes in that are continually changing the relative values of different crops and therefore the relative values of land in different situations.

Lastly, we suppose the cultivator to be of normal ability relatively to the task he has undertaken, and the circumstances of time and place. If he is of less ability his actual gross produce will be less than that which normally should come from the land: it will be yielding to him less than its true producer's surplus. If, on the contrary, he is of more than normal ability, he will be getting in addition to the producer's surplus due to the land, some producer's surplus due to rare ability.

§ 3. We have already traced in some detail the way in which a rise in the value of agricultural produce increases the producer's surplus, measured in terms of produce, from all lands, but especially from those where the tendency to diminishing return acts but feebly98 . We have seen that generally speaking it raises the value of poor lands relatively to rich: or in other words, that if a person anticipates a rise in the value of produce, he may expect a larger future income from investing a given sum of money in poor land at present prices than from investing it in rich land99 .

Next, the real value of the producer's surplus, i.e. its value measured in terms of general purchasing power, will rise relatively to its produce value, in the same ratio as the value of produce measured in the same way has risen: that is to say, a rise in the value of produce causes a double rise in the value of producer's surplus.

The term the "real value" of produce is indeed ambiguous. Historically it has most often been used to mean the real value from the point of view of the consumer. This use is rather dangerous: for there are some purposes for which it is better to consider real value from the point of view of the producer. But with this caution we may use the term "labour-value" to express the amount of labour of a given kind that the produce will purchase; and "real value" to mean the amount of necessaries, comforts, and luxuries of life that a given amount of produce will purchase. A rise in the labour-value of raw produce may imply an increasing pressure of population on the means of subsistence; and a rise of the producer's surplus from land due to that cause goes together with, and is a sort of measure of, the degradation of the people. But if, on the other hand, the rise in the real value of raw produce has been caused by an improvement of the arts of production, other than agricultural, it will probably be accompanied by a rise in the purchasing power of wages.

§ 4. In all this it has been clear that the producer's surplus from land is not evidence of the greatness of the bounty of nature, as was held by the Physiocrats and in a more modified form by Adam Smith: it is evidence of the limitations of that bounty. But it must be remembered that inequalities of situation relatively to the best markets are just as powerful causes of inequalities of producer's surplus, as are inequalities of absolute productiveness100 .

This truth and its chief consequences, many of which seem now so obvious, were first made manifest by Ricardo. He delighted to argue that no surplus can be reaped from the ownership of those of nature's gifts the supply of which is everywhere practically unlimited: and in particular that there would be no surplus from land if there were an unlimited supply of it all equally fertile and all equally accessible. He carried this argument further, and showed that an improvement in the arts of cultivation, equally applicable to all soils (which is equivalent to a general increase in the natural fertility of land), will be nearly sure to lower the aggregate corn-surplus and quite sure to lower the aggregate real surplus derived from the land that supplies a given population with raw produce. He also pointed out that, if the improvements affected chiefly those lands that were already the richest, it might raise the aggregate surplus; but that, if it affected chiefly the poorer class of lands, it would lower that aggregate very much.

It is quite consistent with this proposition to admit that an improvement in the arts of cultivation of the land of England now would raise the aggregate surplus from her land, because it would increase the produce without materially lowering its price, unless it were accompanied by a similar improvement in those countries from which she imports raw produce; or, which comes to the same thing for this purpose, by an improvement in the means of communication with them. And as Ricardo himself says, improvements that apply equally to all the land supplying the same market, "as they give a great stimulus to population, and at the same time enable us to cultivate poorer lands with less labour, are ultimately of immense advantage to the landlords101 ."

There is some interest in the attempt to distinguish that part of the value of land which is the result of man's labour, from that which is due to the original bounty of nature. Part of its value is caused by highways and other improvements that were made for the general purposes of the country, and are not a special charge on its agriculture. Counting these in, List, Carey, Bastiat and others contend that the expense of bringing land from its original to its present condition would exceed the whole value it has now; and hence they argue that all of its value is due to man's labour. Their facts may be disputed; but they are really not relevant to their conclusions. What is wanted for their argument is that the present value of land should not exceed the expense, in so far as it can properly be charged to agricultural account, of bringing the land from its original condition to one in which it would be as fertile and generally useful for agricultural purposes as it now is. Many of the changes wrought in it were made to suit agricultural methods that are long since obsolete; and some of them even deduct from, rather than add to, the value of the land. And further, the expenses of making the change must be the net expenses after adding indeed interest on the gradual outlay, but also after deducting the aggregate value of the extra produce which has, from first to last, been attributable to the improvement. The value of land in a well-peopled district is generally much greater than these expenses, and often many times as great.

§ 5. The argument of this chapter so far is applicable to all systems of land tenure, which recognize private ownership of land in any form; for it is concerned with that producer's surplus, which accrues to the owner if he cultivates his land himself; or, if he does not, then accrues to him and his tenants, regarded as a firm engaged in the business of cultivation. Thus it holds true, whatever be the division which custom or law or contract may have arranged between them with regard to their several shares of the cost of cultivation on the one hand, and the fruits of the cultivation on the other. The greater part of it is also independent of the stage of economic development which has been reached; and it is valid even if little or no produce is sent to market, and dues are levied in kind and so on102 .

At the present day, in those parts of England where custom and sentiment count for least, and free competition and enterprise for most in the bargaining for the use of land, it is commonly understood that the landlord supplies, and in some measure maintains, those improvements which are slowly made and slowly worn out. That being done, he requires of his tenant the whole producer's surplus which the land thus equipped is estimated to afford in a year of normal harvests and normal prices, after deducting enough to replace the farmer's capital with normal profits, the farmer standing to lose in bad years and gain in good years. In this estimate it is implicitly assumed that the farmer is a man of normal ability and enterprise for that class of holding; and therefore, if he rises above that standard, he will himself reap the benefit; and if he falls below it will himself bear the loss, and perhaps ultimately leave the farm. In other words, that part of the income derived from the land which the landlord obtains, is governed, for all periods of moderate length, mainly by the market for the produce, with but little reference to the cost of providing the various agents employed in raising it; and it therefore is of the nature of a rent. And that part which the tenant retains, is to be regarded, even for short periods, as profits entering directly into the normal price of the produce; because the produce would not be raised unless it were expected to yield those profits.

The more fully therefore the distinctively English features of land tenure are developed, the more nearly is it true that the line of division between the tenant's and the landlord's share coincides with the deepest and most important line of cleavage in economic theory103 . This fact perhaps more than any other was the cause of the ascendancy of English economic theory early in this century; it helped English economists to pioneer the way so far ahead, that even in our own generation, when as much intellectual activity has been devoted to economic studies in other countries as in England, nearly all the new constructive ideas are found to be but developments of others which were latent in the older English work.

The fact itself appears accidental: but perhaps it was not. For this particular line of cleavage involves less friction, less waste of time and trouble in checks and counter checks than any other. It may be doubted whether the so-called English system will endure. It has great disadvantages, and it may not be found the best in a future stage of civilization. But when we come to compare it with other systems, we shall see that it afforded great advantages to a country, which pioneered the way for the world in the development of free enterprise; and which therefore was impelled early to adopt all such changes as give freedom and vigour, elasticity and strength.

BOOK VI, CHAPTER X

LAND TENURE.

§ 1. In early times, and in some backward countries even in our own age, all rights to property depend on general understandings rather than on precise laws and documents. In so far as these understandings can be reduced to definite terms and expressed in the language of modern business, they are generally to the following effect:—The ownership of land is vested, not in an individual, but in a firm of which one member or group of members is the sleeping partner, while another member or group of members (it may be a whole family) is the working partner104 .

The sleeping partner is sometimes the ruler of the State, sometimes he is an individual who inherits what was once the duty of collecting the payments due to this ruler from the cultivators of a certain part of the soil; but what, in the course of silent time, has become a right of ownership, more or less definite, more or less absolute. If, as is generally the case, he retains the duty to make certain payments to the ruler of the State, the partnership may be regarded as containing three members, of whom two are sleeping partners105 .

The sleeping partner, or one of them, is generally called the proprietor, or landholder or landlord, or even the landowner. But this is an incorrect way of speaking, when he is restrained by law, or by custom which has nearly the force of law, from turning the cultivator out of the holding by an arbitrary increase of the payments exacted from him or by any other means. In that case the property in the land vests not in him alone, but in the whole of the firm of which he is only the sleeping partner, the payment made by the working partner is not a rent at all, but is that fixed sum, or that part of the gross proceeds, as the case may be, which the constitution of the firm binds him to pay; and, in so far as the custom or law which regulates these payments is fixed and unalterable, the theory of rent has but little direct application.

§ 2. But in fact the payments and dues, which custom is supposed to stereotype, nearly always contain elements which are incapable of precise definition; while the accounts of them handed down by tradition are embodied in loose and vague impressions, or at best are expressed in words that make no attempt at scientific exactness106 .

We can watch the influence of this vagueness in the agreements between landlord and tenant even in modern England; for they have always been interpreted by the aid of customs, which have ever been imperceptibly growing and dwindling again, to meet the changing exigencies of successive generations. We change our customs more quickly than our forefathers did, and we are more conscious of our changes and more willing to convert our customs into legal enactments, and to make them uniform107 .

At the present day, in spite of minute legislation and carefully drawn agreements, there remains a wide margin of uncertainty as to the amount of capital which the landlord will from time to time invest in maintaining and extending the farm buildings and other improvements. It is in these matters, quite as much as in his direct money relations with the tenant, that the generous and liberal landlord shows himself; and, what is specially important for the general argument of this chapter, alterations in the real net rent required of the tenant are as often made by a quiet readjustment of the shares of the expenses of working the farm that are borne by the landlord and the tenant as by a change in the money rent. Thus corporate bodies and many large private landowners often let their tenants go on from year to year, without any attempt to make the money rents follow the changes in the real letting value of the land; and there are many farms which are not let on lease and yet the rent of which has nominally remained unchanged during the agricultural inflation which culminated in 1874, and during the depression which followed. But in the earlier period the farmer, who knew he was under-rented, could not put pressure on his landlord to lay out capital in drainage or new buildings or even in repairs, and had to humour him as regards the game and in other matters; while just now the landlord, who has a steady tenant, will do many things, that are not stipulated for in the agreement, in order to retain him. Thus, while the money rent has remained stationary, the real rent has changed.

This fact is an important illustration of the general proposition, that the economic theory of rent, the Ricardian theory as it is sometimes called, does not apply to modern English land tenure without many corrections and limitations both as regards substance and form; and that a further extension of these corrections and limitations will make the theory applicable to all forms of Mediæval and Oriental land tenure, in which any sort of private ownership is recognized. The difference is only one of degree.

§ 3. But the difference of degree is very great. This is partly because in primitive times and backward countries the sway of custom is more undisputed; partly because, in the absence of scientific history, shortlived man has little better means of ascertaining whether custom is quietly changing, than the fly, born to-day and dead to-morrow, has of watching the growth of the plant on which it rests. But the chief reason is that the conditions of partnership were expressed in terms which were seldom capable of exact definition and measurement.

For the share of the senior partner in the firm, or the landlord as we may for shortness call him, generally included (either with or without a right to a certain share of the produce) the right to claim certain labour services and dues, tolls and presents; and the amount which he obtained under each of those heads varied from time to time, from place to place, and from one landlord to another. Whenever payments of all kinds made by the cultivator left him a margin beyond the necessaries of life for him and his family, together with those comforts and luxuries which were established by custom, the landlord was likely to use his superior strength to raise the payments in some form or other. If the chief payments were a certain share of the produce, he might increase that share: but, as that could seldom be done without an appearance of violence, he would be more likely to increase the number and weight of his minor imposts, or to insist that the land be more intensively cultivated, and a larger part of it be given to crops that cost much labour and are of great value. Thus changes went on, smoothly for the most part, silently and almost imperceptibly, like the hour-hand of a clock; but in the long run they were very thorough108 .

The protection which custom afforded to the tenant was not indeed unimportant even as regards these dues. For he always knew pretty well what demands he would have to meet at any particular time. The moral sense of all around him, high and low, protested against any attempt on the part of his landlord to make a sudden and violent increase in the payments and dues, the tolls and fines which were recognized as usual; and thus custom rounded off the edges of change.

It is moreover true that these vague and variable elements of rent were generally but a small part of the whole; and that in those not very rare cases in which the money rent remained fixed for very long periods together, the tenant had a kind of partnership in the soil, which he owed partly to the forbearance of his landlord if it happened that the true net value of the land had risen, but partly also to the constraining force of custom and public opinion. This force in some measure resembled the force which holds raindrops on the lower edge of a window frame: the repose is complete till the window is violently shaken, and then they fall together; and in like way the legal rights of the landlord which had long lain latent were sometimes brought suddenly into action in a period of great economic change109 .

§ 4. The question whether the payments made by the cultivator for the use of his land should be reckoned in money or in produce is of growing interest with reference to both India and England. But we may pass it by for the present and consider the more fundamental distinction between the "English" system of rental and that of holding land on "shares," as it is called in the New World, or the "Metayer110 " system as it is called in the Old.

In a great part of Latin Europe the land is divided into holdings, which the tenant cultivates by the labour of himself and his family, and sometimes, though rarely, that of a few hired labourers, and for which the landlord supplies buildings, cattle and, sometimes even, farm implements. In America there are few agricultural tenancies of any kind, but two-thirds of those few are small holdings let out to white men of the poorer class, or to freed negroes, on some plan by which labour and capital share in the produce111 .

This plan enables a man who has next to no capital of his own to obtain the use of it at a lower charge than he could in any other way, and to have more freedom and responsibility than he would as a hired labourer; and thus the plan has many of the advantages of the three modern systems of co-operation, profit sharing, and payment by piece-work112 . But though the metayer has more freedom than the hired labourer he has less than the English farmer. His landlord has to spend much time and trouble, either of his own or of a paid agent, in keeping the tenant to his work; and he must charge for these a large sum, which, though going by another name, is really earnings of management. For, when the cultivator has to give to his landlord half of the returns to each dose of capital and labour that he applies to the land, it will not be to his interest to apply any doses the total return to which is less than twice enough to reward him. If, then, he is free to cultivate as he chooses, he will cultivate far less intensively than on the English plan; he will apply only so much capital and labour as will give him returns more than twice enough to repay himself: so that his landlord will get a smaller share even of those returns than he would have on the plan of a fixed payment113 .

This is the case in many parts of Europe, in which the tenant has practical fixity of tenure; and then it is only by constant interference that the landlord can keep up the amount of labour he puts on his farm, and keep down the use he makes of the farm cattle for outside work, the fruits of which he does not share with his landlord.

But even in the most stationary districts the amount and quality of the stock which custom requires the landlord to provide are being constantly, though imperceptibly, modified to suit the changing relations of demand and supply. And if the tenant has no fixity of tenure, the landlord can deliberately and freely arrange the amount of capital and labour supplied by the tenant and the amount of capital supplied by himself to suit the exigencies of each special case114 .

It is obvious then that the advantages of the metayer system are considerable when the holdings are very small, the tenants poor, and the landlords not averse to taking much trouble about small things: but that it is not suitable for holdings large enough to give scope to the enterprise of an able and responsible tenant. It is commonly associated with the system of peasant proprietorship; and we may consider that next.

§ 5. The position of a peasant proprietor has great attractions. He is free to do what he likes, he is not worried by the interference of a landlord, and the anxiety lest another should reap the fruits of his work and self-denial. His feeling of ownership gives him self-respect, and stability of character, and makes him provident and temperate in his habits. He is scarcely ever idle, and seldom regards his work as mere drudgery; it is all for the land that he loves so well.

"The magic of property turns sand into gold," said Arthur Young. It undoubtedly has done so in many cases in which the proprietors have been men of exceptional energy. But such men might perhaps have done as well or better if their horizon had not been limited to the narrow hopes of a peasant proprietor. For indeed there is another side to the picture. "Land," we are told, "is the best savings-bank for the working man." Sometimes it is the second best. But the very best is the energy of himself and his children; and the peasant proprietors are so intent on their land that they often care for little else. Many even of the richest of them stint the food of themselves and their families: they pride themselves on the respectability of their houses and furniture; but they live in their kitchens for economy, and are practically worse housed and far worse fed than the better class of English cottagers. And the poorest of them work hard during very long hours; but they do not get through much work, because they feed themselves worse than the poorest English labourers. They do not understand that wealth is useful only as the means towards a real income of happiness; they sacrifice the end to the means115 .

And it must be recollected that the English labourers represent the failure rather than the success of the English system. They are the descendants of those who for many successive generations have not availed themselves of the opportunities by which their abler and more adventurous neighbours were rising to leading posts at home, and, what is far more important, were acquiring the fee simple of a great part of the surface of the globe. Of the causes which have contributed to make the English race the chief owners of the New World, the most important is that bold enterprise which has made a man, who is rich enough to be a peasant proprietor, generally refuse to be content with the humdrum life and the narrow income of a peasant. And among the causes which have fostered this enterprise, none is more important than the absence of the temptations to wait about for a petty inheritance, and to marry for the sake of property rather than in the free exercise of individual choice—temptations which have often dulled the energy of youth in places in which peasant properties have predominated.

It is partly in consequence of the absence of these temptations that the "farmers" of America, though they are men of the working class cultivating their own land with their own hands, do not resemble "peasant proprietors." They invest their income freely and wisely in developing the energies of themselves and their children; and these energies constitute the chief part of their capital, for their land generally is as yet of but little value. Their minds are always active, and though many of them have little technical knowledge of agriculture, their acuteness and versatility enable them to find out almost unerringly the best solution of the problem immediately before them.

That problem is generally to obtain a produce large in proportion to the labour spent on it, though small in proportion to the abundant land at their disposal. In some parts of America, however, in which land is beginning to get a scarcity value, and in which the immediate neighbourhood of good markets is making an intensive cultivation profitable, the methods of farming and of tenure are rearranging themselves on the English model. And within the last few years there have been signs of a tendency on the part of native Americans to hand over to persons of recent European origin the farms of the West, as they have already done the farms of the East, and as they did long ago the textile industries.

§ 6. Let us then turn to that English system of tenure. It is faulty and harsh in many respects; but it stimulated and economized the enterprise and energy, which, aided by England's geographical advantages and freedom from devastating wars, gave her the leadership of the world in the arts of manufacture and colonization and, though in a less marked degree, in agriculture. England has learnt lessons in agriculture from many countries and especially the Netherlands; but on the whole she has taught far more than she has learnt. And there is now no country except the Netherlands which can compare with her in the amount of produce per acre of fertile land; and no country in Europe which obtains nearly so high returns in proportion to the labour expended in getting them116 .

The chief merit of the system is that it enables the landlord to keep in his own hands the responsibility for that part and only that part of the property which he can look after with but little trouble to himself, and little vexation to his tenant; and the investment of which, though requiring both enterprise and judgment, does not demand constant supervision of minor details. His part consists of land, buildings and permanent improvements, and averages in England five times that which the farmer has to supply himself; and he is willing to supply his part in the enterprise with this great capital at a net rent which seldom gives interest at as much as three per cent. on its cost. There is no other business in which a man can borrow what capital he wants at so low a rate, or can often borrow so large a part of his capital at any rate at all. The metayer indeed may be said to borrow an even larger share, but at a much higher rate117 .

The second merit of the English system, which partly follows from the first, is that it gives the landlord considerable freedom in the selection of an able and responsible tenant. So far as the management of land, as opposed to its ownership, goes, the accident of birth counts for less in England than in any other country of Europe. But we have already seen that even in modern England the accident of birth counts for a good deal in the access to posts of command in all kinds of business, to the learned professions and even to skilled manual trades. And it counts for somewhat more in English agriculture: for the good and bad qualities of landlords combine to prevent their selecting tenants on strictly commercial principles, and they do not very often go far afield for a new tenant118 .

§ 7. The number of people who have the opportunity of making a step forward in the arts of agriculture is very great. And since the different branches of agriculture differ from one another in general character less than do those of manufacture, it might have been expected that new ideas in it would have followed one another quickly and have been speedily diffused. But on the contrary progress has been slow. For the most enterprising agriculturists drift towards the town; those who stay behind live more or less isolated lives; and, as a result of natural selection and education, their minds have always been more staid than those of townsmen, and less ready to suggest or even to follow new paths. And further, though a manufacturer is nearly always safe in copying a plan that has worked well with his neighbour in the same trade, a farmer is not: for every farm has slight peculiarities of its own, so that the blind adoption of a plan, that has worked well close by, is likely to fail; and its failure encourages others in the belief that old and tried ways are the best.

Again, the variety in agricultural detail makes the proper keeping of farming accounts very difficult. There are so many joint products and so many by-products, so many complex and shifting relations of debtor and creditor between the several crops and methods of feeding, that an ordinary farmer, even if he were as fond of accounts as he is in fact averse to them, would have great difficulty in ascertaining, otherwise than by a semi-instinctive guess, what is the price that will just pay him to raise a certain amount of extra produce. He may know its prime cost with fair certainty, but he seldom knows its true total cost; and this increases the difficulty of reading quickly the teachings of experience and making progress by their aid119 .

And there is another difference between the mode of action of competition in agriculture and in manufacture. If one manufacturer is unenterprising, others may be able to step into the opening which he leaves vacant: but when one landowner does not develop the resources of his land in the best way, others cannot make up for the deficiency without calling into play the tendency to diminishing return; so that his want of wisdom and enterprise makes the (marginal) supply price a little higher than it otherwise would be120 . It is however true that the difference between the two cases is only one of degree; since the growth of any branch of manufacture may be retarded perceptibly by any falling-off in the ability and enterprise of the leading firms engaged in it. The chief agricultural improvements have been made by landlords who have themselves been townsmen or at least have associated a good deal with townsmen, and by manufacturers in trades subsidiary to agriculture121 .

§ 8. Though nature yields generally a less than proportionate return to an increased amount of labour of a given efficiency; man's part conforms generally to the law of increasing return (i.e. it increases in aggregate efficiency more than in proportion to the number of workers), in agriculture as well as in manufacture122 . But yet the economies of production on a large scale are not quite similar in the two cases.

Firstly, agriculture must be spread over the broad land: raw material can be brought to the manufacturer for him to work on; but the agriculturist must seek his work. Again, the workers on the land must adapt their work to the seasons, and can seldom confine themselves entirely to one class of work; and in consequence agriculture, even under the English system, cannot move fast in the direction of the methods of manufacture.

But yet there are considerable forces tending to push it in that direction. The progress of invention is constantly increasing the number of serviceable, but expensive machines, for most of which a small farmer can find employment during only a very short time. He may hire some of them; but there are many the use of which he can get only by cooperation with his neighbours; and the uncertainties of the weather prevent this plan from working very smoothly in practice123 .

Again, the farmer must go beyond the results of his own and his father's experience in order to keep abreast of the changes of the day. He should be able to follow the movements of agricultural science and practice closely enough to see their chief practical applications to his own farm. To do all this properly requires a trained and versatile mind; and a farmer who has these qualities could find time to direct the general course of the management of several hundred, or even of several thousand acres; and the mere superintendence of his men's work in matters of detail is not a task fitting for him. The work which he ought to do is as difficult as that of a large manufacturer, who would not spend his own strength on minute supervision which he can easily hire subordinates to do. A farmer, who can do this higher work, must be wasting his strength on work that is beneath him, unless he employs many gangs of workmen each of them under a responsible foreman. But there are not many farms which give scope for this, and there is therefore very little inducement for really able men to enter the business of farming; the best enterprise and ability of the country generally avoid agriculture and go to trades in which there is room for a man of first-rate ability to do nothing but high class work, to do a great deal of it, and therefore to get high earnings of management124 .

If it be assumed, as is the modern fashion, that the farmer is not to work habitually with his men and to encourage them by his presence, it seems best for the economy of production that farms should be as large as is practicable under the existing conditions of land tenure; so as to give room for the use of highly specialized machines and for the exercise of great ability on the part of the farmer. But if a farm is not very large, and if, as is often the case, the farmer has no greater ability and activity of mind than is commonly to be found among the better class of working foremen in manufactures; then it would be best for others, and in the long run for himself, that he should return to the old plan of working among his men. Perhaps also his wife might return to some of those lighter tasks in and near the farmhouse which tradition ascribes to her. They require discretion and judgment, they are not inconsistent with education and culture; and combined with it they would raise and not lower the tone of her life, and her real claims to a good social position. There is some reason for thinking that the stern action of the principle of natural selection is now displacing those farmers, who have not the faculty to do difficult head-work, and yet decline to do hand-work. Their places are being taken by men of more than average natural ability who, with the help of modern education, are rising from the ranks of labourers; who are quite able to manage the ordinary routine work of a model farm; and who are giving to it a new life and spirit by calling their men to come and work, instead of telling them to go and work. Very large farms being left out of view, it is with rather small farms worked on these principles that the immediate future of English agriculture seems to lie. Small holdings have great advantages wherever so much care has to be given to individual plants, that machinery is out of place. But modern applications of scientific methods are giving an increasing importance to that economy of technical skill which can be attained in a large nursery for choice flowers and fruits, with several highly paid assistants.

§ 9. We may next consider how far landlords will in their own interest adjust the size of holdings to the real needs of the people. Small holdings often require more expensive buildings, roads and fences, and involve greater trouble and incidental expenses of management to the landlord in proportion to their acreage than do large holdings; and while a large farmer who has some rich land can turn poor soils to good account, small holdings will not flourish generally except on good soil125 . Their gross rental per acre must therefore always be at a higher rate than that of large farms. But it is contended that, especially when land is heavily burdened by settlements, landlords are unwilling to incur the expense of subdividing farms, unless they see their way to rents for small holdings that will give them, in addition to high profits on their outlay, a heavy insurance fund against the chance of having to throw the holdings together again; and that the rental for small holdings, and especially for those of only a few acres, is extravagantly high in many parts of the country. Sometimes the prejudices of the landlord and his desire for undisputed authority make him positively refuse to sell or let land to persons who are not in harmony with him on social, political or religious questions. It seems certain that evils of this kind have always been confined to a few districts, and that they are rapidly diminishing, but they rightly attract much attention; for there is a public need in every district for small holdings, as well as large; for allotments and large gardens; and generally for holdings so small that they can be worked by people who have some other occupation126 .

And lastly though peasant proprietorship, as a system, is unsuited to the economic conditions of England, to her soil, her climate, and the temper of her people, yet there are a few peasant proprietors in England who are perfectly happy in this condition; and there are a few others who would buy small plots of land and would live happily on them, if they could get just what they wanted where they wanted it. Their temper is such that they do not mind working hard and living sparely, provided they need call no one master; they love quiet and dislike excitement; and they have a great capacity for growing fond of land. Reasonable opportunity should be given to such people to invest their savings in small plots of land, on which they may raise suitable crops with their own hands; and at the very least the present grievous legal charges on the transfer of small plots should be diminished.

Co-operation might seem likely to flourish in agriculture and to combine the economies of production on a large scale with many of the joys and the social gains of small properties. It requires habits of mutual trust and confidence; and unfortunately the bravest and the boldest, and therefore the most trustful, of the countrymen have always moved to the towns, and agriculturists are a suspicious race. But Denmark, Italy, Germany, and lastly Ireland have led the way in a movement which seems full of promise for organized co-operation in the handling of dairy produce, in the making of butter and cheese; in buying farmers' requisites and in selling farmers' produce: and Britain is following in their wake. The movement is however of limited scope: it scarcely touches work in the field itself.

As co-operation might combine more of the advantages of all systems of tenure, so the cottier system of Ireland often combined the disadvantages of all; but its worst evils and their causes have almost disappeared and the economic elements of the problem are just now overshadowed by the political. We must therefore pass it by127 .

§ 10. The failures of the English system of land tenure in Ireland have brought into clear relief difficulties which are inherent in it, but which have been kept in the background in England by the conformity of the system to the business habits and the character of the people. The chief of these difficulties arise from the fact that while the system is competitive in its essence, the conditions of agriculture even in England offer a strong resistance to the full action of free competition. To begin with, there are special difficulties in ascertaining the facts on which that action must be based. We have just noticed the difficulty of keeping exact farming accounts: to this must be added that a farmer's calculations as to the rent which it is worth his while to undertake to pay, are further hampered by the difficulty of deciding what is a normal harvest and a normal level of prices. For good and bad seasons come so much in cycles that many years are required to afford a trustworthy average of them128 : and in those many years the industrial environment is likely to have changed much; the local demand, the facilities for selling his own produce in distant markets and those which assist competitors from a distance to sell their produce in his local markets may all have changed.

The landlord in determining what rent to accept is met by this difficulty and also by another, arising out of variations in the standards of ability among farmers in different parts of the country. The producer's surplus, or English rent, of a farm is that excess which its produce yields over its expenses of cultivation, including normal profits to the farmer: it being assumed that that farmer's ability and enterprise are such as are normal for farms of that class in that place. The difficulty in view is to decide whether these last words are to be interpreted broadly or narrowly.

It is clear that if a farmer falls below the standard of ability of his own district, if his only forte is in driving hard bargains, if his gross produce is small and his net produce even smaller in proportion; in such a case the landlord acts in the interest of all when he hands over the farm to a more competent tenant, who will pay better wages, obtain a much higher net produce and pay a somewhat higher rent. On the other hand, when the local standard of normal ability and enterprise is low, it is not clearly right from an ethical point of view, nor is it clearly in the business interests of the landlord in the long run, that he should endeavour to take to himself a greater rent than can be paid by a farmer who reaches that standard; even though it could be obtained by importing a farmer from another district in which the standard is higher129 .

Closely related to this question is one as to the freedom the tenant should have to develop the natural capabilities of his land at his own risk, with the understanding that if he is successful he is to retain something more than mere normal profits on his enterprise. So far as minor improvements go, this difficulty is in a great measure met by long leases. These have done much for Scotland: but they have disadvantages of their own. And as has been often observed, "the English tenant has always something of a lease even when he has no lease": and again, "there are traces of métayage even in tenures which are thoroughly English." When seasons and markets are favourable to the farmer, he pays his full rent and avoids making demands on the landlord that might set him thinking whether the rent ought not to be raised. When things go badly, the landlord, partly from sympathy and partly as a matter of business, makes temporary remissions of rent, and bears the expense of repairs, etc., which he would otherwise have left for the farmer. There may thus be much give and take between landlord and tenant without any change of nominal rent130 .

Custom has always given to the English tenant some partial security for compensation for improvements made by him; and legislation has recently caught up custom, and even passed it. The tenant is now practically secure against the raising of his rent on account of increased yield of the soil due to improvements of a reasonable nature made by himself: and on leaving he can claim compensation for the unexhausted value of them, to be fixed by arbitration131 .

Finally a word may be said as to private and public interests with regard to open spaces in towns. Wakefield and the American economists have taught us how a sparsely inhabited new district is enriched by the advent of every new settler. The converse truth is that a closely peopled district is impoverished by every one who adds a new building or raises an old one higher. The want of air and light, of peaceful repose out-of-doors for all ages and of healthy play for children, exhausts the energies of the best blood of England which is constantly flowing towards our large towns. By allowing vacant spaces to be built on recklessly we are committing a great blunder from a business point of view. For the sake of a little material wealth we are wasting those energies which are the factors of production of all wealth: we are sacrificing those ends towards which material wealth is only a means132 .

BOOK VI, CHAPTER XI

GENERAL VIEW OF DISTRIBUTION.

§ 1. The argument of the preceding ten chapters may now be summarized. It falls far short of a complete solution of the problem before us: for that involves questions relating to foreign trade, to fluctuations of credit and employment, and to the influences of associated and collective action in its many forms. But yet it extends to the broad action of the most fundamental and permanent influences which govern distribution and exchange. In the summary at the end of Book V. we traced a continuous thread running through and connecting the applications of the general theory of equilibrium of demand and supply to different periods of time; from those so short that cost of production could exercise no direct influence on value, to those so long that the supply of the appliances of production could be fairly well adjusted to the indirect demand for them, which is derived from the direct demand for the commodities which they produce. In the present Book we have been concerned with another thread of continuity, which lies transversely to the thread connecting different periods of time. It connects the various agents and appliances for production, material and human; and establishes a fundamental unity between them, in spite of their important differences of outward feature.

Firstly, wages and other earnings of effort have much in common with interest on capital. For there is a general correspondence between the causes that govern the supply prices of material and of personal capital: the motives which induce a man to accumulate personal capital in his son's education, are similar to those which control his accumulation of material capital for his son. There is a continuous transition from the father who works and waits in order that he may bequeath to his son a rich and firmly-established manufacturing or trading business, to one who works and waits in order to support his son while he is slowly acquiring a thorough medical education, and ultimately to buy for him a lucrative practice. Again, there is the same continuous transition from him to one who works and waits in order that his son may stay long at school; and may afterwards work for some time almost without pay while learning a skilled trade, instead of being forced to support himself early in an occupation, such as that of an errand-boy, which offers comparatively high wages to young lads, because it does not lead the way to a future advance.

It is indeed true that the only persons, who, as society is now constituted, are very likely to invest much in developing the personal capital of a youth's abilities are his parents: and that many first-rate abilities go for ever uncultivated because no one, who can develop them, has had any special interest in doing so. This fact is very important practically, for its effects are cumulative. But it does not give rise to a fundamental difference between material and human agents of production: for it is analogous to the fact that much good land is poorly cultivated because those who would cultivate it well have not access to it.

Again, since human beings grow up slowly and are slowly worn out, and parents in choosing an occupation for their children must as a rule look forward a whole generation, changes in demand take a longer time to work out their full effects on supply in the case of human agents than of most kinds of material appliances for production; and a specially long period is required in the case of labour to give full play to the economic forces which tend to bring about a normal adjustment between demand and supply. Thus on the whole the money cost of any kind of labour to the employer corresponds in the long run fairly well to the real cost of producing that labour133 .

§ 2. The efficiency of human agents of production on the one hand, and that of material agents on the other, are weighed against one another and compared with their money costs; and each tends to be applied as far as it is more efficient than the other in proportion to its money cost. A chief function of business enterprise is to facilitate the free action of this great principle of substitution. Generally to the public benefit, but sometimes in opposition to it, business men are constantly comparing the services of machinery, and of labour, and again of unskilled and skilled labour, and of extra foremen and managers; they are constantly devising and experimenting with new arrangements which involve the use of different factors of production, and selecting those most profitable for themselves134 .

The efficiency as compared with the cost of almost every class of labour, is thus continually being weighed in the balance in one or more branches of production against some other classes of labour: and each of these in its turn against others. This competition is primarily "vertical": it is a struggle for the field of employment between groups of labour belonging to different grades, but engaged in the same branch of production, and inclosed, as it were, between the same vertical walls. But meanwhile "horizontal" competition is always at work, and by simpler methods: for, firstly, there is great freedom of movement of adults from one business to another within each trade; and secondly, parents can generally introduce their children into almost any other trade of the same grade with their own in their neighbourhood. By means of this combined vertical and horizontal competition there is an effective and closely adjusted balance of payments to services as between labour in different grades; in spite of the fact that the labour in any one grade is mostly recruited even now from the children of those in the same grade135 .

The working of the principle of substitution is thus chiefly indirect. When two tanks containing fluid are joined by a pipe, the fluid, which is near the pipe in the tank with the higher level, will flow into the other, even though it be rather viscous; and thus the general levels of the tanks will tend to be brought together, though no fluid may flow from the further end of the one to the further end of the other; and if several tanks are connected by pipes, the fluid in all will tend to the same level, though some tanks have no direct connection with others. And similarly the principle of substitution is constantly tending by indirect routes to apportion earnings to efficiency between trades, and even between grades, which are not directly in contact with one another, and which appear at first sight to have no way of competing with one another.

§ 3. There is no breach of continuity as we ascend from the unskilled labourer to the skilled, thence to the foreman, to the head of a department, to the general manager of a large business paid partly by a share of the profits, to the junior partner, and lastly to the head partner of a large private business: and in a joint-stock company there is even somewhat of an anti-climax when we pass from the directors to the ordinary shareholders, who undertake the chief ultimate risks of the business. Nevertheless business undertakers are to a certain extent a class apart.

For while it is through their conscious agency that the principle of substitution chiefly works in balancing one factor of production against another; with regard to them it has no other agency than the indirect influence of their own competition. So it works blindly, or rather wastefully; it forces many to succumb who might have done excellent work if they had been favoured at first: and, in conjunction with the tendency to increasing return, it strengthens those who are strong, and hands over the businesses of the weak to those who have already obtained a partial monopoly.

But on the other hand there is also a constant increase in the forces which tend to break up old monopolies, and to offer to men, who have but little capital of their own, openings both for starting new businesses and for rising into posts of command in large public and private concerns; and these forces tend to put business ability in command of the capital required to give it scope.

On the whole the work of business management is done cheaply—not indeed as cheaply as it may be in the future when men's collective instincts, their sense of duty and their public spirit are more fully developed; when society exerts itself more to develop the latent faculties of those who are born in a humble station of life, and to diminish the secrecy of business; and when the more wasteful forms of speculation and of competition are held in check. But yet it is done so cheaply as to contribute to production more than the equivalent of its pay. For the business undertaker, like the skilled artisan, renders services which society needs, and which it would probably have to get done at a higher cost if he were not there to do them.

The similarity between the causes that determine the normal rewards of ordinary ability on the one hand, and of business power in command of capital on the other, does not extend to the fluctuations of their current earnings. For the employer stands as a buffer between the buyer of goods and all the various classes of labour by which they are made. He receives the whole price of the one and pays the whole price of the others. The fluctuations of his profits go with fluctuations of the prices of the things he sells, and are more extensive: while those of the wages of his employees come later and are less extensive. The earnings at any particular time of his capital and ability are sometimes large, but sometimes also a negative quantity: whereas those of the ability of his employees are never very large, and are never a negative quantity. The wage-receiver is likely to suffer much when out of work; but that is because he has no reserve, not because he is a wage-receiver136 .

That part of a man's income which he owes to the possession of extraordinary natural abilities is a free boon to him; and from an abstract point of view bears some resemblance to the rent of other free gifts of nature, such as the inherent properties of land. But in reference to normal prices, it is to be classed rather with the profits derived by free settlers from the cultivation of new land, or again with the find of the pearl-fisher. The plot of one settler turns out better and that of another worse than was expected; the good find of one dive of the pearl-fisher compensates for many others that are fruitless: and the high income which one barrister, or engineer, or trader earns by his natural genius has to be counted with the comparative failures of many others; who perhaps appeared of no less promise when young and received as costly an education and start in life, but whose services to production were less than his in proportion to their cost. The ablest business men are generally those who get the highest profits, and at the same time do their work most cheaply; and it would be as wasteful if society were to give their work to inferior people who would undertake to do it more cheaply, as it would be to give a valuable diamond to be cut by a low waged but unskilled cutter.

§ 4. Returning to the point of view of the second Chapter of this Book, we may call to mind the double relation in which the various agents of production stand to one another. On the one hand they are often rivals for employment; any one that is more efficient than another in proportion to its cost tending to be substituted for it, and thus limiting the demand price for the other. And on the other hand they all constitute the field of employment for each other: there is no field of employment for any one, except in so far as it is provided by the others: the national dividend which is the joint product of all, and which increases with the supply of each of them, is also the sole source of demand for each of them.

Thus an increase of material capital causes it to push its way into new uses; and though in so doing it may occasionally diminish the field of employment for manual labour in a few trades, yet on the whole it will very much increase the demand for manual labour and all other agents of production. For it will much increase the national dividend, which is the common source of the demand for all; and since by its increased competition for employment it will have forced down the rate of interest, therefore the joint product of a dose of capital and labour will now be divided more in favour of labour than before.

This new demand for labour will partly take the form of the opening-out of new undertakings which hitherto could not have paid their way; while a new demand will come from the makers of new and more expensive machinery. For when it is said that machinery is substituted for labour, this means that one class of labour combined with much waiting is substituted for another combined with less waiting: and for this reason alone, it would be impossible to substitute capital for labour in general, except indeed locally by the importation of capital from other places.

It remains true, however, that the chief benefit which an increase of capital confers upon labour is not by opening out to it new employments, but by increasing the joint product of land, labour and capital (or of land, labour and waiting), and by reducing the share of that product which any given amount of capital (or of waiting) can claim as its reward.

§ 5. In discussing the influence which a change in the supply of work of any one industrial group exerts on the field of employment for other kinds of labour, there was no need to raise the question whether the increase of work came from an increase in the numbers or in the efficiency of those in the group: for that question is of no direct concern to the others. In either case there is the same addition to the national dividend: in either case competition will compel them to force themselves to the same extent into uses in which their marginal utility is lower; and will thus lessen to the same extent the share of the joint product which they are able to claim in return for a given amount of work of a given kind.

But the question is of vital importance to the members of that group. For, if the change is an increase of one-tenth in their average efficiency, then each ten of them will have as high an aggregate income as each eleven of them would have if their numbers had increased by one-tenth, their efficiency remaining unchanged137 .

This dependence of the wages of each group of workers on the numbers and efficiency of others is a special case of the general rule that the environment (or Conjuncture) plays a part at least coordinate with a man's energy and ability in governing that net product to which his wages ever approximate under the influence of competition.

The net product to which the normal wages of any group of workers approximate, must be estimated on the assumption that production has been pushed to that limit at which the output can be just marketed with normal profits, but not more: and it must be estimated with reference to a worker of normal efficiency; whose additional output repays an employer of normal ability and normal good fortune and normal resources with normal profits, but not more. (Something must be added to or subtracted from this net product to find the normal wages of a worker whose efficiency is more or less than normal.) The time chosen must be one of normal prosperity; and when the supplies of different kinds of labour are relatively appropriate. For instance if the building trade is exceptionally depressed, or exceptionally prosperous: or if its development is checked by an inadequate supply of bricklayers or carpenters, while the supply of other classes of building operatives is superabundant, then the occasion is one which does not afford a convenient opportunity for estimating the relations of net product to normal wages of either bricklayers or carpenters138 .

BOOK VI, CHAPTER XII

GENERAL INFLUENCES OF ECONOMIC PROGRESS.

§ 1. The field of employment which any place offers for labour and capital depends, firstly, on its natural resources; secondly, on the power of turning them to good account, derived from its progress of knowledge and of social and industrial organization; and thirdly, on the access that it has to markets in which it can sell those things of which it has a superfluity. The importance of this last condition is often underrated; but it stands out prominently when we look at the history of new countries.

It is commonly said that wherever there is abundance of good land to be had free of rent, and the climate is not unhealthy, the real earnings of labour and the interest on capital must both be high. But this is only partially true. The early colonists of America lived very hardly. Nature gave them wood and meat almost free: but they had very few of the comforts and luxuries of life. And even now there are, especially in South America and Africa, many places to which nature has been abundantly generous, which are nevertheless shunned by labour and capital, because they have no ready communications with the rest of the world. On the other hand high rewards may be offered to capital and labour by a mining district in the midst of an alkaline desert, when once communications have been opened up with the outer world, or again by a trading centre on a barren sea-coast; though, if limited to their own resources, they could support but a scanty population, and that in abject poverty. And the splendid markets which the old world has offered to the products of the new, since the growth of steam communication, have rendered North America, Australia and parts of Africa and South America, the richest large fields for the employment of capital and labour that there have ever been.

But after all the chief cause of the modern prosperity of new countries lies in the markets that the old world offers, not for goods delivered on the spot, but for promises to deliver goods at a distant date. A handful of colonists having assumed rights of perpetual property in vast tracts of rich land, are anxious to reap in their own generation its future fruits; and as they cannot do this directly, they do it indirectly, by selling in return for the ready goods of the old world promises to pay much larger quantities of the goods that their own soil will produce in a future generation. In one form or another they mortgage their new property to the old world at a very high rate of interest. Englishmen and others, who have accumulated the means of present enjoyment, hasten to barter them for larger promises in the future than they can get at home: a vast stream of capital flows to the new country, and its arrival there raises the rate of wages very high. The new capital filters but slowly towards the outlying districts: it is so scarce there, and there are so many persons eager to have it, that it often commands for a long time two per cent. a month, from which it falls by gradual stages down to six, or perhaps even five per cent., a year. For the settlers being full of enterprise, and seeing their way to acquiring private title-deeds to property that will shortly be of great value, are eager to become independent undertakers, and if possible employers of others; so wage-earners have to be attracted by high wages, which are paid in a great measure out of the commodities borrowed from the old world on mortgages, or in other ways.

It is, however, difficult to estimate exactly the real rate of wages in outlying parts of new countries. The workers are picked men with a natural bias towards adventure; hardy, resolute, and enterprising; men in the prime of life, who do not know what illness is; and the strain of one kind and another which they go through, is more than the average English, and much more than the average European labourer could sustain. There are no poor among them, because there are none who are weak: if anyone becomes ailing, he is forced to retire to some more thickly-peopled place where there is less to be earned, but where also a quieter and less straining life is possible. Their earnings are very high if reckoned in money; but they have to buy at very high prices, or altogether dispense with, many of the comforts and luxuries which they would have obtained freely, or at low prices, if they had lived in more settled places. Many of these things however meet only artificial wants; and they can be easily foregone, where no one has them and no one expects them.

As population increases, the best situations being already occupied, nature gives generally less return of raw produce to the marginal effort of the cultivators; and this tends a little to lower wages. But even in agriculture the law of increasing return is constantly contending with that of diminishing return, and many of the lands which were neglected at first give a generous response to careful cultivation; and meanwhile the development of roads and railroads, and the growth of varied markets and varied industries, render possible innumerable economies in production. Thus the tendencies to increasing and diminishing return appear pretty well balanced, sometimes the one, sometimes the other being the stronger.

If labour and capital increase at equal rates; and if, taking one thing with another, the law of production is that of constant return, there will be no change in the reward to be divided between a dose of capital and labour; that is, between capital and labour working together in the same proportions as before; there need not therefore be any change in wages or interest.

If however capital increases much faster than labour, the rate of interest is likely to fall; and then the rate of wages will probably rise at the expense of the share of a given quantum of capital. But yet the aggregate share of capital may increase faster than the aggregate share of labour139 .

But whether the law of production of commodities be one of constant return or not, that of the production of new title-deeds to land is one of rapidly diminishing return. The influx of foreign capital, though perhaps as great as ever, becomes less in proportion to the population; wages are no longer paid largely with commodities borrowed from the old world: and this is the chief reason of the subsequent fall in the necessaries, comforts and luxuries of life which can be earned by work of a given efficiency. But two other causes tend to lower average daily wages measured in money. For, as the comforts and luxuries of civilization increase, the average efficiency of labour is generally lowered by the influx of immigrants of a less sturdy character than the earlier settlers: and many of these new comforts and luxuries do not enter directly into money wages, but are an addition to it140 .

§ 2. England's present economic condition is the direct result of tendencies to production on a large scale, and to wholesale dealings in labour as well as in goods which had long been slowly growing; but which in the eighteenth century received a twofold impetus from mechanical inventions, and the growth of consumers beyond the seas, who imported large quantities of goods of the same pattern. Then were the first beginnings of machine made interchangeable parts, and the application of special machinery to make special machinery for use in every branch of industry. Then first was seen the full force which the law of increasing return gives in a manufacturing country with localized industries and large capitals; particularly when many of the large stocks of capital are combined together either into Joint-stock or Regulated companies, or into modern Trusts. And then began that careful "grading" of goods for sale in distant markets, which has already led to national and even international speculative combinations in produce markets and stock-exchanges; and the future of which, no less than that of more lasting combinations among producers, whether undertakers of industry or working men, is the source of some of the gravest practical problems with which the coming generation will have to deal.

The key-notes of the modern movement are the reduction of a great number of tasks to one pattern; the diminution of friction of every kind which might hinder powerful agencies from combining their action and spreading their influence over vast areas; and the development of transport by new methods and new forces. The macadamized roads and the improved shipping of the eighteenth century broke up local combinations and monopolies, and offered facilities for the growth of others extending over a wider area: and in our own age the same double tendency is resulting from every new extension and cheapening of communication by land and sea, by printing-press and telegraph and telephone.

§ 3. But though in the eighteenth century, as now, the real national dividend of England depended much on the action of the law of increasing return with regard to her exports, the mode of dependence has very much changed. Then England had something approaching to a monopoly of the new methods of manufacture; and each bale of her goods would be sold—at all events when their supply was artificially limited—in return for a vast amount of the produce of foreign countries. But, partly because the time was not yet ripe for carrying bulky goods great distances, her imports from the far-east and the far-west consisted chiefly of comforts and luxuries for the well-to-do; they had but little direct effect in lowering the labour-cost of necessaries to the English workman. Indirectly indeed her new trade lowered the cost of hardware, clothing and such other English manufactures as he consumed; because the production on a large scale of these things for consumers beyond the sea cheapened them for him. But it had very little effect on the cost of his food; and that was left to rise under the tendency to diminishing return, which was called into action by the rapid increase of population in new manufacturing districts where the old customary restraints of a narrow village life did not exist. A little later the great French war, and a series of bad harvests, raised that cost to much the highest point it has ever reached in Europe.

But gradually the influence of foreign trade began to tell on the cost of production of our staple food. As the population of America spread westward from the Atlantic, richer and still richer wheat soils have come under cultivation; and the economies of transport have increased so much, especially in recent years, that the total cost of importing a quarter of wheat from the farms on the outskirts of cultivation has diminished rapidly, though the distance of that margin has been increasing. And thus England has been saved from the need of more and more intensive cultivation. The bleak hill-sides, up which the wheat-fields were laboriously climbing in Ricardo's time, have returned to pasture; and the ploughman works now only where land will yield plentiful returns to his labour: whereas if England had been limited to her own resources, he must have plodded over ever poorer and poorer soils, and must have gone on continually reploughing land that had already been well ploughed, in the hope of adding by this heavy toil an extra bushel or two to the produce of each acre. Perhaps in an average year now, the ploughing which only just pays its expenses, the ploughing "on the margin of cultivation," gives twice as much produce as it gave in Ricardo's time, and fully five times as much as it would have given now if with her present population England had been compelled to raise all her own food.

§ 4. Every improvement in the manufacturing arts increased England's power of meeting the various wants of backward countries; so that it answered their purpose to divert their energies from making things by hand for their own use, to growing raw material with which to buy manufactures from her. In this way the progress of invention opened a wider field for the sale of her special products, and enabled her more and more to confine her own production of food to conditions under which the law of diminishing return did not make itself much felt. But this good fortune has been short-lived. Her improvements have been followed, and latterly often anticipated, by America and Germany and other countries: and her special products have lost nearly all their monopoly value. Thus the amount of food and other raw material which can be bought in America with a ton of steel cannot be more than the produce of as much capital and labour as would make a ton of steel there by the new processes; and therefore it has fallen as the efficiency of English and American labour in making steel has increased. It is for this reason, as well as because of the heavy tariffs levied on her goods by many countries, that in spite of England's large trade, the progress of invention in the manufacturing arts has added less than might have been otherwise expected to her real national dividend.

It is no slight gain that she can make cheaply clothes and furniture and other commodities for her own use: but those improvements in the arts of manufacture which she has shared with other nations, have not directly increased the amount of raw produce which she can obtain from other countries with the product of a given quantity of her own capital and labour. Probably more than three-fourths of the whole benefit she has derived from the progress of manufactures during the nineteenth century has been through its indirect influences in lowering the cost of transport of men and goods, of water and light, of electricity and news: for the dominant economic fact of our own age is the development not of the manufacturing, but of the transport industries. It is these that are growing most rapidly in aggregate volume and in individual power, and which are giving rise to the most anxious questions as to the tendencies of large capitals to turn the forces of economic freedom to the destruction of that freedom: but, on the other hand, it is they also which have done by far the most towards increasing England's wealth.

§ 5. Thus the new economic age has brought with it great changes in the relative values of labour and the chief requisites of life; and many of these changes are of a character which could not have been anticipated at the beginning of last century. The America then known was ill-suited for growing wheat; and the cost of carrying it great distances by land was prohibitive. The labour value of wheat—that is the amount of labour which will purchase a peck of wheat—was then at its highest point, and now is at its lowest. It would appear that agricultural wages have been generally below a peck of wheat a day; but that in the first half of the eighteenth century they were about a peck, in the fifteenth a peck and a half or perhaps a little more, while now they are two or three pecks. Prof. Rogers's estimates for the middle ages are higher: but he seems to have taken the wages of the more favoured part of the population as representative of the whole. In the middle ages, even after a fairly good harvest, the wheat was of a lower quality than the ordinary wheat of to-day; while after a bad harvest much of it was so musty that now-a-days it would not be eaten at all; and the wheat seldom became bread without paying a high monopoly charge to the mill belonging to the lord of the manor.

It is true that, where population is very sparse, nature supplies grass and therefore animal food almost gratis; and in South America beggars pursue their calling on horseback. During the middle ages however the population of England was always dense enough to give a considerable labour value to meat, though it was of poor quality. For cattle, though only about a fifth as heavy as now, had very large frames: their flesh was chiefly in those parts from which the coarsest joints come; and since they were nearly starved in the winter and fed up quickly on the summer grass, the meat contained a large percentage of water, and lost a great part of its weight in cooking. At the end of the summer they were slaughtered and salted: and salt was dear. Even the well-to-do scarcely tasted fresh meat during the winter. A century ago very little meat was eaten by the working classes; while now, though its price is a little higher than it was then, they probably consume more of it, on the average, than at any other time in English history.

Turning next to the rent of house-room, we find that ground-rents in town have risen, both extensively and intensively. For an increasing part of the population is living in houses on which ground-rents at an urban scale have to be paid, and that scale is rising. But house rent proper, that is what remains of the total rent after deducting the full rental value of the ground, is probably little, if at all, higher than at any previous time for similar accommodation; for the rate of profits on the turnover which is earned by capital engaged in building is now low, and the labour cost of building materials has not much altered. And it must be remembered that those who pay the high town rents get in return the amusements and other advantages of modern town life, which many of them would not be willing to forego for the sake of a much greater gain than their total rent.

The labour value of wood, though lower than at the beginning of the century, is higher than in the middle ages: but that of mud, brick or stone walls has not much changed; while that of iron—to say nothing of glass—has fallen much.

And indeed the popular belief that house rent proper has risen, appears to be due to an imperfect acquaintance with the way in which our forefathers were really housed. The modern suburban artisan's cottage contains sleeping accommodation far superior to that of the gentry in the middle ages; and the working classes had then no other beds than loose straw, reeking with vermin, and resting on damp mud floors. Even these were probably less unwholesome, when bare and shared between human beings and live stock, than when an attempt at respectability covered them with rushes, which were nearly always vile with long accumulated refuse: but it is undeniable that the housing of the very poorest classes in our towns now is destructive both of body and soul; and that with our present knowledge and resources we have neither cause nor excuse for allowing it to continue141 .

Fuel, like grass, is often a free gift of nature to a sparse population; and during the middle ages the cottagers could generally, though not always, get the little brushwood fire needed to keep them warm as they huddled together round it in huts which had no chimney through which the heat could go to waste. But as population increased the scarcity of fuel pressed heavily on the working classes, and would have arrested England's progress altogether, had not coal been ready to take the place of wood as fuel for domestic purposes, as well as for smelting iron. It is now so cheap that even the comparatively poor can keep themselves warm indoors without living in an unwholesome and stupefying atmosphere.

This is one of the great services that coal has wrought for modern civilization. Another is to provide cheap underclothing, without which cleanliness is impossible for the masses of the people in a cold climate: and that is perhaps the chief of the benefits that England has gained from the direct application of machinery to making commodities for her own use. Another, and not less important service, is to provide abundant water, even in large towns142 ; and another to supply, with the aid of mineral oil, that cheap and artificial light which is needed not only for some of man's work, but, what is of higher moment, for the good use of his evening leisure. To this group of requisites for a civilized life, derived from coal on the one hand, and modern means of transport on the other, we must add, as has just been noticed, the cheap and thorough means of communication of news and thought by steam-presses, by steam-carried letters and steam-made facilities for travel. These agencies, aided by electricity, are rendering possible the civilization of the masses in countries the climate of which is not so warm as to be enervating; and are preparing the way for true self-government and united action by the whole people, not merely of a town such as Athens, Florence or Bruges, but a broad country, and even in some respects of the whole civilized world143 .

§ 6. We have seen that the national dividend is at once the aggregate net product of, and the sole source of payment for, all the agents of production within the country; that the larger it is, the larger, other things being equal, will be the share of each agent of production, and that an increase in the supply of any agent will generally lower its price, to the benefit of other agents.

This general principle is specially applicable to the case of land. An increase in the amount of productiveness of the land that supplies any market redounds in the first instance to the benefit of those capitalists and workers who are in possession of other agents of production for the same market. And the influence on values which has been exerted in the modern age by the new means of transport is nowhere so conspicuous as in the history of land; its value rises with every improvement in its communications with markets in which its produce can be sold, and its value falls with every new access to its own markets of produce from more distant places. It is not very long ago that the home counties were full of fears that the making of good roads would enable the more distant parts of England to compete with them in supplying London with food; and now the differential advantages of English farms are in some respects being lowered by the importation of food that has travelled on Indian and American railroads, and been carried in ships made of steel and driven by steam turbines.

But as Malthus contended, and Ricardo admitted, anything that promotes the prosperity of the people promotes also in the long run that of the landlords of the soil. It is true that English rents rose very fast when, at the beginning of last century, a series of bad harvests struck down a people that could not import their food; but a rise so caused could not from the nature of the case have gone very much further. And the adoption of free trade in corn in the middle of the century, followed by the expansion of American wheat-fields, is rapidly raising the real value of the land urban and rural taken together; that is, it is raising the amount of the necessaries, comforts and luxuries of life which can be purchased by the aggregate rental of all the landowners urban and rural taken together144 .

§ 7. But though the development of the industrial environment tends on the whole to raise the value of land, it more often than not lessens the value of machinery and other kinds of fixed capital, in so far as their value can be separated from that of the sites on which they rest. A sudden burst of prosperity may indeed enable the existing stock of appliances in any trade to earn for a time a very high income. But things which can be multiplied without limit cannot retain for long a scarcity value; and if they are fairly durable, as for instance ships and blast furnaces and textile machinery, they are likely to suffer great depreciation from the rapid progress of improvement.

The value of such things as railways and docks however depends in the long run chiefly on their situation. If that is good, the progress of their industrial environment will raise their net value even after allowance has been made for the charges to which they may be put in keeping their appliances abreast of the age145 .

§ 8. Political Arithmetic may be said to have begun in England in the seventeenth century; and from that time onwards we find a constant and nearly steady increase in the amount of accumulated wealth per head of the population146 .

Man, though still somewhat impatient of delay, has gradually become more willing to sacrifice ease or other enjoyment in order to obtain them in the future. He has acquired a greater "telescopic" faculty; that is, he has acquired an increased power of realizing the future and bringing it clearly before his mind's eye: he is more prudent, and has more self-control, and is therefore more inclined to estimate at a high rate future ills and benefits—these terms being used broadly to include the highest and lowest affections of the human mind. He is more unselfish, and therefore more inclined to work and save in order to secure a future provision for his family; and there are already faint signs of a brighter time to come, in which there will be a general willingness to work and save in order to increase the stores of public wealth and of public opportunities for leading a higher life.

But though he is more willing than in earlier ages to incur present ills for the sake of future benefits, it is doubtful whether we can now trace a continued increase in the amount of exertion which he is willing to undergo for the sake of obtaining positive pleasures, whether present or future. During many generations the industry of the western world has steadily become more sedulous: holidays have diminished, the hours of work have increased, and people have from choice or necessity contented themselves with less and less search for pleasure outside their work. But it would seem that this movement has reached its maximum, and is now declining. In all grades of work except the very highest, people are getting to prize relaxation more highly than before, and are becoming more impatient of the fatigue that results from excessive strain; and they are perhaps on the whole less willing than they used to be to undergo the constantly increasing "discommodity" of very long hours of work, for the sake of obtaining present luxuries. These causes would make them less willing than before to work hard in order to provide against distant needs, were it not that there is an even more rapid increase in their power of realizing the future, and perhaps—though this is more doubtful—in their desire for that social distinction which comes from the possession of some small store of accumulated wealth.

This increase of capital per head tended to diminish its marginal utility; and therefore the rate of interest on new investments fell, though not uniformly. It was reported to be 10 per cent. during a great part of the middle ages; but it fell to 3 per cent. in the earlier half of the eighteenth century. The subsequent vast industrial and political demand for capital raised it again, and it was relatively high during the great war. It fell when the political drain had ceased, the gold supply at the time being very small; but it rose in the third quarter of last century, when new gold abounded, and capital was much needed for railways and the development of new countries. After 1873 an era of peace, combined with a slackening of the gold supply, lowered interest; but now it is rising again, partly in consequence of an increased gold supply147 .

§ 9. The growth of general enlightenment and of a sense of responsibility towards the young has turned a great deal of the increasing wealth of the nation from investment as material capital to investment as personal capital. There has resulted a largely increased supply of trained abilities, which has much increased the national dividend, and raised the average income of the whole people: but it has taken away from these trained abilities much of that scarcity value which they used to possess, and has lowered their earnings not indeed absolutely, but relatively to the general advance; and it has caused many occupations, which not long ago were accounted skilled, and which are still spoken of as skilled, to rank with unskilled labour as regards wages.

A striking instance is that of writing. It is true that many kinds of office work require a rare combination of high mental and moral qualities; but almost any one can be easily taught to do the work of a copying clerk, and probably there will soon be few men or women in England who cannot write fairly well. When all can write, the work of copying, which used to earn higher wages than almost any kind of manual labour, will rank among unskilled trades. In fact the better kinds of artisan work educate a man more, and will be better paid than those kinds of clerk's work which call for neither judgment nor responsibility. And, as a rule, the best thing that an artisan can do for his son is to bring him up to do thoroughly the work that lies at his hand, so that he may understand the mechanical, chemical or other scientific principles that bear upon it; and may enter into the spirit of any new improvement that may be made in it. If his son should prove to have good natural abilities, he is far more likely to rise to a high position in the world from the bench of an artisan than from the desk of a clerk.

Again a new branch of industry is often difficult simply because it is unfamiliar; and men of great force and skill are required to do work, which can be done by men of ordinary capacity or even by women and children, when the track has once been well beaten: its wages are high at first, but they fall as it becomes familiar. And this has caused the rise of average wages to be underrated, because it so happens that many of the statistics, which seem typical of general movements of wages, are taken from trades which were comparatively new a generation or two ago, and are now within the grasp of men of much less real ability than those who pioneered the way for them148 .

The consequence of such changes as these is to increase the number of those employed in occupations which are called skilled, whether the term is now properly applied or not: and this constant increase in the numbers of workers in the higher classes of trades has caused the average of all labour to rise much faster than the average of representative wages in each trade149 .

In the middle ages, though some men of great ability remained artisans all their lives, and became artists; yet as a class the artisans ranked more nearly with the unskilled labourers than they do now. At the beginning of the new industrial era in the middle of the eighteenth century the artisans had lost much of their old artistic traditions and had not yet acquired that technical command over their instruments, that certainty and facility in the exact performance of difficult tasks which belong to the modern skilled artisan. A change set in early in last century, and observers were struck by the social gulf that was opening out between skilled and unskilled labour; and the rise of the wages of the artisan, to about double those of ordinary labour. For indeed the great increase in the demand for highly skilled labour, especially in the metal trades, stimulated a rapid absorption of the strongest characters among the labourers and their children into the ranks of the artisans. The breaking down just at that time of the old exclusiveness of the artisans, was making them less than before an aristocracy by birth and more than before an aristocracy by worth; and this rise in the quality of artisans enabled them to maintain a rate of wages much above that of ordinary labour for a long while. But gradually some of the simpler forms of skilled trades began to lose their scarcity value, as their novelty wore off; and at the same time continually increasing demands began to be made on the ability of those in some trades, that were traditionally ranked as unskilled. The navvy for instance, and the agricultural labourer, have been increasingly trusted with expensive and complicated machinery, which had been thought to belong only to the skilled trades, and the real wages of these two representative occupations have risen fast. The rise of wages of agricultural labourers would be more striking than it is, did not the spread of modern notions to agricultural districts cause many of the ablest children born there to leave the fields for the railway or the workshop, to become policemen, or to act as carters or porters in towns. Those who are left behind in the fields have received a better education than was to be had in earlier times; and, though having perhaps less than an average share of natural ability, they earn much higher real wages than their fathers.

There are some skilled and responsible occupations, such as those of the head heaters and rollers in iron works, which require great physical strength, and involve much discomfort: and in them wages are very high. For the temper of the age makes those who can do high-class work, and can earn good wages easily, refuse to undergo hardship, except for a very high reward150 .

§ 10. We may next consider the changes in the relative wages of old and young men, of women and children.

The conditions of industry change so fast that long experience is in some trades almost a disadvantage, and in many it is of far less value than a quickness in taking hold of new ideas and adapting one's habits to new conditions. A man is likely to earn less after he is fifty years old than before he is thirty; and the knowledge of this is tempting artisans to follow the example of unskilled labourers, whose natural inclination to marry early has always been encouraged by the desire that their family expenses may begin to fall off before their own wages begin to shrink.

A second and even more injurious tendency of the same kind is that of the wages of children to rise relatively to those of their parents. Machinery has displaced many men, but not many boys; the customary restrictions which excluded them from some trades are giving way; and these changes, together with the spread of education, while doing good in almost every other direction, are doing harm in this that they are enabling boys, and even girls, to set their parents at defiance and start in life on their own account.

The wages of women are for similar reasons rising fast relatively to those of men. And this is a great gain in so far as it tends to develop their faculties; but an injury in so far as it tempts them to neglect their duty of building up a true home, and of investing their efforts in the personal capital of their children's character and abilities.

§ 11. The relative fall in the incomes to be earned by moderate ability, however carefully trained, is accentuated by the rise in those that are obtained by many men of extraordinary ability. There never was a time at which moderately good oil paintings sold more cheaply than now, and there never was a time at which first-rate paintings sold so dearly. A business man of average ability and average good fortune gets now a lower rate of profits on his capital than at any previous time; while yet the operations, in which a man exceptionally favoured by genius and good luck can take part, are so extensive as to enable him to amass a huge fortune with a rapidity hitherto unknown.

The causes of this change are chiefly two; firstly, the general growth of wealth; and secondly, the development of new facilities for communication, by which men, who have once attained a commanding position, are enabled to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before.

It is the first cause, almost alone, that enables some barristers to command very high fees; for a rich client whose reputation, or fortune, or both, are at stake will scarcely count any price too high to secure the services of the best man he can get: and it is this again that enables jockeys and painters and musicians of exceptional ability to get very high prices. In all these occupations the highest incomes earned in our own generation are the highest that the world has yet seen. But so long as the number of persons who can be reached by a human voice is strictly limited, it is not very likely that any singer will make an advance on the £10,000, said to have been earned in a season by Mrs Billington at the beginning of last century, nearly as great as that which the business leaders of the present generation have made on those of the last.

For the two causes have co-operated to put enormous power and wealth in the hands of those business men of our own generation in America and elsewhere, who have had first-rate genius and have been favoured by fortune. It is true that a great part of these gains have come, in some cases, from the wrecks of the rival speculators who had been worsted in the race. But in others they were earned mainly by the supreme economizing force of a great constructive genius working at a new and large problem with a free hand: for instance the founder of the Vanderbilt family, who evolved the New York Central Railroad system out of chaos, probably saved to the people of the United States more than he accumulated himself151 .

§ 12. But these fortunes are exceptional. The diffusion of education, and prudent habits among the masses of the people, and the opportunities which the new methods of business offer for the safe investment of small capitals, are telling on the side of moderate incomes. The returns of the income tax and the house tax, the statistics of consumption of commodities, the records of salaries paid to the higher and the lower ranks of employees of Government and public companies, all indicate that middle class incomes are increasing faster than those of the rich; that the earnings of artisans are increasing faster than those of the professional classes, and that the wages of healthy and vigorous unskilled labourers are increasing faster even than those of the average artisan. The aggregate income of the very rich is perhaps not a larger part of the whole in England now than in earlier times. But in America the aggregate value of land is rising fast; the higher strains of the working population are yielding ground to lower strains of immigrants; and great financiers are acquiring vast power: and it may possibly be true that the aggregate income from property is rising relatively to that from labour, and that the aggregate income of the very rich is rising fastest of all.

It must be admitted that a rise in wages would lose part of its benefit, if it were accompanied by an increase in the time spent in enforced idleness. Inconstancy of employment is a great evil, and rightly attracts public attention. But several causes combine to make it appear to be greater than it really is.

When a large factory goes on half time, rumour bruits the news over the whole neighbourhood, and perhaps the newspapers spread it all over the country. But few people know when an independent workman, or even a small employer, gets only a few days' work in a month; and in consequence, whatever suspensions of industry there are in modern times, are apt to seem more important than they are relatively to those of earlier times. In earlier times some labourers were hired by the year: but they were not free, and were kept to their work by personal chastisement. There is no good cause for thinking that the mediæval artisan had constant employment. And the most persistently inconstant employment now to be found in Europe is in those non-agricultural industries of the West which are most nearly mediæval in their methods, and in those industries of Eastern and Southern Europe in which mediæval traditions are strongest152 .

In many directions there is a steady increase in the proportion of employees who are practically hired by the year. This is for instance the general rule in many of those trades connected with transport which are growing fastest; and which are, in some respects, the representative industries of the second half of the nineteenth century, as the manufacturing trades were of the first half. And though the rapidity of invention, the fickleness of fashion, and above all the instability of credit, do certainly introduce disturbing elements into modern industry; yet, as we shall see presently, other influences are working strongly in the opposite direction, and there seems to be no good reason for thinking that inconstancy of employment is increasing on the whole.

BOOK VI, CHAPTER XIII

PROGRESS IN RELATION TO STANDARDS OF LIFE.

§ 1. Let us begin by pursuing a little further the line of thought on which we started in Book III., when considering wants in relation to activities. We there saw reasons for thinking that the true key-note of economic progress is the development of new activities rather than of new wants; and we may now make some study of a question that is of special urgency in our own generation; viz.—what is the connection between changes in the manner of living and the rate of earnings; how far is either to be regarded as the cause of the other, and how far as the effect?

The term the standard of life is here taken to mean the standard of activities adjusted to wants. Thus a rise in the standard of life implies an increase of intelligence and energy and self-respect; leading to more care and judgment in expenditure, and to an avoidance of food and drink that gratify the appetite but afford no strength, and of ways of living that are unwholesome physically and morally. A rise in the standard of life for the whole population will much increase the national dividend, and the share of it which accrues to each grade and to each trade. A rise in the standard of life for any one trade or grade will raise their efficiency and therefore their own real wages: it will increase the national dividend a little; and it will enable others to obtain their assistance at a cost somewhat less in proportion to its efficiency.

But many writers have spoken of the influence exerted on wages by a rise, not in the standard of life, but in that of comfort;—a term that may suggest a mere increase of artificial wants, among which perhaps the grosser wants may predominate. It is true that every broad improvement in the standard of comfort is likely to bring with it a better manner of living, and to open the way to new and higher activities; while people who have hitherto had neither the necessaries nor the decencies of life, can hardly fail to get some increase of vitality and energy from an increase of comfort, however gross and material the view which they may take of it. Thus a rise in the standard of comfort will probably involve some rise in the standard of life; and, in so far as this is the case, it tends to increase the national dividend and to improve the condition of the people.

Some writers however of our own and of earlier times have gone further than this, and have implied that a mere increase of wants tends to raise wages. But the only direct effect of an increase of wants is to make people more miserable than before. And if we put aside its possible indirect effect in increasing activities, and otherwise raising the standard of life, it can raise wages only by diminishing the supply of labour. It will be well to go into this matter more closely.

§ 2. It has already been noted that if population increased in high geometrical progression uninterruptedly for many generations together in a country which could not import food easily, then the total produce of labour and capital, working on the resources provided by nature, would barely cover the cost of rearing and training each generation as it came: this would be true even if we supposed that nearly the whole of the national dividend went to labour, scarcely any share being allotted to capitalist or landowner153 . If the allowance fell below that level, the rate of increase of the population must necessarily shrink; unless indeed the expenses of their nurture and rearing were curtailed, with a resulting lowering of efficiency, and therefore of the national dividend, and therefore of earnings.

But in fact the check to the rapid growth of population would probably come earlier, because the population at large would not be likely to limit its consumption to bare necessaries: some part of the family income would almost certainly be spent on gratifications which contributed but little to the maintenance of life and efficiency. That is to say, the maintenance of a standard of comfort, raised more or less above that which was necessary for life and efficiency, would necessarily involve a check to the growth of population at a rather earlier stage than would have been reached if family expenditure had been directed on the same principles as is the expenditure on the nurture and training of horses or slaves. This analogy reaches further.

Three necessaries for full efficiency—hope, freedom and change154 —cannot easily be brought within the slave's reach. But as a rule the shrewd slave-owner goes to some trouble and expense to promote rough musical and other entertainments, on the same principle that he provides medicines: for experience shows that melancholy in a slave is as wasteful as disease, or as cinders that clog the furnace of a boiler. Now if the standard of comfort of the slaves were to rise in such a way that neither punishment nor the fear of death would make them work unless provided with expensive comforts and even luxuries, they would get those comforts and luxuries; or else they would disappear, in the same way as would a breed of horses that did not earn their keep. And if it were true that the real wages of labour were forced down chiefly by the difficulty of obtaining food, as was in fact the case in England a hundred years ago; then indeed the working classes might relieve themselves from the pressure of Diminishing Return by reducing their numbers.

But they cannot do so now, because there is no such pressure. The opening of England's ports, in 1846, was one among many causes of the development of railways connecting the vast agricultural lands of North and South America and Australia with the sea. Wheat grown under the most advantageous circumstances is brought to the English working man in sufficient quantities for his family at a total cost equal to but a small part of his wages. An increase in numbers gives many new opportunities for increased efficiency of labour and capital working together to meet men's wants; and thus may raise wages in one direction as much as it lowers them in another; provided only the stock of capital required for the new developments increases fast enough. Of course the Englishman is not unaffected by the law of diminishing return: he cannot earn his food with as little labour as if he were near spacious virgin prairies. But its cost to him, being now governed mainly by the supplies which come from new countries, would not be greatly affected either by an increase or by a diminution in the population of this country. If he can make his labour more efficient in producing things which can be exchanged for imported food, then he will get his food at less real cost to himself, whether the population of England grows fast or not.

When the wheat-fields of the world are worked at their full power (or even earlier, if the free entry of food into England's ports should ever be obstructed), then indeed an increase of her population may lower wages, or at all events check the rise that would otherwise have come from the continued improvement in the arts of production: and, in such a case a rise in the standard of comfort may raise wages merely by stinting the growth of numbers.

But, while the present good fortune of abundant imported food attends on the English people, a rise in their standard of comfort could not increase their wages, merely by its action on their numbers. And further if it were obtained by measures which forced down the rate of profits on capital even further below the level, which can be got in countries which have a greater power of absorbing capital than England has, it might both check accumulation in England, and hasten the exportation of capital: and in that case wages in England would fall both absolutely, and relatively to the rest of the world. If on the other hand a rise in the standard of comfort went together with a great increase in efficiency; then—whether it were accompanied by an increase in numbers or not—it would enlarge the national dividend relatively to population, and establish a rise of real wages on an enduring basis. Thus a diminution by one-tenth of the number of workers, each doing as much work as before, would not materially raise wages; and therefore a diminution by one-tenth in the amount of work done by each, the number remaining unchanged, would lower wages in general by one-tenth.

This argument is of course consistent with the belief that a compact group of workers can for a time raise their wages at the expense of the rest of the community by making their labour scarce. But such strategy seldom succeeds for more than a short time. However strong the anti-social obstacles which they erect against those who would like a share of their gains, interlopers find their way in; some over the obstacles, some under them, and some through them. Meanwhile invention is set on foot to obtain in some other way, or from some other place, things of the production of which the compact group thought to have a partial monopoly: and, what is even more dangerous to them, new things are invented and brought into general use, which satisfy nearly the same wants, and yet make no use of their labour. Thus after a while those, who have striven to make a shrewd use of monopoly, are apt to find their numbers swollen rather than reduced, while the total demand for their labour has shrunk: in that case their wages fall heavily.

§ 3. The relations between industrial efficiency and the hours of labour are complex. If the strain is very great, a man is apt to be so tired by long work that he is seldom at his best, and is often much below it or even idling. As a general, though not universal rule, his work is more intense when paid by piece, than when paid by time; and, in so far as this is the case, short hours are specially suitable to industries in which piece-work prevails155 .

When the hours, the nature of the work done, the physical conditions under which it is done, and the method by which it is remunerated, are such as to cause great wear-and-tear of body or mind or both, and to lead to a low standard of living; when there has been a want of that leisure, rest and repose, which are among the necessaries for efficiency; then the labour has been extravagant from the point of view of society at large, just as it would be extravagant on the part of the individual capitalist to keep his horses or slaves overworked or underfed. In such a case a moderate diminution of the hours of labour would diminish the national dividend only temporarily: for as soon as the improved standard of life had had time to exert its full effect on the efficiency of the workers, their increased energy, intelligence and force of character would enable them to do as much as before in less time; and thus, even from the point of view of material production, there would be no ultimate loss, any more than there would be in sending a sick worker into hospital to get his strength renovated. The coming generation is interested in the rescue of men, and still more in that of women, from excessive work; at least as much as it is in the handing down to it of a good stock of material wealth.

This argument assumes that the new rest and leisure raise the standard of life. And such a result is almost certain to follow in the extreme cases of overwork which we have been now considering; for in them a mere lessening of tension is a necessary condition for taking the first step upwards. The lowest grade of honest workers seldom work very hard. But they have little stamina; and many of them are so overstrained that they might probably, after a time, do as much in a shorter day as they now do in a long one156 .

Again there are some branches of industry which at present turn to account expensive plant during nine or ten hours a day; and in which the gradual introduction of two shifts of eight hours, or even less, would be a gain. The change would need to be introduced gradually; for there is not enough skilled labour in existence to allow such a plan to be adopted at once in all the workshops and factories for which it is suited. But some kinds of machinery, when worn out or antiquated, might be replaced on a smaller scale; and, on the other hand, much new machinery that cannot be profitably introduced for a ten hours' day, would be introduced for a sixteen hours' day; and when once introduced it would be improved on. Thus the arts of production would progress more rapidly; the national dividend would increase; working men would be able to earn higher wages without checking the growth of capital, or tempting it to migrate to countries where wages are lower: and all classes of society would reap benefit from the change.

The importance of this consideration is more apparent every year, since the growing expensiveness of machinery, and the quickness with which it is rendered obsolete, are constantly increasing the wastefulness of keeping the untiring iron and steel resting in idleness during sixteen hours out of the twenty-four. In any country, such a change would increase the net produce, and therefore the wages of each worker; because much less than before would have to be deducted from his total output on account of charges for machinery, plant, factory-rent, etc. But Anglo-Saxon artisans, unsurpassed in accuracy of touch, and surpassing all in sustained energy, would more than any others increase their net produce, if they would keep their machinery going at its full speed for sixteen hours a day, even though they themselves worked only eight157 .

It must however be remembered that this particular plea for a reduction of the hours of labour applies only to those trades which use, or can use, expensive plant; and that in many cases, as for instance in some mines and some branches of railway work, the system of shifts is already applied so as to keep the plant almost constantly at work.

There remain therefore many trades in which a reduction of the hours of labour would certainly lessen the output in the immediate present, and would not certainly bring about at all quickly any such increase of efficiency as would raise the average work done per head up to the old level. In such cases the change would diminish the national dividend; and the greater part of the resulting material loss would fall on the workers whose hours of labour were diminished. It is true that in some trades a scarcity of labour would raise its price for a good long while at the expense of the rest of the community. But as a rule a rise in the real price of labour would cause a diminished demand for the product, partly through the increased use of substitutes; and would also cause an inrush of new labour from less favoured trades.

§ 4. It may be well to try to explain the great vitality of the common belief that wages could be raised generally by merely making labour scarce. To begin with, it is difficult to realize how different, and often even opposed, are the immediate and permanent effects of a change. People see that when there are competent men waiting for work outside the offices of a tramway company, those already at work think more of keeping their posts than of striving for a rise of wages; and that if these men were away, the employers could not resist a demand for higher wages. They dwell on the fact that, if tramway men work short hours, and there is no diminution in the number of miles run by the cars on existing lines, then more men must be employed; probably at higher wages per hour, and possibly at higher wages per day. They see that when an enterprise is on foot, as for instance the building of a house, or a ship, it must be finished at any cost, since there is nothing to be gained by stopping half way: and the larger the slices of work on it done by any one man, the fewer slices of work on it will be left for other people.

But there are other consequences more important, though less obtrusive, which need to be considered. For instance, if tram workers and building operatives stint their labour artificially, tramway extensions will be checked; fewer men will be employed in making and working tramways; many work-people and others will walk into town, who might have ridden; many will live closely packed in the cities who might have had gardens and fresher air in the suburbs; the working classes, among others, will be unable to pay for as good housing accommodation as they would otherwise have had; and there will be less building to be done.

In short the argument that wages can be raised permanently by stinting labour rests on the assumption that there is a permanent fixed work-fund, i.e. a certain amount of work which has to be done, whatever the price of labour. And for this assumption there is no foundation. On the contrary, the demand for work comes from the national dividend; that is, it comes from work. The less work there is of one kind, the less demand there is for work of other kinds; and if labour were scarce, fewer enterprises would be undertaken.

Again, constancy of employment is dependent on the organization of industry and trade, and on the success with which those who arrange supply are able to forecast coming movements of demand and of price, and to adjust their actions accordingly. But this would not be better done with a short day's work than with a long one; and indeed the adoption of a short day, not accompanied by double shifts, would discourage the use of that expensive plant, the presence of which makes employers very unwilling to close their works. Almost every artificial stinting of work involves friction, and therefore tends, not to lessen, but to increase the inconstancy of employment.

It is true that, if plasterers or shoemakers could exclude external competition, they would have a fair chance of raising their wages by a mere diminution of the amount of work done by each, whether by shortening the hours of labour or in any other way; but these gains can be got only at the cost of a greater aggregate loss to other sharers in the national dividend; which is the source of wages and profits in all industries in the country. This conclusion is emphasized by the fact, to which experience testifies and which analysis explains, that the strongest instances of a rise in wages attained by trade union strategy are found in branches of industry, the demand for whose labour is not direct, but "derived" from the demand for a product in making which many branches of industry co-operate: for any one branch, which is strong in strategy, can absorb to itself some share of the price of the ultimate product, which might have gone to other branches158 .

§ 5. We now come to a second cause of the vitality of the belief that wages can be raised generally and permanently by checking the supply of labour. This cause is an underestimate of the effects of such a change on the supply of capital.

It is a fact—and, so far as it goes, an important fact—that some share of the loss resulting from the lessening of output by (say) plasterers or shoemakers, will fall on those who do not belong to the working classes. Part of it will no doubt fall on employers and capitalists, whose personal and material capital is sunk in building or shoemaking; and part on well-to-do users, or consumers, of houses or shoes. And further if there were a general attempt by all of the working classes to obtain high wages by restricting the effective supply of their labour, a considerable part of the burden resulting from the shrinkage of the national dividend would doubtless be thrown on other classes of the nation, and especially on the capitalists, for a time: but only for a time. For a considerable diminution in the net return to investments of capital would speedily drive new supplies of it abroad. In regard to this danger it is indeed sometimes urged that the railways, and factories of the country cannot be exported. But nearly all of the materials, and a large part of the appliances of production are consumed, or worn out, or become obsolete every year; and they need to be replaced. And a reduction in the scale of this replacement, combined with the exportation of some of the capital thus set free, might probably so lessen the effective demand for labour in the country in a few years, that in the reaction wages generally would be reduced much below their present level159 .

But though the emigration of capital would not in any case be attended by much difficulty, owners of capital have good business reasons as well as a sentimental preference in favour of investing it at home. And therefore a rise in the standard of life, which makes a country more attractive to live in, is sure to counteract to some extent the tendency of a fall in the net return on investments to cause capital to be exported. On the other hand an attempt to raise wages by anti-social contrivances for stinting output, is certain to drive abroad well-to-do people in general; and especially just that class of capitalists whose enterprise and delight in conquering difficulties is of the most importance to the working classes. For their ceaseless initiative makes for national leadership and enables man's work to raise real wages; while promoting an increased supply of those appliances which make for efficiency, and thus sustain the growth of the national dividend.

It is true also that a general rise in wages however attained, if spread over the whole world, could not cause capital to migrate from any one part of it to another. And it is to be hoped that in time the wages of manual labour will rise all over the world, mainly through increased production; but partly also in consequence of a general fall in the rate of interest, and of a relative—if not absolute—diminution of incomes larger than are necessary to supply the means of efficient work and culture even in the highest and broadest senses of these terms. But methods of raising wages, which make for a higher standard of comfort by means that lessen rather than promote efficiency, are so anti-social and shortsighted as to invoke a speedy retribution; and there is perhaps little chance of their being adopted over any great part of the world. If several countries adopted such methods, the others going straight for raising the standards of life and of efficiency, would speedily attract to themselves much of the capital and of the best vital force away from those who followed an ignoble restrictive policy.

§ 6. In this discussion it has been necessary to adhere to general reasoning: for a direct appeal to experience is difficult; and, if made lightly, it can but mislead. Whether we watch the statistics of wages and production immediately after the change or for a long period following it, the prominent facts are likely to be due chiefly to causes other than that which we are wishing to study.

Thus if a reduction of hours resulted from a successful strike, the chances are that the occasion chosen for the strike was one when the strategical position of the workmen was good, and when the general conditions of trade would have enabled them to obtain a rise of wages, if there had been no change in the hours of labour: and therefore the immediate effects of the change on wages are likely to appear more favourable than they really were. And again many employers, having entered into contracts which they are bound to fulfil, may for the time offer higher wages for a short day than before for a long day. But this is a result of the suddenness of the change, and is a mere flash in the pan; and, as has just been observed, the immediate results of such a change are likely to be in the opposite direction to those which follow later, and are more enduring.

On the other hand, if men have been overworked, the shortening of the hours of labour will not at once make them strong: the physical and moral improvement of the condition of the workers, with its consequent increase of efficiency and therefore of wages, cannot show itself at once.

Further, the statistics of production and wages several years after the reduction of hours are likely to reflect changes in the prosperity of the country, and especially of the trade in question; of the methods of production; and of the purchasing power of money: and it may be as difficult to isolate the effects of reduction of the hours of labour as it is to isolate the effects on the waves of a noisy sea caused by throwing a stone among them160 .

We must then be careful not to confuse the two questions whether a cause tends to produce a certain effect and whether that cause is sure to be followed by that effect. Opening the sluice of a reservoir tends to lower the level of the water in it; but if meanwhile larger supplies of water are flowing in at the other end, the opening of the sluice may be followed by a rising of the level of the water in the cistern. And so although a shortening of the hours of labour would tend to diminish output in those trades which are not overworked, and in which there is no room for double shifts; yet it might very likely be accompanied by an increase of production arising from the general progress of wealth and knowledge. But in that case the rise of wages would have been obtained in spite of, and not in consequence of, a shortening of hours.

§ 7. In modern England nearly all movements of the kind which we have just been discussing are directed by trade unions. A full appreciation of their aims and results lies beyond the scope of the present volume: for it must be based on a study of combinations in general, of industrial fluctuations, and of foreign trade. But a few words may be said here on that part of their policy which is most closely connected with standards of life, and work, and wages161 .

The increasing changefulness and mobility of industry obscure the influences both for good and for evil which the earnings and industrial policy of any group of workers in one generation exert on the efficiency and earning power of the same group in a later generation162 . The family income, from which the expenses of rearing and training its younger members must be defrayed, seldom comes now from a single trade. The sons are less frequently found in their father's occupation: the stronger and more strenuous of those to whose nurture the earnings of any occupation have contributed are likely to seek higher fortunes elsewhere; while the weak and the dissolute are likely to descend below it. It is therefore becoming increasingly difficult to bring the test of experience to bear on the question, whether the efforts, which any particular trade union has made to raise the wages of its members, have borne rich fruit in raising the standard of life and work of the generation reared by aid of those high wages. But some broad facts stand out clearly.

The original aims of British trade unions were almost as closely connected with the standard of life as with the rate of wages. They derived their first great impulse from the fact that the law, partly directly and partly indirectly, sustained combinations among employers to regulate wages in their own supposed interest; and prohibited under severe penalties similar combinations on the part of employees. This law depressed wages a little; but it depressed much more the strength and richness of character of the workman. His horizon was generally so limited that he could not be fully drawn out of himself by a keen and intelligent interest in national affairs: so he thought and cared little about any mundane matters, except the immediate concerns of himself, his family and his neighbours. Freedom to combine with others in his own occupation would have widened his horizon, and given him larger matters to think about: it would have raised his standard of social duty, even though this duty might have been tainted with a good deal of class selfishness. Thus the early struggle for the principle that workmen should be free to do in combination the counterpart of anything which employers were free to do in combination, was in effect an effort to obtain conditions of life consistent with true self-respect and broad social interests, as much as a struggle for higher wages.

On this side of the field victory has been complete. Trade unionism has enabled skilled artisans, and even many classes of unskilled workers, to enter into negotiations with their employers with the same gravity, self-restraint, dignity and forethought as are observed in the diplomacy of great nations. It has led them generally to recognize that a simply aggressive policy is a foolish policy, and that the chief use of military resources is to preserve an advantageous peace.

In many British industries Boards for the adjustment of wages work steadily, and smoothly, because there is a strong desire to avoid waste of energy on trifles. If an employee disputes the justice of any judgment passed by his employer or foreman on his work or his remuneration for it, the employer in the first instance calls in the trade union secretary as arbiter: his verdict is generally accepted by the employer; and of course it must be accepted by the operative. If beneath this particular personal dispute there is a question of principle on which no clear agreement has been reached by the Board, the matter may be referred for discussion to the secretaries of the employers' association and the trade union in conference: if they cannot agree, it may be passed on to the Board. At last, if the stake at issue is large enough, and neither side will give way, the issue is relegated by a strike or a lock-out to the decision of force. But even then the good services of several generations of organized trade unions are seen in the conduct of the contest; which generally differs in method from the contest waged between employers and employed a century ago, very much as honourable war between modern civilized peoples does from fierce guerilla war among wild peoples. Self-control and moderation of manner overlying resolute purpose distinguish the British delegates above others at an international labour conference.

But the very greatness of the services which trade unions have rendered imposes on them corresponding obligations. Noblesse oblige: and they are bound to look with suspicion on those who exaggerate their power of raising wages by particular devices, especially when such devices contain an anti-social element. There are indeed but few movements which are without reproach: some destructive influence lurks in nearly every great and good effort. But the evil should be stripped of all gloss, and carefully examined, so that it may be kept down.

§ 8. The chief instrument by which trade unions have obtained their power of negotiating on even terms with their employers is a "Common Rule" as regards the standard wage to be paid for an hour's work of a given class, or again for piece-work of a given class. Custom and the rather ineffective assessments of wages by Justices of the Peace, while hindering the workman from rising, had also defended him from extreme pressure. But, when competition became free, the isolated workman was at a disadvantage in bargaining with employers. For, even in Adam Smith's time, they were generally in agreement, formal or informal, not to outbid one another in the hire of labour. And when, as time went on, a single firm was often able to employ several thousands of workmen, that firm by itself became a larger as well as a more compact bargaining force than a small trade union.

It is true that the agreements and understandings of employers not to overbid one another were not universal, and were often evaded or broken. It is true that when the net product due to the labour of additional workers was largely in excess of the wages that were being paid to them, a pushing employer would brave the indignation of his peers, and attract workers to him by the offer of higher wages: and it is true that in progressive industrial districts this competition was sufficient to secure that no considerable body of workers should remain for long with wages much below the equivalent of their net product. It is necessary to reassert here the fact that this net product, to which the wages of a worker of normal efficiency approximate, is the net product of a worker of normal efficiency: for a suggestion has indeed been made by some advocates of extreme enforcements of the Common Rule, that competition tends to make the wages of the efficient worker equal to the net product of that worker who is so inefficient that the employer can barely be induced to employ him at all163 .

But in fact competition does not act in this way. It does not tend to make weekly wages in similar employments equal: it tends to adjust them to the efficiency of the workers. If A will do twice as much work as B, an employer on the margin of doubt as to whether it is worth his while to take on additional workers, will make just as good a bargain by taking on A at four shillings as by taking on B and another at two shillings each. And the causes which govern wages are indicated as clearly by watching the marginal case of A at four shillings as that of B at two164 .

§ 9. Speaking broadly then it may be said that trade unions have benefited the nation as well as themselves by such uses of the Common Rule as make for a true standardization of work and wages; especially when combined with a frank endeavour to make the resources of the country go as far as they will, and thus to promote the growth of the national dividend. Any rise of wages or improvement in the conditions of life, and employment, which they may obtain by these reasonable methods, is likely to make for social wellbeing. It is not likely to worry and dishearten business enterprise, nor to throw out of their stride those whose efforts are making most for national leadership: nor will it drive capital abroad to any great extent.

The case is different with applications of the Common Rule which make for a false standardization; which tend to force employers to put relatively inefficient workers in the same class for payment as more efficient workers; or which prevent anyone from doing work for which he is capable, on the ground that it does not technically belong to him. These uses of the Rule are primâ facie anti-social. There may indeed be stronger reasons for such action than appear on the surface: but their importance is apt to be exaggerated by the professional zeal of trade union officials for the technical perfection of the organization, for which they are responsible. The reasons are therefore of a kind for which external criticism may be serviceable, in spite of its aloofness. We may begin with a strong case, on which there is now relatively little difference of opinion.

In the days when trade unions had not learnt full self-respect, forms of false standardization were common. Obstacles were put in the way of the use of improved methods and machinery; and attempts were made to fix the standard wage for a task at the equivalent of the labour required to perform it by methods long antiquated. This again tended to sustain wages in the particular branch of industry concerned; but only by so great a check to production, that the policy, if generally successful, would have greatly curtailed the national dividend, and lessened employment at good wages in the country generally. The service which the leading trade unionists rendered to the country by condemning this anti-social conduct are never to be forgotten. And though some partial relapse from its high principles on the part of an enlightened union led up to the great dispute of 1897 in the engineering trade, the error was quickly purged of at least its worst features165 .

Again, false standardization is involved in a practice, still followed by many unions, of refusing to allow an elderly man, who can no longer do a full standard day's work, to take something less than standard wages. This practice slightly restricts the supply of labour in the trade, and appears to benefit those who enforce it. But it cannot permanently restrict numbers: it often involves a heavy burden on the benefit funds of the union, and it is generally shortsighted even from a purely selfish point of view. It lowers the national dividend considerably: it condemns elderly men to take their choice between oppressive idleness, and a weary struggle to work harder than is good for them. It is harsh and anti-social.

To pass to a more doubtful case:—some delimitation of the functions of each industrial group is essential to the working of the Common Rule: and it is certainly in the interests of industrial progress that every urban artisan should seek to attain high proficiency in some branch of work. But a good principle is apt to be pushed to evil excess, when a man is not allowed to do a certain part of the work on which he is engaged, though it is quite easy to him, on the pretext that it belongs technically to another department. Such prohibitions are of relatively little injury in establishments that make large numbers of similar goods. For in these it is possible so to arrange the work that there is fairly uniform employment for an integral number of operatives of each of many different classes: an integral number, i.e., one with no ragged fringe of workers who earn a part of their living elsewhere. But such prohibitions press hardly on small employers; and especially on those who are on the lower rungs of a ladder that may lead in two generations, if not in one, to great achievements that make for national leadership. Even in large establishments, they increase the chance that a man, for whom it is difficult to find work at the time, will be sent to seek employment elsewhere; and thus swell for the time the ranks of the unemployed. Delimitation then, though a social good when applied moderately and with judgment, becomes an evil when pushed to extremes for the sake of the minor tactical advantages which it offers166 .

§ 10. Next we may pass to a still subtler and more difficult matter. It is a case in which the Common Rule appears to work badly, not because it is applied harshly: but because the work, to which it is set, requires it to be more perfect technically than it is, or perhaps can be made. The centre of this matter is that the standards of wages are expressed in terms of money: and since the real value of money changes from one decade to another, and fluctuates rapidly from year to year, rigid money standards cannot work out truly. It is difficult, if not impossible, to give them appropriate elasticity: and that is a reason against extreme applications of the Common Rule, which must perforce use so rigid and imperfect an implement.

The urgency of this consideration is increased by the natural tendency of trade unions to press for a rise in standard money wages during inflations of credit, which raise prices and lower the purchasing power of money for the time. At that time employers may be willing to pay high wages, measured in real purchasing power and still higher wages in terms of money, even for labour that falls somewhat short of the standard of full normal efficiency. Thus men of but second-rate efficiency earn the high standard money wages, and make good their claim to be admitted as members of the union. But very soon the inflation of credit subsides, and is followed by a depression; prices fall, and the purchasing power of money rises: the real value of labour falls, and its money value falls faster. The high standard of money wages, attained during the inflation, is now too high to leave a good margin of profits even on the work of fully efficient men; and those, who are below the standard of efficiency, are not worth the standard wages. This false standardization is not an unmixed evil to the efficient members of the trade: for it tends to make their labour more in demand, just as does the compulsory idleness of elderly men. But it does so only by checking production, and therefore checking the demand for the labour of other branches of industry. The more such a policy is persisted in by trade unions generally, the deeper and the more sustained is the injury caused to the national dividend; and the less is the aggregate of employment at good wages throughout the country.

In the long run every branch of industry would prosper better, if each exerted itself more strenuously to set up several standards of efficiency for labour, with corresponding standards for wages; and were more quick to consent to some relaxation of a high standard of money wages when the crest of a wave of high prices, to which it was adapted, had passed away. Such adjustments are full of difficulty: but progress towards them might be hastened if there were a more general and clear appreciation of the fact that high wages, gained by means that hinder production in any branch of industry, necessarily increase unemployment in other branches. For, indeed, the only effective remedy for unemployment is a continuous adjustment of means to ends, in such way that credit can be based on the solid foundation of fairly accurate forecasts; and that reckless inflations of credit—the chief cause of all economic malaise—may be kept within narrower limits.

This matter cannot be argued here: but a few words may be said in further explanation. Mill well observed that "What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because everyone would have twice as much to offer in exchange."

But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones. Projects for new railways meet with no favour, ships lie idle, and there are no orders for new ships. There is scarcely any demand for the work of navvies, and not much for the work of the building and the engine-making trades. In short there is but little occupation in any of the trades which make fixed capital. Those whose skill and capital is specialized in these trades are earning little, and therefore buying little of the produce of other trades. Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less: the diminution of the demand for their wares makes them demand less of other trades. Thus commercial disorganization spreads: the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization.

The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others. If all trades which make goods for direct consumption agreed to work on, and to buy each other's goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. The trades which make fixed capital might have to wait a little longer: but they too would get employment when confidence had revived so far that those who had capital to invest had made up their minds how to invest it. Confidence by growing would cause itself to grow; credit would give increased means of purchase, and thus prices would recover. Those in trade already would make good profits, new companies would be started, old businesses would be extended; and soon there would be a good demand even for the work of those who make fixed capital. There is of course no formal agreement between the different trades to begin again to work full time, and so make a market for each other's wares. But the revival of industry comes about through the gradual and often simultaneous growth of confidence among many various trades; it begins as soon as traders think that prices will not continue to fall: and with a revival of industry prices rise167 .

§ 11. The main drift of this study of Distribution then suggests that the social and economic forces already at work are changing the distribution of wealth for the better: that they are persistent and increasing in strength; and that their influence is for the greater part cumulative; that the socio-economic organism is more delicate and complex than at first sight appears; and that large ill-considered changes might result in grave disaster. In particular it suggests that the assumption and ownership by Government of all the means of production, even if brought about gradually and slowly, as the more responsible "Collectivists" propose, might cut deeper into the roots of social prosperity than appears at first sight.

Starting from the fact that the growth of the national dividend depends on the continued progress of invention and the accumulation of expensive appliances for production; we are bound to reflect that up to the present time nearly all of the innumerable inventions that have given us our command over nature have been made by independent workers; and that the contributions from Government officials all the world over have been relatively small. Further, nearly all the costly appliances for production which are now in collective ownership by national or local Governments, have been bought with resources borrowed mainly from the savings of business men and other private individuals. Oligarchic Governments have sometimes made great efforts to accumulate collective wealth; and it may be hoped that in the coming time, foresight and patience will become the common property of the main body of the working classes. But, as things are, too great a risk would be involved by entrusting to a pure democracy the accumulation of the resources needed for acquiring yet further command over nature.

There is therefore strong primâ facie cause for fearing that the collective ownership of the means of production would deaden the energies of mankind, and arrest economic progress; unless before its introduction the whole people had acquired a power of unselfish devotion to the public good which is now relatively rare. And, though this matter cannot be entered upon here, it might probably destroy much that is most beautiful and joyful in the private and domestic relations of life. These are the main reasons which cause patient students of economics generally to anticipate little good and much evil from schemes for sudden and violent reorganization of the economic, social and political conditions of life.

Further, we are bound to reflect that the distribution of the national dividend, though bad, is not nearly as bad as is commonly supposed. In fact there are many artisan households in England, and even more in the United States in spite of the colossal fortunes that are found there, which would lose by an equal distribution of the national income. Therefore the fortunes of the masses of the people, though they would of course be greatly improved for the time by the removal if all inequalities, would not be raised even temporarily at all near to the level which is assigned to them in socialistic anticipations of a Golden Age168 .

But this cautious attitude does not imply acquiescence in the present inequalities of wealth. The drift of economic science during many generations has been with increasing force towards the belief that there is no real necessity, and therefore no moral justification for extreme poverty side by side with great wealth. The inequalities of wealth though less than they are often represented to be, are a serious flaw in our economic organization. Any diminution of them which can be attained by means that would not sap the springs of free initiative and strength of character, and would not therefore materially check the growth of the national dividend, would seem to be a clear social gain. Though arithmetic warns us that it is impossible to raise all earnings beyond the level already reached by specially well-to-do artisan families, it is certainly desirable that those who are below that level should be raised, even at the expense of lowering in some degree those who are above it.

§ 12. Prompt action is needed in regard to the large, though it may be hoped, now steadily diminishing, "Residuum" of persons who are physically, mentally, or morally incapable of doing a good day's work with which to earn a good day's wage. This class perhaps includes some others besides those who are absolutely "unemployable." But it is a class that needs exceptional treatment. The system of economic freedom is probably the best from both a moral and material point of view for those who are in fairly good health of mind and body. But the Residuum cannot turn it to good account: and if they are allowed to bring up children in their own pattern, then Anglo-Saxon freedom must work badly through them on the coming generation. It would be better for them and much better for the nation that they should come under a paternal discipline something like that which prevails in Germany169 .

The evil to be dealt with is so urgent that strong measures against it are eagerly to be desired. And the proposal that a minimum wage should be fixed by authority of Government below which no man may work, and another below which no woman may work, has claimed the attention of students for a long while. If it could be made effective, its benefits would be so great that it might be gladly accepted, in spite of the fear that it would lead to malingering and some other abuses; and that it would be used as a leverage for pressing for a rigid artificial standard of wages, in cases in which there was no exceptional justification for it. But, though great improvements in the details of the scheme have been made recently, and especially in the last two or three years, its central difficulties do not appear to have been fairly faced. There is scarcely any experience to guide us except that of Australasia, where every inhabitant is part owner of a vast landed property; and which has been recently peopled by men and women in full strength and health. And such experience is of but little use in regard to a people whose vitality has been impaired by the old Poor Law, and the old Corn Laws; and by the misuses of the Factory system, when its dangers were not yet understood. A scheme, that has any claim to be ready for practical adoption, must be based on statistical estimates of the numbers of those who under it would be forced to seek the aid of the State, because their work was not worth the minimum wage; with special reference to the question how many of these might have supported life fairly well if it had been possible to work with nature, and to adjust in many cases the minimum wage to the family, instead of to the individual170 .

§ 13. Turning then to those workers who have fairly good moral and physical stamina, it may be estimated roughly that those who are capable only of rather unskilled work constitute about a fourth of the population. And those who, though fit for the lower kinds of skilled work are neither fit for highly skilled work, nor able to act wisely and promptly in responsible positions, constitute about another fourth. If similar estimates had been made in England a century ago, the proportions would have been very different: more than a half would have been found unfit for any skilled labour at all, beyond the ordinary routine of agriculture; and perhaps less than a sixth part would have been fit for highly skilled or responsible work: for the education of the people was not then recognized as a national duty and a national economy. If this had been the only change the urgent demand for unskilled labour would have compelled employers to pay for it nearly the same wage as for skilled: the wages for skilled labour would have fallen a little and those for unskilled would have risen, until the two had nearly met.

Even as it is, something like this has happened: the wages of unskilled labour have risen faster than those of any other class, faster even than those of skilled labour. And this movement towards the equalization of earnings would have gone much faster, had not the work of purely unskilled labour been meanwhile annexed by automatic and other machinery faster even than that of skilled labour; so that there is less wholly unskilled work to be done now than formerly. It is true that some kinds of work, which traditionally belong to skilled artisans, require now less skill than formerly. But, on the other hand, the so-called "unskilled" labourer has now often to handle appliances too subtle and expensive to have been safely entrusted to the ordinary English labourer a century ago, or to any people at all in some backward countries now.

Thus mechanical progress is a chief cause of the great differences that still exist between the earnings of different kinds of labour; and this may seem at first sight a severe indictment: but it is not. If mechanical progress had been much slower the real wages of unskilled labour would have been lower than they are now, not higher: for the growth of the national dividend would have been so much checked that even the skilled workers would generally have had to content themselves with less real purchasing power for an hour's work than the 6d. of the London bricklayer's labourer: and the unskilled labourers' wages would of course have been lower still. It has been assumed that the happiness of life, in so far as it depends on material conditions, may be said to begin when the income is sufficient to yield the barest necessaries of life: and that after that has been attained, an increase by a given percentage of the income will increase that happiness by about the same amount, whatever the income be. This rough hypothesis leads to the conclusion that an increase by (say) a quarter of the wages of the poorer class of bonâ fide workers adds more to the sum total of happiness than an increase by a quarter of the incomes of an equal number of any other class. And that seems reasonable: for it arrests positive suffering, and active causes of degradation, and it opens the way to hope as no other proportionate increase of incomes does. From this point of view it may be urged that the poorer classes have derived a greater real benefit from economic progress on its mechanical and other sides, than is suggested by the statistics of their wages. But all the more is it the duty of society to endeavour to carry yet further an increase of wellbeing which is to be obtained at so low a cost171 .

We have then to strive to keep mechanical progress in full swing: and to diminish the supply of labour, incapable of any but unskilled work; in order that the average income of the country may rise faster even than in the past, and the share of it got by each unskilled labourer may rise faster still. To that end we need to move in the same direction as in recent years, but more strenuously. Education must be made more thorough. The schoolmaster must learn that his main duty is not to impart knowledge, for a few shillings will buy more printed knowledge than a man's brain can hold. It is to educate character, faculties and activities; so that the children even of those parents who are not thoughtful themselves, may have a better chance of being trained up to become thoughtful parents of the next generation. To this end public money must flow freely. And it must flow freely to provide fresh air and space for wholesome play for the children in all working class quarters172 .

Thus the State seems to be required to contribute generously and even lavishly to that side of the wellbeing of the poorer working class which they cannot easily provide for themselves: and at the same time to insist that the inside of the houses be kept clean, and fit for those who will be needed in after years to act as strong and responsible citizens. The compulsory standard of cubic feet of air per head needs to be raised steadily though not violently: and this combined with a regulation that no row of high buildings be erected without adequate free space in front and behind, will hasten the movement, already in progress, of the working classes from the central districts of large towns, to places in which freer playroom is possible. Meanwhile public aid and control in medical and sanitary matters will work in another direction to lessen the weight that has hitherto pressed on the children of the poorer classes.

The children of unskilled workers need to be made capable of earning the wages of skilled work: and the children of skilled workers need by similar means to be made capable of doing still more responsible work. They will not gain much, they are indeed more likely to lose, by pushing themselves into the ranks of the lower middle class: for, as has already been observed, the mere power of writing and keeping accounts belongs really to a lower grade than skilled manual work; and has ranked above it in past times, merely because popular education had been neglected. There is often a social loss as well as a social gain when the children of any grade press into the grade above them. But the existence of our present lowest class is an almost unmixed evil: nothing should be done to promote the increase of its numbers, and children once born into it should be helped to rise out of it.

There is plenty of room in the upper ranks of the artisans; and there is abundant room for new comers in the upper ranks of the middle class. It is to the activity and resource of the leading minds in this class that most of those inventions and improvements are due, which enable the working man of to-day to have comforts and luxuries that were rare or unknown among the richest of a few generations ago: and without which indeed England could not supply her present population with a sufficiency even of common food. And it is a vast and wholly unmixed gain when the children of any class press within the relatively small charmed circle of those who create new ideas, and who embody those new ideas in solid constructions. Their profits are sometimes large: but taking one with another they have probably earned for the world a hundred times or more as much as they have earned for themselves.

It is true that many of the largest fortunes are made by speculation rather than by truly constructive work: and much of this speculation is associated with anti-social strategy, and even with evil manipulation of the sources from which ordinary investors derive their guidance. A remedy is not easy, and may never be perfect. Hasty attempts to control speculation by simple enactments have invariably proved either futile or mischievous: but this is one of those matters in which the rapidly increasing force of economic studies may be expected to render great service to the world in the course of this century.

In many other ways evil may be lessened by a wider understanding of the social possibilities of economic chivalry. A devotion to public wellbeing on the part of the rich may do much, as enlightenment spreads, to help the tax-gatherer in turning the resources of the rich to high account in the service of the poor, and may remove the worst evils of poverty from the land.

§ 14. The inequalities of wealth, and especially the very low earnings of the poorest classes, have just been discussed with reference to their effects in dwarfing activities as well as in curtailing the satisfaction of wants. But here, as everywhere, the economist is brought up against the fact that the power of rightly using such income and opportunities, as a family has, is in itself wealth of the highest order, and of a kind that is rare in all classes. Perhaps £100,000,000 annually are spent even by the working classes, and £400,000,000 by the rest of the population of England, in ways that do little or nothing towards making life nobler or truly happier. And, though it is true that a shortening of the hours of labour would in many cases lessen the national dividend and lower wages: yet it would probably be well that most people should work rather less; provided that the consequent loss of material income could be met exclusively by the abandonment by all classes of the least worthy methods of consumption; and that they could learn to spend leisure well.

But unfortunately human nature improves slowly, and in nothing more slowly than in the hard task of learning to use leisure well. In every age, in every nation, and in every rank of society, those who have known how to work well, have been far more numerous than those who have known how to use leisure well. But on the other hand it is only through freedom to use leisure as they will, that people can learn to use leisure well: and no class of manual workers, who are devoid of leisure, can have much self-respect and become full citizens. Some time free from the fatigue of work that tires without educating, is a necessary condition of a high standard of life.

In this, as in all similar cases, it is the young whose faculties and activities are of the highest importance both to the moralist and the economist. The most imperative duty of this generation is to provide for the young such opportunities as will both develop their higher nature, and make them efficient producers. And an essential condition to this end is long-continued freedom from mechanical toil; together with abundant leisure for school and for such kinds of play as strengthen and develop the character.

Even if we took account only of the injury done to the young by living in a home in which the father and the mother lead joyless lives, it would be in the interest of society to afford some relief to them also. Able workers and good citizens are not likely to come from homes, from which the mother is absent during a great part of the day; nor from homes, to which the father seldom returns till his children are asleep: and therefore society as a whole has a direct interest in the curtailment of extravagantly long hours of duty away from home, even for mineral-train-guards and others, whose work is not in itself very hard.

§ 15. In discussing the difficulty of adjusting the supply of industrial skill of various kinds to the demand for it, attention was called to the fact that the adjustment could not be nearly accurate, because the methods of industry change rapidly, and the skill of a worker needs to be used for some forty or even fifty years after he has set himself to acquire it173 . The difficulties which we have just discussed turn largely on the long life of inherited habits and tones of thought and feeling. If the organization of our joint-stock companies, of our railways or our canals is bad, we can set it right in a decade or two. But those elements of human nature which have been developed during centuries of war and violence, and of sordid and gross pleasures, cannot be greatly changed in the course of a single generation.

Now, as always, noble and eager schemers for the reorganization of society have painted beautiful pictures of life, as it might be under institutions which their imagination constructs easily. But it is an irresponsible imagination, in that it proceeds on the suppressed assumption that human nature will, under the new institutions, quickly undergo changes such as cannot reasonably be expected in the course of a century, even under favourable conditions. If human nature could be thus ideally transformed, economic chivalry would dominate life even under the existing institutions of private property. And private property, the necessity for which doubtless reaches no deeper than the qualities of human nature, would become harmless at the same time that it became unnecessary.

There is then need to guard against the temptation to overstate the economic evils of our own age, and to ignore the existence of similar and worse evils in earlier ages; even though some exaggeration may for the time stimulate others, as well as ourselves, to a more intense resolve that the present evils shall no longer be allowed to exist. But it is not less wrong, and generally it is much more foolish, to palter with truth for a good than for a selfish cause. And the pessimist descriptions of our own age, combined with romantic exaggerations of the happiness of past ages, must tend to the setting aside of methods of progress, the work of which if slow is yet solid; and to the hasty adoption of others of greater promise, but which resemble the potent medicines of a charlatan, and while quickly effecting a little good, sow the seeds of widespread and lasting decay. This impatient insincerity is an evil only less great than that moral torpor which can endure that we, with our modern resources and knowledge, should look on contentedly at the continued destruction of all that is worth having in multitudes of human lives, and solace ourselves with the reflection that anyhow the evils of our own age are less than those of the past.

And now we must conclude this part of our study. We have reached very few practical conclusions; because it is generally necessary to look at the whole of the economic, to say nothing of the moral and other aspects of a practical problem before attempting to deal with it at all: and in real life nearly every economic issue depends, more or less directly, on some complex actions and reactions of credit, of foreign trade, and of modern developments of combination and monopoly. But the ground which we have traversed in Books V. and VI. is, in some respects, the most difficult of the whole province of economics; and it commands, and gives access to, the remainder.

[1.]Thus Turgot, who for this purpose may be reckoned with the Physiocrats, says (Sur la Formation et Distribution des Richesses, § VI.), "In every sort of occupation it must come to pass, and in fact it does come to pass, that the wages of the artisan are limited to that which is necessary to procure him a subsistence ... He earns no more than his living (Il ne gagne que sa vie)." When however Hume wrote, pointing out that this statement led to the conclusion that a tax on wages must raise wages; and that it was therefore inconsistent with the observed fact that wages are often low where taxes are high, and vice versâ; Turgot replied (March, 1767) to the effect that his iron law was not supposed to be fully operative in short periods, but only in long. See Say's Turgot, English Ed. pp. 53, etc.

[2.]From these premises the Physiocrats logically deduced the conclusion that the only net produce of the country disposable for the purposes of taxation is the rent of land; that when taxes are placed on capital or labour, they make it shrink till its net price rises to the natural level. The landowners have, they argued, to pay a gross price which exceeds this net price by the taxes together with all the expenses of collecting them in detail, and an equivalent for all the impediments which the tax-gatherer puts in the way of the free course of industry; and therefore the landowners would lose less in the long run if, being the owners of the only true surplus that exists, they would undertake to pay direct whatever taxes the King required; especially if the King would consent "laisser faire, laisser passer," that is, to let every one make whatever he chose, and take his labour and send his goods to whatever market he liked.

[3.]Wealth of Nations, Bk. I. ch. VIII.

[4.]Political Economy, IV. 2. There is some doubt as to the extent of the rise of real wages in the fifteenth century. It is only in the last two generations that the real wages of common labour in England have exceeded two pecks.

[5.]Principles, V.

[6.]Compare above, IV. III. 8.

[7.]Some German economists, who are not socialists, and who believe that no such law exists, yet maintain that the doctrines of Ricardo and his followers stand or fall with the truth of this law; while others (e.g. Roscher, Gesch. der Nat. Oek. in Deutschland, p. 1022) protest against the socialist misunderstandings of Ricardo.

[8.]It may be well to quote his words. "The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a super-abundant population. In those countries, where the labouring classes have the fewest wants, and are contented with the cheapest food, the people are exposed to the greatest vicissitudes and miseries. They have no place of refuge from calamity; they cannot seek safety in a lower station; they are already so low, that they can fall no lower. On any deficiency of the chief article of their subsistence, there are few substitutes of which they can avail themselves, and dearth to them is attended with almost all the evils of famine." (Principles, ch. V.) It is noteworthy that McCulloch, who has been charged, not altogether unjustly, with having adopted the extremest tenets of Ricardo, and applied them harshly and rigidly, yet chooses for the heading of the fourth Chapter of his Treatise On Wages:—"Disadvantage of Low Wages, and of having the Labourers habitually fed on the cheapest species of food. Advantage of High Wages."

[9.]This habit of Ricardo's is discussed in Appendix I. (See also V XIV. 5.) The English classical economists frequently spoke of the minimum of wages as depending on the price of corn. But the term "corn" was used by them as short for agricultural produce in general, somewhat as Petty (Taxes and Contributions, ch. XIV.) speaks of "the Husbandry of Corn, which we will suppose to contain all necessaries of life, as in the Lord's Prayer we suppose the word Bread doth." Of course Ricardo took a less hopeful view of the prospects of the working classes than we do now. Even the agricultural labourer can now feed his family well and have something to spare: while even the artisan would then have required the whole of his wages, at all events after a poor harvest, to buy abundant and good food for his family. Sir W. Ashley insists on the narrowness of Ricardo's hopes as compared with those of our own age; he describes instructively the history of the passage quoted in the last note; and shows that even Lassalle did not attribute absolute rigidity to his brazen law. See Appendix I, 2.

[10.]Book II. ch. XI. § 2. He had just complained that Ricardo supposed the standard of comfort to be invariable, having apparently overlooked passages such as that quoted in the last note but one. He was however well aware that Ricardo's "minimum rate of wages" depended on the prevalent standard of comfort, and had no connection with the bare necessaries of life.

[11.]Compare V. V., especially §§ 2, 3.

[12.]See below, § 10.

[13.]See above V. IV. 1—4. A little later we shall have to consider in what respects the hire of human labour differs from the hire of a house or a machine: but, for the present, we may neglect this difference, and look at the problem only in its broad outlines. Even so, some technical difficulties will be passed on the way: and those readers, who, in accordance with the suggestion made at the end of V. VII., have omitted the later chapters of that Book, must be asked, if dissatisfied with the general treatment offered here, to turn back and read V. VIII. and IX.

[14.]See the remarks on labour standardization below, VI. XIII. 8, 9.

(1) number of shepherds	(2) number of sheep	(3) product due to last man	(4) average product per man	(5) wages bill	(6) excess of (2) over (5)
8	580	—	72½	160	420
9	615	35	68½	180	435
10	640	25	64	200	440
11	660	20	60	220	440
12	676	16	56½	240	436

As we move downwards the figures in (3) constantly diminish; but those in (6) increase, then remain without change, and at last diminish. This indicates that the farmer's interests are equally served by hiring 10 or 11 men; but that they are less well served by hiring 8, or 9, or 12. The eleventh man (supposed to be of normal efficiency) is the marginal man, when the markets for labour and sheep are such that one man can be hired for a year for the price of 20 sheep. If the markets had put that hire at 25 sheep, the numbers in (6) would have been 380, 390, 390, 385 and 376 respectively. Therefore that particular farmer would probably have employed one less shepherd, and sent less sheep to market; and among many sheep farmers there would certainly have been a large proportion who would have done so.

It has been argued at length in regard to similar cases (see V. VIII. 4, 5) that the price which it is just worth while for the farmer to pay for this labour, merely gauges the outcome of multitudinous causes which between them govern the wages of shepherds; as the movements of a safety-valve may gauge the outcome of the multitudinous causes that govern the pressure in a boiler. Theoretically a deduction from this has to be made for the fact that, by throwing twenty extra sheep on the market, the farmer will lower the price of sheep generally, and therefore lose a little on his other sheep. This correction may be of appreciable importance in special cases. But in general discussions such as this, in which we are dealing with a very small addition to the supply thrown by one of many producers on a large market, it becomes very small (mathematically a small quantity of the second order), and may be neglected. (See above, footnote on p. 409.)

Of course the net product of the shepherd in this exceptional case plays no greater part in governing the wages of shepherds, than does that of any of the marginal shepherds on farms where they cannot be profitably employed without considerable extra outlay in other directions; as for land, buildings, implements, labour of management, etc.

Column (4) in the above table is deduced from (1) and (2), just as (3) is. But the table shows how many men the farmer can afford to hire, when they are to be had at wages equivalent to the value of the number of sheep in (3), and therefore goes to the heart of the problem of wages: while (4) has no direct bearing on the problem. When therefore Mr J. A. Hobson, remarking on a similar table of his own (in which however the numbers chosen are inappropriate to the hypothesis which he criticises) says:—"In other words the so-called final or marginal productivity turns out to be nothing other than an average productivity.... The whole notion that there is a marginal productivity ... is entirely fallacious" (The Industrial System, p. 110), he appears to be mistaken.

[15.]Compare p. 436.

[16.]Such a method of illustrating the net product of a man's labour is not easily applicable to industries in which a great deal of capital and effort has to be invested in gradually building up a trade connection, and especially if they are such as obey the law of increasing return. This is a practical difficulty of the same order as those discussed in V. XII. and Appendix H See also IV. XII.; V. VII. 1, 2; and XI. The influence of an additional man employed in any considerable business on its general economies might also be considered from a purely abstract point of view; but it is too small to be taken seriously. (See the footnote on p. 409.)

[17.]The charge made to traders for loans is generally much more than 4 per cent. per annum; but as we shall see in chapter VI. it includes other things besides true net interest. Before the recent great destruction of capital by war, it seemed reasonable to speak of 3 per cent.: but even 4 per cent. may scarcely avail for some years after its close.

[18.]Compare V. IV.: also Appendix I, 3; where some remarks are made on Jevons' doctrine of interest.

[19.]This statement follows closely the lines of V. IV. and VIII.

[20.]Der Isolirte Staat, II. I. p. 123. He argues (ib. p. 124) that therefore "the rate of interest is the element by which the relation of the efficiency of capital to that of human labour is expressed"; and finally, in words, very similar to those, which Jevons, working independently a generation later, adopted for the same purpose, he says (p. 162): "The utility of the last applied little bit of capital defines (bestimmt) the height of the rate of interest." With characteristic breadth of view, von Thünen enunciated a general law of diminishing return for successive doses of capital in any branch of production; and what he said on this subject has even now much interest, though it does not show how to reconcile the fact than an increase in the capital employed in an industry may increase the output more than in proportion, with the fact that a continued influx of capital into an industry must ultimately lower the rate of profits earned in it. His treatment of these and other great economic principles, though primitive in many respects, yet stands on a different footing from his fanciful and unreal assumptions as to the causes that determine the accumulation of capital, and as to the relations in which wages stand to the stock of capital. From these he deduces the quaint result that the natural rate of wages of labour is the geometric mean between the labourer's necessaries, and that share of the product which is due to his labour when aided by capital. By the natural rate he means the highest that can be sustained; if the labourer were to get more than this for a time, the supply of capital would, von Thünen argues, be so checked as to cause him in the long run to lose more than he gained.

[21.]As von Thünen was well aware. Ib. p. 127. See also below, VI. II. 9, 10.

[22.]See II. III. 2; IV. I. 2; IV. IX. 1.

[23.]Recent discussions on the eight hours day have often turned very little on the fatigue of labour; for indeed there is much work in which there is so little exertion, either physical or mental, that what exertion there is counts rather as a relief from ennui than as fatigue. A man is on duty, bound to be ready when wanted, but perhaps not doing an hour's actual work in the day; and yet he will object to very long hours of duty because they deprive his life of variety, of opportunities for domestic and social pleasures, and perhaps of comfortable meals and rest.

[24.]See ch. XII. Bad harvests, war prices, and convulsions of credit have at various times compelled some workers, men, women and children, to over-work themselves. And cases of ever-increasing exertion in return for a constantly sinking wage, though not as numerous now as is often alleged, have not been very rare in past times. They may be compared with the exertions of a failing firm to secure some return for their outlay by taking contracts at little more than enough to recompense them for their prime, or special and direct cost. And on the other hand almost every age, our own perhaps less than most others, has stories of people who in a sudden burst of prosperity, have contended themselves with the wages to be earned by very little work, and have thus contributed to bring the prosperity to a close. But such matters must be deferred till after a study of commercial fluctuations. In ordinary times the artisan, the professional man or the capitalist undertaker decides, as an individual or as a member of a trade association, what is the lowest price against which he will not strike.

[25.]On all locomotives there is some brass or copper work designed partly for ornament, and which could be omitted or displaced without any loss to the efficiency of the steam-engine. Its amount does in fact vary with the taste of the officials who select the patterns for the engines of different railways. But it might happen that custom required such expenditure; that the custom would not yield to argument, and that the railway companies could not venture to offend against it. In that case, when dealing with periods during which the custom ruled, we should have to include the cost of that ornamental metal work in the cost of producing a certain amount of locomotive horse-power, on the same level with the cost of the piston itself. And there are many practical problems, especially such as relate to periods of but moderate length, in which conventional and real necessaries may be placed on nearly the same footing.

[26.]The reiteration in this section has seemed to be unavoidable in consequence of the misunderstandings of the main argument of the present Book by various critics; among whom must be included even the acute Prof. v. Böhm-Bawerk. For in the article recently quoted (see especially Section 5), he seems to hold that a self-contradiction is necessarily involved in the belief that wages correspond both to the net product of labour and also to the cost of rearing and training labour and sustaining its efficiency (or, more shortly, though less appropriately, the cost of production of labour). On the other hand the mutual interactions of the chief economic forces are set forth in an able article by Prof. Carver in the Quarterly Journal of Economics for July 1894; see, also his Distribution of Wealth, ch. IV.

[27.]See below, VI. VI. 6.

[28.]See IV. VII., summarized in § 10.

[29.]The argument of this section is put broadly. For a technical and more thorough treatment the reader is referred to V. X.

[30.]See V. VIII. 5; and VI. I. 7.

[31.]See above pp. 517, 8. The net product of a factory is now commonly taken, as it is in the official Census of Production, to be the work which it puts into its material: thus the value of its net product is the excess of the gross value of its output over the value of the material used by it.

[32.]Differences between the adjustments of demand and supply in the case of commodities and in the case of labour are discussed in the following chapters.

[33.]We are leaving on one side here the competition for employment between labour in the narrower sense of the term, and the work of the undertaker himself and his assistant managers and foremen. A great part of chs. VII. and VIII. is given to this difficult and important problem.

[34.]Capital is here reckoned broadly: it is not confined to trade capital. This point is of secondary interest and is relegated to Appendix J, 4.

[35.]Such a survey is focussed in Notes XIV.—XXI. of the Mathematical Appendix: the last of them is easy of comprehension, and shows the complexity of the problems. Most of the rest are developments of details arising out of Note XIV., the substance of part of which is translated into English in V. IV.

[36.]About fifty years ago correspondence between farmers in the North and the South of England led to an agreement that putting roots into a cart was an excellent measure of physical efficiency: and careful comparison showed that wages bore about the same proportion to the weights which the labourers commonly loaded in a day's work in the two districts. The standards of wages and of efficiency in the South are perhaps now more nearly on a level with those in the North than they were then. But the standard trade union wages are generally higher in the North than in the South: and many men, who go North to reach the higher rate, find that they cannot do what is required, and return.

[37.]This argument would be subject to corrections in cases in which the trade admitted of the employment of more than one shift of workpeople. It would often be worth an employer's while to pay to each of two shifts as much for an eight hours' day as he now pays to one shift for a ten hours' day. For though each worker would produce less, each machine would produce more on the former than on the latter plan. But to this point we shall return.

[38.]Ricardo did not overlook the importance of the distinction between variations in the amount of commodities paid to the labourer as wages, and variations in the profitableness of the labourer to his employer. He saw that the real interest of the employer lay not in the amount of wages that he paid to the labourer, but in the ratio which those wages bore to the value of the produce resulting from the labourer's work: and he decided to regard the rate of wages as measured by this ratio: and to say that wages rose when this ratio increased, and that they fell when it diminished. It is to be regretted that he did not invent some new term for this purpose; for his artificial use of a familiar term has seldom been understood by others, and was in some cases even forgotten by himself. (Compare Senior's Political Economy, pp. 142-8.) The variations in the productiveness of labour which he had chiefly in view were those which result from improvements in the arts of production on the one hand, and on the other from the action of the law of diminishing return, when an increase of population required larger crops to be forced from a limited soil. Had he paid careful attention to the increase in the productiveness of labour that results directly from an improvement in the labourer's condition, the position of economic science, and the real wellbeing of the country, would in all probability be now much further advanced than they are. As it is, his treatment of wages seems less instructive than that in Malthus' Political Economy.

[39.]Wealth of Nations, I. V.

[40.]The Report of the Poor Law Commissioners on the Employment of Women and Children in Agriculture, 1843, p. 297, contains some interesting specimens of yearly wages paid in Northumberland, in which very little money appeared. Here is one:—10 bushels of wheat, 30 of oats, 10 of barley, 10 of rye, 10 of peas; a cow's keep for a year; 800 yards of potatoes; cottage and garden; coal-shed; £3. 10s. in cash; and 2 bushels of barley in lieu of hens.

[41.]See II. IV. 7.

[42.]This class of questions is closely allied to those raised when discussing the definitions of Income and Capital in Book II.; where a caution has already been entered against overlooking elements of income that do not take the form of money. Earnings of many even of the professional and wage-receiving classes are in a considerable measure dependent on their being in command of some material capital.

[43.]Employers, whose main business is in a healthy condition, are generally too busy to be willing to manage such shops unless there is some strong reason for doing so; and consequently in old countries those who have adopted the Truck system, have more often than not done so with the object of getting back by underhand ways part of the wages which they have nominally paid. They have compelled those who work at home to hire machinery and implements at exorbitant rents; they have compelled all their workpeople to buy adulterated goods at short weights and high prices; and in some cases even to spend a very large part of their wages on goods on which it was easiest to make the highest rate of profits, and especially on spirituous liquors. Mr Lecky, for instance, records an amusing case of employers who could not resist the temptation to buy theatre tickets cheap, and compel their workpeople to buy them at full price (History of the Eighteenth Century, VI. p. 158). The evil is however at its worst when the shop is kept not by the employer, but by the foreman or by persons acting in concert with him; and when he, without openly saying so, gives it to be understood that those, who do not deal largely at the shop, will find it difficult to get his good word. For an employer suffers more or less from anything that injures his workpeople, while the exactions of an unjust foreman are but little held in check by regard for his own ultimate interest.

[44.]These considerations are specially important with regard to piece-work; the rates of earnings being in some cases much reduced by short supplies of material to work on, or by other interruptions, avoidable or unavoidable.

[45.]The evils of irregularity of employment are trenchantly stated in a lecture on that subject given by Prof. Foxwell in 1886.

[46.]Workers in the higher grades are generally allowed holidays with pay; but those in the lower grades generally forfeit their pay when they take holidays. The causes of this distinction are obvious; but it naturally raises a feeling of grievance of a kind, to which the inquiries by the Labour Commission gave vent. See e.g. Group B. 24, 431-6.

[47.]See II. IV. 2.

[48.]It ought, however, to be remarked that some of the beneficial effects of custom are cumulative. For among the many different things that are included under the wide term "custom" are crystallized forms of high ethical principles, rules of honourable and courteous behaviour, and of the avoidance of troublesome strife about paltry gains; and much of the good influence which these exert on race character is cumulative. Compare I II. 1, 2.

[49.]This is consistent with the well-known fact that slave labour is not economical, as Adam Smith remarked long ago that "The fund destined for replacing or repairing, if I may say so, the wear-and-tear of the slave is commonly managed by a negligent master or careless overseer. That destined for performing the same office for the free man is managed by the free man himself ... with strict frugality and parsimonious attention."

[50.]Sir William Petty discussed "The Value of the People" with much ingenuity; and the relation in which the cost of rearing an adult male stands to the cost of rearing a family unit was examined in a thoroughly scientific manner by Cantillon, Essai, Part I. chap. XI., and again by Adam Smith, Wealth of Nations, Book I. ch. VIII.: and in more recent times by Dr Engel, in his brilliant Essay Der Preis der Arbeit, and by Dr Farr and others. Many estimates have been made of the addition to the wealth of a country caused by the arrival of an immigrant whose cost of rearing in his early years was defrayed elsewhere, and who is likely to produce more than he consumes in the country of his adoption. The estimates have been made on many plans, all of them rough, and some apparently faulty in principle: but most of them find the average value of an immigrant to be about £200. It would seem that, if we might neglect provisionally the difference between the sexes, we should calculate the value of the immigrant on the lines of the argument of V. IV. 2. That is, we should "discount" the probable value of all the future services that he would render; add them together, and deduct from them the sum of the "discounted" values of all the wealth and direct services of other persons that he would consume: and it may be noted that in thus calculating each element of production and consumption at its probable value, we have incidentally allowed for the chances of his premature death and sickness, as well as of his failure or success in life. Or again we might estimate his value at the money cost of production which his native country had incurred for him; which would in like manner be found by adding together the "accumulated" values of all the several elements of his past consumption and deducting from them the sum of the "accumulated" values of all the several elements of his past production.

Many writers assume, implicitly at least, that the net production of an average individual and the consumption during the whole of his life are equal; or, in other words, that he would neither add to nor take from the material well-being of a country, in which he stayed all his life. On this assumption the above two plans of estimating his value would be convertible; and then of course we should make our calculations by the latter and easier method. We may, for instance, guess that the total amount spent on bringing up an average child of the lower half of the labouring classes, say two-fifths of the population, is £100; for the next fifth we may put the sum at £175; for the next fifth at £300; for the next tenth at £500, and the remaining tenth at £1200: or an average of £300. But of course some of the population are very young and have had but little spent on them; others have got nearly to their life's end; and therefore, on these assumptions, the average value of an individual is perhaps £200.

[51.]See above, VI. III.

[52.]On the subject of this Section compare Book V. II. 3, and Appendix F on Barter. Prof. Brentano was the first to call attention to several of the points discussed in this chapter. See also Howell's Conflicts of Capital and Labour.

[53.]On the subject of this section compare Bk. IV. VI. 8; Mr Charles Booth's Life and Labour in London; and Sir H. Ll. Smith's Modern Changes in the Mobility of Labour.

[54.]There is some ground for regarding this special return as a quasi-rent. See VI. V. 7 and VIII. 8.

[55.]Compare above, VI. II. 2. If they have any considerable stock of trade implements, they are to that extent capitalists; and part of their income is quasi-rent on this capital.

[56.]Comp. V. X. 2.

[57.]That the supply of capital is held back by the prospectiveness of its uses, men's unreadiness to look forward, while the demand for it comes from its productiveness, in the broadest sense of the term, is indicated in II. IV.

[58.]See Book III. V. 3, 4; and IV. VII. 8. It is a good corrective of this error to note how small a modification of the conditions of our own world would be required to bring us to another in which the mass of the people would be so anxious to provide for old age and for their families after them, and in which the new openings for the advantageous use of accumulated wealth in any form were so small, that the amount of wealth for the safe custody of which people were willing to pay would exceed that which others desired to borrow; and where in consequence even those who saw their way to make a gain out of the use of capital, would be able to exact a payment for taking charge of it; and interest would be negative all along the line.

[59.]Compare III. V. and IV. VII.

[60.]Prof. v. Böhm-Bawerk appears to have underrated the acumen of his predecessors in their writings on capital and interest. What he regards as mere naïve fragments of theories appear rather to be the utterances of men well acquainted with the practical workings of business; and who, partly for some special purpose, and partly through want of system in exposition, gave such disproportionate stress to some elements of the problem as to throw others into the background. Perhaps part of the air of paradox with which he invests his own theory of capital may be the result of a similar disproportionate emphasis, and an unwillingness to recognize that the various elements of the problem mutually govern one another. Attention has already been called to the fact that, though he excludes houses and hotels, and indeed everything that is not strictly speaking an intermediate good, from his definition of capital, yet the demand for the use of goods, that are not intermediate, acts as directly on the rate of interest, as does that for capital as defined by him. Connected with this use of the term capital is a doctrine on which he lays great stress, viz. that "methods of production which take time are more productive" (Positive Capital, Book V. ch. IV. p. 261), or again that "every lengthening of a roundabout process is accompanied by a further increase in the technical result" (Ib. Book II. ch. II. p. 84). There are however innumerable processes which take a long time and are roundabout; but are not productive and therefore are not used; and in fact he seems to have inverted cause and effect. The true doctrine appears to be that, because interest has to be paid for, and can be gained by the use of capital; therefore those long and roundabout methods, which involve much locking up of capital, are avoided unless they are more productive than others. The fact that many roundabout methods are in various degrees productive is one of the causes that affect the rate of interest; and the rate of interest and the extent to which roundabout methods are employed are two of the elements of the central problem of distribution and exchange that mutually determine one another. See Appendix I, 3.

[61.]From St Chrysostom's Fifth Homily, see above I. II. 8. Compare also Ashley's Economic History, VI. VI.; and Bentham On Usury. The sentiment against usury had its origin in tribal relationships, in many other cases besides that of the Israelites, perhaps in all cases; and, as Cliffe Leslie remarks (Essays, 2nd Edition, p. 244):—It was "inherited from prehistoric times, when the members of each community still regarded themselves as kinsmen; when communism in property existed at least in practice, and no one who had more than he needed could refuse to share his superfluous wealth with a fellow-tribesman in want."

[62.]They also make a distinction between hiring things which were themselves to be returned, and borrowing things the equivalent of which only had to be returned. This distinction, however, though interesting from an analytical point of view, has very little practical importance.

[63.]Archdeacon Cunningham has described well the subtleties by which the mediæval church explained away her prohibition of loans at interest, in most of those cases in which the prohibition would have been seriously injurious to the body politic. These subtleties resemble the legal fictions by which the judges have gradually explained away the wording of laws, the natural interpretation of which seemed likely to be mischievous. In both cases some practical evil has been avoided at the expense of fostering habits of confused and insincere thought.

[64.]This is Marx's phrase. Rodbertus had called it a "Plus."

[65.]See Appendix I, 2.

[66.]Mortgages for long periods are sometimes more sought after by lenders than those for short periods, and sometimes less. The former save the trouble of frequent renewal, but they deprive the lender of command over his money for a long time, and thus limit his freedom. First-class stock-exchange securities combine the advantages of very long and very short mortgages. For their holder can hold them as long as he likes, and can convert them into money when he will; though, if at the time credit is shaken and other people want ready money, he will have to sell at a loss. If they could always be realized without a loss, and if there were no broker's commissions to be paid on buying and selling, they would not yield a higher income than money lent "on call" at the lender's choice of time; and that will always be less than the interest on loans for any fixed period, short or long.

[67.]Again, Dr Jessop (Arcady, p. 214) tells us "there are hosts of small money-lenders in the purlieus of the cattle markets who make advances to speculators with an eye," lending sums, amounting in exceptional cases up to £200, at a gross interest of ten per cent. for the twenty-four hours.

[68.]See also below, ch. VIII. § 2.

[69.]Compare Fisher's Appreciation and Interest 1896: and The rate of interest 1907, especially Chapters V, XIV and their respective Appendices.

[70.]See p. 313.

[71.]See IV. VIII.

[72.]With this argument may be compared that of VI. I. 7.

[73.]Comp. IV. XII. 3.

[74.]The employer of a large number of workmen has to economize his energies on the same plan that is followed by the leading officers of a modern army. For as Mr Wilkinson says (The Brain of an Army, pp. 42-6):—"Organization implies that every man's work is defined, that he knows exactly what he must answer for, and that his authority is coextensive with his responsibility ... [In the German army] every commander above the rank of captain deals with a body composed of units, with the interior affairs of none of which he meddles, except in the case of failure on the part of the officer directly responsible.... The general commanding an army corps has to deal directly with only a few subordinates.... He inspects and tests the condition of all the various units, but ... he is as far as possible unhampered by the worry of detail. He can make up his mind coolly." Bagehot in characteristic fashion had remarked (Lombard Street, ch. VIII.) that if the head of a large business "is very busy, it is a sign of something wrong"; and had compared (Essay on the Transferability of Capital) the primitive employer with a Hector or Achilles mingling in the fray, and the typical modern employer with "a man at the far end of a telegraph wire—a Count Moltke with his head over some papers—who sees that the proper persons are slain, and who secures the victory."

[75.]Comp. IV. XI. 4.

[76.]Lombard Street, Introductory chapter.

[77.]See IV. XII. 9, 10.

[78.]IV. XII. 12. When the forms of productions cease to be few and simple, it becomes "no longer true that a man becomes an employer because he is a capitalist. Men command capital because they have the qualifications to profitably employ labour. To these captains of industry ... capital and labour resort for opportunity to perform their several functions." (Walker, Wages Question, ch. XIV.)

[79.]Bagehot, Postulates, p. 75.

[80.]Bagehot (l. c. pp. 94-5) says that the great modern commerce has "certain general principles which are common to all kinds of it, and a person can be of considerable use in more than one kind if he understands these principles and has the proper sort of mind. But the appearance of this common element is in commerce, as in politics, a sign of magnitude, and primitive commerce is all petty. In early tribes there is nothing but the special man—the clothier, the mason, the weapon-maker. Each craft tried to be, and very much was, a mystery except to those who carried it on. The knowledge required for each was possessed by few, kept secret by these few, and nothing else was of use but this monopolised and often inherited acquirement; there was no 'general' business knowledge. The idea of a general art of money making is very modern; almost everything ancient about it is individual and particular."

[81.]Fortnightly Review, June 1879, reprinted in his Essays.

[82.]See VI. IV. 3. On the general functions of those who undertake the chief responsibilities of business, see Brentano, Der Unternehmer, 1907.

[83.]Wealth of Nations, Book I. ch. X. Senior, Outlines, p. 203, puts the normal rate of profits on a capital of £100,000 at less than 10 per cent., on one of £10,000 or £20,000 at about 15 per cent., on one of £5,000 or £6,000 at 20 per cent., and "a much larger per-centage" on smaller capitals. Compare also § 4 of the preceding Chapter of the present Book. It should be noted that the nominal rate of profits of a private firm is increased when a manager, who brings no capital with him, is taken into partnership and rewarded by a share of the profits instead of a salary.

[84.]On risk as an element of cost see V. VII. 4. There would be an advantage in a careful analytical and inductive study of the attractive or repellent force which various kinds of risks exert on persons of various temperaments, and as a consequence on earnings and profits in risky occupations; it might start from Adam Smith's remarks on the subject.

[85.]There is a great difficulty in ascertaining even approximately the amounts of capital of different kinds invested in different classes of business. But guided mainly by the valuable statistics of American Bureaux, inexact as they avowedly are in this particular matter, we may conclude that the annual output is less than the capital in industries where the plant is very expensive, and the processes through which the raw material has to go are very long, as watch and cotton factories: but that it is more than four times the capital in businesses in which the raw material is expensive and the process of production rapid, e.g. boot factories; as well as in some industries, which make only a slight change in the form of their material, such as sugar-refining, and slaughtering and meat-packing.

Many of these inequalities disappear if the value of the raw material, coal, etc. used in a business is deducted before reckoning its output. This plan is commonly followed by careful statisticians in estimating the manufacturing output of a country, so as to avoid counting say yarn and cloth twice over; and similar reasons should make us avoid counting both cattle and fodder crops in the agricultural product of a country. This plan is however not quite satisfactory. For logically one ought to deduct the looms which a weaving factory buys as well as its yarn. Again, if the factory itself was reckoned as a product of the building trades, its value should be deducted from the output (over a term of years) of the weaving trade. Similarly with regard to farm buildings. Farm horses ought certainly not to be counted, nor for some purposes any horses used in trade. However the plan of deducting nothing but raw material has its uses, if its inaccuracy is clearly recognized.

[86.]See above IV. XI. 2-4.

[87.]See above p. 483.

[88.]Compare pp. 319, 320.

[89.]He would however not need to charge a high rate of profits per annum on that part of his capital which he had sunk in the earlier stages of building the ship; for that capital, when once invested, would no longer require any special exercise of his ability and industry, and it would be sufficient for him to reckon his outlay "accumulated" at a high rate of compound interest; but in that case he must count the value of his own labour as part of his early outlay. On the other hand, if there be any trade in which a continuous and nearly uniform expenditure of trouble is called for on all the capital invested, then it would be reasonable in that trade to find the "accumulated" value of the earlier investments by the addition of a "compound" rate of profit (i.e. a rate of profit increasing geometrically as compound interest does). And this plan is frequently adopted in practice for the sake of simplicity even where it is not theoretically quite correct.

[90.]Strictly speaking it will be a little greater than the sum of these three, because it will include compound interest over a longer period.

[91.]The fishmongers and greengrocers in working-class quarters especially lay themselves out to do a small business at a high rate of profits; because each individual purchase is so small that the customer would rather buy from a dear shop near at hand than go some way to a cheaper one. The retailer therefore may not be getting a very good living though he charges a penny for what he bought for less than a halfpenny. The same thing was however perhaps sold by the fisherman or the farmer for a farthing or even less: and the direct lost of carriage and insurance against loss will not account for any great part of this last difference. Thus there seems to be some justification for the popular opinion that the middlemen in these trades have special facilities for obtaining abnormally high profits by combination among themselves.

[92.]The expert evidence that is given in such cases is full of instruction to the economist in many ways, and in particular because of the use of mediæval phrases as to the customs of the trade, with a more or less conscious recognition of the causes which have produced those customs, and to which appeal must be made in support of their continued maintenance. And it almost always comes out finally that if the "customary" rate of profit on the turnover is higher for one class of job than another, the reason is that the former does (or did a little while ago) require a longer locking-up of capital; or a greater use of expensive appliances (especially such as are liable to rapid depreciation, or cannot be kept always employed, and therefore must pay their way on a comparatively small number of jobs); or that it requires more difficult or disagreeable work, or a greater amount of attention on the part of the undertaker; or that it has some special element of risk for which insurance has to be made. And the unreadiness of experts to bring to light these justifications of custom, which are lying almost hidden from themselves in the recesses of their own minds, gives ground for the belief that if we could call to life and cross-examine mediæval business men, we should find much more half-conscious adjustment of the rate of profit to the exigencies of particular cases than has been suggested by historians. Many of them fail sometimes to make it clear whether the customary rate of profits of which they are speaking is a certain rate on the turnover, or such a rate on the turnover as will afford in the long run a certain rate of profits per annum on the capital. Of course the greater uniformity of the methods of business in mediæval times, would enable a tolerably uniform rate of profits on the capital per annum to exist without causing so great variations in the rate on the turnover as are inevitable in modern business. But still it is clear that if one kind of rate of profits were nearly uniform, the other would not be; and the value of much that has been written on mediæval economic history seems to be somewhat impaired by the absence of a distinct recognition of the differences between the two kinds, and between the ultimate sanctions on which customs relating severally to them must depend.

[93.]A century ago many Englishmen returned from the Indies with large fortunes, and the belief spread that the average rate of profits to be made there was enormous. But, as Sir W. Hunter points out (Annals of Rural Bengal, ch. VI.), the failures were numerous, but only "those who drew prizes in the great lottery returned to tell the tale." And at the very time when this was happening, it used commonly to be said in England that the families of a rich man and his coach-man would probably change places within three generations. It is true that this was partly due to the wild extravagance common among young heirs at that time, and partly to the difficulty of finding secure investments for their capital. The stability of the wealthy classes of England has been promoted almost as much by the spread of sobriety and education as by the growth of methods of investment, which enable the heirs of a rich man to draw a secure and lasting income from his wealth though they do not inherit the business ability by which he acquired it. There are however even now districts in England, in which the majority of manufacturers are workmen or the sons of workmen. And in America, though foolish prodigality is perhaps less common than in England, yet the greater changefulness of conditions, and the greater difficulty of keeping a business abreast of the age, have caused it commonly to be said that a family passes "from shirt sleeves to shirt sleeves" in three generations. Wells says (Recent Economic Changes, p. 351), "There has long been a substantial agreement among those competent to form an opinion, that ninety per cent. of all the men who try to do business on their own account fail of success." And Mr J. H. Walker gives (Quarterly Journal of Economics, Vol. II. p. 448) some detailed statistics with regard to the origin and careers of the manufacturers in the leading industries of Worcester in Massachusetts between 1840 and 1888. More than nine-tenths of them began life as journeymen; and less than ten per cent. of the sons of those who were on the list of manufacturers in 1840, 1850 and 1860, had any property in 1888, or had died leaving any. And as to France, M. Leroy Beaulieu says (Répartition des Richesses, ch. XI.) that out of every hundred new businesses that are started twenty disappear almost at once, fifty or sixty vegetate, neither rising nor falling, and only ten or fifteen are successful.

[94.]The late General Walker rendered excellent service in explaining the causes that govern wages on the one hand and earnings of management on the other. But he maintained (Political Economy, §311) that profits do not form a part of the price of manufactured products; and he does not limit that doctrine to short periods, for which, as we have seen, the income derived from all skill, whether exceptional or not, whether that of an employer or a workman, may be regarded as a quasi-rent. He uses indeed the word "profits" in an artificial sense; for, having excluded interest altogether from profits, he assumes that the "No-profits employer" earns "on the whole or in the long run the amount which he could have expected to receive as wages if employed by others" (First Lessons, 1889, § 190): that is to say, the "No-profits employer" obtains, in addition to interest on his capital, normal net earnings of management of men of his ability whatever that may be. Thus profits in Walker's sense exclude four-fifths of what are ordinarily classed as profits in England (the proportion would be rather less in America, and rather more on the Continent than in England). So that his doctrine would appear to mean only that that part of the employer's income, which is due to exceptional abilities or good fortune, does not enter into price. But the prizes as well as the blanks of every occupation, whether it be that of an employer or not, take their part in determining the number of persons who seek that occupation and the energy with which they give themselves to their work: and therefore do enter into normal supply price. Walker appears to rest his argument mainly on the important fact, which he has done much to make prominent, that the ablest employers, who in the long run get the highest profits, are as a rule those who pay the highest wages to the workman and sell at the lowest price to the consumer. But it is an equally true and an even more important fact that those workmen who get the highest wages are as a rule those who turn their employers' plant and material to best account (see VI. III. 2), and thus enable him both to get high profits for himself and to charge low prices to the consumer.

[95.]Compare V. X. 8.

[96.]When a firm has a speciality of its own, many even of its ordinary workmen would lose a great part of their wages by going away, and at the same time injure the firm seriously. The chief clerk may be taken into partnership, and the whole of the employees may be paid partly by a share in the profits of the concern; but whether this is done or not, their earnings are determined, not so much by competition and the direct action of the law of substitution, as by a bargain between them and their employers, the terms of which are theoretically arbitrary. In practice however they will probably be governed by a desire to "do what is right," that is, to agree on payments that represent the normal earnings of such ability, industry and special training as the employees severally possess, with something added if the fortunes of the firm are good, and something subtracted if they are bad.

[97.]But compare V. XI. 2 for exceptions to the rule as to situation rent.

[98.]IV. III. 3. Thus we see that if the value of produce rises from OH' to OH (figs. 12, 13, 14), so that while an amount of produce OH was required to remunerate a dose of capital and labour before the rise, an amount OH' would suffice after the rise, then the producer's surplus will be increased a little in the case of lands of the class represented in fig. 12, with regard to which the tendency to diminishing return acts quickly; much more with regard to the second class of lands (fig. 13), and most of all with regard to the third class (fig. 14).

[99.]Ib. § 4. Comparing two pieces of land (figs. 16 and 17) with regard to which the tendency to diminishing return acts in a similar way, but of which the first is rich and the second poor, we found that the rise of producer's surplus from AHC to AH'C', caused by a rise in the price of produce in the ratio OH to OH', was much larger in proportion in the second case.

[100.]England is so small and so thickly peopled, that even milk and vegetables which require to be marketed quickly, and even hay in spite of its bulk, can be sent across the country at no inordinate expense: while for the staple products, corn and live stock, the cultivator can get nearly the same net price in whatever part of England he is. For this reason English economists have ascribed to fertility the first rank among the causes which determine the value of agricultural land; and have treated situation as of secondary importance. They have therefore often regarded the producer's surplus, or rental value, of land as the excess of the produce which it yields, over what is returned to equal capital and labour (applied with equal skill) to land that is so barren as to be on the margin of cultivation; without taking the trouble to state explicitly either that the two pieces of land must be in the same neighbourhood, or that separate allowance must be made for differences in the expense of marketing. But this method of speaking did not come naturally to economists in new countries, where the richest land might lie uncultivated, because it had not good access to markets. To them situation appeared at least equally important with fertility in determining the value of land. In their view land on the margin of cultivation, was land far from markets; and, especially, land far from railways that lead to good markets: and the producer's surplus presented itself to them as the excess value of the produce from well-situated land over that which equal labour, capital (and skill), would get on the worst-situated land; allowance being of course made for differences of fertility, if necessary. In this sense the United States cannot any longer be regarded as a new country: for all the best land is taken up, and nearly all of it has obtained access by cheap railways to good markets.

[101.]Footnote to his third Chapter.

[102.]Petty's memorable statement of the law of rent (Taxes and Contributions, IV. 13) is so worded as to apply to all forms of tenure and to all stages of civilization:—"Suppose a man could with his own hands plant a certain scope of Land with Corn, that is, could Digg, or Plough; Harrow, Weed, Reap, Carry home, Thresh, and Winnow, so much as the Husbandry of this Land requires; and had withal Seed wherewith to sow the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the Remainder of Corn, is the natural and true Rent of the Land for that year; and the medium of seven years, or rather of so many years as make up the Cycle, within which Dearths and Plenties make their revolution, doth give the ordinary Rent of the Land in Corn."

[103.]In technical language it is the distinction between the quasi-rents which do not, and the profits which do, directly enter into the normal supply prices of produce for periods of moderate length.

[104.]The sleeping partner may be a village community; but recent investigations, especially those of Mr Seebohm, have given cause for believing that the communities were not often "free" and ultimate owners of the land. For a summary of the controversy as to the part which the village community has played in the history of England the reader is referred to the first chapter of Ashley's Economic History. Mention has already been made of the ways in which primitive forms of divided ownership of the land hindered progress, I. II. 2.

[105.]The firm may be further enlarged by the introduction of an intermediary who collects payments from a number of cultivators, and after deducting a certain share, hands them over to the head of the firm. He is not a middleman in the sense in which the word is used ordinarily in England; that is, he is not a subcontractor, liable to be dismissed at the end of a definite period for which he has contracted to collect the payments. He is a partner in the firm, having rights in the land as real as those of the head partner, though, it may be, of inferior value. The case may be even more complex than this. There may be many intermediate holders between the actual cultivators and the person who holds direct from the State. The actual cultivators also vary greatly in the character of their interests; some having a right to sit at fixed rents and to be altogether exempt from enhancement, some to sit at rents which are enhanceable only under certain prescribed conditions, some being mere tenants from year to year.

[106.]Prof. Maitland in the article on Court Rolls in the Dictionary of Political Economy observes that "we shall never know how far the tenure of the mediæval tenant was precarious until these documents have been examined."

[107.]Thus Mr Pusey's Committee of the House of Commons in 1848 reported, "That different usages have long prevailed in different counties and districts of the country, conferring a claim on an outgoing tenant for various operations of husbandry.... That these local usages are imported into leases or agreements, ... unless the terms of the agreement expressly, or by implication, negative such a presumption. That in certain parts of the country a modern usage has sprung up, which confers a right on the outgoing tenant to be reimbursed certain expenses ... other than those above referred to.... That this usage appears to have grown out of improved and spirited systems of farming, involving a large outlay of capital.... That these [new] usages have gradually grown into general acceptance in certain districts, until they have ultimately become recognized there as the custom of the country." Many of them are now enforced by law. See below, § 10.

[108.]Thus the value of a service of a certain number of days' work would depend partly on the promptness with which the labourer left his own hayfield when called to that of his landlord, and on the energy he put into his work. His own rights, such as that of cutting wood or turf, were elastic; and so were those of his landlord which bound him to allow flocks of pigeons to devour his crops unmolested, to grind his corn in the lord's mill, and to pay tolls levied on the lord's bridges and in his markets. Next, the fines or presents, or "abwabs" as they are called in India, which the tenant might be called on to pay, were more or less elastic, not only in their amounts but in the occasions on which they were levied. Under the Moguls the tenants in chief had often to pay a vast number of such imposts in addition to their nominally fixed share of the produce: and they passed these on, increased in weight and with additions of their own, to the inferior tenants. The British Government has not levied them itself; but it has not been able, in spite of many efforts, to protect the inferior tenants from them. For instance, in some parts of Orissa, Sir W. W. Hunter found that the tenants had to pay, besides their customary rent, 33 different cesses. They paid whenever one of their children married, they paid for leave to erect embankments, to grow sugar-cane, to attend the festival of Juggernaut, etc. (Orissa, I. 55-9.)

[109.]In India at the present time we see very various forms of tenure existing side by side, sometimes under the same name and sometimes under different names. There are places in which the raiyats and the superior holders own between them the property in the land subject to definite dues to Government, and where the raiyat is safe not only from being ejected, but also from being compelled by fear of violence to pay over to his superior holder more than that share of the producer's surplus, which custom strictly prescribes. In that case the payment which he makes is, as has already been said, simply the handing over to the other partner in the firm of that share of the receipts of the firm which under the unwritten deed of partnership belongs to him. It is not a rent at all. This form of tenure, however, exists only in those parts of Bengal in which there have been no great recent dislocations of the people, and in which the police are sufficiently active and upright to prevent the superior holders from tyrannizing over the inferior.

The whole history of India records little of that quiet stability which has come over the rural parts of England since war, famine, and plague have ceased to visit us. Extensive movements seem to have been nearly always in progress, partly in consequence of the recurrence of famines (for, as the Statistical Atlas of India shows, there are very few districts which have not been visited at least once by a severe famine during this century); partly of the devastating wars which one set of conquerors after another has inflicted on the patient people; and partly of the rapidity with which the richest land reverts to a thick jungle. The land which has supported the largest population is that which, when deprived of its human inhabitants, most quickly provides shady harbours for wild beasts, for venomous snakes, and for malaria; these prevent the return of the refugees to their old homes, and cause them often to wander far before they settle. When land has been depopulated, those who have the control over it, whether the Government or private persons, offer very favourable terms in order to attract cultivators from elsewhere; this competition for tenants very much influences the relations of cultivators and superior holders for a long distance around them; and therefore, in addition to the changes of customary tenure, which, though impalpable at any time, have been always going on, there have been in almost every place many epochs in which the continuity even of the former custom has been broken and keen competition has reigned supreme.

These disturbing forces of war, famine, and plague were frequent in mediæval England, but their violence was less. And further, the rate of movement of nearly all changes in India has been greater than it would have been if the average period of a generation were as long as in the colder climate of England. Peace and prosperity therefore enable Indian populations to recover from their calamities more quickly; and the traditions which each generation holds of the doings of its fathers and grandfathers run back for a shorter time, so that usages of comparatively recent growth are more easily believed to have the sanction of antiquity. Change can move faster without being recognized as change.

Modern analysis may be applied to the contemporary conditions of land tenure in India and other Oriental countries, the evidence as to which we can examine and cross-examine, in such a way as to throw light on the obscure and fragmentary records of mediæval land tenures, which may indeed be examined, but cannot be cross-examined. There is of course great danger in applying modern methods to primitive conditions: it is easier to misapply them than to apply them rightly. But the assertion, which has been sometimes made, that they cannot be usefully applied at all appears to be based on a conception of the aims, methods and results of analysis, which has little in common with that presented in this, and other modern treatises. See A Reply in the Economic Journal, Sept. 1892.

[110.]The term Metayer applies properly only to cases in which the landlord's share of the produce is one-half; but it is usually applied to all arrangements of this kind whatever the landlord's share be. It must be distinguished from the Stock lease system in which the landlord provided part at least of the stock, but the tenant managed the farm entirely, at his own risk subject to a fixed annual payment to the landlord for land and stock. In mediæval England this system was much used, and the Metayer system appears not to have been unknown. (See Rogers, Six Centuries of Work and Wages, ch. X.)

[111.]In 1880 74 per cent. of the farms of the United States were cultivated by their owners, 18 per cent., or more than two-thirds of the remainder, were rented for a share of the produce, and only 8 per cent. were held on the English system. The largest proportion of farms that were cultivated by persons other than their owners were in the Southern States. In some cases the landowner—the farmer as he is called there—supplies not only horses and mules, but their feed; and in that case the cultivator—who in France would be called not a Metayer but a Maître Valet—is almost in the position of a hired labourer paid by a share of what he gets; as is for instance a hired fisherman whose pay is the value of a part of the catch. The tenant's share varies from one-third, where the land is rich and the crops such as to require little labour, to four fifths, where there is much labour and the landlord supplies little capital. There is much to be gained from a study of the many various plans on which the share contract is based.

[112.]The relations between publisher and author on the "half-profits" system resemble in many ways those between landlord and metayer.

[113.]This can be most clearly seen by aid of diagrams of the same kind as those used in IV. III. A tenant's-share curve would be drawn standing one-half (or one-third or two-thirds) as high above OD as AC does; the area below that curve would represent the tenant's share, that above the landlord's. OH being, as before, the return required to remunerate the tenant for one dose; he will, if left to his own devices, not carry cultivation beyond the point at which the tenant's-share curve cuts HC: and the landlord's will therefore be a less proportion of the returns to a slighter cultivation than under the English plan. Diagrams of this kind may be used to illustrate the way in which Ricardo's analysis of the causes that govern the Producer's Surplus from land, apply to systems of tenure other than the English. A little further change will adapt them to such customs as those found in Persia, where land itself is of small value; and "the harvest is divided into five parts, which are apportioned as follows, one part to each: 1, land; 2, water for irrigation, etc.; 3, seed; 4, labour; 5, bullocks. The landlord generally owns two, so he gets two-fifths of the harvest."

[114.]This is already done in America, and in many parts of France; and some good judges think that the practice may be extended largely, and infuse new life into what a little while ago was regarded as the decaying system of Metayage. If worked out thoroughly, it will result in the cultivation being carried just about as far and affording the landlord the same income as he would have on the English plan for equally fertile and well-situated land equipped with the same capital, and in a place in which the normal ability and enterprise of candidates for farms is the same.

Starting as in the last note, let the Circulating capital supplied by the landlord be represented by the distance OK marked off along OD. Then, if the landlord controls the amount OK freely and in his own interest, and can bargain with his tenant as to the amount of labour he applies, it can be proved geometrically that he will so adjust it as to force the tenant to cultivate the land just as intensively as he would under the English tenure; and his share will then be the same as under it. If he cannot modify the amount OK, but can still control the amount of the tenant's labour, then with certain shapes of the produce curve, the cultivation will be more intensive than it would be on the English plan; but the landlord's share will be somewhat less. This paradoxical result has some scientific interest, but little practical importance.

[115.]The term "peasant proprietor" is a very vague one: it includes many who by thrifty marriages have collected into one hand the results of several generations of hard work and patient saving; and in France some of these were able to lend freely to the Government after the great war with Germany. But the savings of the ordinary peasant are on a very small scale; and in three cases out of four his land is starved for want of capital: he may have a little money hoarded or invested, but no good grounds have been shown for believing that he often has much.

[116.]It would seem that England gets more produce per acre of fertile land than even the Netherlands, though there is some doubt about it. The Netherlands have led the way for England in more paths of industrial enterprise than any other country has; and this enterprise has diffused itself from their thickly scattered towns over the whole land. But there is error in the common opinion that they support as dense a population as England does, and yet export on the balance a great deal of agricultural produce. For Belgium imports a great part of her food; and even Holland imports as much food as she exports, though her non-agricultural population is small. In France, farm crops and even potatoes are on the average only about half as heavy as in England proper; and France has only about half the weight of cattle and sheep in proportion to her area. On the other hand, the small cultivators of France excel in poultry and fruit and other light branches of production for which her superb climate is well suited.

[117.]For long periods the landlord may be regarded as an active partner and the predominant partner in the business: for short periods his place is rather that of the sleeping partner. On the part played by his enterprise compare the Duke of Argyll's Unseen Foundations of Society, especially p. 374.

[118.]There is still (1907) considerable difference of opinion as to the extent to which the habits of the landlords combined with the existing system of tenure hinder the formation of new small holdings, which might provide an intelligent labourer with an opportunity for starting an independent business of his own, as easily as the artisan can start a retail shop and repairing business in metal or other goods.

[119.]The difficulty is even greater in small holdings. For the capitalist farmer does at all events measure the prime cost in terms of money. But the cultivator working with his own hands often puts into his land as much work as he feels able to do, without estimating carefully its money value in relation to its product.

[120.]See VI. II. 5, and the references given there.

[121.]Prothero's English Farming, ch. VI. gives some instances of prolonged resistance to changes, and adds that an Act had to be passed in England as late as 1634 "agaynst plowynge by the taile."

[122.]See IV. III. 5, 6.

[123.]Horse-power is dearer relatively to both steam-power and hand-power in England than in most other countries. England has taken the lead in the improvement of field steam machinery. The cheapness of horse-power tells generally on the side of moderate sized farms versus very small ones; but the cheapness of steam-power and "motor" power obtained from petrol, etc., tells on the side of very large farms, except in so far as the use of field steam machinery can be hired economically and at convenient times.

[124.]The experiment of working farms on a very large scale is difficult and expensive, because it requires farm buildings and means of communication specially adapted to it; and it may have to overcome a good deal of resistance from custom and sentiment not altogether of an unhealthy kind. The risk also would be great; for in such cases those who pioneer often fail, though their route when well trodden may be found to be the easiest and best.

[125.]The interpretation of this term varies with local conditions and individual wants. On permanent pasture near a town or an industrial district the advantages of small holdings are perhaps at their maximum, and the disadvantages at their minimum. For small arable holdings the land should not be light, but strong, and the richer the better; and this is especially the case with holdings so small as to make much use of the spade. The small cultivator can often pay his rent most easily where the land is hilly and broken, because there he loses but little from his want of command of machinery.

[126.]They increase the number of people who are working in the open air with their heads and their hands: they give to the agricultural labourer a stepping-stone upwards, prevent him from being compelled to leave agriculture to find some scope for his ambition, and thus check the great evil of the continued flow of the ablest and bravest farm lads to the towns. They break the monotony of existence, they give a healthy change from indoor life, they offer scope for variety of character and for the play of fancy and imagination in the arrangement of individual life; they afford a counter attraction to the grosser and baser pleasures; they often enable a family to hold together that would otherwise have to separate; under favourable conditions they improve considerably the material condition of the worker; and they diminish the fretting as well as the positive loss caused by the inevitable interruptions of their ordinary work.

The evidence before the Committee on small holdings, 1906 [Cd 3278] discusses very fully the advantages and disadvantages of ownership for small holders; with apparently a balance of opinion against ownership.

[127.]The Ricardian theory of rent ought not to bear the greater part of the blame that has been commonly thrown on it, for those mistakes which English legislators made during the first half of this century in trying to force the English system of land tenure on India and Ireland. The theory concerns itself with the causes that determine the amount of the Producer's surplus from land at any time; and no great harm was done when this surplus was regarded as the landlord's share, in a treatise written for the use of Englishmen in England. It was an error in jurisprudence and not in economics that caused our legislators to offer to the Bengal tax-collector and Irish landlord facilities for taking to themselves the whole property of a cultivating firm, which consisted of tenant and landlord in the case of Ireland, and in the case of Bengal, of the Government and tenants of various grades; for the tax-collector was in most cases not a true member of the firm, but only one of its servants. But wiser and juster notions are prevailing now in the Government of India as well as of Ireland.

[128.]Compare Tooke and Newmarch, History of Prices, Vol. VI. App. III.

[129.]Difficulties of this kind are practically solved by compromises which experience has justified, and which are in accordance with the scientific interpretation of the term "normal." If a local tenant showed extraordinary ability, the landlord would be thought grasping who, by threatening to import a stranger, tried to extort a higher rent than the normal local farmer could make the land pay. On the other hand, a farm being once vacant, the landlord would be thought to act reasonably if he imported a stranger who would set a good model to the district, and who shared about equally with the landlord the extra net surplus due to his ability and skill, which, though not strictly speaking exceptional, were yet above the local standard. Compare the action of Settlement Officers in India with regard to equally good land cultivated by energetic and unenergetic races, noticed in the footnote on p. 642.

[130.]Compare Nicholson, Tenants' Gain not Landlords' Loss, ch. X.

[131.]The Agricultural Holdings Act of 1883 enforced customs which Mr. Pusey's committee eulogized, but did not propose to enforce. Many improvements are made partly at the expense of the landlord and partly at that of the tenant, the former supplying the materials, and the latter the labour. In other cases it is best that the landlord should be the real undertaker of the improvements, bearing the whole expense and risk, and realizing the whole gain. The Act of 1900 recognized this; and, partly for the sake of simplicity in working, it provided that compensation for some improvements can be claimed only if they have been made with the consent of the landlord. In the case of drainage notice of the tenant's wishes must be served on the landlord; so that he may have the opportunity of himself undertaking the risks and reaping a share of the accruing benefits. In reference to manuring, and some kinds of repairs, etc., the tenant may act without consulting the landlord, merely taking the risk that his outlay will not be regarded by the arbitrator as calling for compensation.

[132.]This matter is further discussed in Appendix G.

[133.]Comp. IV. V. VI. and VII. and XII.; and VI. IV. V. and VII.

[134.]Compare V. III. 3; and VI. VII. 2.

[135.]Compare IV. VI. 7; and VI. V. 2.

[136.]Compare V. II. 3, and VI. IV. 6, and VIII. 7-9.

[137.]Suppose, for instance, that an increase in the supply of work of the group by one-tenth forced them into work in which their marginal uses were lower, and thus lowered by a thirtieth their wages for any given amount of work; then, if the change came from an increase in their numbers, their average wages would fall by a thirtieth. But if it came from an increase in their efficiency, their wages would rise by about a sixteenth. (More exactly they would be 11/10 × 29/30 = 1 19/300 of what they were before.)

[138.]As regards the relation between wages and the marginal net product of labour see VI. I. and II. and especially pp. 516-7 and 537-540: the matter is further discussed in VI. XIII. especially p. 706 n. As regards the need to seek a truly representative margin see V. VIII. 4, 5: where it is argued (p. 409 n.) that when that has been reached, the influence of the supply of any group of workers on the wages of others has already been reckoned: and that the influence which any one individual worker exerts on the general economic environment of the industries of a country is infinitesimal, and is not relevant to an estimate of his net product in relation to his wages. In V. XII. and Appendix H something is said of the hindrances to a rapid increase of output even where such an increase would theoretically yield great economies; and of the special care needed in the use of the term "margin" in regard to them.

[139.]Suppose for instance that an amount of capital, c, co-operating with an amount of labour, l, had raised a product 4p; of which p goes as interest to capital, and the remaining 3p to labour. (The labour is of many grades, including management, but it is all referred to a common standard in a day's unskilled labour of given efficiency: see above IV. III. 8.) Suppose that the quantity of labour has doubled, and that of capital has quadrupled: while the absolute efficiency in production of any given amount of each of the agents has not changed. Then we may expect 4c in co-operation with 2l to produce 2 × 3p + 4p = 10p. Now suppose the rate of interest, i.e. the reward for any quantum of capital (exclusive that is of the work of management etc.) to have fallen to two-thirds of its original amount; so that 4c receives only 8/3p instead of 4p as interest; then there will be left for labour of all kinds 7 1/3p instead of 6p. The amount, that goes to each quantum of capital, will have decreased; and that which goes to each quantum of labour, will have increased. But the aggregate amount that goes to capital will have increased in the ratio of 8:3; while that which goes to labour will have increased in the lower ratio of 22:9.

[140.]We took account of them when arriving at the conclusion that the tendency to increasing return would on the whole countervail that to diminishing return: and we ought to count them in at their full value when tracing the changes in real wages. Many historians have compared wages at different epochs with exclusive reference to those things which have always been in common consumption. But from the nature of the case, these are just the things to which the law of diminishing return applies, and which tend to become scarce as population increases, and the view thus got is therefore one-sided and misleading in its general effect.

[141.]The evils of the past were however greater than is commonly supposed. See e.g. the striking evidence of the late Lord Shaftesbury and of Miss Octavia Hill upon the Commission on Housing of 1885. London air is full of smoke; but it is probably less unwholesome than it was before the days of scientific sanitation, even though the population was then relatively small.

[142.]Primitive appliances will bring water from high ground to a few public fountains: but the omnipresent water supply which both in its coming and its going performs essential services for cleanliness and sanitation, would be impossible without coal-driven steam-pumps and coal-made iron pipes.

[143.]See Appendix A, especially § 6.

[144.]Mr W. Sturge (in an instructive paper read before the Institute of Surveyors, Dec. 1872) estimates that the agricultural (money) rent of England doubled between 1795 and 1815, and then fell by a third till 1822; after that time it has been alternately rising and falling; and it is now about 45 or 50 millions as against 50 or 55 millions about the year 1873, when it was at its highest. It was about 30 millions in 1810, 16 millions in 1770, and 6 millions in 1600. (Compare Giffen's Growth of Capital, ch. V., and Porter's Progress of the Nation, Sect. II. ch. I.) But the rental of urban land in England is now much greater than the rent of agricultural land: and in order to estimate the full gain of the landlords from the expansion of population and general progress, we must reckon in the values of the land on which there are now railroads, mines, docks, etc. Taken all together, the money rental of England's soil is more than twice as high, and its real rental is perhaps four times as high, as it was when the corn laws were repealed.

[145.]Of course there are exceptions. Economic progress may take the form of building new railways that will draw off much of the traffic of some of those already existing, or of increasing the size of ships till they can no longer enter docks the entrance to which is through shallow waters.

[146.]See IV. VII.

[147.]See above VI. VI. 7.

[148.]Comp. IV. VI. 1, 2; and IX. 6. As the trade progresses, improvements in machinery are sure to lighten the strain of accomplishing any given task; and therefore to lower task wages rapidly. But meanwhile the pace of the machinery, and the quantity of it put under the charge of each worker, may be increased so much that the total strain involved in the day's work is greater than before. On this subject employers and employed frequently differ. It is for instance certain that time wages have risen in the textile trades; but the employees aver, in contradiction to the employers, that the strain imposed on them has increased more than in proportion. In this controversy wages have been estimated in money; but when account is taken of the increase in the purchasing power of money, there is no doubt that real efficiency wages have risen; that is, the exertion of a given amount of strength, skill and energy is rewarded by a greater command over commodities than formerly.

[149.]This may be made clearer by an example. If there are 500 men in grade A earning 12s. a week, 400 in grade B earning 25s. and 100 in grade C earning 40s., the average wages of the 1000 men are 20s. If after a time 300 from grade A have passed on to grade B, and 300 from grade B to grade C, the wages in each grade remaining stationary, then the average wages of the whole thousand men will be about 28s. 6d. And even if the rate of wages in each grade had meanwhile fallen 10 per cent., the average wages of all would still be about 25s. 6d., that is, would have risen more than 25 per cent. Neglect of such facts as these, as Sir R. Giffen has pointed out, is apt to cause great errors.

[150.]The above brief remarks on the evolution of wages may well be supplemented by Prof. Schmoller's survey in his Volkswirtschaftslehre, III. 7 (Vol. II. pp. 259-316). It is specially notable for its breadth of view, and its careful coordination of the material and psychical elements of progress. See also the latter half of his second Book.

[151.]It should be noticed however that some of these gains may be traced to those opportunities for the formation of trade combinations engineered by a few able, wealthy and daring men to exploit for their own benefit a great body of manufactures, or the trade and traffic of a large district. That part of this power, which depends on political conditions, and especially on the Protective tariff, may pass away. But the area of America is so large, and its condition so changeful, that the slow and steady-going management of a great joint-stock company on the English plan is at a disadvantage in competition with the vigorous and original scheming, the rapid and resolute force of a small group of wealthy capitalists, who are willing and able to apply their own resources in great undertakings to a much greater extent than is the case in England. The ever-shifting conditions of business life in America enable natural selection to bring to the front the best minds for the purpose from their vast population, almost every one of whom, as he enters on life, resolves to be rich before he dies. The modern developments of business and of business fortunes are of exceptional interest and instruction to Englishmen: but their lessons will be misread unless the essentially different conditions of business life in the old world and the new are constantly borne in mind.

[152.]An instance, which came under the present writer's observation, may be mentioned here. In Palermo there is a semi-feudal connection between the artisans and their patrons. Each carpenter or tailor has one or more large houses to which he looks for employment; and so long as he behaves himself fairly well, he is practically secure from competition. There are no great waves of depression of trade; the newspapers are never filled with accounts of the sufferings of those out of work, because their condition changes very little from time to time. But a larger percentage of artisans are out of employment at the best of times in Palermo, than in England in the centre of the worst depression of recent years. Something further is said as to inconstancy of employment below, VI. XIII. 10.

[153.]See VI. II. 2, 3; also IV. IV. and V.; and VI. IV.

[154.]See IV. V. 4.

[155.]The facts are much in question, partly because they vary much from one industry to another; and those who have the most intimate knowledge of them, are apt to be biassed. When piece-work can be brought under collective bargaining by trade unions, the first effect of an improvement in plant is to raise real wages: and the onus of claiming a readjustment of piece rates in order to keep wages in just proportion to those which are being earned by equally difficult and responsible work in other occupations, is thus thrown upon the employers. In such cases, piece-work is generally in favour with employees. And where their organization is good, as in some classes of mining work, they approve it even in regard to work that is not uniform. But in many other cases it arouses their suspicion of unfair advantage. See below, § 8. According to Prof. Schmoller, it is estimated that piece-work increases output by 20 to 100 per cent. according to the race of the workers and the character and technique of the industry, Volkswirtschaftslehre, § 208. An instructive detailed statement of the causes which lead workers generally to oppose payment by results in certain industries, while welcoming it in others, is given by Cole, The payment of wages, ch. II.

[156.]The history of British industries offers the most various, the most clearly defined, and the most generally instructive experiments as to the influence of variations in the hours of labour on output: but international studies on the subject seem to be specially German. See for instance Bernard, Höhere Arbeitsintensität bei Kurzeren Arbeitszeit, 1909.

[157.]On the whole of this subject see Prof. Chapman's address at the British Association, 1909, published in the Economic Journal, vol. XIX.

[158.]See above, V. VI. 2.

[159.]To take an illustration, let us suppose that shoemakers and hatters are in the same grade, working equal hours, and receiving equal wages, before and after a general reduction in the hours of labour. Then both before and after the change, the hatter could buy, with a month's wages, as many shoes as were the net product of the shoemaker's work for a month (see VI. II. 7). If the shoemaker worked less hours than before, and in consequence did less work, the net product of his labour for a month would have diminished, unless either by a system of working double shifts the employer and his capital had earned profits on two sets of workers, or his profits could be cut down by the full amount of the diminution in output. The last supposition is inconsistent with what we know of the causes which govern the supply of capital and business power. And therefore the hatter's wages would go less far than before in buying shoes; and so all round for other trades.

[160.]For instance, when we look at the history of the introduction of the eight hours' day in Australia we find great fluctuations in the prosperity of the mines and the supply of gold, in the prosperity of the sheep farms and the price of wool, in the borrowing from old countries capital with which to employ Australian labour to build railways, etc., in immigration, and in commercial credit. And all these have been such powerful causes of change in the condition of the Australian working man as to completely overlay and hide from view the effects of a reduction of the hours of labour from 10 gross (8¾ net after deducting meal times) to 8 net. Money wages in Australia are much lower than they were before the hours were shortened; and, though it may be true that the purchasing power of money has increased, so that real wages have not fallen, yet there seems no doubt that the real wages of labour in Australia are not nearly as much above those in England as they were before the reduction in the hours of labour: and it has not been proved that they are not lower than they would have been if that change had not taken place. The commercial troubles through which Australia passed shortly after the change were no doubt mainly caused by a series of droughts supervening on a reckless inflation of credit. But a contributory cause appears to have been an over-sanguine estimate of the economic efficiency of short hours of labour, which led to a premature reduction of hours in industries not well adapted for it.

[161.]A short provisional description of trade unions is affixed to Vol. I. of my Elements of Economics, which is, in other respects, an abridgment of the present volume. And the account of their aims and methods given in the Final Report of the Labour Commission, 1893, has the unique authority derived from the cooperation of employers and trade union leaders of exceptional ability and experience.

[162.]Compare above, VI. III. 7 and V. 2.

[163.]The wholesome influences on social wellbeing, which are exercised by trade union leaders in many directions, are apt to be marred by a misunderstanding on this matter. They commonly give as their authority the very weighty and able treatise on Industrial Democracy by Mr and Mrs Webb, where the misunderstanding is suggested. Thus they say, p. 710, "It is now theoretically demonstrated, as we saw in our chapter on 'The Verdict of the Economists,' that under 'perfect competition,' and complete mobility between one occupation and another, the common level of wages tends to be no more than 'the net produce due to the labour of the marginal labourer' who is on the verge of not being employed at all!" And, p. 787 f. n., they refer to this marginal labourer as an industrial invalid or pauper, saying:—"If the wages of every class of labour under perfect competition tend to be no more than the net produce due to the additional labour of the marginal labourer of that class, who is on the verge of not being employed at all, the abstraction of the paupers, not necessarily from productive labour for themselves, but from the competitive labour market, by raising the capacity of the marginal wage labourer, would seem to increase the wages of the entire labouring class."

[164.]It is really an understatement to say that competition tends to make the employer willing to pay twice as high wages to A as to B under these conditions. For an efficient worker who will make the same factory space and plant and supervision serve for twice as much production as an inefficient worker, is worth more than twice as much wages to the employer: he may really be worth three times as much. (See above, VI. III. 2.) Of course the employer may be afraid to offer to the more efficient worker wages proportionate to his true net product, lest inefficient workers, supported by their unions, should over-estimate his rate of profits, and claim a rise in wages. But in this case the cause which makes the employer pay attention to the net product of the less efficient worker, when considering how much it is worth his while to offer to the more efficient, is not free competition, but that resistance to free competition which is offered by the misapplication of the common rule. Some modern schemes for "gain sharing" aim at raising the wages of efficient workers nearly in proportion to their true net product; that is, more than in proportion to the "piece-work" rate: but trade unions do not always favour such schemes.

[165.]A useful history of the opposition to machinery is given in Industrial Democracy, Part II. chapter VIII. It is combined with the advice not generally to resist the introduction of machinery, but not to accept lower wages for working on the old methods in order to meet its competition. This is good advice for young men. But it cannot always be followed by men who have reached their prime: and if the administrative power of Governments should increase faster than the new tasks which they appropriate from private enterprise, they may do excellent service by grappling with those social discords that arise, when the skill of middle-aged and elderly men is rendered almost valueless by improved methods.

[166.]It may be noted that the great Amalgamated Society of Engineers, to which reference has just been made, led the way to concerted action between kindred branches of industry that softens the hard outlines of delimitation.

[167.]The quotation from Mill and the two paragraphs which follow it are reproduced from The Economics of Industry, III. I. 4, published by my wife and myself in 1879. They indicate the attitude which most of those, who follow in the traditions of the classical economists, hold as to the relations between consumption and production. It is true that in times of depression the disorganization of consumption is a contributory cause to the continuance of the disorganization of credit and of production. But a remedy is not to be got by a study of consumption, as has been alleged by some hasty writers. No doubt there is good work to be done by a study of the influence of arbitrary changes in fashion on employment. But the main study needed is that of the organization of production and of credit. And, though economists have not yet succeeded in bringing that study to a successful issue, the cause of their failure lies in the profound obscurity and ever-changing form of the problem; it does not lie in any indifference on their part to its supreme importance. Economics from beginning to end is a study of the mutual adjustments of consumption and production: when the one is under discussion, the other is never out of mind.

[168.]Some years ago the annual income of some 49,000,000 people in the United Kingdom appeared to amount to more than £2,000,000,000. Many leading artisans were earning about £200 a year; and there were a vast number of artisan households in which each of four or five members were earning an income ranging from 18s. to 40s. a week. The expenditure of these households was on as large, if not a larger scale, than would be possible if the total income were divided out equally, so as to yield about £40 annually a head. PS, 1920. No recent statistics are accessible on the matter. But it seems certain that the incomes of the working classes generally are increasing at least as fast as those of other classes. Several of the suggestions made in the present chapter are further developed in an article on "The social possibilities of economic chivalry" in the Economic Journal for March 1907.

[169.]A beginning might be made with a broader, more educative and more generous administration of public aid to the helpless. The difficulty of discrimination would need to be faced: and in facing it local and central authorities would obtain much of the information needed for guiding, and in extreme cases for controlling, those who are weak and especially those whose weakness is a source of grave danger to the coming generation. Elderly people might be helped with a chief regard to economy and to their personal inclinations. But the case of those, who are responsible for young children, would call for a greater expenditure of public funds, and a more strict subordination of personal freedom to public necessity. The most urgent among the first steps towards causing the Residuum to cease from the land, is to insist on regular school attendance in decent clothing, and with bodies clean and fairly well fed. In case of failure the parents should be warned and advised: as a last resource the homes might be closed or regulated with some limitation of the freedom of the parents. The expense would be great: but there is no other so urgent need for bold expenditure. It would remove the great canker that infects the whole body of the nation: and when the work was done the resources that had been absorbed by it would be free for some more pleasant but less pressing social duty.

[170.]This last consideration seems to have been pushed on one side largely under the influence of a faulty analysis of the nature of "parasitic" work and of its influence on wages. The family is, in the main, a single unit as regards geographical migration: and therefore the wages of men are relatively high, and those of women and children low where heavy iron or other industries preponderate, while in some other districts less than half the money income of the family is earned by the father, and men's wages are relatively low. This natural adjustment is socially beneficial; and rigid national rules as to minimum wages for men and for women, which ignore or oppose it, are to be deprecated.

[171.]See above, III. VI. 6; and Note VIII. in the Mathematical Appendix. Compare also Professor Carver on "Machinery and the Laborers" in the Quarterly Journal of Economics, 1908.

[172.]It is urged below, Appendix G, 8, 9, that the health of the working classes, and especially of their children, has a first claim on rates levied on that special value of urban land which is caused by the concentration of population.

[173.]See VI. V. 1, 2.

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BOOK VI: THE DISTRIBUTION OF THE NATIONAL INCOME. - Alfred Marshall, Principles of Economics (8th ed.) [1890]

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BOOK VI

THE DISTRIBUTION OF THE NATIONAL INCOME.

BOOK VI, CHAPTER I

PRELIMINARY SURVEY OF DISTRIBUTION.

BOOK VI, CHAPTER II

PRELIMINARY SURVEY OF DISTRIBUTION, CONTINUED.

BOOK VI, CHAPTER III

EARNINGS OF LABOUR.

BOOK VI, CHAPTER IV

EARNINGS OF LABOUR, CONTINUED.

BOOK VI, CHAPTER V

EARNINGS OF LABOUR, CONTINUED.

BOOK VI, CHAPTER VI

INTEREST OF CAPITAL.

BOOK VI, CHAPTER VII

PROFITS OF CAPITAL AND BUSINESS POWER.

BOOK VI, CHAPTER VIII

PROFITS OF CAPITAL AND BUSINESS POWER, CONTINUED.

BOOK VI, CHAPTER IX

RENT OF LAND.

BOOK VI, CHAPTER X

LAND TENURE.

BOOK VI, CHAPTER XI

GENERAL VIEW OF DISTRIBUTION.

BOOK VI, CHAPTER XII

GENERAL INFLUENCES OF ECONOMIC PROGRESS.

BOOK VI, CHAPTER XIII

PROGRESS IN RELATION TO STANDARDS OF LIFE.