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• Preface
• Note.
• Wealth
• Chapter I: The Subject-matter of Economics
• Chapter II: The Fundamental Conditions of Wealth For Isolated Man and For Society
• Chapter III: Co-operation, Or Combination and Division of Labour
• Chapter IV: Population
• Chapter V: The Social Order
• Chapter VI: The Controlling Power of Demand
• Chapter VII: The Control of Provision For the Future
• Chapter VIII: Continuous Power to Demand, Or Income
• Chapter IX: The Classification of Incomes
• Chapter X: The Division of Income Between Owners and Workers
• Chapter XI: Incomes From Ownership of Property
• Chapter XII: Incomes From Work
• Chapter XIII: The Relation Between Individual Income and Individual Wealth
• Chapter XIV: The Wealth of Nations

CHAPTER II

the fundamental conditions of wealth for isolated man and for society

Most of economics deals with man living in society, but it is best to begin with the simplest possible cases. I shall therefore disregard the sneers which have sometimes been directed by sciolists against “the Crusoe economy,” and consider for a moment the conditions on which the material welfare or wealth of isolated man depends.

Our Isolated Man must necessarily be somewhat of an abstraction. Adam, as described in Genesis, was too much surrounded by supernatural influences to be a useful type for our purpose, and if we fell back on evolutionary theories, we should, I suppose, trace the human race back not to an isolated man, or even to an isolated pair—an Adam with an Eve—but to something more like a society of chimpanzees. Robinson Crusoe is not quite satisfactory, because he started on his career of isolation with a stock of knowledge acquired in societary existence, to say nothing of the important tools and other things which he saved from the wreck. Moreover, his efforts during his isolation were frequently directed towards a return to the societary existence from which he had accidentally become divorced, so that he did not always act as a completely isolated man would have done. In order to study profitably the conditions on which the material welfare of Isolated Man really depend, we can best proceed by imagining our Crusoe as having been always the sale human inhabitant of the globe, putting behind us any inquisitiveness as to how he got there and as to the probable duration of his life. We may also suppose that he has by some means or other become located in the most suitable situation for Isolated Man.

In these circumstances the wealth of the Isolated Man will depend first on his original qualities, secondly on the extent to which he has improved his powers and his material surroundings in the past, thirdly on the judgment which he exercises in the use of his actual powers and surroundings, and fourthly on his deliberate choice between wealth and other welfare.

1. The proposition that the original or natural qualities of the Man are one of the conditions on which his material welfare depends needs little elaboration. If strong in body and mind in proportion to his physical needs, he will obviously be able to satisfy those needs more easily and better. The only mistake likely to be made is one which is not of any very great practical importance, namely, the omission from consideration of the magnitude of physical needs. We are apt to regard the stronger man as the superior engine for the production of material welfare, without much thought for his greater requirements in the matter of food, clothing, and shelter. But we cannot reasonably suppose that a large man gets greater satisfaction from his large meal, his large suit en clothes, and his large bed than the smaller man gets from his smaller meal, clothes, and bed. The most favourable condition, therefore, is not simply the greatest strength, but the greatest strength in proportion to physical requirements.

2. When we start from any particular point of time and consider the material welfare of the man for the ensuing period, it is clear that much depends on what he has done in the past.

(a) Unless he has abandoned himself to some sort of vice which has enfeebled him) he will almost necessarily have improved his powers. The frequent repetition of different forms of manual exertion will have made him more expert with his hands and body. He can scarcely live without observing, and can scarcely forget all that he observes, so that his knowledge can scarcely fail to increase, and this increase of knowledge means an increase of power to gain many, at any rate, of the ends which he is likely to put before himself. But over and above this merely incidental kind of improvement, the man may have deliberately set himself to improve his manual or mental dexterity and to Increase his stock of useful knowledge. At one stage of his development, for example, he may have trained his mind to calculate distances and his hand to act on the knowledge by shooting at targets when no game presented itself, or he may have deliberately experimented with different kinds of ore with the intention of increasing his knowledge of metals and their properties. The longer he lives, then, the more expert and the more well-informed he is likely to become.

(b) In addition to improving himself, our Isolated Man may also have improved his surroundings, that is to say, he may have made them more suitable for his own purposes. The outer crust of the earth itself may have had its qualities altered by him in such a way as to become either better or worse from his point of view. He may have cultivated the soil in such a way as to destroy many of its useful properties, or by careful management he may have made it more and more suitable for cultivation in the future. In taking out of the earth such things as stone, minerals, or clay, it is true, he cannot expect to leave the land as good as he found it, as he can when he takes away crop after crop of vegetable or animal produce. But while somewhat worsening the land, he may all the same be improving his surroundings as a whole. The stone or clay which he takes out of the land will certainly be not less but more useful to him when he has, for example, fashioned them into the walls of a house which he wants, than they were in their raw, unworked state. It is surely better to have a finished axe-head than the mere iron ore necessary to make such an axe-head.

There is no simple means by which we can measure the extent or amount of improvement which the Man may have effected in his outward surroundings. The utility of the changes which have been effected is frequently increased or diminished, or altogether destroyed, by alterations in the circumstances of the Man. When, for example, he has made a tool, some change in his knowledge may easily make it more useful to him than it was when he made it, while some other change in his knowledge may cause him to lay it aside as utterly useless. He has, let us say, with great labour dug a number of pitfalls in which to catch wild animals, and these require elaborate re-roofing each time they have come into action. Then he discovers some simpler kind of trap, which can be re-set time after time with no appreciable labour: such an invention will entirely destroy the usefulness of the old pitfalls, and the man will quite rightly, quite economically, allow them to go to ruin. Before the invention of the superior trap the pitfalls were useful objects or “improvements”; after it they are only troublesome holes in the ground. Even in the absence of such changes in knowledge and other circumstances, it is not possible to reckon up the amount of improvements as a whole and make definite quantitative statements about it, such as that it has increased by 30 per cent. in some particular period of time: we cannot make such statements, because we have no means of adding together different kinds of improvements and comparing their aggregate magnitude with that of some other group. How, for example, should we add together a row of apple-trees and a plough, and compare the magnitude of the result With that of the sum of improvement represented by a ditch plus a barn-door? Even when we have to consider precisely similar objects, their number will not afford us any precise guide for estimating the magnitude of the improvement in the man's material surroundings which they actually represent. It will be better, no doubt, for the Man to have two precisely similar spades than one only, but he certainly will not think two are twice as good as one—and he will be quite right.

3. The Man's judgment in making use of his powers and surroundings is clearly of great importance.

To make use of them at all some effort is necessary. However great his powers, and however excellent his surroundings, they will not even feed the Isolated Man unless he exerts himself to some extent. Exertion should not be lightly pronounced agreeable or disagreeable in itself. Some kinds of exertion are probably always disagreeable to every one who is obliged, in order to attain his ends, to undergo them. But most kinds of exertion are pleasurable when not carried too far, and disagreeable only when carried beyond that point. We get into the way of regarding all the exertion for which we are paid by other people as disagreeable, because we want the pay, and the exertion necessary to obtain it presents itself to us as an obstacle, and an obstacle is necessarily unpleasant and something, to be diminished if possible. But if we were prisoners without any chance of earning anything, we should welcome our present employments as most agreeable relaxation from the ennui of doing nothing. On the other hand, there is no doubt that all kinds of exertion become unpleasant if carried on for too long a time at once. The most passionate devotee of football or even golf does not wish to “play,” as we call it, for eighteen hours a day and three hundred. and sixty-five days in the year. To “play” too long becomes a “labour.” This is true, no matter how diversified. the exertion may be; every one requires a certain amount of absolute repose in the diurnal round. Hence the Isolated Man would be quite justified in regarding exertion as a thing to be reduced wherever possible. He could always have as much as he wanted of it, taken as a whole, and therefore he might as well have as little as he could in getting each particular satisfaction. The first use of judgment is thus to keep effort as small as possible in proportion to any given result.

But this is not all. The Man would also have to seek a certain balance between effort and satisfaction in regard to each particular sort of satisfaction, and in regard to the whole taken together. He would have to arrange his activity and repose so that it might yield the maximum of satisfaction after allowing for any unpleasantnesses involved in the exertion itself or its incidental accompaniments. If he had to do this starting from a tabula rasa, it would be extraordinarily difficult. But, in fact, habit would help him; he would never have to start absolutely fresh, so to speak, and decide all at once to give so many hours to securing animal food, so many to each class of vegetable food, so many to making clothes, and so on. What he would have to do would be merely to decide whether it would give him more satisfaction to make some small reduction in the time and labour given to one mode of production and divert the time and labour to some other line of production, or, as another choice, to knock off the small amount of labour and give the time to repose. Of course even this might be a difficult question. If it were a choice between two different lines of production, the Man would have to weigh not only the satisfactions obtained, but the agreeableness or disagreeableness of the different kinds of labour involved. If it were a choice between the usual exertion and result on the one hand, and on the other hand slightly less exertion and result together with slightly more repose, he would still have to estimate three quantities—the satisfaction foregone, the labour remitted, and the repose secured.

Consequently, much depends on the accuracy of the Man's judgment as to the regulation and distribution of his effort. We have no right to assume, as we sometimes do, that his judgment is certainly infallible. In practical life we never think of doing so. We are always prepared to say that one of our friends overworks himself and should be content with a somewhat smaller income, and that another misdistributes his energies, giving too much of his resources to secure what we consider a disproportionately large amount of some particular satisfaction.

This would be true, even if there were no decisions to be made as to the distribution of effort between immediate and more distant ends. The necessity of making such decisions introduces a further complication. Not only has the Man to decide how much to work and how to distribute his labour between various kinds of satisfactions, but also to decide how far he is to sacrifice the present to the future or the future to the present.1 In ordinary circumstances there are three great choices open to him, and two of them may be adopted to a greater or less degree, as he chooses. He may arrange his work and consumption so that at the end of the period under consideration, the week or the year or whatever length of time we find it convenient to take, his position with regard to the future is just the same as at the beginning of the period, or so that it is more or less better, or finally, so that it is more or less worse. Any one of the three courses may be the judicious one, according to the circumstances of the period. If the period is one of stress, during which the Man finds it very difficult merely to keep himself alive, if, for example, he is ill, he will be quite justified in allowing his position with regard to the future to deteriorate; he will be right not to trouble for the moment about increasing his stores of knowledge and improving his material surroundings: he will be justified in reducing his stores of consumable articles, and even in allowing his tools, his house, and his other effects to fall into some disrepair. On the other hand, when his circumstances are very favourable, when he has no difficulty in making ends meet, he will be a fool if he does not devote some time and labour to improving his position, either by increasing his powers or improving his material surroundings. He should not only try to provide for unfortunate contingencies, but also to secure that even in ordinary times his life will be easier in the future. Why? Because in the circumstances described the future gain will be greater than the present sacrifice. As his circumstances for the moment are favourable, he will not lose very much at the present by devoting a portion of his labour to the future instead of the present, and it is certain that he will know some way of expending labour which will be of permanent benefit to him. He knows, for example, that if he can give ten hours to some investigation into the habits of some animal or the location of some plant, the knowledge will be as useful to him in the future as an extra hour per week of average labour would be. Or it may be that he knows that ten hours spent on the construction of some tool or other improvement of material surroundings will be as useful as an extra hour per week of average labour, of course after allowing for any labour that may be necessary to mend, and when necessary to replace the tool or other improvement. That is to say, ten hours labour now will bring in as much as fifty-two hours per annum in perpetuity. The Man's circumstances being favourable for the moment, he would be foolish not to grasp at the larger return, although if he were extremely pinched for the moment, so that every minute devoted to satisfying present needs was very important, he would be quite right to go on “living from hand to mouth” and not to attempt to make the improvement in his future condition.

Of course only a limited amount of the Man's time should be devoted to the future, even when it is desirable that he should so devote some part of it. There are two reasons for limitation. In the first place, the more labour so devoted the less (in proportion to the amount of labour) is the advantage in the future, and secondly, the more labour so devoted the greater (in proportion to the amount of labour) is the loss in the present. For example, the Man may know one way of spending ten hours labour which will bring in a return, so to speak, of an hour a week or fifty-two hours per annum, but when he comes to think of a second way he may not be able to find another which brings in a return of more than perhaps half an hour per week–i.e., twenty-six hours per annum, while the third way may only bring five hours, and so on. On the other side, also, he has to remember that while taking ten hours off his labour for immediate needs may involve no very severe privation, to take off a second ten hours will be a much more serious matter, and the deduction of a third might involve the loss of some absolute necessaries of life. Clearly the Man must stop somewhere, and the decision where to stop requires the exercise of a nice judgment. The Man will be likely to make a mistake, even if he can foresee all the future quite accurately. In fact, he will not be always right about the future, and consequently we must not expect that his decisions on this subject will approach anywhere near to infallibility.

It must be noticed that we have considered the Man's material welfare as a whole, beginning, it is true, at some arbitrarily chosen point, but without any further limitation. We have supposed the problem to be to maximize the Man's material welfare over all subsequent time. If we wanted to compare his welfare at one period with his welfare at some later period, say his welfare in 1890 with his welfare in 1910, we should have to regard the extent to which he thought it desirable to work for the future instead of for immediate results as one of the conditions on which his material welfare for the particular period depended. Given all other conditions, it is clear that the Man will be better or worse off for the moment according as he devotes more or less of his time and labour to present gratifications and less or more to improving his position with regard to the future.

4. We have so far assumed that the Man will desire to make his material welfare as great as possible, but this is not quite certain. He may deliberately sacrifice some portion of material welfare in order to secure some satisfaction which he regards as of a higher order. J. S. Mill in his earlier days and Bagehot thirty or forty years later thought that political economy must assume an imaginary being, often called the “Economic Man,” who had no desire to do anything except pursue wealth. There is no need for making any such unlikely hypothesis except, perhaps, for simplicity at the very beginning of our exposition. It is quite easy to suppose that our Isolated Man may sometimes deliberately prefer to do things which do not increase his material welfare. He may, for example, think it desirable to endeavour to secure happiness after death by propitiating some idol or other divinity by scourging himself or burning the best of his animals upon an altar. The more he chooses to act in ways like this, the less, other things being equal, will be his material welfare or wealth.

The conditions which govern the material welfare or wealth of Society–of a number of persons living in contact with each other–are, for the most part, identical with those which would govern the wealth of Isolated Man, though some complications are introduced by association and by the mere fact of numbers.

1. The original qualities of the race are obviously just as important to Society as the original qualities of the Man to Isolated Man. If the world had been peopled with a race of men with only one arm or with no eyes, we may quite confidently say that their material welfare would not have been as great as ours, unless the disadvantage was counterbalanced by some advantage which we do not possess. It is also true of Man in Society, as we saw it was of the Isolated Man, that the most favourable condition is not simply the greatest strength, but the greatest strength in proportion to physical requirements. It seems at first sight quite certain that we should not be as well off as we are if we were as small as Swift's Liliputians. But we begin to see that the question is not quite so simple as we supposed, if we ask ourselves whether it is quite certain that we should be much better off if we were as big as the Brobdingnagians. With the strength of a Brobdingnagian we should presumably acquire a Brobdingnagian appetite, and so be no better off than before, unless our numbers were reduced, for that might make an important difference.

2. Secondly, if we start from any particular point of time and consider the wealth of Society for the ensuing period, it is clear that the wealth of that period depends on what has been done by men in the past.

(a) The powers of the people alive at the time must necessarily have undergone great change since their infancy, not owing only to mere “growing up,” but also owing to practice of the various arts and to deliberate education or drawing out of original powers. The conditions of Society may clearly be much better in this respect at one time than at another. No doubt the inhabitants of Europe before the establishment of the Roman Empire were better educated and trained for the work they had to do than we are for that work, and the example suggests that it is difficult to set up any absolute standard of education good for all times and places. But given certain conditions, no one can doubt that it is possible for the people to be better or worse trained for those conditions, and that the difference will affect their material welfare.

More important still than the difference in skill due to education or training are the differences resulting from the varying quantity of the knowledge of which the people may be in possession. When we look round and ask ourselves what are the main causes of the improvement which has taken place in the material condition of the civilized world, we cannot fail to put among the chief of them the increase of knowledge. We are able to use the forces of nature so much more effectively than our remote ancestors, not because we are naturally cleverer nor because we are better educated than they, but because each generation has acquired new knowledge, and has transmitted it to posterity at first by word of mouth and afterwards by means of written and printed symbols, so that the sum of accumulated knowledge has been perpetually increasing.

(b) We saw that the material condition of our Isolated Man would depend largely at any one time on what he had done in previous periods to improve his surroundings. It is equally true that the material condition of Society must depend largely on what has been done in the past by men in altering the arrangement of matter on the face of the globe. Next to the increase of knowledge the improvement (from man's point of view) of his material surroundings is the greatest and most obvious cause of his progress in material welfare. The face of the earth has been adapted by him to his purposes in many ways. The Suez Canal has practically altered the geographical situation of whole continents, and the Panama Canal will do the same. But these are in reality but small things compared with the immense network of roads and railways which covers the civilized and is beginning to penetrate the uncivilized parts of the globe. That network, again, is but a trifle compared with the adaptation of millions of square miles–in fact, the greater part of the land surface of the planet–to agricultural purposes. Then there is the enormous stock of houses and other buildings in which people live and work and store things which will not bear exposure to the weather. Household furniture, tools and machinery of all kinds, including vehicles and ships, form another mass of metal, wood, and other materials originally extracted from the ground and now fashioned to suit man's purposes. And lastly, there is the stock of materials and food which has been raised from the ground and which jt is necessary to keep for the supply of sudden emergencies or to equalize supply over the different seasons. Each generation of men is heir to all that has been left by its predecessors, and the legacy seems to be larger at each transmission, not only absolutely but in proportion to the numbers who inherit it. We must not expect to be able to measure the greatness of the legacy by any numerical standard: we cannot do this any better for Society than for the Isolated Man. The utility of changes in material surroundings can no more be expressed in numbers than the utility of changes in knowledge. It is useful to have a knowledge of the ways in which steam can be made to serve us; it is also useful to have a stock of steam-engines and of the things such as factories, ships, and railroads, which are necessary for their working. No one supposes that we can make numerical statements about the utility of the knowledge we use, and no one should suppose that we can do so about the stock of useful objects which we use in connection with that knowledge. If we wish to get some idea of how useful the stock is, we should endeavour to imagine what would be our condition to-morrow if the whole stock were swept away to-night. Let us try to realize what it would be like to have no knives and forks to eat our food with, no tables to put it on, no rooms to put the tables in, no food ready in the larders, the shops, or the granaries, no sheep, no cattle, but only a few wild pigs, rabbits, and birds, no railways, nor even roads, scarcely any edible vegetables–nothing whatever except a thickly wooded and very swampy land.

Of course much that is done in the way of permanent alteration of material surroundings, and is supposed at the time to be a permanent improvement, eventually turns out to have been only temporarily useful, but a heavy balance to the good seems, at any rate in modern times, always to remain, and this, together with a perpetual increase in the stock of non-permanent useful objects which are replaced by up-to-date substitutes when they wear out, renders the position of each generation in regard to material surroundings more favourable than that of the last.

3. The wealth of Society, like that of the Isolated Man, will obviously depend on the judgment exercised in making use of its powers and surroundings.

Effort, or labour as it is commonly called, is necessary for the use of these powers and surroundings in the case of Society as in that of Isolated Man. There is no more reason for pronouncing effort or labour to be generally a good or an evil in the one case than in the other. But without regarding labour as essentially evil, Society, like the Isolated Man, is justified in desiring to shorten the labour requisite for the attainment of any particular aim, since it is always possible to have enough labour, and labour in excess of a certain quantity is an undoubted evil. Accordingly, Society, like the Isolated Man, in order to make its material welfare or wealth as great as possible, must adopt the easiest methods of attaining its ends, and must regulate the whole of its labour so that it works just up to the point at which the labour and the produce of the labour taken together (the disagreeableness of the labour, if any, being deducted from the agreeableness of the produce) cause the most satisfactory result. Society must at the same time distribute its total labour between the various possible channels in the manner which will bring about the best result, when both the labour and the produce are taken into account.

Difficult as this is for the Isolated Man, it is ten times more so for Society. The Isolated Man has a single brain to estimate the comparative advantages of all the different courses; Society has no common brain, but millions of separate ones. To cast up with any considerable approach to accuracy the total pleasure and pain resulting from any particular arrangement would require knowledge far beyond that which could be possessed by any person or committee served by the most perfect organization which we can conceive. In practice, of course, Society, like the Isolated Man, has never to start from the beginning and decide how much time or labour shall be given to the production of food, how much to clothes, and so on. Some distribution is in force, and all that has to be decided is whether this distribution shall be slightly altered in one direction or another. But even this is a very difficult matter, in which the probability of mistake is enormous.

The difficulty of the Isolated Man as to the distribution of effort between immediate and distant ends is also present in the case of Society. The only difference is that it is considerably greater. Isolated Man, as we have imagined him, with an infinitely long duration of life, would be able to estimate the desirability of skimping enjoyments in the present in order to secure more in the future far more correctly than a society consisting of persons with a short duration of life, who have to estimate the desirability of skimping their own enjoyments in order to increase those of their successors. Little as a single man may be able to compare the advantage of, say, 10 per cent. less this year for himself compared with I per cent. more in every future year for himself, he can perform that feat more easily and accurately than a number of persons can compare 10 per cent. less this year for themselves with 1 per cent. more in every future year for such of themselves as may happen to be alive and the successors of those who are dead. They cannot estimate the strength of the desires of the future persons so well as a man can estimate the strength of his own future desires, and they do not know what changes in numbers there may be. The greater the numbers in the future, the greater, ceteris paribus, the desirability of present saving. Still further difficulty is introduced by the fact that the numbers will be themselves affected by the amount of saving. The more that is saved, the greater the population of the future is likely to be.

Here, as in regard to the Isolated Man, we must remember that we are thinking of the wealth of Society from some point of time onward, taking immediate and more distant future as a whole. We might, of course, take some particular period of time, such as a year, and ask ourselves on what depends the wealth of Society for such period. In that case we should have to regard wealth as (for the time, of course) reduced by any skimping of present enjoyments for the purpose of increasing future enjoyments, however much the future enjoyments might in the end exceed those lost during the period considered.

4. Society, just as much as Isolated Man, may be, and often is, willing to sacrifice a certain amount of wealth in order to secure some other end which it, or at any rate the ruling part of it, thinks preferable.

In addition, however, to these causes of variation common to Isolated Man and Society, we have to add three others affecting Society alone.

5. Though the health of Isolated Man and also of the individual members of Society may be regarded as the result of original personal qualities and what has been done in the past to improve or worsen them, yet in the case of Society health seems to require separate classification in so far as it affects the duration of working life. A people will clearly be stronger and more capable of producing goods if a less proportion of the aggregate number of years lived are years of childhood and old age. It would be better for all to die at 70 than for half to die at 50 and half at 90; it would be better, too, for half to die at 50 and the other half at 90 than for five out of six to die at 15 and the other at 65.

Moreover, the proportion of persons of working age in a population at any moment is affected not only by this different distribution of lifetime between working and other years caused by differences of mortality, but also by increase and decrease of population. A population increasing “naturally”–i.e., by excess of births over deaths, must necessarily have, ceteris paribus, a larger proportion of children; if the increase has been going on steadily for a long time, the weakness from this cause will to some extent be counterbalanced by the smaller proportion of old, infirm people. Similarly a decreasing population will have a larger proportion of old people, and if the decrease is continuous, the weakness from this cause may be counterbalanced by the smaller proportion of children.

We must say, then, that Society's wealth partly depends upon the age-composition of the population.

6. It is also dependent on the advantage taken of the benefits derivable from co-operation, or combination and division of labour.

7. Finally, it is dependent on the nearness of population to the most suitable magnitude. These last two heads will be dealt with in the two following chapters.

[1]It is convenient to talk of “the present” as opposed to “the future,” but it must be remembered that “the present” means nothing more than the near as opposed to the distant future.