The Online Library of Liberty

A project of Liberty Fund, Inc.

• 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 XIII

the relation between individual income and individual wealth

For many purposes we are in the habit of accepting incomes as a rough measure of the material welfare or wealth of the persons receiving them. Of course, we remember that a very large proportion of the normal population—namely, children and others who are not “independent”—obviously enjoy wealth not founded on their own income, since they receive the benefit of some other person's income. But even when we are dealing with “independent” persons living at the same time and in the same place, we constantly find it necessary to modify the conclusion to which a bare comparison of figures of income would bring us.

Firstly, as has already been pointed out (pp. 140–43), income, at any rate as ordinarily understood, does not cover all the material benefits which people get from their own and their family's labour and property. Generally, it may perhaps be said that this is not of great importance, since the uncovered benefits will be approximately proportionate to the incomes, so that their omission will not seriously vitiate a comparison of wealth or material welfare based on income. But often this is not true. It would, for example, be misleading to treat two groups of working families with equal incomes as equally well off if in the one case part of the income was obtained by the mothers going out to work in factories, while in the other case the whole of the income was obtained without that resource, so that the mothers were able to spend their whole time caring for the children and making home-life comfortable. Hasty calculations based on income alone often vitiate comparisons of the wealth of persons living under rural conditions with that of persons living in towns, because the rural people do for themselves many things which have to be paid for out of income in the towns. The fact that incomes are supplemented by unreckoned services performed by the receiver of the income and his family seems on the whole to tend towards making inequality of wealth less than inequality of income—to alleviate inequality of income, as we may perhaps say for shortness—since it is the smaller incomes which receive the larger proportionate supplements. To be convinced of this we need only think of the different results of the death of the mother, first in a working-class family, and then in that of a millionaire, while the children are still young. The millionaire father may regret his loss, but it will not be an economic disaster to him, as it is to the poorer father.

Secondly, comparisons of wealth based on incomes alone are vitiated by the fact that income is not exclusively applied to benefit its receiver. More than a third of an ordinary population consists of children maintained out of the incomes of their parents or other relations, and it is not much use to try to evade the difficulty by reckoning up some very vaguely defined “family income,” so that Bill Smith with a wife and five young children and a pound a week becomes merely one-seventh, or some more nicely calculated fraction, of the Smith family with a pound a week. This method only involves us in an inextricable tangle in regard to family incomes, and still leaves us with a great mass of transferred income on our hands. It leaves us with all charitable expenditure on objects which happen to lie outside the definition of the family, all expenditure out of income in payment of taxes, and all expenditure for non-economic ends. It is far better to recognize frankly that a considerable portion of income is not employed for the material benefit of the recipient of the income. Some he parts with because he prefers either the material benefit of others or some non-economic gain to his own material benefit; other portions he parts with because public opinion or the law compels him. It is little use to attempt to distinguish sharply between what he parts with voluntarily and what he parts with involuntarily. He often makes a virtue of necessity, trying, for example, to feel a glow of satisfaction as he parts with his subscription to the local hospital, although he would not give it if he were not afraid the absence of his name might give rise to unpleasant comment. On the other hand, he often complains of the necessity of paying rates and taxes to defray the cost of things which he would willingly buy if they were sold in shops, like butcher's meat, instead of being provided out of rates and taxes by government.

The fact that recipients of income part with large amounts of it without receiving any material return in their own persons can scarcely be said either to alleviate or to aggravate the inequality of income. On the one hand, it may be said that the obligation of parents to maintain their children aggravates the inequality of incomes, inasmuch as it is generally the recipients of the smaller incomes who have the largest families. But on the other hand, the payments out of the incomes of one set of people, not for the benefit of their families, but for the benefit of a different set of people, whether these payments are voluntary or enforced by public opinion or by law, are, on the whole, transfers from the rich to the poor. It is difficult to see how any judgment about the net result can be arrived at under present conditions, but it seems probable that in future times the transfers of the second class will increase, while the inequality in the size of families is likely to be reduced, so that, on the whole, we shall find here an alleviation of inequality of incomes.

Thirdly, a person's wealth or material welfare, in the usual sense of material welfare enjoyed in some short period of time taken for comparison, is not affected by any portion of income which he saves. If of two men with £100 a year each the one saves £50 and the other nothing, the one who saves will enjoy less wealth during the time this continues, though he may possibly enjoy more in the course of his whole life than the other. Even if we changed our method of comparison, and tried to compare whole lives instead of confining ourselves to a single year or some such period, the different amounts of saving would vitiate comparisons of wealth based on income received, since savings are constantly made from which the saver does not expect to benefit in his own person; and even if savings were all made for the saver's own benefit, discrepancies between whole-life income and whole-life wealth would be occasioned by the uncertainty of the duration of life. Presumably the savers would buy life annuities, and those who lived longest would then get most benefit from their savings.

As at present practised, there can be little doubt that saving alleviates inequality of incomes to some considerable extent. Well-to-do people save money, invest it, and then die and leave all their property to their poor relations, who straightway sell it (to other saving people) and live for some time upon the proceeds. The wealthiest class of all can scarcely spend the whole of its income in ways which will not be more trouble than they are worth: it is much less trouble to purchase £10,000 worth of stock or shares than to maintain a third or fourth country house, and the advantage of a third or fourth country house is inconsiderable. So the wealthiest class becomes a kind of automatic saving-machine, which provides new capital for the world because it finds it is less trouble to do so than to spend, the advantage of further spending being very small after some thousands a year have been spent. It is clear that out of the incomes of the rich a much larger proportion, as well as an enormously greater amount, is saved than out of the incomes of the poor, and, so far as it goes, this tends to alleviate inequality of income.

Fourthly, comparisons of wealth based on income alone are vitiated by the fact that the material wants of individuals differ very greatly, owing to original and acquired differences of body and mind, and these differences are often of such a character as to prevent equal amounts of expenditure yielding the same, or even approximately the same, amounts of material welfare. One man, from his excessive size or some defect of digestion, may require more food, or more expensive food, to keep him in health and strength than another man of smaller size and better digestive organs. Illness at once upsets comparisons based on income: the sick man has to pay for medicine and operations which afford him no active “satisfaction” at all, but only disgust and pain. In real life we are perfectly alive to this. If one man is well and another has to pay £200 a year to doctors and nurses, we never dream of supposing that the two men are equally well off, enjoy equal material welfare, merely because they both have £500 a year. The only reason why we are sometimes apt to overlook the matter in theoretical generalizations is that we are then usually dealing with large classes, and we suppose that individual differences may safely be ignored for the moment. But the differences in question are not altogether a matter of individual idiosyncrasies. They sometimes exist between whole classes. For example, the persons engaged in a particular occupation may very easily be especially liable to some form of sickness which makes the average of sickness higher in that occupation than in others. It may be, too, that some kinds of work actually require for their efficient performance a greater quantity of food or a better quality of food than is sufficient to give equal “satisfaction” to persons engaged in other kinds of work.

The fact of inequality of wants is a great aggravation of the inequality of income. If inequality of income corresponded with inequality of wants, so that those who had the greatest wants had also the greatest incomes, material welfare would be much more equal than incomes. But just the contrary is true: not only is there no correspondence between income and wants, but the rule for the whole working population is rather that when wants are greatest, owing to sickness, childbirth, or infirmity, income is wholly absent. This has been recognized for thousands of years, and well-disposed persons have endeavoured to supply the place of income by charitable gifts, poor laws, and insurance schemes. Children, too, have no income, though their wants are considerable, and without the institution of the family the rest of the economic system could not have preserved the human race.

Fifthly, even where wants are the same, equal amounts of income may yield different amounts of material welfare, owing to the fact that people are not all equally capable of arranging their expenditure in such a way as to satisfy those wants as completely as possible with the money at their disposal. It is absurd to assume that every one's Judgment on the question of what will benefit him most is infallible. Obviously, many people misjudge in a manner which seems amazing to other people at the time, and often to themselves when they think about it after sad experience. They buy too much of one thing, such as intoxicating liquor, tobacco, or motor-cars, and too little of some other things which would have added much more to their material welfare. They live too much for the moment, and spend money to-day which would have produced much more material welfare if it had been reserved till they were out of work or sick. The well-authenticated observation that regular income is considerably better for most people than a somewhat larger but irregular income testifies to the general belief that want of good judgment in the distribution of means over time is a very common phenomenon.

Inequality of judgment in expenditure aggravates inequality of income, since the class with the smallest income is likely to be the most ignorant, and therefore to have the worst judgment. All close observers of the poorest class know that ignorance of how to use their very small opportunities has much to do with their continuance in poverty.

Sixthly, the relative wealth of individuals is clearly affected by the conditions under which their incomes are acquired as well as by the magnitude of those incomes. A man who makes £70 a year by easy work in daylight certainly enjoys greater wealth than one who makes the same amount by hard work underground for the same number of hours. A man with £1,000 a year from investments which give him no trouble is usually better off than one who has to sit in a city office boring over business for sixty hours a week in order to acquire the same amount of income. No doubt the second man would be less happy if he retired and sat on a chair all day, reading the newspapers and worrying his wife, but if he had the income from investments he would not be obliged to adopt that mode of life; he could choose whatever work he liked best and be as active as he pleased. It may be taken as certain that those who have considerable income from property do not have to submit to so much “disagreeableness of labour” when they earn additional income by working as those who have to depend entirely on their labour. They can afford to pick and choose, and they do so. They need not work so far into the realm of fatigue and boredom, and they do not.

The inequality of the conditions under which income is obtained is certainly an alleviation of inequality of income when competition makes it work simply as a counterpoise, so that one occupation giving an income of £100 a year is only as good, on the whole, as another but more agreeable one giving £90. The absence of fully effective competition, however, prevents this balance being universal, and, in fact, we find that the worst-paid occupations are also the most disagreeable, they being chosen by large numbers of people for the same reason—inability to choose a better.

Seventhly, even when equality in all the conditions so far dealt with is present, or, what comes to the same thing, when differences in any or all of these conditions are allowed for, an important cause of discrepancy between income and material welfare or wealth is still left in the fact that though the larger an income is the larger is the wealth of the recipient, yet the increase of wealth is not as a rule proportionate to the increase of income. It is useless to discuss what is the case below a certain very low limit of income necessary for mere subsistence. When this limit has once been reached, a small absolute addition to income, such as £10 a year, will give a very large addition to the wealth of the recipient, because it will be spent upon things which make a great difference to him. The next £10 will not be of quite so much importance, and so on, till, when we get to the richest man in the world, we find that £10 more or less per annum is an inappreciable sum to him. The more income a man has, the more it is spent on comparatively trivial things. So complete has popular perception of the fact become that progressive taxation is often defended by the aid of propositions which imply that, for example, one-tenth taken from Smith with £10,000 a year means less to him than one-tenth taken from Jones with £1,000 a year means to Jones, although Smith's tenth is ten times as big as Jones's tenth, so that we are expected to believe that Smith will “feel” the cutting off of £1,000 less than Jones will “feel” the cutting off of £100. To estimate precisely the acuteness of the feelings of average persons with incomes of different amounts appears to be scarcely possible, but there can be no doubt about the main fact, that material welfare or wealth is not proportionate to income, though it moves in the same direction—more income gives more wealth, but always in a less and less proportion.

This “diminution in the utility of additional income as income increases,” as it is sometimes called, has the important effect of making inequality of income an evil in itself, or, to put it in another way, an evil if we disregard the ultimate effects of inequality upon the future action of the persons concerned. Common opinion fully recognizes this. Whenever we have, without thought of ulterior consequences in the way of encouragement of industry or otherwise, to divide a given amount between two or more persons who have the same wants, we always decide in favour of equal division, if there is enough to keep both or all alive. We may, indeed, allege that our reason for doing so is that it is “fair” or “just,” but a very little thought will suffice to show that it is also economical in the sense of making the given amount “go as far as possible.” If one gets more than the other, the one that gets most will be given something which will satisfy less urgent wants than some of the wants of the other person which remain unsatisfied, and which might have been satisfied if the division had been equal. It is this which is really involved in our feeling that the unequal division is unfair or unjust. We can see it at once if we take a strong case. Let the two persons be supposed to have no other means of support, and the proposition be made that the whole of what is to be given them be given to only one of the two. The one who gets nothing will clamour for “justice,” and the impartial spectator will sympathize. But why? Evidently because the total might have been distributed in a way which would have given greater satisfaction on the whole—that is, to both persons taken together. If there was not enough to keep both alive, but only enough for one, it would be found that there was no general agreement about the demands of justice, and the discussion would turn on the comparative advantage to the persons themselves and others of this or that person's life being saved. The popular belief that “it was never intended,” as the pious sometimes say, or that “it is not right, that some should have so much and others so little,” has a perfectly sound economic foundation. The popularity of progressive taxation, especially of progressive death duties, is due to perception of the fact that it is economical to levy taxes in a way which reduces inequality of available means.

Rather paradoxically, perhaps, the diminishing utility of additional income, though it makes inequality of income a bad thing in itself, undoubtedly tends to alleviate it in the sense of making the difference of wealth less than the difference of income. If increase of income is accompanied by a less than proportionate increase of wealth or material welfare, it is clear that a man with ten times the income of his neighbour is not ten times as well off. Every one knows that this is so, and it is one of the most important reasons why the rich, and especially the very rich, are not more envied than they are. The poorer classes would be much more discontented with their lot if they had not a perfectly sound belief that the rich do not get very much out of a great deal of their expenditure.

I do not feel confident that there is much to be gained by an attempt to sum up the total effect of all the seven causes of discrepancy taken together, but I am inclined to think that, chiefly in consequence of the powerful effect of the seventh, wealth is not on the whole so unequal as income. Possibly we ought to make a distinction between different parts of the scale. It may be said with considerable plausibility that those persons who have very small incomes or none at all are not so badly off as their want of income would indicate, and those with very great incomes are not so well off as their plenty of income would indicate; yet there may be an intermediate class among which variation in the wants of the individual and the claims of his family upon him is so important that differences in wealth become greater than differences in income. But it would be rash to be certain about this.

So far we have only considered persons living at the same place and time. When the persons whose wealth is to be compared live at different places and times their incomes are still less of a guide to us, since in proportion as the places and times become more and more “different,” which is nearly equivalent to more or less distant, the measure of value in which we reckon the magnitude of incomes becomes more and more untrustworthy. The information that one man has £ 100 a year and another £200 in our own country and our own time conveys a good deal to us, because we have some rough notion in our minds of what can be procured by the two sums. The information that two men have those incomes in Siam at the present time, or had them in our own country in the reign of Henry II, conveys something to us, because, though we do not know very well how far the sums mentioned would go in Siam or would have gone in England in the time of Henry II, yet we know at any rate that one sum would buy twice as much of the same things as the other. But if we are told that one has £100 a year in Siam now and another has £200 a year in England, or that one had £100 a year in England in the time of Henry II and another has £200 a year in England now, we cannot even say that the £200 a year man will be able to buy twice as much of the same things as the £100 a year man. The values of most things reckoned in money will be different. It might conceivably happen that £100 in England would buy all the things that would be bought by a man with £100 a year in Siam and leave something over, but such a simple case is vastly improbable. It usually happens that some things are dearer in the one of two places or times and others in the other. Statisticians try to lump everything together by means of what is called an index number, but this does not really help very much, since all men do not want to buy different things in equal proportions. A rich man may think prices have not gone up at all when a poor man, spending a much larger proportion of his income on bread and other provisions, thinks they have risen a great deal. Moreover, in comparing different places, and still more in comparing different times, it is not possible to lump everything together, because some of the things present at the one place and time will be wholly absent at the other. We now buy even out of quite small incomes innumerable things which Henry II could not have bought with the whole national revenue.

All the same, we need not conclude that comparisons of income relating to different places and times are wholly useless. Many different places are sufficiently similar to make a comparison of income quite a useful starting-point for a comparison of wealth: we may not find a comparison of the incomes of the inhabitants of Siam and that of the inhabitants of England much use, but a comparison of the same kind between France and Germany or Italy is quite useful. Similarly, a comparison of incomes in the time of Henry II and that of George V may be futile, but a comparison of incomes between the present time and 1900, or even 1850, will serve very well, because the kinds of things used have not changed very much in the interval, and we have a general knowledge of the sort of change which has taken place sufficient to enable us to modify our conclusions where necessary.