Front Page Titles (by Subject) CHAPTER VIII: continuous power to demand, or income - Wealth: A Brief Explanation of the Causes of Economic Wealth
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CHAPTER VIII: continuous power to demand, or income - Edwin Cannan, Wealth: A Brief Explanation of the Causes of Economic Wealth 
Wealth: A Brief Explanation of the Causes of Economic Wealth (London: P.S. King and Son, 1922).
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continuous power to demand, or income
In order that any person or institution may be able to control production continuously by means of demand, it is necessary that he or it should have a continuous supply of money to spend.
Such a continuous supply is provided, not perhaps exclusively but at any rate principally, by “income,” in the sense in which that word is ordinarily used. It is important for this and other reasons to have a thorough understanding of that sense.
Etymology does not help? us much. “Income” is doubtless something coming in, but what? And what exactly do we mean by “coming in”? I suppose that the unsophisticated person, if there is one in this day of schoolmasters and newspapers, will say that what comes in is money. This is nearly but not quite true. We say that a man's income is £100 or £1,000, as the case may be, but the statement is not intended to convey more than that the incomes are reckoned at that value, just as when we say that a person “inherited a million” we may be perfectly well aware that what he actually inherited was not a million pounds in gold, notes, or any other form of currency, but lands, houses, shares in companies, and other things which were valued at a million pounds. In fact, however, in our own and similar countries where “income” and equivalent words are used, the greater part of most men's income in the ordinary sense of the word does consist of money, not necessarily coins put into their hands, but either coin or some kind of written or printed order which enables them to receive coin if they want it. But in addition to this “money-income,” there are some other incomings which are often, at any rate, valued in money and added, as a sum of money, to the money-income, to make up the whole income.
One of these things is the advantage which a man gets from living in a house of his own instead of in one for which he has to pay rent. It is usual to add to such a man's money-income a sum of money equal to the net amount which could be obtained by letting the house to a tenant. It is common, too, though not so common, to add to the money-income of a farmer an estimate of the money-value of that part of the produce of the farm which he and his family consume.
On the other hand, we seldom or never add to a man's money-income an estimate of the money-value of the good he gets from owning, instead of having to hire, a stock of furniture and clothes, nor do we add an estimate of the money-value of the various services which he and his wife and daughters render directly to themselves.
Why this apparently “illogical” distinction?
The question can only be answered by the help of a consideration of the purpose for which we want the statement of income. If asked why we include the annual value of a man's dwelling-house in his income if he happens to own it, we should probably say at the first blush, “Because it would be misleading to say that a man lessened his income if he sold stock and bought the house which he had previously been renting and continued to live in it, and to say that he increased his income again when he went out of it into another and let it for a rent which he had to spend in paying the rent of his new dwelling.” The suggestion which we should obscurely imply in the word “misleading” is that we use calculations of income for the puprose of comparing the spending power of one individual man with that of others, or his spending power at one time with that which he possesses at some other time. It would be wrong, for example, not to include the house owned by its inhabitant in an estimate of his power to pay income-tax, since if it was omitted, people of really equal means would be unequally taxed, and a premium would be put upon the owning of houses by their inhabitants. Similarly when we think it desirable to include in the income of a farmer an estimate of the money-value of the produce of the farm which he and his family consume, we really do it because we have in view some comparison between the spending power of farmers and that of other classes who have no such goods coming in; or between the powers of different classes of farmers, some of whom have a greater and some a less value of such goods coming in reckoned in proportion to their strictly money-income. If no such comparison is in contemplation—for example, if comparison is being made between a number of farmers carrying on the same kind of agriculture in similar circumstances, so that the proportion between their money-incomes and these other goods is uniform throughout—we should not think of troubling to include the other goods.
We have not been in the habit of including, the “annual value” of furniture and clothes owned by the person who uses them in estimates of his income in the same way as we usually include the annual value of the house owned by the person who lives in it, although it is of precisely the same character. Partly, no doubt, this is because it is less important, being probably under half the value of the house at an average. But there are also two other and better reasons. In the first place, until recently at any rate, nearly every one who has had the use of furniture and clothing of a value great enough in proportion to his money-income to be worth considering, has owned that furniture and clothing, and the value of such things owned by each person has varied roughly with his income. Secondly, it is difficult to make any accurate estimates of the annual value of these things, so that estimates of incomes which included them would be really: less informing than estimates which expressly omitted them.
The same principles apply to the inclusion or non-inclusion of an estimate for the value of board and lodging received as part of their remuneration by domestic servants and others in exchange for services rendered to their employers. If we want to use income for the purpose of comparing the economic position of such persons with that of another class which does not receive board and lodging, we must, of course, brave the difficulties of estimation: but in instituting a comparison between the cook's place at Mrs. Smith's and at Mrs. Brown's, we should prefer to hear from those ladies that Mrs. Smith paid £25 and Mrs. Brown £30, rather than that Mrs. Smith estimated the total income of her cook at £50 and Mrs. Brown that of hers at £54.
If asked why we never attempt to include in incomes estimates of the value of the services gratuitously rendered by men and women —we should, perhaps, drop the conventional order and say women and men here—to themselves and their families, we should probably at once reply “Because they are invaluable,” and this is as good an answer as can be given. It is not practically possible to value the domestic services of a wife and mother to her husband and children: they are not practically interchangeable with hired services in the same way that eggs produced in one farmer's yard are interchangeable with eggs produced in another farmer's yard.
The conclusion is that the term income as commonly used includes in addition to money-income an estimate of the money-value of incomings of such other commodities and services (and such only) as are ordinarily bought and sold and can consequently be valued with substantial accuracy.
On the other hand, a great deal of money received is clearly not included in the common conception of income, in which it is distinguished from mere “receipts.”
We do not include in income the money which a man gets by robbery or theft, whether he gets it by taking money itself or by taking other things and selling them for money. Little importance need be attached to this fact. It seems to be chiefly due to the illegality of robbery and theft. Naturally a man will feel indisposed to enter in his income-tax return “From the trade or profession of burglar carried on by me in London, £1,000,” and he is not bound by law to do so; if the law catches him, it will not take 9d. in the pound from him nor even is. 2d., but the whole 20s., and restore it to the rightful owners. Gains which are on the face of them illicit escape inclusion in income because those who make them never declare them and other people do not know of them. But when the illegality of the gain can be concealed, it constantly happens that illegal gains do appear in income, and nobody thinks of rejecting them from the category of income. If a baker sells his customers bread 10 per cent. short in weight, it will come to much the same thing as if he sold them full weight at the same nominal price per pound and afterwards went round to their houses and stole money to the amount of one-ninth of their bread bills. But the short-weight gàins would be treated as income by income-tax authorities and every one else, while the gains by stealing would be excluded. There is, of course, no doubt that a vast mass of income is obtained in unlawful ways, so that we need not attach much importance to the fact that gains which are obviously unlawful when described by particular designations do not appear, at any rate under those heads, in published accounts. D?ubtless in the private mental records of the burglar and the pickpocket, whether the word income is actually used or not, no fine-drawn distinction between the proceeds of legitimate and illegitimate “industry” is attempted.
No one thinks of including what he inherits or receives by bequest in a statement of his income. The reason for this seems to be that the word “in-come” does not suggest anything coming in casually once for all, but some continuous receipt which can be conceived as a rate per annum, although no doubt often a fluctuating rate. If a man who received a legacy of £2,000 last year was asked why neither he nor any one else included it in his income for last year, he would probably reply “Because it was a windfall which cannot be expected to recur. My income fluctuates between £800 and £1,200 a year in an ordinary way. Why should I say it was £3,000 last year when I got a legacy of £2,000 in addition to what every one calls my income in the other years ? Would it not be very misleading?” It certainly would be misleading to any one who took the £3,000 as an indication of the man's ability to pay taxes or subscriptions to charities and football clubs year by year. Why not, then, some one may ask, strike an average, throwing legacies into the total and averaging out to get a fair annual sum? Obviously because an average of that kind would be of no use unless it extended over the whole of a man's life, and little use then. What is useful is something which will be a guide for the immediate future, and this is provided by the ordinary method of reckoning, excluding legacies, and would not be provided by any conceivable method of including them. That the kernel of the matter is to be found in the “windfall” nature of legacies is shown by the fact that if it were known that a particular person's cousins would die regularly, one every year, and would each leave him £1,000, and that their number was infinite or even simply sufficient to last his lifetime, we might, indeed, still hesitate to call this regular £1,000 a year “income,” because we should be influenced by the general rule in our mind that legacies are not income, but we should feel no difficulty in deciding that the professional legatee would be “justified in treating the £1,000 a year as income.”
Gifts from the living are excluded from calculations of income just like bequests from the dead. Some gifts are casual, like legacies, and would be excluded for the same reason, if there were no other. But very often this reason does not apply: the receipts of most beggars are probably as steady as the receipts of large classes of workers, and the greater part of money received by way of gift is received in allowances and pensions of a regular character which can be depended on at least as much as most incomes derived from labour. Here we seem to be influenced by the feeling that “double reckonings” are misleading. We should be inclined to say, for example, that it would be misleading to treat the income of a family as increased by the father giving his daughter an allowance of £20 per annum, and if we say the daughter has an income of £20 we must do so, unless we treat the father's income as reduced by the same amount, which we do not think of doing. If the father wants to reduce his income by £20 in order to get a better abatement of income-tax or for any other reason, he must hand over to his daughter property yielding £20 per annum or secure the income to her in some legal way. So long as he does not do that, he has the ultimate control, and therefore we regard him as the income-receiver.
Even when we come to the undoubted sources of income, the possession of property and the performance of labour, we find that a large amount of money received is by common consent excluded from the category of income.
Let us deal with these two sources separately, beginning with property. In the first place, in order to be regarded as income receipts from property must come in regularly: not necessarily always exactly at the same rate, nor even without occasional intermissions, but regularly enough to be looked on rather as we look on the flow of a river. The flow may now be great and now small: it may even dry up for a week or two at a time once or oftener every year, but still there is the idea of a flow at some rate or other over a reasonable period. So if a man makes a regular business of buying land and selling it again, whether he divides or amalgamates the lots which he buys or leaves them alone, and whether he does anything to the land or not, we should reckon any profits which he made as income, just as we should reckon the profits of a picture-dealer. But if a private person bought a piece of land and let It to a farmer or lived in a house upon it for twenty years, and then sold it at a profit, we should not include that profit in a statement of his income: we should regard it, like a legacy, as a windfall.
Secondly, the more or less steady flow from the possession of property in order to be called income must ordinarily be of the nature of profit, that is to say, it must not include such part of total receipts as are necessary in order to pay necessary expenses, including the maintenance of the property unimpaired. A boot retailer who sold boots for no more than just sufficient to pay back what they cost, including the expense of keeping up the shop and all other necessary outlay, might carry on a big business and receive quite regularly week by week a very large sum, but none of it would be income: the income which such traders obtain is the surplus over the expenses necessary for carrying on the business and maintaining the capital intact. Even the rent of lands and houses is not all income, inasmuch as the contracts between landlord and tenant do not usually bind the tenant to pay everything necessary for maintaining the land and house in an unimpaired condition. An owner must then pay out a certain portion of his rent for repairs and renewals under penalty of seeing his rents diminish in the future, and this portion is deducted from his rent before we declare his income.
While there is a universal acceptance, in regard to most kinds of property, of the principle that income is only what is left after all expenses, including the expense of maintaining the property unimpaired, have been allowed for, It must be admitted that no very precise interpretation of “the expense of maintaining the property unimpaired” has been agreed upon. It cannot well be taken to mean that so much must be annually set aside that, no matter what happens, the property will continue to yield the same amount in the interminable future as it yields at present after the necessary deduction has been made. As we cannot foresee the future with any accuracy, this would be justly felt to be an absurdly high ideal of permanence to aim at. It would seem silly to say that the English agricultural landlords' incomes in the first seventy years of last century were really much smaller than they were reckoned to be, since the landlords ought to have been laying aside large portions of their rents, so as to secure after 1870 incomes equal to the amounts properly regarded as income before the depreciation which set in at that date.
“Maintenance of the property unimpaired” is, in fact, interpreted in different senses in regard to different kinds of property. If the property can be maintained so that it goes on consisting of the same physical constituents without their being the worse for time or wear, this kind of maintenance is regarded as sufficient. But the case is a rare one, some kinds of land being the only important example. It is much more common for the actual constituents of the property to change in character. A Lancashire mill may still be on the same site as when the business was started a century ago, and may still belong to the same family or company, and may have continuous accounts covering the whole period, but scarcely anything in it will much resemble the plant with which it started. When the things concerned have altered in this way, how are we to decide whether the property has been maintained intact, increased, or diminished?
The usual practice in a great many situations is to decide by a money-valuation of assets, and the property is assumed to be unimpaired if the various items of which it consists, taken as a whole, retain the same market value. Such a method of reckoning, for example, is usually supposed sufficient for ordinary agriculture: the farmer's stock, “live and dead,” is valued at the beginning and the end of the year, and the difference between the two valuations, if a gain, is regarded as part of his income, and, if a loss, is subtracted from his gross receipts, before his “true” Income is declared.
But this method is clearly quite inappropriate when the plant of the business is fixed to the ground and specialized to the particular kind of trade carried on. We cannot tear up the half-worn-out rails of a tramway or pull down the walls of a dock and sell them in the nearest market with the ease and absence of loss with which a farmer can drive his cattle and sheep to the next market town and dispose of them among his neighbours. In such cases it is usual to lay aside annually sums which are expected to accumulate during the lifetime of perishable plant sufficiently to provide for the replacement of that plant. The sums thus paid into a, “depreciation fund” are deducted from the gross receipts of the business before the income of the owners is declared. Whenever it is not, as a matter of fact, probable that plant will be replaced by plant of the same value, either owing to change of methods or change of prices, differences of opinion are likely to arise, even among fairly good financial authorities and experts in the particular business, about what the payments to depreciation ought to be. These differences lead to considerable differences in the calculation of income from property, and prevent it being a matter of simple arithmetic as we are apt to suppose it.
Moreover, the principle of non-impairment, though, as has been said above, it is accepted ordinarily or with regard to most kinds of property, is not applied to every kind of property without exception. If a person sells land and buildings he does not dream of regarding the whole proceeds less incidental expenses as income, and the fact that the land contained minerals would make no difference. But if he hires men to dig out the mineral, and sells it ton by ton, he and every one else ordinarily regards the difference between his receipts and the whole expense of working the mine as income: so, too, if, instead of working the mine himself, he allows others to dig out the mineral on condition of paying him a royalty of so much a ton, the whole of the royalty, less any incidental expenses of getting it, is regarded as income. In neither case is it usual to say that “he has to provide for the depreciation of the mine” out of what he gets before his income is declared. The reason why provision for depreciation is not expected here is doubtless to be looked for in the fact that, in the past at any rate, men's knowledge of what is below the ground has been so small that no one has usually formed definite estimates of the total amount of available mineral to be found in any particular property, and the rate of working has been slow, so that there has been a natural inclination to regard each mine as “practically inexhaustible,” and the output accordingly as a permanent flow. The quicker the rate at which the valuable matter can be removed, the more likely is the owner to shrink from regarding the payments he receives for it as income. If, for example, instead of being mineral deep down below the surface, accessible only by narrow shafts equipped with lifting apparatus and by long, low tunnels, the valuable matter is some surface deposit which can be easily removed in a few months, he will regard its sale in the same way as he would regard the sale of acres of land. It seems, therefore, that the apparent exception of income from mines from the rule of non-impairment of property is the consequence of the difficulty of reckoning impairment and its supposed insignificance rather than the result of the application of a principle different from that applied to ordinary incomes.
There is more ground for supposing the application of a different principle to life-annuities when received by the person on whose life they depend. The right to such an annuity is property, and it is a property which depreciates as the annuitant grows older, but the annuitant does not regard the income he receives from the annuity as less than the annuity by an amount sufficient to provide for the depreciation, so that a fund may be provided great enough to furnish the same income (thus calculated) after his decease as before. He always regards the whole of the annuity as income, though “only a life income.” The fact is that there are two sorts of permanence, one of which we indicate when we say “it will last for ever,” and the other when we say “it will last my time,” and the secured life-income, though it has not the first kind of permanence, possesses the second. It should be noticed, too, that the need of providing for depreciation of property does not present itself to the annuitant, inasmuch as he is not in the habit of reckoning the value of the annuity among his assets. If he bought the annuity with a lump sum, he did not think of the purchase as an ordinary “investment,” but rather as a “sinking of capital.” If he bought it by small payments spread over many years, he regarded those payments not as purchasing him a property of so much capital, but as simply buying him the annuity. And if the annuity was given him, he never reckoned it as such and such a capital sum, but regarded himself simply as a person who would from that time forward receive the specified annuity till death.
Coming now to the incomes contained in salaries, wages, and other receipts connected with the performance of labour rather than the ownership of property, we find that the deductions commonly made from gross receipts before income is declared are here of much less importance. Ordinarily, indeed, they are so small that in practice they are disregarded. But we admit that in strict accuracy they ought to be made. We are always willing to deduct the cost of providing any materials which are “found” by the worker out of what are called his wages or his salary. We will allow, too, for the cost of replacing any tools which he has to provide and interest on their original cost. We admit, in short, that all expense to which the worker is put by the conditions of his work in the present must be deducted, although we may often have great difficulty in saying whether some particular expense like that of living in a highly-rented locality, or of paying railway or tram fares in order to avoid doing so, is expense caused specially by the work or by the worker's own tastes and desires.
But though we allow for continuing expenses in the present, we seldom think of allowing anything for the original expenses of training the worker for his particular occupation. Hundreds, and often thousands, of pounds may be spent on the training of a person for an occupation, but the very first time he earns anything, that something is treated by every one as income obtained by him, and the moment he earns more than a certain amount in a year, income-tax becomes due from him. So far as the ordinary conception of income goes, all this expense is treated as non-existent in reckoning the incomes of the earners. Neither interest nor sinking fund is allowed for. There is, however, in reality nothing surprising in this fact. Workers are not brought up on commercial principles, like horses, with a view to the profits of owners. They are brought up and trained by their parents, by charities, and by the State, and it is only in rare instances that they are asked to repay any part of the cost. Consequently the cost is not looked upon by those persons and institutions which defray it as an investment but as an outlay which will bring them in no money return. Moreover, it is often almost impossible to disentangle the special expense from other expense which would have been incurred whether the work was to be taken up or not. We can realize the difficulty when we reflect that the most expensive education is often given to those who are scarcely expected to earn anything, either because they are too rich or too defective.
The degree of permanence which we expect from an individual's income earned by labour is even less than that which we attribute to a life-annuity. A life-annuity is expected to last as long as life, a labour income only as long as working life, which cannot be longer and may be much shorter than life itself. We do not deduct from wages or salaries an amount for the depreciation of the worker before we declare his income.
Consequently, if we disregard the exceptional cases, which, taken as a whole, are really of little magnitude compared with the general mass, we may say that the income of an individual, as commonly reckoned, is equal to the flow of money, usually expressed as so much a week or a year, which, without any assistance from gifts, inheritances, or recognized robbery and theft, and without diminishing. the property he has already obtained by any method, he has available for the following purposes:—
1. To purchase commodities and services (whether taxed or not) from which he expects either no monetary return or one which is obtained only because they increase his earning capacity, by. improving his talents and knowledge:
2. To save:
3. To give away:
4. To meet taxation, so far as it is not included under previous headings, and losses by robbery.
In addition to individuals some institutions are commonly regarded as possessing incomes. We do not and need not regard ordinary commercial companies as having incomes in addition to the incomes of their members. Nor do we or need we regard the amounts received by institutions in gifts or legacies as income to them any more than we regard similar receipts as income to individual recipients. But the net yield of any non-commercial institution's endowments clearly comes under the ordinary conception of income: it is an income from property just as much as if it belonged to an individual owner. If a hospital or a school, for example, possesses land or consols, the income is perfectly genuine income. It may be spent on nursing the sick or on teaching the young, but it will not be reckoned as part of the income of those persons, and so there is no “double reckoning” in treating it as income of the institution.
The position of the States and their subdivisions in regard to income is much more equivocal.
When a State or a local authority possesses ordinary income-yielding property, such as Suez Canal shares or land let to individuals for a rent, there seems at first sight no reason to refuse the application of the name income to its receipts. On the other hand, we usually shrink from regarding receipts from taxes as income of the State which collects them. We make this distinction between the yield of property and the yield of taxes because we think there will be “double reckoning” if we include taxes in income, and not if we only include the yield of property. We think we have already reckoned the yield of the taxes in the incomes of the people who pay them, while we have not reckoned the yield from the property in any one's income.
But neither of these beliefs are quite so easily justified as we at first imagine. It is no doubt true that we should have double reckoning if we first reckoned individuals' incomes in the ordinary way without deduction for taxes, and then reckoned the gross or net yield of the income-tax as income to the State. When we say that a man has £1,000 a year, we mean that he has that sum gross, before his income-tax has been paid (either directly by himself or by way of deduction), and it would be clearly double reckoning to say that both he and the State had the amount paid as tax. But the income-tax has a character of its own, and the argument which applies to it does not seem to apply at all to the yield of ordinary taxes on commodities, such as that on tobacco or tea. Such taxes do not appear in an individual's accounts as charges to be paid out of his income, because they are wrapped up in the higher prices which he has to pay for the commodities which they make dearer. This involves a real difference: when a man pays income-tax he does it because he must, and not because he gets something worth paying for, but when he buys a shillingsworth of tobacco he does actually get something which he reckons worth at least a shilling. If the State gets 10. net out of the shilling, it seems really less confusing to regard the man and the State as having between them 1s. 10d. rod of money-income to spend than to say that there is only is. of income, all belonging to the individual, from whom the State exacts 10d., leaving him with only 2d. The man really has is. to spend. The millions raised by the tobacco duty might be raised, as they are in France, by a State monopoly of tobacco: if the yield of the tobacco tax is not income in the United Kingdom, the amount raised by the tobacco monopoly in France cannot be income; but if the monopoly were the result of private commercial arrangements, should we consider the profits won by the monopolists in consequence of the existence of their monopoly as not properly income because it was got out of the prices charged to the consumers? Do we ever apply that principle, say, to the profits of the Standard Oil Company?
This suggests that we might possibly make a distinction between direct taxes not paid in prices and indirect taxes paid in prices, and confine the doctrine that taxes are reckoned in individuals' incomes to the first class. But there is no way out of the difficulty by that method. It would be very confusing to say that the yield of the income-tax and of the inhabited house duty are not income in addition to the incomes of the taxpayers, but that if a. tax were laid on the building of houses, and was, therefore, paid in the first place by the builders of houses, but ultimately by the users of houses in higher rents and purchase-prices, the yield of this tax would be additional income. What difference can it make whether I pay for a house £100 a year rent and £3 15s. house duty or £103 15S. rent and no duty? It would seem absurd to say that in the first case I spend income amounting to £ 103 155. and the State takes £3 15s. of it, but in the second case I spend £103 15s. of income and the State has, in addition, £3 15s. of income.
The second belief—the doctrine that we need not fear double reckoning when the State has ordinary receipts from ordinary property—also appears less plausible on examination. When a territorial authority is in the enjoyment of such receipts, the presumption is that they will be spent in some way which will relieve the territory from taxation, and this will make the territory a more desirable one in which to live or carry on business. That, again, must tend to raise the value of land within it, and so to raise the income of landowners. In the case of a considerable territory such as the United Kingdom owning a small block of property like the Suez Canal shares, any such effect is likely to be so inappreciable that most persons will be inclined to deny its existence. But no one will doubt that Mr. Carnegie might endow any small town with property enough to cause a very perceptible rise in the value of the land inside it, and it is said that rents in a certain small parish in an old town are actually perceptibly higher than in the neighbouring parishes in consequence of the number of persons attracted by the charitable endowments belonging to the parish. It is only common sense to recognize that any property of which the ownership is attached to a particular territory must raise the value of that territory if the yield from the property is spent in making the territory attractive.
It seems best to avoid the necessity of solving these puzzles. To avoid it we need only refrain from the attempt to build up an aggregate income including incomes of states and all non-commercial institutions as well as incomes of individuals. This need cause us no regret, since the whole importance of the conception of income is to be found in connection with individual property. The conception is useful as an aid in the comparison of the wealth of individuals, and in a less degree of groups of individuals, so far as their wealth is connected with separate property: it is of no use so far as common property is concerned, nor where there is no property.
Returning, then, to our consideration of individuals' income, we may observe that the amount of which people are actually robbed is not, under modern civilized conditions, of any great magnitude; and the amount of which people are deprived by taxation, though of greater magnitude, does not make much difference as between one person and another, in consequence of the natural tendency of governments to tax the richest persons most and the prevalent belief that taxation ought to be according to ability to pay. Consequently the amounts of income which people have left them to spend (or save) as they like are approximately proportionate to their whole incomes.
Now, certainly an individual with property may for a time put forth a demand and consequently exercise a control over production in excess of what his spendable income alone entitles him to, if he chooses to part with property he already possesses. Smith saves, and with his savings buys land, or a house, or consols from Jones, who then can do what he likes with the proceeds, either investing them so as to bring ill income or spending them on commodities and services which will bring in no income. If he invests, he it is, and not Smith, who immediately determines what kind of addition to property shall be made, but of course he is governed in his decision by his opinion of what demand will be in the future. If he merely “spends,” however, he, so to speak, cancels Smith's savings, and his own tastes will decide what shall be produced. So that every one who has property, and can find savers to buy it, may both divert Society from providing for the future and decide what kind of present goods shall be produced. A very large number of persons act in this manner by “spending” legacies which they have received from richer or more provident relatives. But the magnitude of the property so dealt with is not very considerable, so that the total demand coming from reduction of individuals' property is also small in proportion to the whole. In spite of the flagrant examples which occasionally strike the eye in the newspapers, it is quite unusual for well-to-do people to spend much more than their incomes.
It is also true that income-receivers often hand over portions of their incomes to others to spend, and that then these others exercise the power of demand and control over production. If, for example, a father makes his daughter an allowance of £20 per annum to do what she likes with, power to that extent is transferred to her. But this is of little importance: the power is only delegated, and is withdrawn by the giver as soon as he disapproves of the way in which it is exercised. It is a matter of the merest detail.
We may say, then, that individuals' power of demand and consequent control over the economic activity of Society is distributed and exercised approximately in proportion to the comparative magnitude of their incomes.
The next important question is what settles who has a large and who a small income or none at all, or, as it is usually expressed, what settles the distribution of income? But this question has been so much obscured by the traditional classification of incomes under several heads that it is desirable first to devote a chapter to the consideration of the classification of incomes.